Some misconceptions about Capital in the 21st Century Matt Nolan Apr 23

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After reading Piketty’s book, I have run into a good number of comments from people about it.  Some of them appear to be based on some confusion about what the book is saying.  Below I’m going to note down some of the more popular ones, and point out why they are not backed by the central thesis in Capital.  This follows on from yesterday’s review.

This is not a criticism of any of the people making these claims – given the way the book has been discussed, and the nature of the text, I can understand where the confusion has come from.

“According to Piketty, the return on labour will grow more slowly than the return on capital”

No, this is not what he states.

He states that, given his assumptions, the share of total income going to capital owners will rise.  However, this is in a situation where the amount of capital rises significantly.  This process of capital deepening will actually make the ratio r/w (the return on capital relative to the return to labour – wages) fall.

He is assuming a point in the future with full employment, where the relative return to labour is higher.  His concern is instead about the fact that legacy assets will be giving a return to people who ‘do not have to work for it’ (this comes through most strongly in Chapter 11) – which is something he thinks is unfair and morally insidious.  This is an extremely different argument.

“This is a generational issue where baby boomers are getting more than their kids”

No, this is a total misreading of Piketty.  His concern is that current generations are deferring consumption to create a stock of assets their children can live off – a privilege for a small elite.  This has nothing to do with intergenerational welfare, it is an argument about the dispersion of income within generations.  To quote from pages 399-400:

It is perfectly possible to imagine a world in which all people would choose to convert all of their wealth into annuities and die with nothing.  If such behavior were to suddenly become predominant in the twenty-first century, inheritance flows would obviously shrink to virtually zero, regardless of the growth rate or return on capital.

If the baby boomers were to make strong use of schemes that allow them to ‘unlock equity’ in their property, then there would be an intergenerational transfer of resources – but it would also be a counterbalancing force to the one Piketty is describing.  The intergenerational claim and the claim of excessive inheritance incomes are contradictory claims – not complements!

“We will all be poorer in the future”

No.  Piketty points out that he is assuming long-run per capita income growth of 1.2%pa (page 100).  Furthermore, the return to labour has risen in this context due to a process of capital deepening – a transitory process that gives us greater growth than this (although Piketty’s assumptions limit the impact of this).  He is not assuming a zero-sum, or poorer, future.

“It is all rent seeking, not value creation”

No.  Piketty states that:

Quote about all entreprenuers turn into rentiers (pg 422-423)

In this context, he is talking about rent as an earned return on investment – not as “rent seeking”.  Rent seeking is when someone expends resources to try to transfer resources to themselves.

He inadvertently uses the term “rent seeking” on page 116 – however, I am convinced this is a mistake.  The reason for this is his later discussion of the term rent on page 423:

It is particularly interesting to note that the word “rent” is often used nowadays in a very different sense: to denote an imperfection in the market (as in “monopoly rent”), or, more generally, to refer to any undue or unjustified income

He compares this to his usage

The problem posed by this use of the word “rent” is very simple: the fact that capital yields income … has absolutely nothing to do with the problem of imperfect competition or monopoly.  If capital plays a useful role in the process of production, it is natural that it should be paid.

This is certainly not “rent seeking”.  In fact, it is largely the fact that increments of capital are creating value, in a situation where the ‘stock of people’ is growing slowly that is driving the result.

“It is all about misallocation/unproductive investment (housing) instead of returns on real investment”

No.  Piketty is at pains to say how ridiculous the “unproductive” vs “productive” split in investment is.  From page 48:

Similarly I ruled out the idea of excluding residential real estate from capital on the ground that it is “unproductive” ….  The truth is that all these forms of wealth are useful and productive.

For him, it is about looking at investment and returns on the same basis, irrespective of what the investment is.  Then given that, he is discussing a process where he thinks incomes will become dispersed, a process he is concerned about.

“It shows we need more taxes and a larger government”

No.  Piketty explicitly states that he is talking about changing the tax mix, not increasing the level of taxation and the size of government.  From page 481

There is no significant support for continuing to expand the social state at its 1930-1980 growth rate

On the face of it this does not seem to say much.  But when combined with his push for all policy to be based on democratic support and the rest of chapter 13, noting that governments now use more of national income then they have at any point in the past (the fantasy of shrinking governments that some have makes very little sense), it leads us to his conclusion that we should about how to improve policy – rather than saying we should further shift resources from private to public hands.

