Matt Nolan

Technology: Dystopia or utopia?

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Nick Rowe has a great post on technology and labour.  Fundamentally, it states that, one day, increases technology and improving capital will replace labour, destroying demand for labour.  I was discussing a similar issue with Linuxlover on Twitter (and who blogs here).

Both men seemed to imply that such a situation could be a bad thing.  Linux lover told me of the “legion of unemployed”, while Nick mentioned a book that states:

It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labour, except for the labour of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects

However, I am not afraid of such an occurrence per see – in fact I am excited.  Why?  What is wrong with me?

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Matt Nolan

Hmmm, suspicious … (New Zealand as a financial hub)

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I have nothing against the idea of a “financial hub” per see.  We can make an argument for “infant industries” or “positive spillovers” to justify government involvement.  However, the burden of proof is on those making the claims.

That is why the Herald story on this makes me suspicious.

Making New Zealand an international finance centre with “middle and back-office functions” in the funds management industry was one of the recommendations of the Capital Markets Taskforce report last month.

It found the “hub” notion viable but kept the detail of its advice on how to implement the plan out of the report, giving it directly to Mr Key instead.

Usually, people avoid putting things into reports and give them straight to ministers when their analysis is suspect …

Furthermore, look at these claims:

Mr Key says early advice is that between 3000 and 5000 jobs could be created if the plan comes off.

…

The benefit would be the creation of back-room jobs and taxing the fund administrators. The funds themselves would not be taxed.

On the face of it this is fine.  We shouldn’t tax the funds as we are just an intermediatary – we should tax the value added bit.  Cool.  Furthermore, there are jobs, implying that value is being added which creates labour income, cool.

However, HOW do they plan to make us a hub.  This is the important question.  Do these jobs come from subsidising an industry and thereby moving workers from one sector to another.  If so there are opportunity costs – and we better well have some damn good analysis about why market prices aren’t providing the right signal.

Now, it is trivial to state that a government action COULD have a positive impact – give me a possible policy and I can make up a model that would make it sound like a good thing to do.  In truth, we need details so we can ask if we think it WILL have a positive impact – a situation which is only a small subset of all the “could” situations.

And of course, to do that we would actually have to see some analysis – which we have been told was not put in the report.

Hmmmmmm

Matt Nolan

Shift to GST and “imbalances”

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Further to our discussion of New Zealand doing a compensated shift of taxes from income to GST (see here, here, here, here, here, here, here) we come to the issue of economic imbalances in NZ.

Ok, so the imbalance has something to do with tradable sector activity flatlining while non-tradable sector activity increased – meaning that we have more non-tradable activity as a % of total activity.  There is a feeling this isn’t sustainable.  In part this might be true, but to be honest we have also had a massive increase in our terms of trade – which implies we can sustain more non-tradable activity for each unit of traded activity.

However, I digress.  If we accept that there is an imbalance, if only for the sake of argument, we can say that the higher exchange rate is a symptom of this imbalance.  Given this, what will GST do?

Now, changing from income tax to GST is likely to bump up the domestic price level immediately.  The increase in the domestic price level will then translate into a lower dollar – however, since this is because of a lift in domestic prices, is will not help competitiveness in any way.  Namely the real exchange rate remains unchanged

However, correct me if I’m wrong, but there is one way that shifting to GST promotes exports and discourages importing.  I believe that GST does not tax the “value-added” from exporting.  This is effectively subsidising exports.

Furthermore, I think that firms do get GST rebates on imports – but if they don’t that implies that the change in the price level, which goes through the exchange rate, does act like a tax on imports.  If this is the case it would discourage importing.

If anyone has any more details on the tax treatment of exports and imports I would like to hear about it – as this is the way that the tax shift could change structure, not through an adjustment in the exchange rate per see.

Matt Nolan

Tax shift and immigration

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There is talk that a lower income tax might, at the margin, reduce immigration.  Now when the income tax cut is measured with an increase in consumption taxes, this argument becomes a lot weaker.

By taxing consumption instead of income we increase the price of everything, and thereby lower incomes.  If people HAD to consume in the same place where they worked then this would have no impact on immigration incentives at all!!

If people could decide to save (which we could) then shifting from income tax to consumption tax gives people, at the margin, the incentive to work in New Zealand – but to move away and use this income somewhere else.

When the shift is introduced we are increasing the cost of consumption domestically – so people who have saved will want to move away (at the margin) and people who have borrowed will be more likely to stay in the country.

The net impact on migration is going to be ambiguous, but on the margin we can tell that there will be more incentive to work here and less incentive to spend here.

Of course this ignores one major thing, the dollar will fall to compensate for the change in the price level – implying that an “unexpected” increase in GST could have no impact at all at the margin for those with savings or borrowing (as the lower dollar reduces the value of domestic income overseas and makes consumption here cheaper for those with foreign income – thereby increasing the incentive for people who have saved to move here, and reducing the incentive for those who have borrowed to move here)

Matt Nolan

More winners and losers from GST

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So, us New Zealander’s are switching some income tax to consumption tax.  Good for us.  In order to think about whether this is a good thing we need to discuss costs and benefits.

It turns out this switch is also a “transfer” of resources between two groups, relatively speaking.  These groups are people that HAVE borrowed and people that HAVE saved.

When we increase GST and lower income tax we are saying “we will tax future consumption more and future income less”.

If people have borrowed this implies that they purchased consumption when it was relatively “cheaper”, and are now going to be taxed at a lower rate on the income they are making to pay it back – as a result, borrowers win.

If people have saved, this implies that they have deferred consumption when it was cheap – and will buy things when they are more expensive.  As a result, savers lose out from the change in relative taxes.

Since it is “true” that people on low incomes borrow relatively more of their income, then in a static sense this switch could be seen as more “progressive” right?  I don’t really like static definitions, but if people are complaining about the poor and saying that the poor borrow more then it is important to keep this initial transfer in mind …

Personally, I think borrowing and saving  is based more strongly on lifetime income, impatience (which I think is income neutral) and the lumpiness of consumption – as a result, I’m don’t see to much progressivity here.  However, this does tell us that people with a stock of liabilities will benefit and people with a stock of assets will lose.

Matt Nolan

Quote: From Keynes to Key

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A famous quote from Keynes:

When the facts change, I change my mind. What do you do, sir?

This is what John Key really needs to say about the “revelation” that he wouldn’t increase GST in 2008.

John Key now knows that increasing GST and reducing income tax is seen as a way to improve economic efficiency – so he is willing to do it.  When he said they wouldn’t do it, it was because the facts he was labouring under were different.

Criticising him on the basis of a speech in 2008, before the impact of the great financial crisis was clear, is petty – shame on the politicians, and other members of society, indulging themselves in this.