Alex's politico-economic blogroll: Farrar doubts TPP with US; Robertson on food stress; Crampton wants to sue everyone

Alex's politico-economic blogroll: Farrar doubts TPP with US; Robertson on food stress; Crampton wants to sue everyone

Here's my politico-economic blogroll for the last week. Apologies it wasn't out on Friday, was rather hectic and I was recovering from the Press Gallery earthquake fundraiser on Thursday night.

I ended up paying for half of a bottle of the PM's Pinot with Herald journo Derek Cheng at the auction (which we shall drink on election night). Was thinking about whether I should claim that donation tax break on it, but figured the country might need it going on what we heard from Key over the weekend.

Remember, we still haven't had the corporate tax cut yet - the drop from 30% to 28% comes in on April 1 - which is going to be another hit on the government's revenue line.

From the right

1. Now Farrar is questioning TPP with the US. David Farrar at Kiwiblog is taking a long hard look at his free trade beliefs and how they rub up with the proposed Trans Pacific Partnership Agreement which would include America.

He's not convinced it would be free trade. I'm not sure anyone is anymore. Remember the PM has said there could be some tough decisions made, but that's alright as long as NZ gets a net benefit from any agreement.

Bloody nasty isn’t it. And it is not as if NZ is a country with weak copyright laws. The Property Rights Alliance do an annual index of property rights. Their 2010 report for New Zealand ranked NZ the 4th best country (out of 125) in the world for (lack of) copyright piracy.

The New Zealand Government position has been to reject these provisions, which is good. But at some stage, there will be some calls to be made and compromises to occur to get an agreement.

This will pose a challenge for free trade advocates such as myself. Is allowing the United States to rewrite our copyright laws, a price worth paying?

Well if it was a true free trade deal, where the United States agreed to phase out all (or at least the vast majority) of its tariffs, then yeah it might be. An extra $2b a year of exports would create a lot of extra jobs, extra investment, extra wealth and extra tax revenue.

But what if we don’t get the US to agree to let in our lamb, our beef, our wool, our milk, our fruit without restrictions? What if the lowering of trade barriers is modest at best? This can not be ruled out – the US/Australia free trade agreement was very modest in terms of lowering trade barriers.

2. Show me the evidence. Roger Kerr (the Business Roundtable one) picks up on this article out of Australia on compulsory superannuation, which argues there is still no detailed policy report showing any "net economic and social gains flow from forcing employees to hand over a growing slice of their salary to the richly rewarded fund managers in the nation’s booming financial sector".

NZ's Savings Working Group decided not to recommend 'hard' compulsory Super (most of its research on this was on the Aussie scheme), but instead leaned toward a 'soft' option where people would be automatically enrolled (perhaps when they turned 18 or entered employment) but had the option of opting out. 

Some people argue that a similar scheme here would boost growth in New Zealand.  I have never seen any account of Australia’s improved economic performance over the past 25 years that attributes it to compulsory superannuation.  Rather, the main explanation is the economic reforms initiated by the Hawke and Keating governments and carried on by John Howard.  These figures suggest why compulsory savings have not been a significant factor, at least over the past 10 years: the returns to the scheme have been poor and capital has been misallocated.

The Australian Productivity Commission has amplified this point as Toohey notes, saying:

Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings.  In particular, younger people may be less able to invest in their preferred mode of savings (for example, owning their own home, which is a tax effective savings vehicle and offers social benefits).

There are other drawbacks with compulsory savings.  Toohey notes that fees paid to fund managers and administrators now amount to about $18 billion a year.  Last year it was reported that around $10 billion in superannuation accounts had gone missing – the owners of the lost accounts could not be tracked down.  The legislation backing the scheme has been endlessly tinkered with – over 2000 amendments to it had been made at last count – and further amendments are currently being debated.

Perhaps considerations such as these led the recent Savings Working Group not to recommend a compulsory savings scheme for New Zealand.

