Matt Nolan

Land tax and benefits, a point to think on

/2 Comments/in , , /by

Land tax.  It is a popular idea among economists.

However, I have heard some people pushing it based on getting land “in use” (this was mentioned at Kiwiblog for example).  I am not sure if I agree on this point.

Saying that we should tax land so people use it is similar to saying we should cut benefits to get labour “in use”.  Both these arguments involve increasing individual costs to get “activity” going.  This isn’t necessarily welfare optimal.  Remember the goal of policy is not to increase productivity or to get our GDP number as big as possible, it is to ensure that we have a society where net happiness is as high as possible.

Focusing on getting things “in use” by pushing a cost on private individuals does not ensure that net happiness will be higher, and is definitely a violation of the principal for policy we suggested here that:

Any regulation should be based on the idea of avoiding coercion either from the private or the public sector

Arbitrarily adding costs to get people to arbitrarily do other things is coercion, and I don’t know if I can support the actions of any private or public agents that are based solely on coercion.

I like a land tax as a replacement for other taxes given that the elasticities of supply and demand are low – implying that the “deadweight loss” from taxation will be relatively low.  Furthermore, the tax on land is a “fixed cost” of production, implying that the impact on downstream costs should be minimal (depending on how this changes relative land use in the long-run of course).

These reasons are not related to some arbitrary goal of maximising statistics, but instead on the idea that we should be trying to raise any target level of revenue at the lowest possible social cost.

Matt Nolan

Cubicle cows

/6 Comments/in /by

I am torn.

I the one hand I immediately feel uncomfortable with the idea, as I don’t naturally feel that being constrained will maximise animal welfare (which is the reason why you would want to constrain the actions of the farmer).  This comes from the “factory farm” argument.

On the other hand, I don’t know how these “cubicles” make the animal feel – could it be that they are happier in them?  I don’t know exactly what these cubicles are like, and whether an “investment” in them would actually be beneficial for cow welfare.

This way of framing the argument says “it is costly for farmers to invest these in facilities that will improve animal welfare, so they are doing too little” – actually implying the opposite result to the factory farming argument.

A few weeks ago I was at a presentation on dairy cow welfare.  In it the presenter was complaining that farmers had invested too little in these sorts of facilities, as in many ways (the animals health, ease of getting to feed, stress levels) these facilities would improve animal welfare.  If this is true I would have to say I am pro.

However, I do not know enough about the current scheme, or the preferences of cows, to decide whether I think it is a good idea.  Hopefully, any policy will explore the impact on animal welfare before we policy is made.

I do have one strong view though.  Stop sending me facebook group invites suggesting that I should sign a petition.

Matt Nolan

More on currency misalignment

/5 Comments/in , , /by

Given the rising pressure for the Reserve Bank to target the currency as well as other things in New Zealand it is important to have a look at reasons why people may think our currency is misaligned.  I have said before that IF the currency is overvalued I think it is a structural issue and is really unrelated to monetary policy – however, there are of course many other arguments.

We have mentioned the begger thy neighbour type externalities from domestic focused monetary policy – something that a small country like NZ cannot cause, and so we can’t blame our domestic monetary environment for.

And a new discussion paper by the Dallas Fed discusses why the exchange rate may be an important issue to look at intervening into (ht Econobrowser).  Specifically the paper states:

If the nominal exchange rate regime matters for the determination of relative prices such as the real exchange rate or the terms of trade, it must matter because there is some kind of nominal price stickiness. For example, if the U.S. dollar/euro exchange rate is to affect any real prices, it must be because there are some nominal prices that are sticky in dollar terms and others that are sticky in euros. From the standpoint of modern macroeconomics, the question should be posed: What policy best deals with the distortions from sticky prices and other sources? Is it a fully flexible exchange rate, or some sort of exchange rate targeting?

However, coming back to New Zealand I still feel fully flexible exchange rates are appropriate.  Why?  Apart from the fact that I view such a “relative price shock” as an insufficient condition for intervention, the idea of price stickiness only matters when export prices are SET by exporters.  New Zealand is a small open economy that sells on foreign markets and receives (and pays) the world price – therefore our trade prices are flexible.

The inefficiency occurs when prices are denominated in domestic dollars, and do not change in the face of some “shock” which changes the value of the exchange rate.

Finally there is an asset price bubble argument for intervention (as the currency is a forward looking asset price).  Whether we can really identify and then improve welfare by intervening against “currency bubbles” is highly debatable – and it is an area the Bank has already been involved in (by becoming a currency trader 😉 )

Matt Nolan

A little bit of filler on monetary policy: An addition to the Dom article

/10 Comments/in , /by

While working on the Dom Post article I was given a few questions I might get.  I quickly tried to rope together some incredibly average answers.  I am going to post them here so I don’t lose them 😛

Read more

Matt Nolan

Dom Post article: Defending the Bank

/2 Comments/in , , , /by

Did an article on why we should leave the Reserve Bank Act alone in the Dom this week.  Given I’m too lazy to put up new material this morning I will just link to it (on Rates Blog, on the Infometrics site).

Money quote:

Warping the Reserve Bank Act to focus on a multitude of different goals will not solve these underlying issues; it will just cloak the symptoms by damaging other sections of the economy.  Although pretending to solve an issue may be beneficial for politicians, it is not the best way to run New Zealand economic policy.

Update:  A bit of pointless filler – again because I’m not up to writing anything fresh today 😉

Matt Nolan

Points on optimal taxation

/in , , , /by

There has been a lot of talk about tax (eg here).

When thinking about tax systems it is useful to run the following train of thought for optimal design:

  1. Start with a target level of government spending.  Goal is to raise this revenue at the lowest cost to society.
  2. First start with taxes which improve the allocation of resources by correcting a market failure (externality taxes).
  3. Then design a nice flat tax (either on all income or consumption) which treats everything equally.
  4. Then shift relative taxes in broad areas based on the long-run elasticity of supply and demand, and constrained by the potential for tax avoidance (Ramsey principle).

Once this initial tax system has been designed, and government spending has been sorted we face a clear “equality-efficiency” trade-off.

In a final step we then adjust the progressivity of the tax system, or the type of government welfare spending, in order to achieve the type of trade-off between these factors that society desires.

Now this doesn’t tell us what the scheme should be, but it allows us to directly look at the trade-offs we are making and make a clear decision.  If the goal is to make fiscal policy that represent the preferences of society at the lowest cost this is the way we need to think about it – instead of saying “more growth”, “more redistribution”, “more tax on land/capital/houses/consumption” etc etc without thinking about it in general terms.

Furthermore, even when we come up with a scheme based on this train of thought we only get told what would be optimal “in the long run”.  The required transition path for the tax system from now until then is still far from clear.