A lesson in economic forecasting
Peak oil will be here any minute now…
A note on redistribution
There is a point to keep in mind following the state of the union address in the USA.
We may believe that more redistribution is required to meet/maintain our social contract. That is fine. We may believe that more redistribution is “morally right”. That is fine.
But lifting taxes in of itself isn’t redistribution. The higher revenue from taxes must then be passed on to the poor – providing it directly as a transfer is the most obvious way.
Having the government lift taxes, and then arbitrarily use it for “industrial policy” or some other pet project is not redistribution – it is a large institution taking advantage of its position to waste other peoples resources for its own sense of pleasure.
If society wants redistribution it should get it, but this implies higher benefit payments (or policies that increase equality of opportunity directly) not just higher taxes. It involves actually redistributing income, not taking it and pissing it in the wind.
Automatic smoothing with VAT/GST?
Via the Money Illusion I see that there is a suggestion to make consumption taxes an automatic stabiliser for a given economy.
Russ Abbott, who is a computer science professor at Cal State LA, sent me an ingenious plan for having the Fed use fiscal policy to stabilize the economy. It involves sales tax rebates when times are bad and tax surcharges when times are good. It would be easiest to implement in an economy that already had a VAT, and/or state sales taxes. I see it as analogous to my proposal to makes cyclical adjustments to the employer-side payroll tax rate. These plans tend to work best when the central bank is targeting inflation. Of course an even better policy is to directly target NGDP expectations.
The entire paper is only 2 pages, a model of clarity and concision.
I can not access the article, so just have to discuss it in terms of a concept. It also remember that the RBNZ has discussed the issue before, but I said this on the blog before I got into the habit of hyperlinking everything … I will find a link at some point.
The way I see it, expectations regarding the relative price of consumption now to future consumption are incredibly important – which is why we need to think about these very issues in terms of expectations. This raises four things to keep in mind when thinking about a proposal like this:
- How do we determine the cycle,
- what timing is there between data on the cycle and when the tax change occurs,
- Given information about what the cycle is, and regarding any lags in timing, what does the change in VAT/GST do to relative prices for consumption in current and expected future periods,
- Is this necessary with inflation targeting?
So, in answer to point 1 we would determine that we are on the upswing of a cycle when we are a certain % above some trend per capita – it may not be perfect, but it works in an operational sense. Very good.
In answer to point 2, we would know whether we were above this point with a lag of about a quarter (three months) in New Zealand. A similar lag would likely exist overseas, as they wait to have sufficient data finalised.
So, when it comes to forming expectations, people in the economy will already know if we are near a point where the consumption tax is going to be hiked (due to this being a some cycle), and they will have partial data from other economic indicators for the three months after the end of this quarter – as a result, if it seem sufficiently likely that taxes are going to be hiked, consumers will foresee it and lift their consumption now. Similarly, on the downside if people start to expect that a cut in VAT/GST will happen at a near time in the future (due to expectations of a downswing) people will cut consumption now.
In other words, by making the level of VAT/GST depend on the perceived point in the cycle we are at, we make any expectations of a downturn or upturn self reinforcing.
However, this is not the full impact. When activity is below trend, then consumption taxes will fall, when activity is above trend they will rise. Although the timing does cause some cyclical elements, the existence of the tax would likely smooth out the magnitude of any underlying cycle that happens to exist in economic activity (if the cycle is sufficiently larger than the deviations from trend that are targeted with the change in VAT) – in many ways it can be justified in the same way as an interest rate target for smoothing economic activity, as both involve changing the relative price of consumption based on where we are in the economic cycle.
Do we need this
Well no. With inflation targeting, we have a natural built mechanism for dealing with cyclical changes in economic activity. Furthermore, without having to rely on some arbitrary trend estimate we don’t have to worry about a supply shock knocking the fiscal position into a perpetual deficit/surplus.
Bleg: Shifting the demand curve for Phoenix games
So crowds for Phoenix games (the professional Wellington Football team) are struggling at the moment. I was just wondering if you fine people had any suggestions – given that the majority of games are likely to be stuck being on Sunday’s, in what ways can the Phoenix shift the demand curve right cost effectively?
