Matt Nolan

The cost of transition

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In an article on the Herald Brian Fallow, with the aid of Andrew Coleman, takes on the unaffordable nature of superannuation at present.

Essentially the argument boils down to two points:

  1. The implied transfer from future generations to current generations is equitable given fair assumptions of technological and population growth.
  2. A save as you go system would be a more efficient way of ensuring that the elderly save the required amount.

If they are saying these things I’ll believe them – especially given the underlying truth that changing population demographics will place a lot of strain on the country given the way institutions are currently structured.

However, there was one thing I felt was underplayed in the article – the transitional costs of changing from a pay-as-you-go system to a save as you go one.

The reason I bring this up is that Gen X and Gen Y have been paying for the generation above them – and in this way they will then have to start paying for themselves without any support from the generation below them.  That implies that a “sudden shift” is equivalent to stating that we think it is fair for a very specific generation to bear the cost of retirement for a much larger group.

No matter what we do with superannuation, someone will have to bear the burden of the shift.  Framing it in those terms, and deciding what we think is equitable as a society, will be an important step when figuring out how to move forward.

jamesz

Taxing the poor to help the rich?

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Rob Salmond has written a post claiming that New Zealand’s tax system is unfair on poor people and generally inefficient. His evidence boils down to this chart of tax rates across incomes:

Rob’s an expert on tax systems so I trust that the figure is accurate, but there is so much it doesn’t say that bears on his conclusion. There are a few points that immediately spring in to my mind, although I’m sure you can think of plenty more.

  1. Most importantly, a tax system’s incidence should be judged by net taxes, rather than gross revenues. Taxes don’t disappear into a bottomless pit; they accrue to someone as a benefit. Looking at the net tax people pay, once government services are taken in to account, shows a different picture. As you can see, lower deciles receive more services and transfers from the government than they pay for in taxes, and the reverse is true for wealthier deciles. So, even if there is a flat effective total tax rate, that is not the same as a flat tax incidence. I have no idea how this compares to tax incidence across similar nations, so maybe we still have a high relative incidence on poorer people.
  2. We might also ask why it is that Rob believes it so intrinsically unfair that tax rates are flat. From the same publication by the Institute of Policy Studies, here is the average income tax paid by each decile: Now we can have different views about what fair is, but it isn’t obvious to me that that distribution is unfair without a lot of normative judgments being mixed in.
  3. Rob also claims that the high GST in New Zealand is unfairly regressive, which has been discussed by Matt numerous times previously. To summarise, GST is not regressive over a person’s lifetime but it may affect the welfare of low income people more than the welfare of high income people.

Rob finally concludes that the tax system is bad for efficiency and the economy. He doesn’t draw any causal links between his discussion and conclusions, and it’s not immediately clear to me why a fairly constant average tax rate across income groups generates any of the outcomes he describes. I haven’t read Rob’s book, so I probably don’t see the connection because it’s complicated enough that you need a whole book to explain it. At least, I hope so because no effort is made to draw the connections in his blog post. This is really the nub of what bothered me about Rob’s post: it suggests a lot more than it shows and the content doesn’t appear to support the conclusion.

Maybe I’m being unfair because he’s trying to summarise a lot of material in a very short post. But, when you’re a really smart political scientist, you don’t need to provide charts without context and conclusions without justification in order to convince people of something. Particularly if you’re so familiar with the arguments that you wrote a whole book about it! I really hope that this post is just a teaser and we’ll see more in this series to back up the hefty conclusions that have already been drawn. Or, perhaps, this is just a ruse to get us out to buy the book 😛

Matt Nolan

Bigger than meets the eye

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Bryan Caplan has another great post up on Econlog.  In it he mentions his rule of thumb that “Human heterogeneity is bigger than you think“.

I completely agree, and often when we look at other people, or when economists analyse decision making, we rely on the fact that other people share certain attributes with us – an assumption that can be folly.

Furthermore, I found his description about the debates around imagination in the 19th century to be eye opening.

However, I also believe a second rule of thumb “Human homogeneity is bigger than you think“.

