Matt Nolan

Tax links, Rates Blog and Offsetting Behaviour

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The Rates Blog is doing this cool thing where they have written segments on different tax policies.  They have:

They are good pieces for sure, go have a look.  We promise to write something on tax in the next week or two, although I can’t vouch to live up to the high standards these guys have set.

Also have a look at Eric Crampton’s post on spending and tax.  The tax discussion is about trying to figure out how to set up the tax system to get revenue at the lowest economic cost.  There is also a separate, but important, discussion that we need to have on the optimal level of government spending – as these taxes we use to spend on government projects do have very real costs, both in terms of taking money out of peoples pockets AND the loss of efficiency associated with this taxation (deadweight loss).

Matt Nolan

On the fixed exchange rate

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It appears that the idea of a fixed exchange rate has been risen, again.

Now the suggestion in here does take into account the impossible trinity – so it is theoretically possible.  We have:

  1. Monetary policy can impact on output and inflation,
  2. The exchange rate is fixed,
  3. Capital flows ARE LIMITED

That third one is the kicker.  Two issues I have here are:

  1. Limited capital flows implies that interest rates will rise (as for the previous interest rate there is a shortage of capital relative to demand).  This implies that our functioning monetary policy that controls inflation must have higher interest rates and lower output.
  2. Limiting capital flows is pretty difficult for a small open economy like New Zealand.

On the balance of evidence and theory I would say that I strongly disagree with this proposal.

Update:  BK Drinkwater comments here.  He rightly points out that a less volatile currency isn’t obviously a good thing – it is the movement in export prices and whether they represent actual changes in relative prices that matters.

Matt Nolan

Guaranteed minimum income. Where did it come from

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So I see Gareth Morgan is suggesting a set minimum income level and a flat tax rate.  Very nice, I can see merits in some of the set up for sure given my personal value judgments.

Some on the left will think this is right wing (where is the progressivity!),

Some on the right will think its left wing (we are giving benefits to everyone!),

Others will like it (it lowers effective marginal tax rates and ensures that everyone can live),

Others will hate it (churn in the tax system, don’t need to work to live, its tax, it involves government, the rich will pay less)

So where did this come from?

Hint *.  Guess who else suggested it in the 80s.

Tell me, does this change the way you view these two people as well?  Or does knowing that these people came up with the idea change how you view the idea.  If that is the case, why?

Update:  The Standard supports, DimPost does not.

Matt Nolan

Agreement or no?

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David Cunliffe has stated that new prudential regulation by the Reserve Bank shows that they agree with Labour on the need to dump the monetary policy consensus.

I would say no.

Monetary policy and prudential policy need to be treated separately.  In the same way that fiscal policy and monetary policy are.  Monetary policy (achieved through interest rates) should stick to the consensus view of keeping inflation expectations anchored.

Prudential policy is meant to ensure that we have bank stability.  In this sense there may be some quantifiable social cost associated with systematic risk in the banking system, and that policy looks to internalize that risk.  Now, there may be a role for this – or I’ll go out on a limb here and say that there may not be.  However, this IS NOT an issue of monetary policy in the narrow sense.

Does prudential policy indirectly influence interest rates and the money supply – yes.  So does fiscal policy.  So does consumer confidence.  So does risk preference in society.  However, it is not monetary policy and it is not part of the reason for the Reserve Bank Act that Labour seems interested in tinkering with and adding “other goals too”.

I am not against Labour thinking about prudential regulation and other issues of policy.  I am against them trying to use actual monetary policy to achieve multiple goals, and I am against trying to use monetary policy to achieve any goal other than a stable and low inflation rate.  These issues NEED to be separated when discussing policy, or else we risk destroying a fully functional Reserve Bank Act.

Matt Nolan

Dear Rod Oram

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I read your article on monetary policy in the Sunday Star Times (thanks to a link from Rates Blog).  I disagreed with many of the things you said, but I really don’t think our conclusions are that separate when we look through the issues.  First on my disagreements:

  1. I don’t agree that monetary policy needs to change (so an opposite conclusion in some ways),
  2. It isn’t up to monetary policy to tame housing bubbles – we should be asking where the bubble came from,
  3. The high OCR didn’t cause the high exchange rate persee – it is more likely that some other factor was causing both (say strong demand for housing, which is based on other fundamental factors).
  4. The “speed” of the domestic and international concept has very little to do with anything, neither does the size of trade in our currency.
  5. Capital inflows are not scary beasts – it just means people are lending to us.  We should be asking why people are borrowing domestically and why that is too high (something you do get to at the end of your article).
  6. Prudential regulation is not monetary policy and is not part of the RBA in itself – I guess this means you would call me a purist.  However, we need to make the distinction between the two clear, or else we muffle the signals of monetary policy and make the good outcomes associated with this policy difficult to achieve.  My solution, separate the two cleanly – at least in terms of the statements they make.  That way people know what is what.
  7. I agree that ultimately there are imbalances in the economy, and we need to adjust other forms of policy to improve them.  Threatening the RBA in order to try and “achieve this” is not good – and should be shut out right now.
  8. When central bankers from Brazil don’t like the capital inflow tax (and they do it) it makes me suspect there is something wrong.  By taxing inflows we are constraining our own borrowing – if people are borrowing on the basis of actual costs and benefits then taxing it will hurt the economy.  It is better to look at the domestic issues influencing this then throwing in an arbitrary tax.
  9. A more stable exchange rate means more volatile export prices for most exporters – I don’t see how this is a good thing …
  10. Finally, we aren’t a centrally planned economy, and neither is the global economy.  Talking about “running the economy” in this sense doesn’t make much sense in itself – we should be looking at how our policies influence the choices, and ultimately the welfare of, our citizens.

Ultimately, we can make a case for a change in prudential regulation and tax policy in New Zealand on the basis of our completely different assumptions.  However, I don’t agree with the blame you have placed on the shoulders of the OCR.  Monetary policy is being blamed for a bunch of bad policy both domestically and internationally, blame it does not deserve.  It is receiving the blame because it can’t really answer back for itself.

So lets sit down and try to figure out the real issues the could be hurting New Zealanders, instead of running with the monetary policy scapegoat.

Matt Nolan

More good news for NZ!!

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Guess what.  The EU subsidies on dairy products, introduced at the start of this year, are GONE.

Now US, step up to the plate and dump yours.  Or are we going to move into a situation where the United States is more protectionism than Europe …