Matt Nolan

One proviso on tax …

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Kiwiblog blogs about to a good sounding report by the Maxim Institute on tax.  I especially like this line:

We need to design the tax system so that it allows the government to take the money it requires, while doing the least amount of damage to the economy and so too our potential prosperity

However, there is a proviso that needs to be taken into account when we say this.  Any redistribution that we as a society deem is appropriate given our value judgments needs to occur through “the money the government requires”.

The tax system that is solely based on efficiency will not be a tool for redistribution.  Depending on our value judgments, we will want a certain level of redistribution, and this has to occur through the level of government spending.  The higher redistribution is, the higher government spending is, and as a result the higher the tax rate will have to be.

Yet, according to this post, the recommendations of the report switch from the design of optimal tax to the equity-efficiency trade-off associated with redistribution:

A 2001 OECD study found that about one half of a percentage point increase in government consumption (the expenditure to GDP ratio) could cause a 0.6 to 0.7% direct reduction in per capita output.

Yes, there is a trade-off.  However, the level of government spending and redistribution should be premised on this trade-off.  By saying something like “If we can limit spending so that over time it is under 30% of GDP” we are making a value judgment regarding the amount of redistribution that is in societies interest – we aren’t discussing the role of optimal taxation.

My main point here is, there are two separate issues:  Firstly, the design of an optimal tax system GIVEN the level of redistribution.  Secondly, the socially preferred level of redistribution.  The first question is easy, even an economist can answer it.  The second question is incredibly difficult.

goonix

A wild day on the markets

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The Dow Jones Industrial Average fell nearly 1,000 points today, the largest intra-day fall since 1987.

It’s not quite certain yet what caused it, with some blaming an “erroneous trade”, possibly via human error or a computer glitch. It seems the initial fall, whatever the cause, then triggered many more sells as paranoia over the global situation, particularly Greece, grew. Crazy!

Matt Nolan

Prior moral hazard and the credit crisis

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Were inextricably linked.  A quote that illustrates this to me strongly came from a Bloomberg article today.  The ECB decided to tell the countries that have high soverign debts to go to hell, and now that they aren’t going to take on the risk themselves private investors aren’t willing to and are selling.

This makes sense, previously people purchased the junk on the basis that someone else would pay for it – high return low risk!  Now that they have to face the real risk profile they are like “f**k that”.  However, Bloomberg (or at least David Kovacs) stated:

The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk(y) assets

No s**t.  An asset appeared low risk, and now it is high risk, and the expected return is (at most) unchanged – so the risk adjusted return is lower.  No wonder they want to sell.

Now we are in a crisis, and if there is a run on good quality debt because of concerns we have to do strange things – sure.  But we need to come up with a system that rips this moral hazard out of the system.  It is the moral hazard that helps to drive crisis after crisis ultimately.

Matt Nolan

Labour market improving rapidly. But still weak.

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Yes the labour market is recovering incredibly rapidly.  Yes the labour market is still weak.  This illustrates it:

In the same vein the Reserve Bank is right that it should lift rates.  But should still keep them in stimulatory territory at present.  How long it should stay there is an issue for debate – and one where I am sure a lot of different people and economists will disagree 😉

The labour market data is strong than expected, but it is a very backwards looking indicator.  It appears that workers have been willing to take lower wages to get back in the labour market – moving us down the demand curve and helping reduce the “surplus of labour” (see the QES and LCI for the wage data).  As a result, growth may still be moderate going forward even off the back of this.

I’d take this as a sign that our labour market is more dynamic, robust, and flexible than I’d previously realised.  That is good.  But it doesn’t mean the NZ economy is on the verge of taking off.

Update:  Kiwiblog discusses here.  A lot of good points are raised in the post definitely worth a look.  However the December to March comparisons are a little bit misleading IMO.  Why?  Two reasons:

  1. Well the September to December 09 increase was substantial and unexpected – there is some feeling that this increase “overstated” the real weakness in the labour market.  As a result, comparing December to March may, in some sense, overstates the improvement in labour market conditions.
  2. Seasonal patterns can break during recessions, and the movements in the SA numbers in December and March are a good example of how this may occur methinks.
Matt Nolan

TVHE bleg: Good history books

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Hi everyone,

We haven’t done a bleg in a while – so I think its time to bring up a new one.  I’m wondering what good history books are out there.  They can be about any period in history, focused on any part or portion of a historical incidence, the key is that they provide a good descriptive discussion of whatever it is.

goonix

A novel solution to the student loan ‘problem’

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In the 2005 election the Labour Government found itself in a very tight battle to retain power. In order to mobilise the student vote, Labour promised interest free student loans. The bribe assisted Labour in returning to Government for their third consecutive term.

At the time National called the interest free loan scheme “irresponsible”. Since coming to power in 2008, however, they have maintained the policy, presumably for similarly cynical political reasons as led to the policy being introduced in the first instance.

As a result of the policy, students have been encouraged to borrow more and pay back less. Debt has ballooned. There are obviously other factors to take into account, such as increasing student numbers during the economic downturn. Nonetheless, it is clear that when given the option of borrowing interest free money, those with student loans have limited incentive to pay anymore than the minimum from their loan, for which they might as well borrow the maximum.

What is National’s response to the perceived student loan problem? The introduction of a $50 administrative fee that student loan borrowers must pay annually. Note that National have also provided an incentive for students to voluntarily pay back their loans through a 10% discount on their loans.

I propose a rather simpler solution. Abolish the half measures currently in place and start charging interest on student loans again. Only then will the correct incentives be instilled.