Matt Nolan

Welfare working group says what?

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So the Welfare working group has come out with their first piece (main site, ht Welfare Watch).  Did they have any sort of point, or were they just getting paid on the basis of how many times they could mention “welfare dependency” and “getting people into work”? 😀

However, I jest.  I can’t judge their policies at present, as there aren’t any – they have just released a first document outlining the issues they think will need addressing before they think about policies.

I can say that I found the lumping together of sickness, invalid, and unemployment benefits a bit disconcerting.  And I can also say that, contrary to their language, I think the idea of welfare dependency is being overplayed as an issue – but if we get some cleaner evidence out I’d be willing to change my mind.

The thing that most scared me in the report was the discussion on “poverty” and getting people to “work their way out”.  I hate it when people go on about poverty traps, and then turn around and say we should get these people into work by “cutting benefits” or “tightening eligibility”. But note, they have not said this yet – and I am not keen to put words in their mouth.

Now hopefully they didn’t mean it this way.  Hopefully what they mean is that there are major issues in the labour market, which can make it difficult for people to move back in after a sustained period outside of the workforce.  If the welfare working group is interested in increasing the integration between the labour market, welfare policy, and education then that is a good thing.

But if, as I’ve heard a lot in the past, we are going to get told that benefit eligibility should be cut so that people have to get jobs, because “it will be good for them” I fear we are just going to hurt a lot of people – like we did in the early 1990’s, but without the excuse of international credit markets threatening to devalue us.

Note:  Also, try to remember that a social safety net is part of our social contract as a society – it is something we agree to as a group of disparate individuals.  If we want to debate the size and scope of this safety net as a society then that is reasonable.  But lets not move down the road where our sole focus falls on “benefit abuse” – as it leads us to forget about the far larger group of people who we are intrinsically willing to help.

And don’t forget that the “labour market” is only really voluntary if we believe labour has an outside option.  The benefit provides this outside option – and in theory it should be funded by a tax on land.  But I digress again 😉

Note 2:  Why are we so willing to focus our attention sharply on how injured people “should” be working (even if the opportunity cost of doing so is very high for them) – and yet we are unwilling to cut back on working for families, which is largely welfare for the middle classes?

If you are worried about whether government can balance the books, if you are concerned that there are government policies that are distorting investment and spending decisions, if you fear the fact that some transfers appear “unfair” – the primary target of your ire “should” be working for families, not invalid benefits.

Update:  Sue Bradford and Dim Post comment.  I agree largely with what they are saying – but in defence of the welfare working group, they weren’t really providing “policies” just outlining the data.

Matt Nolan

How many economists see government

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I have seen economists termed “growth fatalists” for the fact that we don’t believe that there is much government can do to change underlying economic fortunes.  Greg Mankiw posted a quote that summed up the position well:

Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm.

If I’m honest, I think that the belief that government can create growth magically stems from the fact that people want to feel like they have control of things – economic growth is something that impacts upon our daily lives that we have no control over, but if we can tell ourselves we have control it is easier to live our lives.

In the same way our forefathers would worship the sun, or a “god of the harvest” our modern society worships government policies that “will provide economic growth”.

Discuss 😉

Matt Nolan

Translation: Foreign investment

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This time from Frogblog:

Foreign investment is driving up the price of rural land to an extent that it is unaffordable for many would-be New Zealand farmers to own their own farms

Translation:  Foreign investors are willing to pay at a higher level than is appropriate given the rate of return of the land for domestic land owners – so allowing them to buy the land increases wealth.

I agree with this – but not so much with the “tone” Frogblog is giving the issue.

High land prices are driving farmers to make the maximum possible return from their land through ecologically unsustainable farming practices

Translation:  Farmers are dumb and will only maximise their revenue stream when they are struggling.

I don’t really agree with this – there could be a “competition issue” but in my experience farmers aren’t “dumb”.  Furthermore, even if we do believe there are negative externalities from farmers farming practices – shouldn’t we find a way of making them pay for the external cost of their actions.  Banning voluntary trade with people who aren’t “New Zealanders” is insanely, well, xenophobic.

Update: Turns out you can support xenophobia under the guise of democracy – as long as it isn’t actual democracy, but what the party believes society actually wants.  I am glad I have people here to explain this to me …

Matt Nolan

Selling farms, a thought experiment

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I agree with Kiwiblog and Anti-Dismal strongly regarding foreign investment.  Kiwiblog is completely right when he says that restricting foreign investment does the following:

  1. The current owner of the land is unable to sell the land for as much as they otherwise would have got. This means less wealth in NZ.
  2. The foreign owner of the land, as they valued it more highly, may be able to put it to better economic use (as they need higher returns to cover the higher capital) and this can contribute to a more efficient economy.

For someone that doesn’t believe this, and wants to say that “selling our assets means we will send more $$$ overseas” this is not the case – we can illustrate that with a little, massively oversimplified, thought experiment.

Imagine a firm took out a loan to invest in, what they thought was, the best use of the land.  The loan is expected to have an average interest rate of 6%pa, and is borrowed from people with credit overseas.  Over time they find out that the rate of return they get is only 4%pa – so this is a loss of wealth for this person.  Furthermore, if we wanted to talk about the “country” this is a flow of funds overseas.

If we allowed this person to sell the asset, this flow disappears.  The person that purchased it can make their rate of return at 4%, but the 6% being sent overseas is no more.

Ultimately, if we think we are “borrowing too much” from overseas we need to think on the flip side of that – are we spending too much relative to what we earn?  If so, why?  Instead of restricting foreign trade we should be asking how the incentive structure in our economy is working – and then we can see:

  1. Whether there is actually any problem
  2. If there is a problem, the most direct way of improving outcomes.

And if we think, for some reason, that all of society owns the land – then why not introduce a land tax as a form of “rental”?

Matt Nolan

More defence

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Ok, so there were a couple of comments in the previous post that I think I need to discuss in order to explain why macroforecasters have value.

Read more

Matt Nolan

Careful throwing stones: The employment rate

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No Right Turn suggests that John Key is “intellectually shallow” (the Standard makes the same claim) for calling the employment rate the percentage of the working age population employed (ht CPW).  I was surprised with this, as that is also the definition I use.  Furthermore, it is the definition the OECD uses.

NRT’s belief that the employment rate = 1- UR is wrong, and it would be a relatively pointless statistic to release.  However, just because he got it wrong does not lead me to the conclusion that he is “intellectually shallow”.  In fact, I will appreciate his posts with the same amount of interest that I usually do.  I just suspect that he should be a little more careful before throwing around stones attacking other peoples intelligence.

However, there is one place where I disagree with NRT AND John Key – “catching Australia” is a managerial consultants view of policy, and doesn’t make sense on either economic or social policy grounds.  (Comments here, here, and here).

Update:  Anti-Dismal agrees that this goal is weird.