Matt Nolan

A good illustration of tax incidence

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Via Marginal Revolution we have seen this post from Steve Landsburg.

So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

Now this is a caricature – like a lot of good economic description – but it does illustrate a point.  If we place tax on one group, be it the rich, or the “bankers”, it isn’t clear who actually faces the burden of this tax until we have a look over all the changes in choices that occur … tax incidence is key.

This is one reason why I remain against a Robin Hood tax.

Matt Nolan

Financial stability, the crisis, and counterfactuals

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In an interesting post on macro-blog, two things are mentioned towards the end:

Specifically, the pre-2008 consensus argued that monetary policy should follow a ‘rule’ based only on output gaps and inflation, but a few dissenters thought that credit aggregates deserved to be watched carefully and incorporated into monetary policy. The influence of the credit view has certainly advanced after the 2008–09 crash, just as respect has waned for the glib assertion that central banks could ignore potential financial bubbles and easily clean up after they burst.

…

The macroeconomic performance of individual countries varied markedly during the 2007–09 global financial crisis.… Better-performing economies featured a better-capitalised banking sector, a current account surplus, high foreign exchange reserves and low private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.

In a sense, the better performance of countries with lower debt during the credit crisis is being used as evidence of the fact that central banks should limit credit growth in the economy (that was the assertion I took from reading this section of the post).

Note:  Now, a quick point I want to make before discussing this central point – when inflation targeting is mentioned above it is a separate issue.  The role of monetary policy is to target inflation, but the concept of watching out for financial stability is a separate issue.  At the moment both are taken on by central banks, but I feel that the above description implies that there is a trade-off between “price stability” and “financial stability” – which is false.

So note that, the entire discussion on financial stability says nothing about whether inflation targeting is sensible – and I really wish people would stop pushing the issues together (this comes from the fact that inflation targeting is about managing expectations).

So, to the key point.

Read more

Matt Nolan

Black markets, crime, and costs

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Via Facebook I’ve been informed that our Australian friends have added an interesting interpretation to the costs of crime syndicates.

“Every dollar stolen through organised crime activity is a dollar that cannot be spent on education, health or any number of services,” O’Connor said.

Now on the face of it this statement is patently ridiculous – not every dollar taken by criminal syndicates would have gone to government for the government to spend on services.  However, we already know politicians struggle to think outside their own interests – so lets give them the benefit of the doubt here.

In that case, we may interpret this statement as saying “every dollar taken by a crime syndicate translates into a dollar taken from a ‘victim'”.  Ok, this is alright – its a tautology, but its still alright. Now this DOES NOT imply that the actual economy is any smaller as a result of the existence – simply that resources are being transferred from one set of people to another (sort of like with tax).  I would go as far as saying that we would not like some of the transfers to occur – I’m not a fan of people hacking into bank accounts and stealing funds.  But the claim that resources are being “is ripped from the economy by drug cartels and other crime syndicates” … they are part of the economy.

However, in of itself we still can’t get a feeling for the costs and benefits of what is going on – and the associated policy response – without actually thinking about what the syndicates are doing.  Luckily we are given such a list:

Increasingly sophisticated criminal operations included narcotics, money laundering, fraud, corruption, tax evasion, counterfeiting, identity theft and people smuggling.

Right.  So lets think about this.  We are being told that there is a cost to people smuggling, identity theft, corruption, counterfeiting – well no sh*t.  However, that is the cost to the individuals involved – we are being told here that some individuals lose out, and we may believe that is unfair.  Again, this isn’t a cost to the “economy” overall – this is a direct issue stemming from the crime having a victim, and this being seen as morally unfair.

However, that isn’t the case with all of these “crimes”.  The drug cartels they discuss exist BECAUSE of government policy.  When people voluntarily buy drugs this isn’t ripping money out of the economy – its actually creating value.  The cartels are IMPROVING economic outcomes by providing goods that people value – when government is trying to restrict individual choice.

Counting spending on illegal drugs as a “cost” to the economy is nonsensical – and that is what they have done hear.   If the Australian government is annoyed it isn’t getting the tax revenue from it (which seems to be their focus), the solution is to legalise drugs and tax them …

Thanks to the drug lawyer Perth as their expert team of attorneys are helping prevent more crimes by placing away criminals behind bars.

