Monday, September 15, 2014

Parker versus NZIER on Capital Gains Taxes

Labour finance spokesperson, David Parker, sent this letter to the New Zealand Institute of Economic Research, regarding a report they wrote for Federated Farmers on Labour's proposed captial gains tax policy. 

I don't have time to read the original report or the earlier one by BERL referred to in the letter. What struck me, however, is that the points of disagreement are really quite tangential to the issues that should be at the heart of a debate on the merits of a capital gains tax (CGT). Let's take these in turn.
  1. Parker believes the tax will raise more revenue than NZIER do. A CGT that is designed to ensure savings is directed to the most productive investments rather than be motivated by differential tax treatments is one that would raise zero revenue. Any CGT that increases revenue is one that increases the existing tax distortion penalising saving relative to consumption. Of course, one might have the objective of increasing the tax on saving for the equity objective of increasing the tax paid by the rich, but that is a different objective. Either claim the tax will raise revenue, or claim it is about encouraging productive investment, not both.
  2. Parker believes the proposed CGT will be more progressive than NZIER do. This may be true, but if the objective is to increase the progressivity of the tax system, the policy question is whether it would be better to achieve this through increasing the income tax rates that would target high levels of wage and salary income as well, rather than just one component of capital income. 
  3. Parker believes the current income-tax paid on trading is not important enough to make the claim that we currently have a CGT. That is possibly true, but it misses the point: We do have a perfect, all-of-the-advantages, none-of-the-disadvantages 13% CGT. It is called GST
  4. Parker believes that a CGT will have more impact on housing speculation than NZIER. Again, this is possibly true, but why is that a good thing? Let's reiterate some points made previously, here and here
    • Housing speculation is only profitable if house prices are expected to rise in the future. That is, speculation can't permanently increase house prices; it can only bring the increases forward in time. A policy designed to make speculation less profitable is a policy that admits that nothing will be done to curb the underlying drivers of house-price inflation. 
    • To the extent that bringing forward future house price increases creates an incentive to build more houses, speculation will actually lower future prices. One can claim that the tax distortion that means home owners pay no income tax on the imputed rental they earn from themselves leads to a country having too large a housing stock, but not if your rhetoric is about making home ownership more affordable. 
    • And curbing speculation in home ownership, to the extent that it has an impact on home affordability must operate through making renting more expensive. Again, this might be an objective, but not one that is easily squared with rhetoric concerned with poverty levels. 
One final point. Parker claims that the Australian experience is illustrative, because they had a CGT excluding the family home, their "home ownership rate was lower than New Zealand's. Now it is higher and ours is at a 60-year low". Is the claim that Australia's CGT had an impact on New Zealand's home-ownership rate? Or is this a difference-in-difference estimation that assumes as a control that Australia's rate would have fallen like New Zealand's but for the CGT? 

One of these is a lie

From February:
The GCSB and the SIS were asked whether they get funding directly or indirectly from the governments of Australia, Canada, the United Kingdom or the United States.

Both withheld the information. They also refused to say whether any foreign government paid for any positions within the agencies.

However, they did confirm that they do not collect wholesale metadata on New Zealanders and, to the best of their knowledge, American counterpart the National Security Agency does not either.
Vodafone is setting up cable and internet at our new house this morning. I should then be able to watch tonight's relevant programming.

If GCSB and the SIS were just playing semantics over the term "wholesale", I call that a lie.

I wrote in February:
The GCSB has to know that there's a strong chance that, if they have been collecting metadata or if the Americans have been collecting it here, it'll be revealed in the forthcoming Snowden releases. They'd also know that, if they lied to Parliament, it would be very bad, and that if the Americans were doing it here without GSCB's knowing about it, GCSB would be seen to be incompetent or wilfully ignorant. I further expect that Kiwis wouldn't have much truck with semantic tricks on verb tenses or definitions of "wholesale". And so I must expect that they know that it isn't being done here and hasn't been done here. This makes me happy.
I hope to stay happy.

Update: here's the RadioNZ interview with Greenwald.

Friday, September 12, 2014

Strategic voting on the right

So the latest chatter on the NZ right is that strategic voting for the Conservatives is a great idea. I'm going to disagree.

Under New Zealand's MMP system, a party enters Parliament on earning one electorate seat, or 5% of the Party Vote. In the former case, the MP enters Parliament with however many additional MPs the Party would be entitled to if there were no threshold in the Party vote: 2% of the vote gets 2% of the seats, if you have an electorate. If you don't have an electorate seat, and you get 4% of the vote, those votes are wasted: the composition of Parliament is determined by the Party Votes of those voters supporting parties that enter Parliament.

