Economist Shamubeel Eaqub on myth busting tax cuts, the house price paradox, limits to life expectancy, the trouble with forecasting, adapting to the digital world, the way to cut traffic and more

Today's Top 10 is a guest post from economist Shamubeel Eaqub.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Myth busting tax cuts.

With our election coming up, tax cuts are back on the agenda. While company tax cuts are unlikely, this explainer from The Conversation is a useful guide to the fiscal impacts, the shenanigans of the numbers and investment reaction from firms.

The conclusion is predictably economist:

“…there are genuine uncertainties about the costs and benefits of a company tax cut, but many of the objections that have dominated public discussion seem overblown. The main problem for the Government is that, in an era of persistent budget deficits, it has failed to show why it’s fiscally prudent to offer an unfunded tax cut.”

2. Can't afford falling house prices.

Like NZ, Australia is trapped in a system of high house prices. If prices fall, then current and coming crop of retirees will be much worse off. But with falling home ownership, this wealth is concentrating among fewer people and voters. Each government faces the paradox of raising prices for current home owners and still increase home ownership. A really good read from The Conversation Australia:

“…even if house prices weren’t to decline, there is a paradox at play in this system. In order to maintain a healthy housing asset base for retirees, house prices must remain high. So the policy-price cycle is aimed at sustaining home ownership as a key pillar of the welfare system. However, it has also resulted in housing wealth becoming increasingly concentrated in the hands of smaller subgroups. Notably, housing equity is getting concentrated in the hands of older generations.”

3. End of rising life expectancy?

Life expectancy has been increasing steadily for decades. But in recent years this has ticked down. It may be an aberration, but an interesting issue to consider. Particularly with the big cost of superannuation and health with an ageing population.

This article from the UK is an interesting glimpse into how actuaries work out cohort life expectancy.

…assumptions as to what might happen to mortality in 30 years’ time might largely be driven by what has happened in the last five years or so. This means that small changes in mortality rates now can mean huge changes in what we expect longevity to be in the long run.

4. More welfare = more dependency?

There is a fear that if welfare is too generous, there will be a growing cohort of dole bludgers. Recent evidence from Australia shows that is not true. More money, particularly child support, leads to much better outcomes.

One of the big cohorts of poverty in New Zealand are single mums. This Australian research should focus our minds on breaking the poverty cycle, investing in children and prioritising children’s rights:

Single mothers work more when their child support increases and other welfare payments such as the Parenting Payment fall by less than the increase in earnings. This means that when child support increases, single mothers have higher household income.

5. The trouble with forecasting.

A great read from Noah Smith. Economics as a profession is under attack, but often because it failed to predict the GFC.

When people come up to me and declare that economists are charlatans, they usually mention how economists failed to predict the Great Recession. This is true.

macroeconomic data just doesn’t have much useful information in it. The old Wall Street joke that “all financially useful data costs money, which is why macro data is free” seems to hold true.

All this adds up to a pessimistic conclusion -- recessions just aren’t very predictable from economic data.

It seems economics needs to go back to its roots as a social science, rather than pretending to do the impossible.

6. Adapting to the digital world.

Technological change is disrupting many industries. The music industry was one of the first to be impacted by digitisation.

But they have adapted by developing talent, consolidating and paid streaming. Industry revenues will likely reach historical peaks by the end of the next decade.

Some lessons for our media sector and the disruption from digitisation more generally.

“…streaming helped the industry not just to get by, but to grow. By sticking to what it did best, getting bigger to bargain harder, and finding new partners, it gained more life.”

7. Boosting productivity.

NZ has a long track record of anaemic productivity increases. The OECD described it as a paradox and sits uncomfortably against a bunch of indices that say we are the least corrupt, very easy to do business in, and a great place to live.

Noah Smith writes:

If you want to raise productivity, you need to focus some attention on the quality of your country’s institutions -- for example, how markets are set up and regulated or how contracts are made and enforced.

But ends on a rather dismal note:

There is no obvious solution on the horizon. But as with Europe and Japan in the 1990s, the crucial first step is to recognise the severity of the problem.

8. Spread government jobs?

Spread government jobs to the regions? There is plenty being written about spreading Washington jobs. This The Economist blogs pull a lot of this together. It traverses the various pushes and pulls, but concludes that it probably does make sense to keep a core of government jobs and services in one place:

In one sense, putting government agencies in Washington is a solution to a political problem; things go there because the politics of putting them elsewhere gets very messy very quickly.

9. Assessing politicians.

How to assess opposition politicians? After all, we haven’t seen them in action before to judge them. This LSE Blog provides a 5 point critique of Corbyn in the UK. It’s a useful frame to think about our own opposition leaders ahead of the coming elections. I reckon a solid 3/5 for the three larger opposition parties.

First, ‘fresh faces’: does the leadership promote talent to signal a change of political generations and the renewal of the party in the wake of electoral defeat?