Do you need a personal consultation? Contact Lauren Campoli.

Matt Nolan

GST up, income tax down: Both happened remember

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Blah blah blah government is to blame for increasing GST and hurting families struggling to put food on the table.  This is coming out constantly.  It is a load of crud.

GST went up, and income taxes were cut by an amount that implied that pretty much EVERYONE had greater real disposable income following both changes (benefits and super were adjusted as well remember).  So don’t pull this line.

And also, all this talk about prices rising rapidly … well the CPI rose 0.8% in the quarter, almost all the result of a spike in petrol prices (on unrest in the Middle East and North Africa) and a spike in food prices (on the back of droughts and floods overseas).  Prices across a whole range on retail products actually fell during the quarter – such as clothing and footwear.

Also, lets not forget that both parties arbitrarily want the exchange rate lower – remember that a lower exchange rate increases the price of imported goods.  This is something that will make it harder for families to put food on the table and make it more difficult for mum and dad to pay for a new school uniform for the kids.  The high exchange rate (due to high food prices, when we sell a lot of food overseas) helps to take some of the gains from high export prices and pass them on to other households in society – don’t forget this, as politicians and exporters seem determined to hide this fact from the public.

If we genuinely think incomes are too low for the poorest households, increase the benefit/minimum income provided by government as a transfer to these households.  Stop this political bullsh*t that misinforms people regarding the true impact of other, completely unrelated, policy changes.

Note:  My apologises for the lack of updates from us at the moment – things are extremely busy.  There are a few posts I HAVE to write – hopefully I can write them over Easter and get them up afterwards.

jamesz

Is economic theory inherently pro-market?

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I often get told that I must be a crazy free-marketeer because I’m an economist, as if there is something inherently pro-market about economic theory. So when I was reading an article in the JPE today it was refreshing to come across this:

The question whether – and why – markets may perform better than governments has fascinated economists for a long time, at least since the work of Hayek (1945). However, despite the importance of this question for economics and beyond, it is still hard to find formal arguments for why markets may be able to outperform a benevolent government. Instead, the benchmark result is still provided by standard welfare theorems according to which a benevolent government can always replicate the market outcome, or even improve upon it if the market is affected by failures such as adverse selection or externalities.

Now, it’s true that the article itself is about a set of circumstances in which markets always outperform the best governments — and the real world doesn’t always have the best — but it’s worth remembering that the core of economic theory is not at all the same thing as the political views of some of its practitioners.

Matt Nolan

In defence of the “low wage advantage call”

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I don’t like politics, and I get a peverse pleasure from attacking things that political parties say – what can I say, I’m human.

However, I can’t say I agree with the attacks on Bill English’s comment that NZ has a comparative advantage over Australia because labour is cheaper.

He was talking about this in the context of “attracting capital”.  He was saying that the labour quality was similar, the regulatory environment was similar, but because of a lack of investment wages were 30% lower.

How does this work?  Well, capital increases the “marginal product” of workers, the higher the marginal product of workers the higher their wages will/can be.  We know that Bill English believes that NZ hasn’t been investing enough – a point I find interesting, even if I don’t completely agree.

However, this is consistent with what he believes – he thinks investment in NZ has been too low, and that is why wages are too low.  As a result, by saying “hey our workers are cheaper” he is in one sense telling people overseas that the return on capital in NZ is higher – and that they should invest here.  If they invest, they will in turn push up wages helping NZ to “catch Australia” as he loves to say.

Now I don’t believe this – I think there are likely to be fundamental reasons we can’t “catch Australia“.  However, if Bill English believes that low investment has lead to lower wages, going out and telling investors about this IS consistent with their goal of catching Australia. [It is consistent with the long running productivity discussion in recent years (see here and here) – a discussion that has “morphed” into a focus on savings more recently]

I’m sure it doesn’t seem like a good statement to make in a “marketing/political” sense – but at least its honest and consistent.  Surprising for a politician …

Update:  It appears that John Key made some comments as well – it looks like he had the same idea about it being a push to increase the flow of capital to drive higher wages in the future.

Update 2:  Whole situation is discussed here.  Just as a note, I have no problem with foreign investment – yes foreign investors want a rate of return, but by definition they can only get that return if they are creating value …