Matt Nolan

NZ Inc: Good marketing, bad for society

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Indeed, as Brennan McDonald states here (Update: and with more discussion here):

The phrase NZ Inc is so nauseating. Please stop using it. New Zealand is a collection of individuals, firms, government agencies, councils, charities, families, iwi and a whole lot of other fluid groups that change their composition and goals frequently.

Update:  Paul Walker also discusses here.

This comes back to this post I popped up about something Mai Chen wrote.

The lack of discussion of trade-offs, or comparisons of counterfactuals, is a perplexing feature of this sort of writing [eg NZ Inc] for an economist – and makes the statement mentioned above absolutely useless for policy analysis.

The phrase “NZ Inc” is marketing for businesses who can benefit from the government taking on risk for them.  Given that the government is linked to the taxpayer, it is the taxpayer taking on risk for them.

Now, all political parties have fallen for this trap, and I’ve spent far too many long hours arguing the point with them.  They will say “isn’t being aspirational a good in itself” and I say yes.  Then they say “shouldn’t we make aspirational policy” and I say, no that is stupid.

Sometimes I’ll be told we need “measurable goals”.  And by sometimes I mean someone tells me that at least once a week.  There is only “one goal” for “society” – meeting the social contract and maximising the “social good”.  Can you measure that, can any of us measure that?

We have elections, and we have plenty of clear measures of other types of outcomes, but the only way we can figure if we are “meeting that” is to honestly describe trade-offs between things and then have society vote (even though this is not perfect, given Arrow’s Impossibility Theorem).

This NZ Inc and measurable goals business INVOLVES presuming what we want.  Which just means it is vested interest groups passing off what is in their interest as in the “national good”.

Discussing, measuring, and debating trade-offs is hard!  But if we actually care about people in society we would actually do this.  And we would use a relatively broad principle for understanding it – such as the long-term benefit of the consumer, rather than the maximisation of some random indicator (like GDP, or export volumes) which just happens to coincide with the interests of the individual selling it to us 😉

Note:  People think I’m being pedantic with all this.  I am not, and if you think this point is a “pedantic point about policy” then I would suggest reading a bit more about normative economics – and how crazy complicated the “real world” actually is in terms of the trade-offs we face.  People that are trying to simplify it to sell their own policy aren’t always doing it out of the goodness of their heart … and even when they are, their experience blinds them to the impact these policies have on others.  True story.

 

Matt Nolan

The employment decline exists – let’s just be careful interpreting it

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Over at Whale Oil I spotted this piece by the NBR which discusses the claims of “40,000 job losses in manufacturing” – a claim I think I’ve heard from the Greens in the past, I’ll include a link if someone gives me one 🙂 .  [Update:  Link here, along with a pointer that it is from QES for 2008 to now.  Adjusting for seasonal variation this specific claim does look a little exaggerated in terms of filled jobs (but I still don’t think it is necessarily a misleading claim in this context) – I’m also not sure why we’d ignore the 2005-08 period given this is when the real exchange rate issues really kicked into gear.]

The figures quoted by Whale Oil suggest that the drop was only half that over the past 17 quarters.  However, the people who have been claiming that employment in the manufacturing sector is down by around 40k over time are not wrong.

For that, let’s jump on the Statistics New Zealand site and look at the HLFS (Household labour force survey).  Below I have a graph of annual average employment from 2004 onwards:

Between it’s peak in March 2005 and now, average annual employment is indeed down by 44,125 people.

Now this measure isn’t perfect – but it is better than the QES.  The HLFS measures “employment”, the QES measured the number of jobs (people can have multiple jobs) and it excludes self-employment and some areas such as agriculture.  Self-employment is pretty important in a industry filled with small firms like NZ manufacturing, so we have to keep that in mind! [Note: For some context, the level of annual QES jobs are currently 77% of the level of annual HLFS employment in manufacturing – even though there are multiple jobs for some employees.  Normally this ratio is closer to 80%, but it does indicate that some true underlying jobs/employment may be missed by the QES 🙂 ]

Of course, we need to think about “why” employment is shifting out of manufacturing and what that means before we can say anything about it – there is no fixed “lump” of jobs, and the structure of the economy does change.  Eric Crampton notes that in this tweet, pointing to this post on the manufacturing industry.

