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.