3. 'Fools and their money'. Alf Grumble doesn't think Simon Power's idea of targeting celebrities who endorse finance companies will work that well. (Also see number nine below)

An article in the Herald in July 2008 did a nice job of reminding its readers how they – or some of them – had been star-struck when they took their money from under their beds and humped it down to a fine-looking finance company for safe keeping. Ha!

‘Solid as… I’d say!” That’s how Colin “Pinetree” Meads described Provincial Finance before it went into receivership in 2006.

The All Black legend is among celebrities to endorse finance companies as the sector’s reputation nosedived – with about 24 firms collapsing or running into serious problems in two years.

Former New Zealand cricketer John Morrison regularly extolled the virtues of Wellington finance company St Laurence, sponsor of his Radio Sport cricket show, until the company announced 12 days ago it had stopped lending ahead of a likely default and was withdrawing its prospectus.

And former TV One newsreader Richard Long has become the voice of Hanover Finance after narrating its regular spot accompanying the channel’s nightly weather update.

On that occasion Long said adverts for finance companies should be viewed no differently to those for other products.

He might try telling that to Simon Power, who obviously thinks otherwise.

But at the end of the day, there’s the old adage about fools and their money being quickly parted.

And if someone should stick their life savings into a finance company purely on the strength of a celebrity endorsement, only to see those savings evaporate when the company goes belly up…

In those circumstance, Alf is apt to recall a remark wrongly attributed to P T Barnum: there’s a sucker born every minute.

From the left

4. It's not good news. MartyG at The Standard isn't too happy about news that NZ's productivity rose 3.7% last year. That's because it was a result of high unemployment, he says.

But wait, isn’t higher productivity good?

In normal circumstances, yes, when it comes about from capital deepening (ie businesses investing in equipment rather than taking profits) or a more educated workforce. But productivity will also raise when unemployment goes up, because unemployment is rising.

The least productive jobs usually disappear first when businesses close and cut back. Overall output falls but the amount of work done falls even more, so productivity (output divided by hours of work) climbs. That’s not a good thing – everyone is worse off.

That will be worth remembering when New Zealand’s productivity stats come out in March, and they show a big leap in productivity. It would be embarassing for anyone to foolishly claim that increase is somehow a result of Key sitting around and smiling for the cameras, when it’s really a result of tens of thousands of Kiwis losing their jobs.

5. We need a quake levy, just do it later though. No Right Turn argues a levy on higher income earners is still a good way to pay for the costs of rebuilding Christchurch, although govt should hold off imposing it until consumer confidence and spending returns.

This is the same sort of idea Matt Nolan at TVHE touched upon when he asked why we were so focussed on rebalancing behaviour - saving not spending - when what we need now is spending. We can focus on the rebalancing when the economy's recoverying, he says.

Duncan Garner's latest blog post suggests that the government should stop borrowing and pay for the earthquake now with an earthquake levy. I've supported this idea in the past. But after an online discussion with Keith Ng and others a couple of weeks ago, I've changed my mind somewhat.

A short-term earthquake levy targeting the rich is absolutely the fairest way to pay for the immense cost of rebuilding Christchurch. But given the weakness of the economy, now is probably not the best time to impose it (raising taxes in recessions is generally a bad idea, as any Keynesian will tell you). So, its better for the government to borrow in the short-term, and commit to imposing such a levy later (in a year or two, when things have hopefully recovered a little) to cover the costs.

6. Food stress. Labour MP Grant Robertson blogs on Redalert about a Regional Public Health study showing how expensive it is for low income families to put healthy meals on the table. 'Food stress', 'Bill shock', call it what you like, but it seems to be growing. Anyone had a pay rise lately?

While the study notes that on average New Zealanders spend 16% of their income on food, the study shows that in order to put a healthy meal on the table, many New Zealanders would need to spend a far greater percentage of their income on food.

International studies indicate that if you are spending more than 30% of your disposable income on food, you are experiencing ‘food stress’. This study shows that to purchase a basic healthy diet, many low income New Zealanders will be spending a far greater percentage than that.