But in of itself, the number is not bogus – it is straight from the HLFS! it could have come straight from the HLFS 😉

Update:  In terms of the NBR pieces conclusion – it is true there has been a secular decline over a long period of time.  Understanding why in this case is important – and exciting.  Global manufacturing employment is falling, could we be about to experience the “manufacturing revolution” version of the “agricultural revolution”?  I hope so, and I hope that if this is the case then unlike the agricultural revolution society/government helps people with the transition 🙂

Update again:  I’ve noticed people from all the sides blaming government X or Y – a structural trend in the industry, a downturn in global manufacturing, and seizing up of credit conditions to the point where we haven’t been building, are not factors I would blame on any politicians.  And I’m notoriously harsh on politicians.

Matt Nolan

Series on tax: Part 4 – A primer on income taxes

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Over at Rates Blog they have popped up part 4 of the series on tax I’m popping together.  Here are the blog posts linking to part 1, part 2, part 2b, and part 3.  I would note this will at least be an eight part series, instead of six now, as I’ve split up this specific article.

Originally I wanted to talk about income tax, consumption tax, and ideas of progressivity and implementation all at once.  Now I realise it will have to be 3-4 articles on these issues.

The main trust of this piece was to ask “why is income tax distortionary when a poll tax is not”.  Given this idea, we can talk about the “relative efficiency” of types of income tax (namely labour and capital) and point out the idea of time – and how this impacts on the “accumulation” of capital, and thereby the “stock” of capital.

Personally, these things make more sense IMO, and are more closely related to our idea of “transfering goods and services” when we look at output taxes – specifically consumption taxes.  Next time, this is exactly what we do!  Originally I couldn’t bring myself to seperate the income and consumption articles … but at 3k words I sort of had to.  As a result, I’d suggest reading next fortnights article as an extension to this.

Also, I plan a “part 4b” for here.  I can imagine some people may get confused why I view the deadweight loss through the “price wedge” – when if we had perfectly inelastic demand we would “sell” just as much but the price would be higher.  Doesn’t this mean there is no deadweight loss, and that this tax is just like our poll tax?  Well no, but to explain this we need to actually dive into some of the economics they do in first year university.  We will look at indifference curves and budget constraints (we are comparing Marshallian and Hicksian demand) – we will introduce the tax, then assume an income transfer that brings our person to the same level of utility (compensating variation).   The reason we don’t see it in the single good case is that we are not considering the impact on income/wealth from the tax – and what “perfectly inelastic demand” means in terms of income and substitution effects (pro-tip – they must be canceling each other out to leave the quantity demanded at the higher price unchanged!).  Anyway, I’ll leave that to the post.

Matt Nolan

Small open economies and trade: The New Zealand example

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Over on the Herald I saw Bernard Hickey discussing how we have been performing relatively well due to China in recent years (Note, this was also on Rates Blog) – and we have to realise that if something went wrong over there it would hurt us.  Fair point, and one that people should be conscious of given the lack of good information we currently have about China!

I then journeyed down into the comments, where everyone was being civil and discussing the issue.  Very nice.  I noticed a comment by Digby Green:

Well said.

I have noticed that our exports to many other countries have fallen in the last few years.

So “we” need to make sure we do not forget them.

And it reminded me of a neat little thing about being a small open economy with relationships with many many other economies.  We are a “residual claimant” for a “homogenous good” in most of the markets we trade in, and as a result if one country is buying less of our produce we can usually ship somewhere else instead for only a slightly lower price.  What this means is that we produce very little of the world output in many of the things we sell, and the things we sell are pretty “similar” to what is sold overseas.  As a result, we just follow around the world price!

Now this isn’t the case for everything.  NZ wine, and chilled NZ meat, gain significant premiums in some markets – and when demand in those countries cools off, NZ producers have to take quite a price cut to sell them.

However, whenever we jump onto the Statistics New Zealand site and look at the Overseas Merchandise Trade figures, this suggest that we will see the “composition” of our trade (in terms of the countries we sell to) change massively over small periods in time – the best example in the past year was Venezuela, where dairy exports have all but disappeared due to changes in South American production and purchases … but of course, we just sold those dairy products to other countries.  During the drought, farmers destocked by killing livestock – and as a result, meat exports to China have gone up … but this will only be temporary.

In this way, the “amount” we sell overseas isn’t really determined by overseas demand – we are such a small fish we can make as much as we want and sell it!  However, the amount NZ farmers and other exporters for homogenous goods want to produce is determined by the return they get from it!  And this price is determined by demand overseas. This is very different than large economies like China and the United States, and as a result they discuss their trade figures in very different ways than we do over here.