“Piketty hates wealth”

No.  He is so keen on redistribution, because he does not believe that what he is suggesting would reduce wealth – he has no problem with wealth being created, his issue is with long dynasties that control resources.

And this comes from a concern about economic opportunity.  From page 523:

Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest, provided that some countries do not take advantage of their neighbors by siphoning off their tax base

“Piketty’s thesis is not only anti-wealth, but anti-globalisation”

No.  Not at all.  Piketty recognises that such openness is useful – and it is part of the reason he is forecasting 50 years of convergence in incomes between the poorest and richest nations on earth in the first part of his book.

In fact, Piketty expects significant convergence between rich and poor countries as a result of globalisation and free trade.  His concern is that this will come with falling taxes on mobile factors (specifically capital) and that this will be a “prisoner’s dilemma” for nations – as a result, a global agreement for a capital tax, if enforced, could improve outcomes in his view.  This is certainly not an argument against globalisation.

The quote for the above question (“Piketty hates wealth”) actually covers this question off quite well!

“Piketty is describing a world with increasing robotics and automation”

No.  I’m not sure where this one has come from, and I’ve heard it a couple of times.  This is very untrue.

Piketty is not interested in trying to pick the future of technology change.  Instead, he is trying to describe a general tendency that he believes will exist – relatively independently of the type of technological change we experience.

Increasing automation is a secular trend that might reinforce the dynamics that Piketty is discussing, but this isn’t something he discusses.

Gender quotas Eric Crampton Apr 18

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Annick Masselot of Canterbury's Management department wants gender quotas on boards of companies listed on the NZX.
UC associate professor Annick Masselot said the NZX should go further with the introduction of quotas.
"In fact I think they have a duty to do that . . . Diversity is not an option."
She said NZX's diversity rules should at least match rules from the Australian sharemarket that required companies to disclose whether they had a formal diversity policy, and "if not, why not".
Masselot said several studies found that having women on boards led to an improvement in financial metrics.
Countries including Norway had introduced gender quotas in company boards using hard legislative measures. Others, including Australia had increased the number of women on boards with the use of "soft" self-regulation, she said.
The NZX would have the power to introduce gender quotas, but did not consider it appropriate to introduce them and had no intention to do so, a spokeswoman said.
I wouldn't be surprised if there were some studies finding benefits, but I doubt that they'd be sufficient to overturn the general conclusion that quotas aren't necessarily that hot an idea.

Adams and Ferreira, in the Journal of Financial Economics, found that mandating gender quotas for directors reduces firm value for well-governed firms. Forcing Boards to take on more women can help performance where those firms had existing problems that could be solved by greater Board monitoring. But on average, greater diversity yielded worse firm performance in the set of S&P firms (500, MidCaps and SmallCaps) studied.
Given that our previous findings suggest that more gender-diverse boards have stronger governance, these results imply that, on average, tough boards do not improve firm value. But they do not imply that tough boards never add value. There is no reason to expect tough boards to add value in all firms. The value of a tough board should depend on the strength of the other governance mechanisms. If firms have otherwise strong governance, having a tough board could lead to overmonitoring. But if firms have otherwise weak governance, we would expect tough boards to be particularly valuable.
I read this as a strong argument for shareholders' demanding greater female board representation if they think the Board has governance issues. But as for quotas:
Our results highlight the importance of trying to address the endogeneity of gender diversity in performance regressions. Although a positive relation between gender diversity in the boardroom and firm performance is often cited in the popular press, it is not robust to any of our methods of addressing the endogeneity of gender diversity. The true relation between gender diversity and firm performance appears to be more complex. We find that diversity has a positive impact on performance in firms that otherwise have weak governance, as measured by their abilities to resist takeovers. In firms with strong governance, however, enforcing gender quotas in the boardroom could ultimately decrease shareholder value. One possible explanation is that greater gender diversity could lead to overmonitoring in those firms.
More generally, our results show that female directors have a substantial and value-relevant impact on board structure. But this evidence does not provide support for quota-based policy initiatives. No evidence suggests that such policies would improve firm performance on average. Proposals for regulations enforcing quotas for women on boards must then be motivated by reasons other than improvements in governance and firm performance.