For example for a family living off the minimum wage would need to spend 34% of their income before rent and 50% of their income after rent to do this. For a beneficiary family the situation is even more difficult with a range of 43% (before rent) and 74% (after rent) required.

Economics blogs

7. Battle of the babes. No, not Kaye and Ardern in Auckland Central, but of the Tax and Savings Working Groups' reports the government commissioned. Matt Nolan at TVHE thinks they may be touting different ideas about tax treatment. He has some interesting comments on credit cards too.

Should we also be looking at the ease of getting credit in New Zealand? The ease could have a detrimental effect on our national savings.

The Tax Working Group was at pains to align our taxes such that they did not distort peoples’ decisions while the Savings Working Group specifically wanted tax incentives to encourage saving. So who is right? Or can the two views be reconciled?

Let’s think first about what the SWG are saying. They identify a risk to the economy from our high level of foreign liabilities and want increased saving to reduce the risk. So what market failure exists? The most commonly proffered explanation for sub-optimally low saving is that people want to save more but just not today. If that’s the case then there is a good case for the government to give people some incentive to help them save. What the government is doing is helping people to do what they woud do if they didn’t have a problem with self-control. So, if the TWG want to equalise tax rates are they forgetting about that issue?

Well, that would be one explanation but perhaps they’re thinking about it a little more carefully. The best way to overcome the problem of saving too little is to use a precommitment device. Term deposits, savings accounts with withdrawal fees and other such mechanisms allow people to force themselves to save money that they know they’d otherwise spend tomorrow when their self-control waned. If you think these mechanisms are sufficient to overcome the problem then providing incentives to save might actually result in over-saving!

However, some authors argue that these mechanisms are not enough because of how easy it is to get credit these days. Credit cards are so easy to obtain that it’s fairly straightforward to get around the spending restrictions of a term deposit.

When you see something you want to buy you just put it on the credit card and pay that off when your deposit matures. In fact, David Laibson’s work suggests that net saving in the US dropped significantly with the advent of easy credit and he speculates that it is for precisely that reason. So perhaps the SWG’s recommendations aren’t out of line with inducing optimal, individual behaviour at all. At least, the best policy is not at obvious.

8. The value of the internet and productivity. Anti-Dismal has a look at some ideas on the connections between the internet and productivity. "We are trying to use 20th century measurement technology to measure a 21st century economy," he says.

Annie Lowrey has an article in Slate in which she asks, Why hasn't the Internet helped the American economy grow as much as economists thought it would? And answer is, may be it has but we just don't know how to measure it:

Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. "Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we're not listening to less music. There's more music consumed than before." The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. "On paper, the way GDP is calculated, the music industry is disappearing, but in reality it's not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music."

As more of our lives are lived online, he wonders whether this might become a bigger problem. "If everybody focuses on the part of the economy that produces dollars, they would be increasingly missing what people actually consume and enjoy. The disconnect becomes bigger and bigger."

But providing an alternative measure of what we produce or consume based on the value people derive from Wikipedia or Pandora proves an extraordinary challenge—indeed, no economist has ever really done it. Brynjolfsson says it is possible, perhaps, by adding up various "consumer surpluses," measures of how much consumers would be willing to pay for a given good or service, versus how much they do pay. (You might pony up $10 for a CD, but why would you if it is free?) That might give a rough sense of the dollar value of what the Internet tends to provide for nothing—and give us an alternative sense of the value of our technologies to us, if not their ability to produce growth or revenue for us.

9. We should be suing the government, not the celebrities. Economist Eric Crampton weighs in on Simon Power's idea that celebrities who front dodgy finance company ads could be sued if the company went belly up. Crampton isn't a fan of Power's idea, to say the least.

This has things precisely backwards. The problem isn't celebrity endorsement of investment product. Rather, it's folks willing to accept ex-rugby stars and former TV news announcers as providing expert investment opinion. Does Simon Power really think that but for the celebrity endorsement, the folks who put their life savings into dodgy finance companies paying a point or two above a Rabobank term deposit would suddenly become enlightened investors putting their money into passive diversified index funds?