And so what do you do if you're on the right, if you want a National-led government, and if you're worried that National will lose if the 4% (or thereabouts) gained by the Conservatives is wasted? You could be tempted to vote Conservative to help push them over the line so they go into coalition with National. National then isn't forced to look to Winston Peters and New Zealand First for support.

I think this reflects short-term thinking. Winston Peters is near retirement. After he has retired, it seems pretty unlikely that New Zealand First will continue. The Peters personality cult will end. And, for a single retirement term, Peters' price may more likely be in approbation than in real policy.

If the Conservatives enter Parliament this term on a strategic vote, we might expect them to be around for a couple decades. They're socially conservative and, thus far, fiscally incoherent. Maybe they'll increase alcohol excise four times over, maybe they won't. They propose tax cuts but no spending cuts; Christine Rankin said they'd square the circle by turning a billion in alcohol excise revenue into four billion.

I wonder whether alcohol taxes could really go up by enough to make that happen: we start getting into tax territory where I'd be real nervous about applying current point estimates of the price elasticity of alcohol demand. The usual point estimate is -0.44: a 100% increase in the price of alcohol would result in a 44% decrease in consumption. A 133% increase in excise means about a 40% increase in the cost of low-priced beer and a 103% increase in the price of low-cost spirits in New Zealand. A 133% excise hike reduces consumption of low-priced beer by about 17%, so you get a 110% increase in revenue for the 133% increase in tax on beer, assuming no substitution over to home brewing and distillation. I'd expect things get more price elastic as you keep hiking things further (the income effect has to start biting sometime). I doubt you're into backward-bending territory with a 400% revenue increase, but taxes are going to do far more than quadruple to get quadruple the revenue. I really don't like where that's heading.

It's that kind of populist socially-conservative nanny-state knee-jerk economic incoherence that I expect a lot more of if the Conservatives get embedded into the system. Hey, let's propose a fiscally incoherent platform and then wave a referendum wand to find out how to plug the hole!

Is getting a third National term without NZ First really worth getting the Conservatives into Parliament? I suppose it depends on your discount rate. I don't like the long game on this one. I'm sure National could work with the Conservatives and make something decent out of it, but it doesn't seem a particularly good strategic vote for social moderates or liberals on the economic right who care about policy rather than just about keeping John Key in office.

Maybe Paris is worth a mass, but is Key really worth a Craig? I'd really really really prefer that National go into coalition with either NZ First or the Greens, or even a grand coalition with Labour.

Conflicts disclosure: I'm modestly short on the Conservatives' crossing the 5% threshold at iPredict, but long on National winning.

Update: Conservative leader Colin Craig has clarified the party's position: they want to hike alcohol taxes, but not to $4 billion. He also notes that our excise system "is nowhere near consistent with Australia's." He should note that the Australian system is nuts. The anti-alcohol campaigners rightly point out that the WET is distortionary and messes up relative alcohol prices. He also notes that alcohol is cheaper than water. When the kitchen faucet at my house starts supplying Emerson's at no charge, we can have a talk about that.

LEAPs forward

Foreign Policy gives us a somewhat implausible critique of Honduras's LEAP zones, the ZEDEs.

First, a bit of history. Paul Romer shifted from academic work on high-tech growth-theory macroeconomics to pursue institutional innovation. He realised, correctly, that you can't do much to change a country. But you can, perhaps, make some progress in a small region. Set up a small autonomous zone in a developing country with access to sound law, sound money, property rights and decent infrastructure, and you'll kickstart development not just for that special economic zone but also for the rest of the country through remittances at first, then through institutional leakage as the host country starts adopting the best parts of what makes the zone work.

I've been a fan of these for a while. A few years ago, a final exam question in my undergraduate Public Choice class asked students to imagine themselves a billionaire who wanted to make the world a better place: should the billionaire's bequest go to Seasteads, or to Charter Cities?

Honduras changed its constitution to allow a few of these to emerge. The Zones for Economic Development and Employment, the ZEDEs, can now be created. They differ from charter cities in that they're broader regions in which cities could be established, but they don't have to be cities.

Mark Klugmann spoke about these at Mont Pelerin this year; here's a Reason write-up from early August.

Now, over to Foreign Policy. The author there provides two critiques:

  1. The ZEDE board is stacked with Cato-type free-marketers;
  2. The zones, when established, will expropriate the current inhabitants who don't always have well-documented rights to their property.
I believe the first one to be true. It's because I believe the first one to be true that I put rather less weight on the second one. If there's anybody who fights against government expropriation and eminent domain abuses, it's Cato-type free-marketers. A bunch of Cato-type free-marketers are not likely suspects in a "expropriate peasant farmers to benefit big corporates" scheme.