Second, ‘cohesion’: are they able to maintain loyalty and discipline to project a unified image to the electorate?

Third, ‘visibility’: is the leader able to fashion a distinctive, eye-catching agenda which captures the imagination of the electorate, wins the confidence of opinion-formers, and distances the party from a potentially ‘toxic legacy’?

Fourth, ‘efficiency’: has the leader been able to build a party machine that can take on the government of the day?

Finally, ‘adaptability’: is the leadership sufficiently pragmatic to respond to events, changing its strategy where necessary to win power?

10. The way to cut traffic.

Self driving cars wont solve our traffic woes. In this article in the NY Times, lays out a thoughtful discussion of traffic, pricing the peaks and using all modes of transport. We should build more more roads, more public transport, more cycle ways and more walkways. But we have to price congestion if we want travel times to fall:

If decades of urban planning and economic research are any guide, the solution is unlikely to come from technology but from something similar to Uber’s surge pricing: charging people more to use driverless cars at rush hour.

…public transit and land planning are [not] bad ideas, or that widening freeways is a bad idea. When roads are bigger, more people can get around. More people see family; more packages are delivered; more babies are lulled to sleep. It just means that none of those measures have done much to reduce commute times, and self-driving cars seem unlikely to either.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

#1 Company tax cuts rely on trickle-down economics. The benefits in the article appear to be hard to quantify and are probably overstated. A tax cut directed at low-mid income earners would be more helpful to the economy.

In the distant past, fiscal drag tax cuts used to be pretty much automatic.

Better a one off spend/lump sum as a) its not inflationary b) it seems to have a good multiplier effect like 1.6 or so in the right circumstances. PS A tax cut for the well off will just making housing affordability even worse.

New Zealand, Australia and Malta are alone in having a dividend imputation scheme.

For domestic investors, particularly in small companies, the company tax rate is not really an issue as any taxable profits paid out as dividends are offset against the individuals tax with the imputation credit.

Basically the company tax rate for small businesses and domestic inventors is irrelevant. A fact that seems to escape many commentators.

Perhaps an accounting expert can expand upon this issue.

#10 We already have ways to reduce traffic, particularly at peak hours. Things called the internet and telecommuting.
Unfortunately we don't tend to have the corporate management skillset required to implement it effectively.

Fully agree. Unfortunately, the top echelon of the corporate sector are 50+ blokes who grew up with the 9 to 5 (or longer) work hours. I could easily work from home as my field of expertise relies on one software package, plus basics like Outlook and MS Word. Higher ups tend to dislike telecommuting though as they lose the 'Big Brother' control over their employees.

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14

#2 perpetuating the myth. What is firmly established is that a minority of individuals own their own home, and even if they are mostly Boomers (an irrelevancy IMHO), and thus for the cost of housing to fall then the price of residential property MUST fall. If people have used residential property as a means to provide for themselves in their retirement then the paper value is an irrelevancy unless they are over leveraged, and then that is a simple business decision they made and have no right to expect protection from the tax payer. Instead a Government's duty is to protect the majority and that means they MUST keep housing/accommodation affordable. This is tied to the free market and it's failings, thus they must regulate to make it happen, not wait and hope for some vague market effect to maybe take effect at some indeterminate time in the future.

Right on! However, with which group do the votes & electoral power lie? That's all the Govt sees.....

Spot on, with the exception of requiring regulation. I firmly believe government competing with the "free market" is much more effective (look at how bank fees got under control when kiwibank hit the market). If the market won't create the required supply, the government should get of it's ass and make the supply.

I wouldn't say that Boomers having the highest rate of home ownership is irrelevant; rather it's leading to the seeds of feudalism being sown.

Interesting point - and it seems we're breeding 'landlords' who believe they are the lords of the Crown with unlimited privileges.

No. 3: Every time somebody (who has vested interests) states that the NZ super age must rise, they also say that life expectancy is rising and they normally say things like "by the year XX, people will be living until XX".
ie an extrapolation of the recent increases. They do not even think about the consequences of obesity in NZ and that many women are now moving into high powered stressful and sometimes dangerous jobs.

Do you really, truly think that the professionals who calculate life expectancy trends have not thought of that?

Of course it's uncertain. Of course it may turn out to be the case that the life expectancy trend reverses and people, on average and in general, start living less long. So what?

If that happens, then NZS will become more affordable, maybe even to the point that the super age can be revised downwards and/or the Government can spend the money on something else.

Is it your contention, though, that it is so certain that average longevity is going to reduce that we can bank the cost savings now - no action at all need be taken to address the possibility that it will continue to increase?

The professionals! Haha.

8 : Spread Government Jobs !

... Shammy Boy : It is only a matter of time before a suitable office block becomes up for lease ... and she's a doozy ... this one is large enough to house the entire NZ Public Service .... and the local economy down there certainly needs a boost , a shot in the arm ...