Why not be consistent: let any buyer sue any celebrity whose endorsement led to buyer's remorse. And the actors on the ads too. I want to sue all the people in the Mentos ads. I've no problem with the mints, but they never make me quite as happy as the folks in the ads promise. And the woman in that irritating cleaning product commercial who implies you can clean up your whole kitchen in about a minute if only you have the product she's selling. That's never worked out for me. And I want compensation.

If we're going to sue anybody over Mom and Pop investors making idiotic investment decisions, we ought to start with the government. The government's refusal to make credible commitments that they'd never ever bail out the folks who voluntarily chose to invest with risky finance companies probably led more investors astray than did any rugby star. Or maybe we ought to sue those investors who knew that the government couldn't help but bail them out if things went wrong.

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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Alex - the blog is just a reflection what’s happening in the real world – BS - going around a vicious circle without progress.

With the current economic, financial and social situation - Alex stop updating only – take the initiative start taking a leading role in Hickey’s team – it is your generation your world. Your generation has to sort out all the shit the BB generation is currently producing. Your generation has to clean up the mess our generation created. Your generation has to pay an enormous price for what’s happening right now. Your generation needs to become for more progressive, otherwise it could be too late and unrest or worse are dominating your world/ future. We do need changes, major reforms – urgently. The younger generation is my/ your and our hope.

MEQht

#4 Or has productivity gone up because the cost of capital (ie interest) gone down? Economic theory says that if the cost of capital drops relative to labour, capital (machines) subsitutes labour and productivity increases. A side effect is an increase in unemployment until the gains from the increased productivity increase output.

 "Prime Minister John Key says the Government will seek to deliver a Budget that makes no provision for new spending – a level of austerity unmatched since the early 1990s and the infamous "mother of all Budgets".

Mr Key gave an assurance yesterday that there would be no repeat of the 1991 benefit cuts and promised pensions were safe.

But he said the February 22 earthquake had forced ministers back to the drawing board as the hit on the Government ballooned to $10 billion, which will drive up borrowing. The need to trim spending meant some programmes would be axed, spending on others trimmed and only health and education could expect a rise on their 2010 budgets. Even that increase – between $600 million and $800m – will be funded by spending cuts elsewhere" stuff.co

What a bloody shame this govt didn't pull it's collective finger out more than two years ago.

 "Frustrated Christchurch business owners are preparing another protest outside Civil Defence Headquarters today.

Up to 100 business owners scuffled with police and breached an inner city cordon yesterday afternoon as they demanded access to their properties."

Red tape rules boys....welcome to the nuthouse.

Where were civil defence when the CCC allowed building made of brick and stone shite to stand awaiting a quake to topple them onto tourists and locals on the footpaths and in buses and cars...where were they then...was it not a safety matter that so much heritage shite remained standing for so long.....?

 "The situation at Japan's quake-damaged nuclear plant remains very serious, the head of the UN nuclear watchdog said.

But IAEA director-general Yukiya Amano said he had "no doubt that this crisis will be effectively overcome". bbc

I don't know if the powerplant fuel rods and spent fuel rods have or are melting through the bottom of the containment vessels...because the information flow has been effectively shut down and the spin has started.....

The wind direction has been toward Tokyo and the velocity low...QED the shite has been heading for the capital..drifting over the rural land....into and onto everything...

The MOX information has been swept under the media carpet...not a peep now...now we are being prepared for the BS that a little bit of radiation is no worse than an xray...in fact it might be good for you....feck me.

Tax the Rich

Levy the Rich

Make the Rich pay

In New Zealand you are rich if you earn above $100k or so and there are not many of them so taxing the rich will bring in stuff all. You need to think again. The rich New Zealanders are generally living and working in Australia.

NB, I posted that with serious loads of sarcasm.

I would disagree, a high income doesn't necessarily mean you're rich. Some high income earners spend as much as if not more than they earn.

I find it extremely frustrating that the left think "Taxing the Rich" will solve all problems. Income redistribution does nobody any good.