Matt Nolan

The cost of transition

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In an article on the Herald Brian Fallow, with the aid of Andrew Coleman, takes on the unaffordable nature of superannuation at present.

Essentially the argument boils down to two points:

  1. The implied transfer from future generations to current generations is equitable given fair assumptions of technological and population growth.
  2. A save as you go system would be a more efficient way of ensuring that the elderly save the required amount.

If they are saying these things I’ll believe them – especially given the underlying truth that changing population demographics will place a lot of strain on the country given the way institutions are currently structured.

However, there was one thing I felt was underplayed in the article – the transitional costs of changing from a pay-as-you-go system to a save as you go one.

The reason I bring this up is that Gen X and Gen Y have been paying for the generation above them – and in this way they will then have to start paying for themselves without any support from the generation below them.  That implies that a “sudden shift” is equivalent to stating that we think it is fair for a very specific generation to bear the cost of retirement for a much larger group.

No matter what we do with superannuation, someone will have to bear the burden of the shift.  Framing it in those terms, and deciding what we think is equitable as a society, will be an important step when figuring out how to move forward.

jamesz

Taxing the poor to help the rich?

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Rob Salmond has written a post claiming that New Zealand’s tax system is unfair on poor people and generally inefficient. His evidence boils down to this chart of tax rates across incomes:

Rob’s an expert on tax systems so I trust that the figure is accurate, but there is so much it doesn’t say that bears on his conclusion. There are a few points that immediately spring in to my mind, although I’m sure you can think of plenty more.

  1. Most importantly, a tax system’s incidence should be judged by net taxes, rather than gross revenues. Taxes don’t disappear into a bottomless pit; they accrue to someone as a benefit. Looking at the net tax people pay, once government services are taken in to account, shows a different picture. As you can see, lower deciles receive more services and transfers from the government than they pay for in taxes, and the reverse is true for wealthier deciles. So, even if there is a flat effective total tax rate, that is not the same as a flat tax incidence. I have no idea how this compares to tax incidence across similar nations, so maybe we still have a high relative incidence on poorer people.
  2. We might also ask why it is that Rob believes it so intrinsically unfair that tax rates are flat. From the same publication by the Institute of Policy Studies, here is the average income tax paid by each decile: Now we can have different views about what fair is, but it isn’t obvious to me that that distribution is unfair without a lot of normative judgments being mixed in.
  3. Rob also claims that the high GST in New Zealand is unfairly regressive, which has been discussed by Matt numerous times previously. To summarise, GST is not regressive over a person’s lifetime but it may affect the welfare of low income people more than the welfare of high income people.

Rob finally concludes that the tax system is bad for efficiency and the economy. He doesn’t draw any causal links between his discussion and conclusions, and it’s not immediately clear to me why a fairly constant average tax rate across income groups generates any of the outcomes he describes. I haven’t read Rob’s book, so I probably don’t see the connection because it’s complicated enough that you need a whole book to explain it. At least, I hope so because no effort is made to draw the connections in his blog post. This is really the nub of what bothered me about Rob’s post: it suggests a lot more than it shows and the content doesn’t appear to support the conclusion.

Maybe I’m being unfair because he’s trying to summarise a lot of material in a very short post. But, when you’re a really smart political scientist, you don’t need to provide charts without context and conclusions without justification in order to convince people of something. Particularly if you’re so familiar with the arguments that you wrote a whole book about it! I really hope that this post is just a teaser and we’ll see more in this series to back up the hefty conclusions that have already been drawn. Or, perhaps, this is just a ruse to get us out to buy the book 😛

Matt Nolan

When looking at NZ growth today …

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I suggest sticking the September and December quarters together – and talking about the second half of 2011, including the RWC.

A lot of the “upside” surprise in September and the “downside” surprise in December was due to significant variability in stocks – part of which was due to the Rugby World Cup.  Adding the quarters together to smooth this out will give you a better idea of the more fundamental changes in activity that occurred.

Matt Nolan

A point on consistency: Finland v NZ

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After saying I thought the general goal of catching other countries was a bit silly I suddenly clicked onto another point – the implied inconsistency of the policies being suggested by Labour.

Look, I don’t want to beat up on Labour specifically – as I think all parties are guilty of this – they just did it right here right now. Labour is saying:

  1. We want more innovative capital investment, in capital intensive technology industries
  2. We want to introduce a capital gains tax

So they want to increase capital investment … when their main policy recommendation so far is reducing the rate of return on investment.  They also suggest investing more in education – which is fascinating when we are a small open economy with an extremely mobile labour market, implying that it is very hard to keep hold of said highly trained labour.

Seriously, lets let the rest of the world bid down the price of manufactured goods and keep pushing forward technology, while we feed them and offer them awesome holiday’s – focus on what we are good at, and we will be better off than if we start trying to gamble on venture capital, or joining into the current highly competitive game of manufacturing/high tech.

Matt Nolan

Finland and New Zealand

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So there is talk of comparing New Zealand to Finland.  Fine, I still think this is as pointless as comparing us to Australia – but not to worry.

The plus of comparing us to Finland rather than Australia is that Finland is a small open economy more in our mold.  However, they are also significantly closer to market – so any thoughts that we can become like Finland have to be tempered by this fact.

Deep down I don’t believe in government oriented “transformational change”.  If anything, if the rest of the world is busily trying to compete in making information technology and manufactured goods then it is doubly good that we stick to our comparative advantage of making food – because it will become relatively more valuable (just look at our current terms of trade).

However, I have to take issue with this attack on using Finland as an area to compare us to.  Given both parties accept that we should arbitrarily compare ourselves to other countries (which I don’t) the current unemployment rate is not a fair figure to look at – instead we should keep an eye on PPP adjusted GDP per capita.  Finish people are, on average, 30% more wealthy than we are.  So the “final goal” associated with copying Finland seems to be the same goal that the current government is suggesting – magically increase incomes by 30%.

Matt Nolan

The bad side of independence?

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For me, the independence of central banks is one of the greatest institutional changes that has taken place in the past 30 years when it comes to “economic management”.  This independence has allowed central banks to clearly articulate goals and ensure that the arbitrary monetary distortions that previously occurred no longer take place – governments can not use storage, and central banks are generally less likely to accidentally tighten or loosen conditions inappropriately.

But this independence, and this view that a central bank provides some central “management” role has led an increasing number of writers to believe that the central bank truly controls the economy.  Not just in a broad sense, but there is a belief that a central bank can meet many disparity micro goals, changing the structure of the economy, controlling firms pay structures, changing inequality.

There was a time not so long ago when it was clearly recognised that STRUCTURAL issues were the responsibility of Treasury – if there was a clear defined market/institutional/government failure to deal with.

But now an increasing number of these broad structural issues are being blamed on central banks, there is an increasing belief that by changing an interest rate the Bank can separately determine a myriad of clear “good and bad” potential outcomes – and people appear to get frustrated because they feel that central banks are purposefully making things worse.

But this is not true, monetary policy is inherently cyclical, financial stability issues are just that … issues of financial stability.  If there are failures in the more general economy it is due to either the imperfection of the world we live in or the inappropriateness of government policy settings (in either direction) – it is not due to the central bank setting the wrong interest rate, or making the wrong comment in their latest statement.

I just hope this fundamental lesson will be remembered before people decide to start diluting the independence of, or stretching the role of, our central banks.

Update:  This issue is discussed more sensibly on the Money Illusion.  Choice quote:

Monetary policy should be boring, as it is in Australia; not exciting, as it is in the US and Japan.  Most of my readers think I am advocating use of monetary policy as a tool.  Most think I want it to be exciting.  Nothing could be further from the truth.