And those relocated civil servants would get a stunning view over Fouveax Strait ... down in Bluff , at the soon to be vacated Tiwai Point smelter ....

#8: Spread govt jobs: They are talking about the US here, which is a federal system. There are dangers in divesting government to the states - eg it would give states in the Bible belt free rein to discriminate against gays or outlaw abortion etc; poor states could get downgraded services, etc. The NZ situation would be different - simply moving (say) core functions of IRD to Hawkes Bay wouldn't carry those same risks - it would simply be a way of spreading government jobs etc away from the main centres.

#7: the linked article is about the US. Seems to me that Mr Eaqub needs to do more to show the relevance of its diagnosis and conclusions to New Zealand.

One point about productivity. The measure is about output per hour worked. That is bound to suffer, the more not particularly productive people participate in the workforce - the elderly, the disabled, the low-skilled - and that does seem to be the case of New Zealand, where we have a very high rate of labour force participation. There are good reasons to welcome their participation - it has social and health benefits for the workers themselves, and reduces their economic dependency on the state. Would we really think ourselves better off as a society, if we sacked the least productive workers and restricted participation in the labour force only to highly qualified, fit young people?

The less productive people you listed would need to be large percentage of the workforce for them to cause productivity to flatline for years at a time. The only large enough group to do that would be the elderly, more of who are now working past 65 to survive. Also, young and fit people are productivity are not necessarily mutually inclusive, just like middle aged and less fit people and unproductivity are not mutually inclusive.

5. Some, a very few economists did predict it. The Q to ask is why so many failed so miserably and why there seems to have been no change in their methods/dogma to account for this failing.

Of the few, how many were promoted to run the industry do you think?

Moving Govn jobs to the provinces ignores so much reality its mind boggling how stupid it is. I might be missing something but this has been tried before and been a failure? Things like, where do you get people of sufficient calibre / capability? Part of the reason for say working in say Wellington is the breadth and depth of job opportunities and career progression, move to an area of just one job and there is only that one job, a big risk. Advantages of scale etc go bye bye.

Pretty much. Your comment also highlights why young Kiwis would rather not buy houses in the provinces; sure, you might find a job there, but if you want to change jobs or get laid off then you're stuffed. Moving a Gubmint department may work if it's a newly created one, but for existing ones you're asking the staff to move away from their friends, family etc., to pull their kids out of school and sell/rent out/relocate out of the houses they may own. It would also lead to redundancies and staff refusing to leave being 'asked to step down.'

Department of tourism to Queenstown?

Immigration dept in AK? Noooooooo. We don't want more people in AK!

Don't agree with you Steven. Perhaps for the younger people who want the cities but I am well aware of the number of people getting out of Auckland for yet another reason - to live life. Massive housing into South Auckland - to get to jobs in other areas of Auckland means 4 hours a day driving on in this case the Southern Motorway Carpark. That is 20 hours a week and unless in a business vehicle with fuel covered, that is a cost to families and equivalent to working a 60 hour week. It is not sustainable and even the young ones have worked that out. A freehold good home, family life, less mortgage and guess what, the need to be making more money is not the end goal that has been pushed for the past few years. As they say, you can't take it with you. What will children remember of their life with their parents when they are adults? Their family bond or the parents being absent while they are raised by pre schools, schools, after school care etc. The provinces are also finding it hard to get good people so jobs are out there.

Gee Steven. You are showing some limited experience. First the regions are stacked full of people of calibre / capability. Second basing government in large government town leads to a closed loop of wrong thinking. Example. These Wellington town folk don't understand the wealth of New Zealand comes from smart and entrepreneurial folk. three. We don't want influential government folk made up solely of folk who panic at the thought they could not get another job outside of a big government town. We want them to think widely about what they could do.

I was congratulating my neighbours, couple early 30s first baby, on the sale price for what I thought was their first home and the good buy on their bigger second home. They then casually mentioned their 2 rental properties including a boarding house. I also know of others in thirties with several properties. Here’s me, one of those nasty greedy baby boomers, with my one own home, no rentals, no private super (never worked anywhere that offered it and no one ever discussed super) and the small amount I have saved in my kiwisaver (joined 2009, but gap of unemployment has not helped). But according to Mr Eaqub and most Interest.co commentators I am the problem. I am hoping to sell my house in Auckland to retire somewhere cheaper when I stop working but if Auckland prices fall, then they fall and I will hopefully sell and buy in a similar market. I don’t accept that the current and coming crop of retirees are being propped up by some deliberate strategy to concentrate wealth with them. I have a question though – has anyone checked the correlation between when Govt paid “market rents” and increased rental investorship started? And which has then gone thru the roof with the excitement caused by non-resident purchasers paying silly money because they can?

Personally I don't think most boomers want high house prices. There is no advantage at all in owning something that is worth X million if you are not planning on selling it and move elsewhere.
Additionally, the council rates bill is not very pleasant if you own something in a high priced suburb.