So the lesson is we can sell as much as we make, but whether it is worth making depends on how “scarce” (and as a result how high the price is) overseas.

Note:  Indeed there are exceptions, and the more we specialise into “niche” markets the more this is the case.  But for the majority of New Zealand trade, and given the openness of NZ with the rest of the world, this simple little principle is very powerful.

Matt Nolan

A point from Layton’s electricity market discussion

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Brent Layton at the Electricity Authority wrote this piece (or here if that isn’t working) discussing the Labour and Greens power market policy.

I don’t know enough to comment on the specifics – outside of a recognition that the benefit to consumers being mentioned is real dodge.  All the parties say this sort of rubbish, “you will get $XXX in your pocket with no ramifications” and this vexes me – I don’t take lies and half truths particularly well.  But in terms of the specific impact of the policy, and the policy settings, I am in no way qualified to add to the debate 🙂

Now in terms of the policy, seeing these comments by economic rock stars like Brent Layton, Lew Evans, and Seamus Hogan at Offsetting (*,*) means I have set my priors such that the policy doesn’t sound like a good idea – but compelling research could see me switch sides!  I would note that I don’t use the term economic rock star lightly, so they do have a significant impact on the beliefs I have around the effectiveness of the policy regime. [Note:  I should have placed down the arguments on the other side – although I had thought they were a bit more indirect, I should have still linked to them.  Here we have John Small, and here we have Geoff Bertram – I have a lot of time for these guys but I’m not sold on the historic cost argument].

But there was something I can take out of this that I’d like to say.  Constantly, Brent Layton mentions the “long-term benefit of the consumers”.  This is the true underlying purpose of the Electricity Authority, and the central area of interest for government regulation AS WE SPEAK – economists in these roles are looking at the trade-offs involved with policies, given this underlying target.  Layton is saying that the plan is a bad one because, when he has specifically analysed those sorts of policies in the past they were “detrimental to the long-term benefit of the consumers”.

He was saying, when he’s done detailed analysis in the past – he’s found that this sort of policy actually leaves people worse off, and yet it is still explicitly being sold as offering this magical benefit based on extremely partial analysis.  Economists do this for a reason – as I wrote when I discussed rebalancing:

Economists are supposed to discuss trade-offs, and this involves making the costs to those who don’t have loud interest groups (such as the disparate interests of consumers) apparent

This is an important issue, and I like the way organisations like the Commerce Commission and Electricity Authority are very clear about this.

And deep down, I am sure most politicians, pundits, and people who are interested feel the same sort of way – they just don’t realise that economists are trying to understand these costs and changes in distribution that occur when policy is put in place!  Answers are far from simple, and even when many of these rock star economists have done piles of modeling, explaining the results to people who haven’t invested in the “language and underlying body of knowledge” (virtually everyone) is incredibly hard.

In this way, I just wanted to highlight the focus on consumer welfare, how that is a central part of what economists looking at policy are interested in, and how that is a great way for explaining stuff to people – even other people who have an economics background but aren’t in the specific industry of interest like myself 😉

Matt Nolan

Careful how we treat the “economy”

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I’m always glad to see people discussing the New Zealand economy with data and discussion.  So good on Lowell Manning for doing that here.

Of course, this doesn’t mean I have to agree – but I will try to disagree with some substance 😉

There are a number of the specifics I fundamentally disagree with, I will discuss that more later in the post.  But I wanted to touch a methodological line to start with.  The “economy” is the aggregate of individual actions, we cannot reach a conclusion on policy by placing value on outcomes without discussing what individual choices are involved. Four things come out of this:

  1. Without knowing why, we can’t really describe what is going on – this isn’t like a business balance sheet.
  2. As a matter of course, without a “why” we can’t figure out causation – there is a risk of getting things the wrong way around! (For the wonkish, we need behavioural relationships as well as identities to get anywhere 😉 )
  3. When we talk about “debt” someone is borrowing for some purpose.  Someone has to borrow – it is not created from the ether.
  4. We should not want to treat the economy like a business balance sheet even if we could – as we want a society that “maximises happiness” or some derivative of … not economic output.  In honesty, the driver of many structural shifts we see is government policy, which is set GIVEN the fact we’ll take lower output to meet some social needs.  Let us keep that in mind please.

This piece ignores this, where are the prices of non-housing goods, where are the determinants of foreigners willingness to loan to us, and our willingness to borrow?  The links related to these things are weak to non-existent, and it makes the other concerns I have even more stark.  Let us move on with those:

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