Matt Nolan

Film incentives are trade protectionism

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If we follow Australia down the road of trade protectionism for movies, then we all lose out.  What do I mean?

Well the incentives for trade protectionism is a prisoner’s dilemma.

As Peter Jackson says, if Australia starts subsidising movies we need to do the same or we will miss out on productions – as a result our best response to their protectionism is more protectionism.  Furthermore, if we start subsidising and Australia doesn’t then we get a relatively larger share of the movie industry – assume that this occurs to the point where the tax revenue from the movies exceeds the cost of the subsidies.  In this case our best response is to ALWAYS subsidise.

However, there are two issues.  Firstly it is in Australia’s interest to subsidise (it is also their “dominant strategy”).  And secondly, the decision to subsidise pays off because it hurts Australia.  In the end both countries end up subsidising movies, and both sets of taxpayers end up worse off than in the case when neither country subsidises.

This is the issue, not only with the subsidies on movies, but on all trade protectionism.  That is why we need international co-operation to avoid this type of beggar thy neighbour behaviour.

Matt Nolan

F**k being a banker …

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Seriously, so the UK is going to arbitrarily tax bonuses at 50% because they are not “generating real wealth” they are just “rent seeking” (Will Hutton and Paul Krugman feel this way).  Wow.

The decision to pay a wage, or a bonus, is voluntary.  Given that these bankers are creating sufficient value through their work to extract these wages/bonuses why shouldn’t they get their wage/bonus.  They are generating sufficient “wealth” through their activities – or else they would i) get undercut by other labour, ii) not get paid by clients.

Yes the organisations that got bailed out should have to pay back their bailouts.  Yes, we should try to avoid the current moral hazard problem that could exist in the industry (on the basis of the bailouts mind you – which is government intervention). However, shouldn’t the solutions to these issues be focused on the actual issues – rather than arbitrarily attacking bonuses (which will simply be delayed to avoid the tax for those that can afford it).

If we think that the price paid for the financial labour service is out of whack because of some sort of direct market failure then tax it.  If we are trying to work out optimal tax and we find that the supply and demand for these services is perfectly inelastic, potentially shift the tax burden.  But that isn’t what the authors are doing.  They are accusing bankers of being the equivalent of organised crime and then stating that we should punitively attack.  I’m sorry but I find this attitude simply abhorrent.

Seriously, if you have something specifically against bankers, lets apply the logic somewhere else:

UK is going to arbitrarily tax teachers at 50% because they are not “generating real wealth” they are just “rent seeking”

After all, teachers don’t build physical things they just provide a service like the bankers.  If we are going to attack bankers for there being a credit crisis, why don’t we just start taxing teachers more because we “feel like educational standards are too low”.

Update:  Stumbling and mumbling also believes bank bonuses should be hammered.  However, he at least paints his argument out in full and so deserves to be heard.  I don’t agree, but that isn’t really the point 😉

Matt Nolan

Points on optimal taxation

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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.

Matt Nolan

What happened to the term monetarism?

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Given the sudden rapid attack on New Zealand monetary policy from various segments I’ve begun to notice a few more things crawling around in political language that confuse me.

For example, the term monetarist.  In a discussion with my sister and on this post from the DimPost the term “monetarist” was used to describe a relatively right wing outlook about political issues and policy in general.  However, this confuses me.  My impression was that monetarists at their most narrow are people that believe money supply growth = inflation completely.  While more generally a monetarist is someone that believes money supply growth is in some way related to higher long run inflation.

In this sense, even some of the most left-wing economists have a touch of monetarist in them.  Monetarism is a set of beliefs about how changes in the money supply influence inflation – not a set of beliefs regarding the appropriateness of “economic freedom” or “government intervention”.

When replying to my sister I said:

Monetarism is simply people saying, if we print a whole bunch of money it will end up increasing prices. Evidence and logic add some credence to this view, and so even very left wing economists are in some sense monetarists.

However, an early monetarist was Friedman. He also wrote heaps on “economic freedom”, which is viewed as quite right wing a lot of the time. As a result, people have said Friedman=monetarist and have associated that word with political views that have nothing to do with it.

I think what they mean is “capitalism based on the idea that individual freedom almost always leads to the best outcomes for society” instead of “capitalism based on monetarist theory” – as the second statement doesn’t actually make any sense to me.

Update:  Paul Walker blogs Milton Friedman’s own views on what monetarism is.

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).

jamesz

A Stern admonition to carnivores

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Kiwiblog and others are bothered by Nicholas Stern’s pronouncement that:

Meat is a wasteful use of water and creates a lot of greenhouse gases. It puts enormous pressure on the world’s resources. A vegetarian diet is better. For more related post o healthy eating, use this link to learn how to start intermittent fasting.

Why not also try doing healthy living through juicing? Check out a helpful site like https://www.juicebuff.com/ for more information on juice cleanses!

[Stern] predicted that people’s attitudes would evolve until meat eating became unacceptable.

Matt talked recently about why subsidizing agriculture is a bad idea, so I don’t want to rehash those arguments. What really baffles me is why Stern feels that changes in peoples’ attitudes are important. If we price greenhouse gasses, and other natural resources, appropriately then there is no need to worry about peoples’ attitudes. As Stern says, meat is far more environmentally costly to produce, so its price will rise. Meat will become a luxury that most can’t afford to eat on a daily basis. That’s something that will happen whether people consciously make a choice to become vegetarian or not.

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