The article's worth reading for a bit of background. And Paul Romer tweets that he's also a bit worried. I'm not worried about any zones that might be established by Klugmann's group. If others use the provisions for setting up other zones, that could be different. 

My print piece in today's National Business Review hits on the ZEDEs. I wonder whether we could establish special economic zones here as experiments. Imagine getting rid of the RMA in a few areas and there reverting to tort and nuisance. 

Perhaps shifting to reforms in special economic zones is an abandoning of the prospect of large-scale reform in New Zealand. But perhaps it is also the best we can achieve under the current electoral system. It could also be a reasonable approximation of best-practice: try something new in a few places, see if it works, then either scale it up or end it depending on outcomes. The idea seems fertile. 

If it didn't work, the harms are limited. But if it did....

Feeling Chuffed

It was a great day for the ECON department at Canterbury on Wednesday. Our very own Rachel Webb, successfully defended her doctoral thesis, The Health Economics of Macrosomia. Rachel has been a part of the Department for many years, having previously completed her Bachelor's and Honours' degrees at Canterbury prior to starting her Ph.D. Eric blogged on a preliminary finding from Rachel's thesis here last year.

Rachel's successful defence comes on the heels of some other notable achievements of our recent students: James Graham has just started his doctoral studies at New York University, as one of the 26 New Zealand recipients of a Fulbright Award, and the only one with a degree in Economics; Nick Sander has just started his doctoral studies at the University of California, Berkeley; James Horrocks has recently completed his MBA at Cambridge; and Reza Baqaee is just finishing up his Ph.D. at Harvard.

These are not our only success stories by any means, but the notable thing for me about these five is that they were all in my Honours welfare economics class in 2009. The thing I have enjoyed most about teaching in our Honours programme over the past 14 years has not only been the incredible quality of our students, but also the diversity of their academic backgrounds, in large part because we have made a feature of the fact that one can major in Economics as part of an Arts, Science, or Commerce degree. James Graham and James Horrocks both did double majors in Economics and Philosophy; Nick and Reza completed combined Honours degrees in Economics and Maths, and the same class included students with undergraduate degrees in History, Physics and Finance. Keynes is famous for his statement that a master economist "must be mathematician, historian, statesman philosopher". It is too much to ask that students coming into graduate Economics have studied every one of these other subjects in detail, but the next best thing is to have a class that collectively has that breadth.

Thursday, September 11, 2014

Me and Eaqub on Christchurch

Shamubeel Eaqub and I contributed chapters on the Christchurch earthquake and rebuild to a book that came out last week. The Herald covers it here.
Shamubeel Eaqub, NZIER principal economist and from Lincoln outside Christchurch, wrote about "overly restrictive policies on height, density and urban limits" which he said needed to be considered.
Centrally planned clusters never worked because the beauty of cities was that the close proximity of different people, skills and ideas gave rise to new ways of doing things and that was the lifeblood of innovation, Eaqub said. "Creating strict precincts based on one vision of how an economy or community is organised is misguided," he wrote.
The Christchurch Central Recovery Plan had good elements but was too restrictive on building and urban design practices.
"The plan has good enough elements to get the tick but it is taking too long to implement. The longer we wait, the higher the chances of permanent damage to Christchurch's economic future as the South Island's economic capital," he warned.
Eric Crampton, ex-Canterbury University economics lecturer and now head of research with the New Zealand Initiative in Wellington, wrote how the length of time it took to plan the new city centre had disastrous consequences.
"In Christchurch, the three-year-long quest for the perfect central city plan stopped anyone downtown from proceeding with any work at all for far too long, bleeding downtown's prospective recovery as businesses fled for the suburbs or left town entirely," he wrote.
You can, and should, buy the book here.

I'll be on a panel discussion as part of the book launch here in Wellington at LT1, School of Architecture and Design, 139 Vivian Street, at 12:30 on the 18th of September. Come along and say hi.

The Auckland launch, which I won't be attending, is on the 17th, with details at the link above. I missed the Christchurch launch on the 31st, unfortunately.

English gets it

"After the election, there's a Resource Management amendment bill that standardises a lot of the planning processes. That could be quite a step forward. We'd like to do a lot more intensive look at the incentives on councils and council officers and the way they make decisions that restrict the availability of land -- the political pressures to restrict densification within cities (which are) pretty strong here in Auckland, and the interaction with infrastructure."
English said the Government and councils needed to better understand why some Councils, such as Waimakariri and Selwyn in Christchurch, were keener to build infrastructure for new housing than others, such as Auckland.
If development isn't in a Council's financial interest, or if the incentives are so weak that a bit of NIMBY pressure can make the difference, then don't expect Councils to allow more development.