Margins and averages: college edition Eric Crampton Apr 17

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College grads earn more than those who don't go to college. Does it follow that governments should encourage more kids into university? Not necessarily. 

Bryan Caplan here points to work by Eberly and Athreya showing that while the college premium increased substantially, college enrolment did not. Why? Because mediocre students are likely to fail out, and the returns to dropping out of college aren't that high. Caplan summarises:
Let me illustrate.  Suppose you're at the 90th-percentile of high school graduates, so your probability of graduating college if you enroll is around 90%.  When the college premium ascends from 50% to 70%, your expected premium goes from 45% to 63%.  In plain English, the payoff goes from very good to excellent.  Either way, enrollment is a no-brainer.
If instead you're at the 25th-percentile of high school graduates, your probability of graduating college if you enroll is around 20%.  When the college premium ascends from 50% to 70%, your expected premium goes from 10% to 14%.  In plain English, the payoff goes from really crummy to crummy.  Either way, non-enrollment is a no-brainer... especially when you dwell on the fact that colleges don't refund drop-outs' tuition, much less the earnings and work experience they forfeited to attend.
 Bryan then looks to other "no-brainers":
My favorite feature of Eberly-Athreya: Their story readily generalizes to other weighty life choices widely seen as "no-brainers."  Conventional wisdom condemns dropping out of high school.  After all, standard estimates say that finishing high school raises your income by 50%.  For good students, it's easy money.  For stereotypical "bad students," though, it's hard money - or a waste of money.  Why?  Because when bad students attend high school, their probability of graduation - and their expected return - remains fairly low.
The same holds for marriage.  The economic benefits of stable marriage are massive.  But as Charles Murray explains, the probability of stable marriage varies widely by social class.  Divorce rates for the working class are about four times as high as for professionals.  Marginal brides and grooms therefore face a high probability of marital failure - and can reasonably fear that marriage will make them worse off despite its palpable benefits.
To be fair, Eberly and Athreya are not the first or only education researchers to highlight the chasm between ex ante and ex post returns to education.  But as far as I can tell, no one makes the logic clearer.  If anyone taunts, "So your kids should go to college, but other people's kids shouldn't," the honest answer is "Don't shoot the messenger - or his kids."  The numbers don't lie: College is a great investment for great students, a mediocre investment for mediocre students, and a bad investment for bad students.  
This mirrors what Wolfers and Stephenson have been saying about the returns to marriage: the decline in marriage among the poor comes down to its lower expected value for poor people.

I will leave as an exercise for the student the following problem. New Zealand recently changed the university funding model. Previously, universities were funded based on student numbers and research output. Now, they're also rewarded for their degree-completion rates: they're punished for drop-outs. What happens to:

  • equilibrium standards for passing grades
  • the average college premium
  • the absolute college premium for better students
  • the expected college premium for better students
  • the absolute college premium for worse students
  • the expected college premium for worse students

Bad economics and contemptible politics Donal Apr 16

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It's election year, so maybe it shouldn't be a surprise that, according to (for example) the Herald's account, there's a "Rethink on foreign home-buying" underway, with various parties suggesting monitoring, controlling, restricting or banning it.

With the possible exception of gathering some data, this is a truly awful policy line to take.

We have an asset that's come into strong international demand (and which we're capable of building more of), and we want to stop the people willing to pay us high prices from getting out the cheque book? What sort of madness is that? It's as if the Aussies decided that their own manufacturers weren't getting coal or iron ore cheaply enough, so they won't sell any of it to the Chinese.

Let's face it: this is protectionism, pure and simple, and one of the things we know about protectionism is that it is a self-defeating, negative sum game. Both the 'protecting' country and the countries being 'protected' against end up worse off than they would have been if they had been allowed to trade freely with each other.