On the face of it this seems to be contradictory – I appear to be saying that people are more different than we give them credit for AND more similar than we are willing to admit.  However, I would state that this is not contradictory at all, and that by accepting both of these rules we reach a fuller understanding of what we do when we go to analyse choice and other individuals.

Fundamentally, we view others as “less” in terms of their thought processes than we view ourselves.

Think about your own thought process.  Think about all the issues, expectations, rules of thumb, social construction, and concerns that drive your decision making on a daily basis – think of the depth of all your experience.

Then consider that the people around you have the same depth of experience and thought – no matter how hard you think about it, it is impossible to really view someone with the same level of detail that you do yourself.  You do not have the information, and you do not have the interest.

In this context, merely focusing on the fact that humans do not understand the heterogeneity of experience between individuals would give you a biased picture of any underlying cognitive biases – in truth, the lesson is that humans (and economists) create a caricature of individuals in order to help them make decisions.  That caricature doesn’t just strip out heterogeneity, it also strips out elements where individuals are similar, and helps to reinforce the importance of issues like signalling for the outcome of individual decision making.

Matt Nolan

When looking at NZ growth today …

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I suggest sticking the September and December quarters together – and talking about the second half of 2011, including the RWC.

A lot of the “upside” surprise in September and the “downside” surprise in December was due to significant variability in stocks – part of which was due to the Rugby World Cup.  Adding the quarters together to smooth this out will give you a better idea of the more fundamental changes in activity that occurred.

Matt Nolan

New data series: Monthly comparative price levels

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In my constant hunt for new data sources, I made my way to the OECD data portal – a great resource.  I wanted to check up on some PPP’s for a project I’m doing and I noticed a new series sitting around called “monthly comparative price levels”.

It allows you to compare how much you have to spend in your own currency to buy a certain amount of goods in another country – effectively for a New Zealander it shows how much you would spend in NZ$ to buy a bundle of goods in another country, where this bundle of goods cost $100NZ in New Zealand.

The series only appears to have shown up on March 8, and there is a single month – January 2012.  However, as this series builds up it is going to be very interesting.  Even the data for the single month was very very interesting.

For example, it currently takes $100NZ to buy $100NZ worth of stuff in the United Kingdom … so relative price levels in NZ and the UK are bang in line.  Not a result I expected at all.

It also shows that things are all very expensive in Aussie, and very cheap in the USA – very much in line with current thinking.

The PPP’s used in this series are consumption PPPs (rather than GDP PPPs), which means that these relative price levels are very much set up to help us compare consumption bundles (in the same way that growth in CPI is meant to allow us to understand growth in the underlying price of consumer goods).

No-one else may care, but I figured I’d note this down here so I can remember to come back to it later 😉

jamesz

Private prisons

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The government has decided to commission a new, privately run prison. As Eric has previously discussed, there is a fairly canonical paper on the topic by some Harvard economists, which concludes that:

…a plausible theoretical case can be made against prison privatization. This case is weakened if competition for inmates can be made effective, but strengthened by the relevance of political activism by private contractors. One instance in which the case against prison privatization is stronger is maximum security prisons, where the prevention of violence by prisoners against guards and other prisoners is a crucial goal. In many cases, the principal strategy for preventing such violence is the threat of the use of force by the guards. We have shown that it is diffcult to delineate contractually the permissible circumstances for the use of such force. Moreover, hiring less educated guards and undertraining them–which private prisons have a strong incentive to do–can encourage the unwarranted use of force by the guards. As a result, our arguments suggest that maximum security prisons should not be privatized so long as limiting the use of force against prisoners is an important public objective.

Basically, the case for privatisation is that incentives to hit performance targets encourage innovation. The case against them is that there are plenty of things (like inappropriate violence) that you can’t measure, yet help to make the performance targets you can measure. So the important question isn’t ‘what are the performance measures’, but ‘what can’t you measure’? If you can’t measure important aspects of performance and you give strong incentives to meet targets then there are likely to be unintended, and potentially unsavoury, consequences. That’s not an argument against privatisation but simply a caution that high-powered performance targets should be used with great care. It is particularly salient when we are talking about a contract that affects the physical and mental welfare of so many people.