Matt Nolan

Financial transactions tax: Don’t forget about incidence

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Economist’s View has again come out in favour of a financial transactions tax.

Now I believe the version of the tax that Mark Thoma supports is different from the one we hear about from the more left wing parties in New Zealand (see here and here and here) – specifically, it is supposed to only be on trade that is seen as ‘high volume speculative financial trade’ … ultimately, it is a more traditional Tobin tax, rather than the tax on all financial transactions that has been raised here.

Even so, I am convinced it is subject to the same criticism – namely that:

  1. the incidence of the tax is likely to fall in unintended places,
  2. there is no reason to think volatility will decline following the introduction of such a tax
  3. there is no reason to think that the likelihood of “exchange rate bubbles” will decline following the tax – in fact by blunting the market price it may increase the likelihood of exchange rate misalignment
  4. there may be practical difficulties with such a tax – eg tax evasion by changing the name of purchases, buy commodities as a proxy for currency etc.

In truth, a financial transactions tax appears to be an indirect means for trying to achieve any goals – while I see why we may want to increase international co-operation/discussion regarding variables that impact on other countries (tax, exchange rate policy, monetary policy) a FTT/Robin Hood tax does not appear to be a silver bullet – or even a useful policy solution.

Update: Patrick Nolan from Reform discusses this in more detail – given that there is a sizable push towards this sort of tax over in the UK.

Matt Nolan

Economic equations

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(ht SMBC)

Its true – if you think about an issue it is probably hidden in an equation somewhere 😉

Matt Nolan

Sustainable economics conference

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Just come back from the sustainable economics conference – it is still going for a few hours, but it is just on politics now and I’m not a politician 😉

It was Green party hosted, so I have the impression that many of the ideas (especially when mentioned by their own MPs) were their ideas.

Now, there are a number of final value judgments I disagreed with, I felt the idea of crisis was overplayed, and the early characterisation of “neo-classical economics” was in many ways wrong and attacked economists too much – also they were too willing to blame the GFC (Great Financial Crisis) on any pet theory that existed.  BUT, these are all minor quibbles, and overall I was impressed with the discussion.

My main quibble is that sustainability was treated as the primary goal – this is still a “throughput” towards the main goal which is the welfare of the appropriate group on earth.  Assuming sustainability is the sole goal is equivalent to an extreme assumption about the makeup of the environment and/or the welfare function.  However, I will let this slide as I got to note it here 😉 .

The Green MPs spoke well, and showed a willingness to discuss and think about trade-offs, I was impressed with them.  There still seemed to be a feeling of “command and control” among some elements of the discussion, and there were specific issues I disagreed with, but overall I felt that the MPs were actually some of the best speakers – David and Russel spoke very well, and at least in terms of the framework they used I largely agreed with them.

The afternoon economic discussion was civil and sensible – and the policy conclusions that the speakers came too made sense.  So much so that if the Green party actually discussed their framework with Labour, National, and ACT (namely thinking about natural capital and accounting for externalities) they would find a large amount of agreement.

Now, this is the thing – the disagreement between parties is about the magnitudes, the quantitative figures, not the qualitative idea of allocation.

Given how much abuse the descriptive economic method took during the morning, I was surprised that the actual discussion on economic policy turned around and used it – surprised in a pleasant way.

Good on the Green party for getting this together – if you focused on discussing these issues and committing to studies that would try to work out the value of any policies objectively, I would vote for you.

If I continue to hear about capital controls and changes to monetary policy (none of which were raised at this conference thank goodness) then I will not vote for you.

That is just me though.

Matt Nolan

Export prices, import prices, terms of trade, and inflation

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As a small little open economy, international variables are incredibly important to us.  The international rate of return, world prices for tradable goods, and the availability of external people, goods, and services, all have a disproportionate impact on us.

When discussing external prices, people constantly hear economists talk about the terms of trade (note, the wiki article is crap).  During 2007 the Bank was (appropriately) lifting the official cash rate on the back of New Zealand’s climbing terms of trade.  However, what all this meant, and what was going on didn’t really seem clear to everyone at the time.

The terms of trade tells us about the price of what we sell overseas relative to what we buy in.  This is all very nice, but when people see this they might wonder why the Bank would want to react.  To understand what was (and is) going on with our terms of trade we do need to differentiate between both sides of the ratio – export prices and import prices.

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Matt Nolan

Good points on QEII

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Following QEII I noticed a bunch of snark, sarcasm, and general analysis focusing on what we know (how an increase in the money stock, or inflation expectations, impacts upon the general economy) – this was troubling, as I wanted to find some analysis of exactly how QEII is supposed to function 😀

That is why it was good to see a post from Marginal Revolution, and a post from Econbrowser, discussing a few of the issues to keep an eye on.

I would still agree overall with Scott Sumner’s point that we should judge the policy based on where market expectations for future inflation move – however, the idea that there could be a sharp step change in inflation expectations at some point in the future, that the transition path of QEII is uncertain, that there are costs from a potential “asset bubble” in exchange rate markets, and that countries with weak financial institutions may struggle are important risks.

IMO though, these are risks – they do not suddenly indicate that QEII is bad policy.  And in fact, I would say ex-ante, with inflation expectations below the Fed’s implicit target and unemployment above the natural rate QEII made some sense.  An explicit inflation target, or even direct transfers to households, may have mad more sense – but were obviously not practical in a political sense.

Matt Nolan

New Zealand’s right continues to remain statist

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The combination of this article from Fran O’Sullivan, where she treats the NZ economy like a business, and the frankly poor Taskforce 2025 report has flustered me. [We have seen these actions before mind you]

I aim to do a full post discussing the Taskforce 2025 report another time, when I have a moment, but the two main issues were:

  1. It abused the data to make ideological claims rather than honestly looking at it (it is like they didn’t actually talk to anyone who analysed NZ historic data),
  2. It ignored the fundamental trade-off between efficiency and equity – this can be forgiven as long as it is mentioned as a policy relevant factor to be looked at before setting policy itself.

In a similar vein, O’Sullivan seems to think that government needs to pick winners (how they can judge business conditions better than the people actually trading I do not know) and subsidise exports – because for some reason giving other people our produce is a good thing because it makes the GDP stat look bigger.

She bemoans “purists” – a camp I guess I am in – because we care about the efficient allocation of resources, and the welfare of society, rather than using a bunch of business jargon and pretending we can centrally run an economy.

I believe that in both cases, the Taskforce report and O’Sullivan’s article, the authors believe they are suggesting what is best for everyone – what is best for society.  But this just tells me that they are confusing what a firm is and what a country is when making recommendations – it is not governments role to centrally determine society, and anyone that thinks government can pick winners, or that cutting the fiscal deficit right now will make magical things happen, is mistaken.