Some other countries control access to their housing markets? Among the many possible correct responses are: (a) more fool them, (b) most of us learn as adults not to put our hand in the fire just because Little Johnny did, and (c) I'm not inclined to take much economic or political guidance from overseas countries with political and economic systems often a lot worse than ours.

And why is the politics contemptible? Try rewriting any of the news coverage or the proposed policies with 'Catholic', 'gay' or 'black' substituted for 'foreign'.

Nominalism Eric Crampton Apr 16

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An Eleanor by any other name might be as smart, but would have worse odds of winding up at Oxford. A snippet from Greg Clark's work on names and surnames:*
It isn't that the name itself is particularly powerful, or destructive; rather, the sorts of people who wind up naming their daughters Eleanor are very different, on average, from the sorts of people who wind up naming their daughters Kayleigh. From the BBC piece:
However, there is no evidence that it's the names causing such a marked discrepancy, rather than other factors they represent, Clark says. Different names are popular among different social classes, and these groups have different opportunities and goals.

"That's something that's emerged in modern England that didn't exist around 1800," he says. When he re-ran his study, but this time looking at students attending Oxford and Cambridge in the early 19th Century, he found the correlation between names and university attendance far less marked. First names simply weren't the social signifiers they are now.

What's happened since then is a move towards unusual, even unique, names. Before 1800, Clark says, four first names referred to half of all English men. In 2012, according to the Office for National Statistics, the top four names (Harry, Oliver, Jack, Charlie) accounted for just 7% of English baby boys (and the picture was much the same in Wales).

Similarly in the US, in 1950, 5% of US parents chose a name for their child that wasn't in the top 1,000 names. In 2012, that figure was up to 27%.

As late as the 18th Century, it wasn't uncommon for parents to call multiple children the same name - two Johns for different grandfathers, for example. Now parents increasingly look for unique names or spellings of names. As Jean Twenge points out in her book the Narcissism Epidemic, Jasmine now rubs shoulders in naming lists with Jazmine, Jazmyne, Jazzmin, Jazzmine, Jasmina, Jazmyn, Jasmin, and Jasmyn.
Our baby-naming algorithm, which wound up choosing Eleanor for our girl, started with a domain of names in the top 1000 from 1880 to 1930 in the US, then eliminated any names that were in the top-100 any time in the last three decades. So you rule out the made up stuff while also ruling out having too many classmates with the same name. But we're the kind of people who would choose that kind of algorithm.

I especially liked the BBC piece's pointing to Figlio's work on names. It's pretty common for researchers to use audit studies to test for racial discrimination: they send out otherwise-equivalent vitae, but put a 'black-sounding' name on some and a neutral one on others. They tend to find a penalty for having a black-sounding name. The problem with these kinds of studies is that they simultaneously test for black-sounding and for class-linked names: instead of testing black versus white, they're effectively testing lower-class versus upper-class names. Here's Figlio:
This paper investigates the question of whether teachers treat children differentially on the basis of factors other than observed ability, and whether this differential treatment in turn translates into differences in student outcomes. I suggest that teachers may use a child's name as a signal of unobserved parental contributions to that child's education, and expect less from children with names that "sound" like they were given by uneducated parents. These names, empirically, are given most frequently by Blacks, but they are also given by White and Hispanic parents as well. I utilize a detailed dataset from a large Florida school district to directly test the hypothesis that teachers and school administrators expect less on average of children with names associated with low socio-economic status, and these diminished expectations in turn lead to reduced student cognitive performance. Comparing pairs of siblings, I find that teachers tend to treat children differently depending on their names, and that these same patterns apparently translate into large differences in test scores.
I wish that audit studies instead used a cross-cutting method that would test Da'Quan against Dwayne and Cleetus instead of just against Peter. Put it into a 2x2 matrix with race on one axis and class on the other.

First names may just be signals, but "just signalling" hardly means unimportant. If you're economising on time while going through the resumes or university applications, and if a Cleetus is less likely than a Peter to know which fork to use at the important dinner with a client or donor, well, a Cleetus would have to be better than a Peter to get a second look. Because parents who have some minimal social capital expect this to be at least somewhat likely to be true, they make different naming choices than those who don't.

Colby Cosh is right:
The separating equilibrium separates.

