Matt Nolan

Relative prices and GST

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Over time we have been covering specific issues with how income tax and GST influence economic activity. This post was supposed to describe how an increase in GST with a proportional decrease in a flat income tax would lead to no change in consumer activity. This required the assumption that the incidence of tax on the household in both cases was equal, which will not be true.

Next we discussed the incidence of income tax in this post, which allowed us to say that some of the burden of the tax falls on labour, but some also falls on the firms that employ workers. The next step is to look at the incidence associated with a goods and services tax, and some of the inefficiencies that this issue causes for this tax type. Read more

Matt Nolan

Moral hazard and central banks

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Central banks have felt obliged to intervene in the recent credit crunch, introducing a bunch of liquidity into European and US financial markets. This has led market participants to say that “It helps with the confidence and the feeling that the Fed is going to help out the financial system“, but is this what the central bank should be doing?

Now some might say that putting a bit of liquidity in the system and risking a bit of inflation might be a small price to pay to prevent the ‘collapse’ of the financial sector. However, this is not the only costs associated with Central Bank intervention, we also have the problem of moral hazard.
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Matt Nolan

Fed cuts rates to 4.25%

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The US Federal Reserve cut their cash rate and discount rate by 25 basis points. In the statement the Fed said the following about inflation:

“Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation … some inflation risks remain”

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Matt Nolan

Poll tax on kids

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Sticking to the recent theme of externality taxes, some researchers from Perth suggested that Australians should ‘fine’ parents for each kid they have above two. Now we know I’m a big fan of externality taxes, but I’m not too sure about this one.

As we have already established a carbon trading scheme, this externality tax is not being used to cover carbon creation from the consumption or production of certain goods – the kids will pay for all of this when they grow up. This leaves us with the carbon emissions that the child makes from living, by doing things such as breathing.
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Matt Nolan

The desirability of rent controls

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Over at Marginal Revolution, Tyler Cowen posts on what some people have to say about rent control. Several points are put forward as to why rent controls are a good thing, namely:

  1. People do not become happier from a larger, or better quality house and so a lower quality – lower price equilibrium would be preferable.
  2. Given this, lower prices will increase the supply of property over time by getting owners to put more small apartments in a given building.
  3. As it is harder to find an apartment temporarily people are forced to commit to a region for a longer period of time, which may provide a positive externality, or help to solve prisoners dilemma issues through the use of a repeated game.

If you cannot be bothered reading my long, boring post on the issue, then you can just say whatever you think about the above points in the comments 🙂
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Matt Nolan

Will a fiscal stimulus in the US not be inflationary?

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According to Martin Feldstein (hat tip Greg Mankiw):

“Even if the Fed decides that it should not cut rates further at the present time, it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed’s point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money.”

Just because Martin Feldstein is a far, far, better economist then I will ever be does not mean that I have to agree with him, and here’s why.

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