For me there are two main areas to look into:
- Integration with the community 1: Letting kids in free (if they bring a paying adult) could be a relatively cheap way to get a greater amount of community integration, get the crowds up, and increase revenue. The games are largely on a Sunday, so getting families involved is the way to go – this sort of idea needs a long term view, as the kids getting in for free will be paying in the future.
- Marketing: People don’t know when the games are, and aren’t getting excited about the games. Surely there are cheap forms of viral marketing that could help improve awareness and increase value? To do this you need a clear idea of what the team “means” and what people “value” when going to the Phoenix – you aren’t just selling a game, you are selling more than that.
- Integration with the community 2: Marketing it as part of the community. It is a Wellington team, so we need to ask ourselves “what is Wellington”, what are some special parts of Wellington – and in what way can we integrate the Phoenix with that. Wellington sees itself as “cool and edgy” – sort of like a mini-version of San Fransisco – so is there some way we can use a family friendly version of this concept to sell the team.
- Support Yellow Fever: Surely Yellow Fever has some ideas regarding how to improve the environment within and prior to the game. A supporters group needs support – it can’t be expected to build up everything by itself. Now there is some of that going on for sure – but I’m sure there are ideas within Yellow Fever that could be more clearly articulated, and would cheaply add to the experience for potential game goers.
There is an underlying principal for all this to me – it isn’t as simple as some exogenous service that is watching a football game here, that won’t get much demand in Wellington. You are selling an experience that depends on the size of the crowd coming in the first place – the people in the crowd value the community and the experience that is being provided by other people, and their actions, in the crowd.
Given that, you can only have larger crowds by having larger crowds – there is “multiple equilibrium”. The only way to push ourselves into a state where more people come is to build up excitement and information outside of the games, and offer to work with Yellow Fever to create a dynamic environment inside the game.
Rising inequality as a result of falling scarcity?
Via Marginal Revolution, there are a number of interesting slides discussing changes in skills, demand for skills, and wage inequality. Further investigation brings to light a very awesome paper that discusses a standard model that shows wage inequality with different skills, how to estimate it, and where some shortcomings are.
In conjunction with our knowledge of what the data regarding the “top 1%” really means, this adds credence to the view that recent technological advancements that replaced semi-skilled labour has been a primary driver of changes in income distributions around the world.
What do I mean here? Think of it this way, people are rewarded for their skills based on how relatively scarce the service they are providing is. Say there are three types of labour service, unskilled, semi-skilled, and skilled. If technology creates a cheap way of replicating semi-skilled work, and if workers in a certain category have the ability to function in any market below their skill cap, this improvement in technology would reduce demand for semi-skilled workers (due to them being substituted), increase demand for unskilled and skilled workers (due to the improvement in technology increasing “income”), and increase the supply of unskilled workers (as people who are semi-skilled are pushed to move into the unskilled labour market).
As a result, this technological improvement has the immediate impact of increasing relative incomes for the most skilled making wage income inequality greater.
Now these price signals are important, as they give people an idea of what skills to develop, and what industries they should move too. However, in turn we can make a social argument for what falling scarcity implies that we should have greater income redistribution.
Furthermore, if rising income inequality is the result of improving technology it is far from the “end of the world” type scenario some people are painting – in truth we are all benefiting significantly from improvements in technology and falling scarcity for many goods and services, the benefits of this improvement are just accruing more to some than others.
New blog: Test pattern
There is a relatively new blog around called the Test Pattern, that gets a few individuals together to debate specific public policy issues in written essays.
The current debate on the blog is around performance pay for teachers, one such discussion around its merit (or lack of) is given by Robbie Allan here.
What do I think? I have no problem with performance pay in of itself, but it relies on low cost measures of performance. In an area like primary and secondary school education, how observable are outcomes? If we can’t observe actual outcomes well, performance related pay may in fact make outcomes worse – not just by leading teachers to fake results, but by convincing teachers to invest in the “wrong parts” of education.
Hell, when it comes to education do we objectively even know what areas provide the most value? Until we really face the issue of what performance really is, the entire concept of “performance” related pay is relatively redundant.