Matt Nolan

BS from the BIS?

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I see that the Bank for International Settlements has released their latest annual report.  I have not read it, but will place it here to peek at later.

However, if this (great) post from Ryan Avent is to be believed, it sounds like I will not like this report very much.  I’d also note that this report led Lars Christensen to pop this post back up on Twitter (it reminds me of Lords of Finance – the BIS took quite a hammering in that book).

Towards the end of Ryan’s post he quotes this from the report:

Although central banks in many advanced economies may have no choice but to keep monetary policy relatively accommodative for now, they should use every opportunity to raise the pressure for deleveraging, balance sheet repair and structural adjustment by other means.

This is absolutely and totally shocking – I’m having to convince myself it is somehow out of context to prevent an accidental blog rage 😉 .  I was going to write something, but then I realised Ryan said it better than I ever could:

No. They should not. Central banks—small, elite, technocratic groups given as much independence from political pressure as is institutionally possible—should absolutely not use every opportunity to raise the pressure for structural adjustment. Central bankers have been given a phenomenal amount of economic power: relatively untrammeled control over the unit of exchange and, by extension, over the demand side of the economy. Use of that phenomenal power to influence control over other aspects of the economy—including budget decisions, labour-market regulations, and the benefit structure of old-age pensions—is wildly outside the purview of the central bank and sure to prove corrosive to the independence of the central bank and the democratic process.

Part of the parcel of reasons why I’ve been defending central banks against politicians over here suggesting they should do EVERYTHING is because it is wildly inappropriate (lately here and here).  Not only is it outside their mandate, but as I noted on this bubble post, it violates democracy pushing decision making towards a technocratic elite who “know best”.

The point of an independent central bank IS NOT so that technocrats can do fancy things without needing a democratic mandate … it is actually just the way democratically elected governments tie their own hands with regards to monetary policy, just monetary policy.

All these other “structural” policies in the broad economy, they should be determined by our democratically elected government.

If technocrats/economists are not able to “persuade the public” about risks, this is not a reason to use public office to “force” the public to accept this – it is instead a call to try to make your argument more compelling, and to learn to accept that sometime society may not agree!  I’m not a political scientist, but a situation where unelected technocrats punish us if we don’t do what they think is right doesn’t sound like the right way forward …

And here is something I would note.  By trying to force technocrats to impose these structural policy, taxes, costs, and adjustments a democratically elected government would be merely trying to hide the fault for (provide misinformation about) introducing unpopular policies – in itself, a move that seems undemocratic.

Update:  Lars Christensen discusses these ideas with regard to accountability and the “number of targets“.  I completely agree – this combined with the benefit to communication is why I am a fan of clear concise and separate targets for different authorities.  The idea of “why” we give independence and the level of accountability are things we should be discussing – and an area which the Greens have opened up for debate.  After NZAE I intend to start blogging some of the literature discussing this and trade-offs 🙂 … I see NZIER decided to kick that off in any case!

Update 2:  Brennan McDonald raises his concerns about Basel.  I have sympathy for this view – these actions in the name of “financial stability” do have an allocative impact, an issue that is important to try and understand.

Update 3:   Economist’s View points out a bunch of posts – good posts – also frustrated at the BIS report.  I am not sure whether I should read this report anymore 😉 – jks, read everything especially when it disagrees with your priors!

Update 4:  James sent me an Economist article disagreeing with the RA one here.  It stated:

Countries that misallocated resources to the sectors that boomed before the crisis, such as construction and finance, are being held back from the necessary adjustments by rigidities in labour and product markets. Supply-side reforms are needed to break down these barriers but loose monetary policy reduces the pressure to force through these painful changes.

I decided to pop in a response in my email to James:

I’ll link to that, but this is one of the reasons why I still favour flexible inflation targeting – if it is true that the government has munted the supply side, expected inflationary pressures will rise before we hit our prior trend, and a demand focused central bank will start lifting interest rates.  It is still demand management, and the governments choice to f the supply side was theirs.  Furthermore, it is the government, and societies, choice to cut potential output … not technocrats.

Matt Nolan

In defence of Mankiw

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When it comes to looking at policy, I started life fairly heavily left wing.  When I started university at the age of 18, my first textbook was by Greg Mankiw.  He was a Republican, while most of my economics reading at the time had been Marxist or a frustrated attempt at reading the General Theory by Keynes.  I was immediately certain that I would hate the textbook, and that it had no value – at that point I was even more immature than I am now 😉

I was utterly and totally wrong – a situation I have become accustomed to.  Mankiw’s first year textbook is clear, to the point, and is honest about what the economic method is and what it achieves.  He “wears his assumptions on his sleeve” which I have learnt is the distinction of the best type of economist.  His textbook, and his papers on macroeconomics and tax, have been insightful for me as a way of not just understanding economic ideas, but of understanding the economic method.

