Matt Nolan

The government illusion

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Again, I’m hearing increasing talk about managing the economy – specifically, I have people telling me that they don’t think the government is managing growth properly.  Now, anyone reading here knows this statement is patently ridiculous – the government is not a management committee, and John Key is not the nations CEO.

However, this reminded me of a vision that an old work colleague had towards the end of 2010 in this article.  A key point in this vision, which captures the increasing push towards such arbitrary management, is this:

The Glorious Leader displayed a humility belying his greatness when he announced that His Plan has been inspired by patriotic newspaper columnists and internet bloggers.  The Glorious Leader said that these people are not blinded by the failed and discredited dogma of His asinine predecessors.  “The baby and the bathwater both need to be thrown out because the baby grew from devil’s spawn and the bathwater has been poisoned”.  “Shrewd columnists and internet bloggers acknowledge that the nation desperately needs my pragmatic and sensible guidance to allocate the nation’s resources in the right areas” the Glorious Leader said.

Like all good economics, this is an exaggeration, a caricature, of what is actually happening.  But such extreme examples can make key points clear – namely that a determination to “pick winners” and “micromanage” the economy is folly.  As has been shown repeatedly in the past – ultimately, such policies are the result of a mere illusion of control.

Matt Nolan

Son, you can’t have it both ways

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I see that the news of Australian firms relocating in New Zealand has finally hopped over from Australian news (where it was during Christmas) to New Zealand news.

There are complaints that firms are moving over here because we have lower wages than in Australia, and that is causing anger and concern for people that enjoy complaining.

However, these same people are also complaining that the strong NZ dollar against a number of countries (primarily China and the US) is leading us to loss jobs by making labour less competitive – in other words, by making New Zealand labour relatively more expensive, in other words by pushing up peoples real wages.

If we think there is a market or government failure somewhere, go ahead, complain about it.  But don’t simultaneously complain that wages/labour costs in New Zealand are too high and too low.

This is why I hate politics – always looking for a reason to attack each other, instead of accurately describing the trade-offs that exist and giving the electorate a real choice.

Matt Nolan

Is housing affordability the issue?

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The productivity commission has released its final report on “housing affordability”.  Now there are a number of important points in the report, and there are undeniable issues in the New Zealand housing market which have caused a “misallocation” of resources.

However, the justification for their being a housing affordability issue in the report is not fully covered off – something that is surprising given that this is the issue that appears in the title of the report.

Read more

Matt Nolan

More NZ economics blogs

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Given recent hectic times I’ve neglected to mention a couple of new New Zealand economics blogs.

There is Fair play and forward passes (via Anti-Dismal), where an economics lecturer from Massey discusses sports and New Zealand economics.

There is also Welly Gnome, where a Vic University undergrad takes it upon himself to get into economics blogging.

I of course encourage everyone studying, teaching, and practicing economics in New Zealand to start blogging – see it as a way for us to communicate ideas.  In the end it might not be for everyone, but I think its an important way of getting discourse regarding the New Zealand economy (which is at times lacking).

Some people might be worried that there would be too much “noise” – so that whatever is good won’t get through.  Given how few economics blogs currently exist in New Zealand I would say that, even if  the worst case scenario where the noise of a million screaming economists drowns out any useful information is what would happen, we are a long long way away from that now …

Matt Nolan

On GST and regressivity

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James did an excellent post discussing tax issues recently.  After this, he obtained a copy of the book, and dug out the three ways that Rob Salmond had noted GST was regressive.  It is good to see Rob put some thought into it and found measurable reasons why regressivity exists – but I also need to point out where I disagree.

In essence, of the three reasons for regressivity I believe that only one is regressive (and by less than we may expect), that one is neutral, and that one of the reasons actually makes GST a progressive tax.

The reasons Rob outlines are:

  • Some savings are spent on acquiring multiple properties, which do not attract GST
  • Some savings are spent outside of New Zealand, which also do not attract GST
  • Some people do not spend all their savings before they die. That is, they are lifetime net savers.

Importantly, all of these forms of GST-exempt dispersal of savings are more likely among wealthy people than among poor people.

My response (with a bunch of arbitrary notes thrown in) was:

  1. The construction of a house attracts GST, so it is just the rental and “owner occupied rental” that doesn’t.  As rich households tend to spend a lower proportion of their income on rent this is progressive.  Remember in turn that this “rental” price is also related to the replacement cost of the house … part of the reason for not including rent in GST is the impression that we would be double taxing it!
  • [Note on this first point – I wrote it with regards solely to the ownership of a house, not multiple properties – as that is how I read the initial question.  Even so, it isn’t clear that implied rental expenditure as a % of income rises by decline – I will have to investigate. [Huzzah, investigation done, the share of expenditure on housing of total expenditure falls as the income decile rises.]]
  1. Having GST rather than income tax leads to a one off increase in the price level, which lowers the value of the New Zealand dollar.  This pushes up the cost of goods and services overseas in the near term – given convergence towards the PPP level.  Overall, I still think this will be a regressive element though.
  • [Note:  Looking at the HES data, spending overseas as a % of total spending is surprisingly constant among income declines … making it seem like a pretty neutral impact at present.]
  1. Although more wealthy people will leave proportionally larger bequests, bequests only have value in so far as the next generation buys goods and services – as a result, they will be taxed, and this is neutral.

I would also note that, even if all of these elements were “regressive” we would need to look at representative baskets by income groups to get an idea of how much of an impact that would make – and given that GST exists, this will be exaggerated by the fact that people are choosing volumes to consumer based on the “lower relative price” of anything where the GST burden does not fall.

Comments and discussion welcome – tax is a huge issue, with fascinating equity and efficiency considerations running through it.

Matt Nolan

Prices, rents, and costs

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The NBR has pointed to an article to the Economist that shows house price to income and house price to rent ratios – pointing out that the very high house price to rent ratio can be used as an indicator that the return on housing is very low/house prices are heavily overvalued.

Now one criticism that people may raise is that the “quality” of the housing stock and the rental stock has changed – and so the relative prices/spending from income could indeed change.  However, the Economist uses figures from Quotable Value New Zealand (as well as Stats NZ) – and so the quality of housing is in fact taken into account in these indices! [Note:  It is not necessarily clear the categories are comparable – so this argument could still be used]

As a result, we could say that this is true – the return for an investor in the housing market seems pretty low.

But what else can we tell from all this?  Relative to historic averages, the price to rent ratio is 68% higher, and the price to income ratio is 20% higher.  So this implies that price/rent is 168% of its average, and price/income is 120% of its average … which tells us that rent/income is 71% of its long-run average.  If we believe these figures, the rental cost … the cost of actually consuming a housing service relative to income … is very low! [Update:   So this is consistent with rising living standards, and having to spend less on housing services – a nice foil to all the suggestions that housing costs have been eating into incomes!]

I’m not sure how much I trust these figures overall, price to rent ratios in this index has been rising constantly over the last 40 years implying that there may be a “quality adjustment” issue in the data to me.

However, if we do use these figures to say that house prices are too high – they also tell us that rents are too low.  Any explanation we have needs to explain both of these parts of the data.  [Update:  This is not clear from the data – and is actually a misleading statement, so just ignore it.  In truth, we need to ask how much of the adjustment will occur through rents and how much through prices]