I'd tell you to avoid giving your kids dumb names, but if you're reading this, you almost certainly already know it.

* I really need to get his book. The interview teasers have been very tempting.


Alvin Roth on kidney exchange Paul Walker Apr 14

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This video is of Alvin Roth's second, of two, 2014 Marshall Lectures given at Cambridge University, February 20 2014. The topic of this lecture is kidney exchange.

Priorities Eric Crampton Apr 14

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Free riding kills voluntary contributions in public good games. When individuals see that free-riders are able to do well, and where there's no way of excluding those free-riders from the benefits of contibutions, or of punishing them, they lower their likelihood of contributing.

And so organ donation rates are pretty low. Donors provide a public good: they increase everyone else's chance of getting an organ if they need one, but don't get much out of it other than the knowledge that they're potentially helping others. Non-donors have equal access to organs should they need one. It's a sharing club that doesn't punish members for failing to share; takers gonna take.

Israel's solution: the Priority Law. Organ donors get extra points in the priority queue should they ever need an organ transplant. And they had to navigate a lot of the same ethical issues that New Zealand faces. Consider the parallels here to certain aspects of Maori concerns around tapu:
Orthodox Israelis opposed to organ harvesting on religious grounds have called the system discriminatory. But Lavee argues that the willingness of those same people to accept donated organs ultimately dissuaded potential donors from participating in the organ pool. “There was a dismay among the Israeli population that there were many, many free riders,” he explained. “Why should people donate if their organs would go to people who would never donate themselves?”
It isn't a full no-give-no-take system. Instead, donors simply get priority over non-donors. And, beautifully, the families of donors also get priority.
Launched in April 2012, the new Israeli system grants first priority for transplants to living donors and the family members of donors—who, in the event of brain death, make the ultimate decision whether to donate their kin’s organs. Registered donors of three years or more receive second priority; family members of registered donors receive a third tier of priority.
The system confers an advantage to candidates in the same tier of need; it never enables transplant candidates to supersede needier counterparts. Priority can’t catapult Status 2 recipients into the heart-transplant Status 1 list, but it can take them to the top of Status 2. With other organs, like kidneys, where a point system assigns values weighing age, waiting time, and compatibility create a 0 to 18 score, signing up as a donor can add a 1- to 5-point boost.
In 2013, the first full year of the new system, there were a record number of transplants in Israel; meanwhile, transplants received by Israeli patients abroad fell to a quarter of their 2007 peak. Most of what continues is the result of lawful allocations many nations offer foreign transplant candidates. Another feature of the 2008 Organ Transplant Act—full reimbursement to living donors for lost work time, and health and life insurance for five years—has helped spur donations of kidneys, and lobes of liver and lungs. Between 2011 and 2013, the number of Israeli living organ donors increased by 67 percent over the preceding three-year period, and the Israeli transplant waiting list contracted in 2013.
It certainly hasn't abolished the waiting list. But it's helped. New Zealand could well save a lot of lives by following the Israeli example. Otago University hand-wringers prefer deaths to incentives; it would be nice if Parliament could pay a bit less attention to them.

Hit the "Organ Markets" tab for all the prior posts on the topic.

Local Government Financing Eric Crampton Apr 14

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Local Government New Zealand is looking for alternative funding mechanisms.
Basing rates on property values alone may soon no longer be sustainable as the sole taxation form for many councils, says Local Government New Zealand (LGNZ).
Instead, it would investigate other forms of taxation such as local consumption and local income taxes as "complementary alternatives".
The LGNZ Local Government Funding Review comes as an ageing population contributes to an increased number of asset rich/cash poor ratepayers who struggle to pay their rates.
Some councils also face major growth pressures to fund large-scale infrastructure investments to meet the needs of future generations and sustain economic growth, with limited funding tools at their disposal. Yule said this would place severe pressure on a pure property tax model.
Oh dear.

As we've noted before here, there are two very good ways of dealing with this particular problem while maintaining a reliance on property taxes.

First, the wealthy elderly could be encouraged to take out a reverse mortgage. These are available in New Zealand. You lose equity in your home, but you pay your taxes. The wealthy elderly would then provide a smaller bequest to their middle-aged kids, but that's hardly the end of the world.

