Matt Nolan

Against the Paradox of toil

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In a recent post Paul Krugman raises the “paradox of toil” to explain why tax cuts are silly and government spending is good during a recession:

So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employment.

However, this is completely misleading.  Cutting a tax doesn’t really “shift the supply curve” (which is what expanding the labour supply means) in this way.  Lets have a little think about wages and what cutting the tax probably does.

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Matt Nolan

No comment responses until the New Year

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At least from me.  I am away.

There will be posts, I’ve got a number of little delayed ones coming along.  And I’ll try to respond to comments when I get back – we will see 😉

Matt Nolan

Farewell Paul Samuelson

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His work and his methods drove economics into the position it is today.  In terms of driving the economic method forward (and establishing “economic science”) he is the most important economist of the 20th century in my opinion.

Here are some links discussing his life and work:

Economist’s View.

Marginal Revolution (and, and)

Anti-Dismal.

Paul Krugman.

Econlog.

This quote from Lucas is apt:

Samuelson was the Julia Child of economics, somehow teaching you the basics and giving you the feeling of becoming an insider in a complex culture all at the same time. I loved the Foundations. Like so many others in my cohort, I internalized its view that if I couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is mathematical analysis. Everything else is just pictures and talk

Matt Nolan

Film incentives are trade protectionism

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If we follow Australia down the road of trade protectionism for movies, then we all lose out.  What do I mean?

Well the incentives for trade protectionism is a prisoner’s dilemma.

As Peter Jackson says, if Australia starts subsidising movies we need to do the same or we will miss out on productions – as a result our best response to their protectionism is more protectionism.  Furthermore, if we start subsidising and Australia doesn’t then we get a relatively larger share of the movie industry – assume that this occurs to the point where the tax revenue from the movies exceeds the cost of the subsidies.  In this case our best response is to ALWAYS subsidise.

However, there are two issues.  Firstly it is in Australia’s interest to subsidise (it is also their “dominant strategy”).  And secondly, the decision to subsidise pays off because it hurts Australia.  In the end both countries end up subsidising movies, and both sets of taxpayers end up worse off than in the case when neither country subsidises.

This is the issue, not only with the subsidies on movies, but on all trade protectionism.  That is why we need international co-operation to avoid this type of beggar thy neighbour behaviour.

goonix

On football player agents’ fee structures and incentives

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Recently Premier League clubs in the UK have disclosed the amount of money they are spending on football player agents’ fees. These agents act as middle men between players and clubs, facilitating the transfer of players. Some of the more interesting information revealed in the disclosure includes:

  • Premier League clubs are paying almost £2 million a week to agents in commission;
  • The 20 English top flight clubs disclosed they spent £70.7 million on agents’ fees last season alone;
  • Manchester City were by far the biggest spenders, splashing out almost £13 million during dates covering last winter and the recently closed summer transfer window;
  • Chelsea paid out about £9.5 million – the second highest – with Liverpool third on £6.7m; and
  • Burnley parted with the least amount – less than £500,000.

Agents are typically paid a percentage of a player’s transfer fee. The nature of this payment structure means that agents have an incentive to encourage players to transfer regularly, as they are able to ‘clip the ticket’ each time.

Furthermore, agents have an incentive to encourage ‘high’ transfer fees, as they profit more from such moves. One common tactic from agents to try and push up the price of their players is to link them with big clubs (links which media appear all too happy to report on). Just recently, Spurs’ Russian striker Pavlyuchenko was linked with a move to North London rivals Arsenal, for example. Such ludicrous rumours are designed to wrangle more money off clubs genuinely interested in such a player, such as Zenit St Petersburg and Spartak Moscow.

Sounds like a good line of work if you can get it.

Matt Nolan

Land tax and benefits, a point to think on

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Land tax.  It is a popular idea among economists.

However, I have heard some people pushing it based on getting land “in use” (this was mentioned at Kiwiblog for example).  I am not sure if I agree on this point.

Saying that we should tax land so people use it is similar to saying we should cut benefits to get labour “in use”.  Both these arguments involve increasing individual costs to get “activity” going.  This isn’t necessarily welfare optimal.  Remember the goal of policy is not to increase productivity or to get our GDP number as big as possible, it is to ensure that we have a society where net happiness is as high as possible.

Focusing on getting things “in use” by pushing a cost on private individuals does not ensure that net happiness will be higher, and is definitely a violation of the principal for policy we suggested here that:

Any regulation should be based on the idea of avoiding coercion either from the private or the public sector

Arbitrarily adding costs to get people to arbitrarily do other things is coercion, and I don’t know if I can support the actions of any private or public agents that are based solely on coercion.

I like a land tax as a replacement for other taxes given that the elasticities of supply and demand are low – implying that the “deadweight loss” from taxation will be relatively low.  Furthermore, the tax on land is a “fixed cost” of production, implying that the impact on downstream costs should be minimal (depending on how this changes relative land use in the long-run of course).

These reasons are not related to some arbitrary goal of maximising statistics, but instead on the idea that we should be trying to raise any target level of revenue at the lowest possible social cost.