So I see he wrote a paper called “defending the one percent“.  Undeniably it was titled that way to irritate people.  And undeniably it succeeded. (Update:  I’d note Cochrane states it is mistitled – and I believe to an economics auidence it is.  I touch on why I think he gave it that title for his target audience below)
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Matt Nolan

Series on tax: Part 4 – A primer on income taxes

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Over at Rates Blog they have popped up part 4 of the series on tax I’m popping together.  Here are the blog posts linking to part 1, part 2, part 2b, and part 3.  I would note this will at least be an eight part series, instead of six now, as I’ve split up this specific article.

Originally I wanted to talk about income tax, consumption tax, and ideas of progressivity and implementation all at once.  Now I realise it will have to be 3-4 articles on these issues.

The main trust of this piece was to ask “why is income tax distortionary when a poll tax is not”.  Given this idea, we can talk about the “relative efficiency” of types of income tax (namely labour and capital) and point out the idea of time – and how this impacts on the “accumulation” of capital, and thereby the “stock” of capital.

Personally, these things make more sense IMO, and are more closely related to our idea of “transfering goods and services” when we look at output taxes – specifically consumption taxes.  Next time, this is exactly what we do!  Originally I couldn’t bring myself to seperate the income and consumption articles … but at 3k words I sort of had to.  As a result, I’d suggest reading next fortnights article as an extension to this.

Also, I plan a “part 4b” for here.  I can imagine some people may get confused why I view the deadweight loss through the “price wedge” – when if we had perfectly inelastic demand we would “sell” just as much but the price would be higher.  Doesn’t this mean there is no deadweight loss, and that this tax is just like our poll tax?  Well no, but to explain this we need to actually dive into some of the economics they do in first year university.  We will look at indifference curves and budget constraints (we are comparing Marshallian and Hicksian demand) – we will introduce the tax, then assume an income transfer that brings our person to the same level of utility (compensating variation).   The reason we don’t see it in the single good case is that we are not considering the impact on income/wealth from the tax – and what “perfectly inelastic demand” means in terms of income and substitution effects (pro-tip – they must be canceling each other out to leave the quantity demanded at the higher price unchanged!).  Anyway, I’ll leave that to the post.

Matt Nolan

Prices as democratic?

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Recently, a good friend of mine (who is a sneaky economist) was complaining about the policies of political parties on twitter.  In general, we were just doing our usual thing of being sad about Arrow’s Impossibility Theorem.

But it also reminded me of a little view economists hold, that many non-economists may not nowadays, the idea of prices being a type of voting – or a representation of preferences.  Now economists are right (surprised I think this?), but there are elements and issues to it that can sometimes be underplayed.

We vote on issues to illustrate our preference regarding the issue.  Given we use the idea of “one vote one person” we are only showing our preference in an “ordinal” (ranking) sense rather than the “cardinal” sense.  But that is where we are going with voting – showing our preferences.

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Matt Nolan

Series on tax: Part 3 – poll taxes, ability taxes, and fairness considerations

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Over on Rates Blog they’ve popped up part three of the six part thing I’m writing about tax.  Over here, we’ve blogged on part 1 and part 2, and added a part 2b for kicks.

You’ll notice I’m doing sometime pretty specific when I’m loitering around the tax system.  I’m talking about the properties of a tax, and then given we don’t use specific types of tax I’m inferring that there may be some social preference involved such that we’ve chosen not to.  Given that, I’m trying to build up concepts of fairness (read vertical and horizontal equity if you will, but I do mean it a bit more broadly than that) from the way society had evolved.

This may not be the case, but it doesn’t have to be.  It is merely a mechanism I can use to tease out these sorts of principals to try and make them a visible part of the “trade-off” we are discussing.  This series isn’t about saying what tax system we “should” have – it is about describing what different types of tax are, albeit on quite a surface level.  As I stated in the first article, it is actually a lot more complicated (and a damned interesting issue) to figure out exactly how redistribution will work from a given policy!

Of course, if we were to describe the type of tax system we SHOULD have, we would want to actual make subjective judgments about value and potential “social preferences for fairness”.  We require these additional value judgments to actually make a conclusion 😉

Next time I’m talking about income, capital, land, and consumption taxes.  I hope you get ready for me to bring up elasticities again, as we’re going to need them 😉

 

Matt Nolan

Series on tax: Part 2b – let’s experiment with explanations

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In the second part of my series on taxation I wrote about distortion and burden.  But I’m not sure whether my description about wedges and how people respond to prices was necessarily clear enough for a non-economist audience.  So I’m going to experiment with some other ways of articulating what I mean – ways that are equivalent, but for different people may be clearer.

Note:  I apologise in advance if this is a bit scattered – if you have questions or comments note them down in the comments, you’ll be doing me a favour 🙂

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