Second, it doesn't seem like it would be crazy hard to set up a scheme in which the wealthy but cash-poor elderly could defer rates on the house, with interest, so long as the accumulated bill is less than the value of the house. When the owner dies, Council gets the house, sells it, and pays any remaining amount to the Estate. Alternatively, the estate's beneficiary could buy out Council's interest in the house. Either way, we're not "forcing" politically important constituents out of their half-million-dollar-plus homes, although there'd be important implementation issues around ensuring that the scheme is only available to those fully agreeing that the house could be sold on the death of the registered owner if the estate's beneficiary couldn't pay the accumulated tax bill.*

So, the problem isn't really that bad, if we're willing to contemplate that ageing property-wealthy-but-cash-poor Boomers might might be called upon to consider paying their bills.

Because LGNZ has put taxing the wealthy cash-poor elderly into the too-hard basket, they're starting to draw funding ideas from the too-silly basket.
Potential taxes for councils
Local income taxes – an extra tax on income
Local consumption taxes – an extra tax on goods and services
Congestion charges – a charge for a vehicle using congested roads at certain times
Visitor charges – taxing visitors, typically through accommodation bills
Payroll taxes – extra tax collected by an employer when paying an employee
I had a call from Jim Mora's producer asking if I could talk about some of this stuff with The Panel yesterday. I'd written up my notes before noticing that the time clashed with my son's swim lessons and so I wouldn't be able to do it. Stephen Hickson capably filled in for me [hit around the 20 minute mark]. But I'll copy my notes below anyway.
On local taxation, I could note a few things:
  1. Local income taxes are pretty much always a bad idea. If there were a 10 Commandments of Local Government Finance, "Thou Shalt Not Implement A Local Income Tax" would be one of them. Andrei Shleifer and Ed Glaeser had a great paper about a decade ago called "The Curley Effect". The basic model is as follows: where a mayor can use local tax policy to drive out those who would vote against him, he'll do it. And so Coleman Young hiked local income taxes, driving richer voters out of Detroit and funding programmes for his poorer supporters. He also implemented a pretty hefty commuter tax. Detroit's current prosperity owes no small part to his local tax policies. The Curley Effect was named for James Michael Curley, who ran similar policies in Boston to drive out the rich protestants, leaving him with an electorate of poorer Catholics who supported him.

  2. Congestion charges are a great idea, if you can make them implementable. They're not a great idea because of the revenue that they raise, though. Rather, they're a great idea because they help fix local congestion issues. Further, they're a great idea because they might help attenuate some of the current opposition to sprawl and densification. If those who wind up contributing to congestion through sprawl and density wind up bearing the bulk of the costs of that through congestion charges, maybe people wouldn't oppose sprawl so much. But, again, the point isn't revenue-raising. Maybe you could put it in instead of hiking other taxes, but the fees should be set entirely to try to get towards optimal levels of congestion rather than to raise money. Where it's seen as a revenue grab, or where it's likely to be a revenue grab instead of a congestion abatement mechanism, it's less likely to be supported or to be run properly.

  3. Local sales taxes are a bad idea. We have a great clean GST currently. A local sales tax on top of it would mess things up. Local bodies would be tempted to exempt all the feel-good stuff like kids' clothes, vegetables and the like - that makes a hash of any sales tax. Or, if it were just a levy on top of the GST implemented by local government, is it levied on all businesses in the local district? What if they're selling mail-order to folks outside of the city? What if folks outside the city are selling mail-order to those inside the city? We get all of the stupid transactions costs of implementing GST on imports except across all of the local bodies. Bad idea.

  4. One potentially interesting idea, though, or at least worth thinking about: a capitation payment from central government to local bodies. Right now, there's a pretty strong local interest group equilibrium barring development. Homeowners oppose any densification near them and any sprawl on the urban limits because of the reduced amenity value to them and because more houses would reduce the value of their houses. So the nay-sayers hold sway. But imagine if we had a transfer from central government to local government based on the number of people living in the jurisdiction. Do a better job of attracting more people to your city or town and your budget increases. That could provide at least some counterveiling force to the current "don't build anything anywhere ever" pressures. The New Zealand Initiative suggested something similar last year: a payment to local councils from central government for each new dwelling built in their area where that dwelling was able to be built within a specified time from initial consent application. These kinds of things are worth thinking about.
Land use issues are pretty badly messed up in New Zealand. Most of what LGNZ's here proposing will substantially worsen things. And all because they're scared of having the soon-to-be-elderly take out reverse-mortgages.

