Matt Nolan

NZAE 2013 this week!

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Seamus over at Offsetting noted that the annual New Zealand Assoication of Economists conference is on this week.  It is on Wednesday 3rd of July to Friday the 5th of July – although there is a Productivity Hub Symposium on Tuesday the 2nd of July.

I’m disappointed that it seems Eric from Offsetting and Paul Walker from Antidismal will not be there.  However, according to Seamus’s post there will be a few of us loitering around – I am not there on the Tuesday, but will be around on Wednesday, Thursday, and Friday.

Anyone else reading this who is going to be there as well?

Is there any way to get these costumes in time for the conference?

Matt Nolan

Series on tax: Part 5 – A primer on consumption tax

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Yet more on tax – this is part 5. Here are the blog posts on part 1, part 2, part 2b, part 3, and part 4.

The promised “Part 4b” is still in the pipeline – it’ll appear at some point.

This time we discussed consumption taxes, and the fact that we may not like the idea of taxing consumption differently based on when it occurs.

I avoided talking about commodity taxation and then talking about the result where we don’t want to tax intermediate inputs.  I also avoided going too far into the debate around the Atkinson-Stiglitz paper (Saez here has a great piece(REPEC)).  I feel that when just describing the idea of income, poll, and consumption taxes adding these additional issues would add more confusion and less understanding.  I could have added a bit more at the point where I was talking about Ramsey taxation – especially the point that if people with different ability have different preferences we can use variable consumption taxation as a form of redistribution.  The idea of a progressive consumption tax is interesting.  However, the goal in this article was to make consumption tax relatable to forms of income tax – hopefully that got through 😛

I’m saving a lot of these addition factors for when we introduce the talk on progressivity and the equity-efficiency trade-off for the next article.  Urg.  Let us see if I can manage it in one article!

I have avoided using the term “marginal tax rate”.  I don’t know how I’ve done this.  I suspect it will make an appearence in the next article 😉

 

jamesz

Men solve the lifecycle consumption problem

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Why is it that consumption expenditure falls off so dramatically at retirement? Some people say it’s because the lifecycle consumption model is silly and people just don’t save enough for retirement. Spanish researchers now suggest it might be because men finally lend a hand around the house, which saves a pile of cash!

Detailed panel expenditure data from Spain reveals little evidence of a retirement consumption puzzle in 1985–2004. However, there is a drop in food at home expenditure in the later years of the sample along with evidence of households paying lower prices for the food they purchase after retirement. Our findings are consistent with a model that allows for home production as long as one accounts for the greater participation in housework by men after retirement coinciding with this latter period. Our work adds to the evidence from several countries and helps in reconciling the retirement consumption puzzle with life-cycle models.

Matt Nolan

The dangers of “financial stability”

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In an otherwise clear, insightful, and useful speech regarding the use of macroprudential tools – and why – the Reserve Bank states the following

While the Reserve Bank’s mandate is to promote financial stability, not social equity, there are clear implications here for housing affordability. As house prices and debt levels trend increasingly upwards, so too housing becomes less affordable, particularly for first home buyers. While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term. Such measures should also reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly indebted home owners.

And from the summary:

“While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term,” Mr Spencer said.

Sigh.  Is it necessary to go down this road, does it have anything to do with RBNZ policy?  Do people even know what they mean by “affordability”?  If our concern was due to a bubble, does mentioning affordability confuse or help with understanding Bank policy?  Does their comment make any sense (note, I don’t think it really does)?

Why bother defending the Bank from politicians who act like the RBNZ is responsible for everything (here, here) if the Bank is keen to make arbitrary ill-defined statments that seem to imply just that?

Is financial stability not actually about financial stability – but a catch phrase used to justify moral judgments regarding “rebalancing” and “deleveraging“.  This is one of the dangers of focusing on financial stability in such an ill defined way, and one of the reasons why Scott Sumner has pointed out why care must be taken (extra comment here).

This speech was otherwise a good set of clear statments that discussed RBNZ policy.  Why try to pretend it does other things?  It is statements like this one about affordability that makes people believe the central bank can dance upon the head of a pin and make happinesses and manufactured products rain down from the sky.

Matt Nolan

Deleveraging: The question that never gets answered

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Britmouse over at uneconomical has this golden quote:

Those who assert that households “need” to deleverage (which is really an argument about expected future income) must address the question of the desired level of leverage.  Is 144% too high or too low; how should we decide where to draw the line?  Should we let central plannersbankers decide by plucking numbers out of the air?

And because debt is just (ah ha) money we owe to ourselves… let’s not forget household assets, which continue to dwarf liabilities; household net worth was up from £6tn in 2008 to £7tn in 2011 in the last Blue Book estimate, mind-boggling numbers.

“Deleveraging is good” is one of the group of poorly hidden value judgments that come from the broad “rebalancing view” that gets thrown around.

If we, as a society, see high leverage levels in the economy we need to ask “why the hell do I care”?  If the individuals borrowing, and the individuals lending to them, are doing so without coercion, and the risks they face only impact upon them, then who cares.

But we may get concerned about the stability of the banking system, we may believe that the taxpayer is implicitly subsidising risk, or as a society have a special concern around Veblen goods (think of it in terms of “keeping up with the Johnes”), we might come up with reasons why leverage can be excessive.  Armed with a cause we can design policy.

The problem is that we see something like high leverage, decide we want to do something about it, and then post hoc justifying policy on the basis of whatever economic explanation we can tie together.  As we noted in from this Friedman quote, there are an infinite number of hypotheses that “fit” the data – and as a result, this is easy.  We need to limit the number of hypotheses by actually asking “what are the trade-offs involved”, and the best way to do this is not to assume our policy conclusion as a starting point 😉

Matt Nolan

Government, tax, democracy: Careful now

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I note Gareth Morgan is discussing the idea of an independent tax authority.  On paper I don’t disagree, I’ve seen similar sentiments pop up in 2009 and 2011 😉

As mentioned in the 2011 piece though, the idea of what is “democratic” is important.  Recently we touched on this by discussing the appropriate scope for independent monetary policy.

I think the idea of an independent tax authority makes sense for the following:

  • setting a “tax level” given a structure for the tax system that is set by a democratically elected government.  The goal of adjusting the tax level is solely to ensure that the “medium term balance budget” condition is meet … or in other words that the stock of debt to GDP is held at a given target level in the medium-term set by a PTA.

This is fine, this is an operational issue, and implies that if political parties promise to “spend up large” the independent authority will note that this implies the tax burden will have to be higher.  It is transparent, consistent, and neat 🙂

Gareth Morgan is taking things a step too far in my opinion.  He is saying that the authority should set the structure of the tax system itself, rather than leaving it to politicians.  To me, this is an example of a technocrat taking matters too far – it is not up to some tax authority to determine the “optimal level of redistribution”, it is up to society as a whole to push towards this through democratic engagment.  Yes this process is slow and imprecise, but it is preferable to relying on the value judgments of technocrats.

This is not a small distinction.  The idea of having tax levels set to make sure that operational policy is consistent, and parties can’t “lie” is good.  The idea of having the structure of tax policy being set by unelected technocrats who “know best” is not – no matter how many economists belive otherwise 😉

I love economists to the point where I host “sexiest economist” competitions on my blog – but even given this, I don’t believe that a dictatorship of economists is preferable to the democratic ramblings of society as a whole.  And this distinction needs to be made.

Note:  I would even point out that the “technocrats” disagree with each other on issues of tax, adding layers of value judgments makes this even worse – in that sort of environment having technocrats set the structure is even more tenuous.