* Otherwise you get the inevitable sob story about the widow forced out of her house because she wasn't on the title.

Our strong fiscal performance Donal Apr 14

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There was the usual argy bargy over the past day or two when the latest Treasury numbers showed that tax revenues in the eight months to end February were lower than anticipated. Opposition folks used it to beat Bill English about the head  (one sample from Labour's David Parker here) and even Bill himself gave the issue some legs when he said that lower than expected tax would mean ongoing discipline over spending.

I couldn't see any real issue issue, myself. Every man and his dog knows that the economy, currently, is a good deal stronger than anyone was picking when the original tax forecasts were made, and there's a very high probability that any tax shortfall will be made up. Which is pretty much what the government's chief accounting honcho said in the media release - "it is anticipated that a stronger outlook for the economy will further boost tax revenues from their current position, largely offsetting the current weakness in revenue outturns".

If you really wanted to know how well we're managing our fiscal position, though, a much better guide came out yesterday, and it was the IMF's latest Fiscal Monitor (press release here, whole thing here).

Here's one interesting graph (it's part of Figure 1.1  in the Monitor). It's not the most immediately obvious graph to read, but what it is showing is this: it measures how countries' 2013 and 2014 primary fiscal balances are now looking, compared to what they looked like being when the previous Fiscal Monitor was published last October (primary balances are the fiscal balances less net interest, which among other things give you a better picture of what's happening to the fiscal levers you can actually pull). The higher up on the graph a country is, the more the 2014 fiscal position is turning out better than previously thought, and the further right a country is, the better 2103 turned out compared to what looked likely last October. Ideally you want to be in the north-east quadrant. The numbers are percentages of GDP.

Et voilà - there we are, well dug into the north-east quadrant. There isn't the slightest backing, in short, for suggesting that things are going worse than expected. Quite the reverse: most countries have seen either 2013 or 2014 turn out worse than expected (note Australia's significantly worse than expected 2014 outlook), but we're among the virtuous (or lucky) minority that haven't.

This logically means that our government debt hasn't risen as much as originally thought, either, and you can see it happening in this graph (also part of Figure 1.1). This is the same style thing (how did 2013 and 2014 evolve compare to earlier predictions), and this time you want to be in the south-west quadrant where debt is lower than expected in both years. As indeed we are.

There's a huge amount of interesting analysis and data in this publication - too much to readily reproduce here, so I've made a quick digest of some of the forecast fiscal and debt numbers for us, the Aussies, and the advanced economies as a group. Here it is (it's from Statistical Tables 2 and 4 at the back of the Monitor. The forecasts in the Tables go out to 2019 but I reckon the numbers are getting a bit iffy that far out, so I've truncated the forecasts to 2017).

It's a pretty good picture, isn't it? The two numbers I'd pay most attention to - the cyclically adjusted primary balance, and the net debt - are unequivocally heading in the right direction (so are the other two, if it comes to that), and are much better than the developed economy average. So next time there's a beat-up over whether a couple of months' tax revenues have fallen short, remember the big picture: in absolute and relative terms, we're actually one of the world's better fiscal performers.

Always assuming, of course, that something broadly like our current fiscal reconstruction policies remains in place, and that another GFC-style event doesn't loom out of the blue.

Incidentally, while I'm on the subject of the IMF, did you know that the IMF had a blog? Me neither, but now that I've found it, I can see that it is an interesting guide to the hotter issues in international macroeconomics, so I've added it to my list of "The latest from these interesting blogs".

EconTalk this week Paul Walker Apr 12

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Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about the value of a college education. Caplan argues that the extra amount that college graduates earn relative to high school graduates is misleading as a guide for attending college--it ignores the fact that a sizable number of students don't graduate and never earn that extra money. Caplan argues that the monetary benefits of a college education have a large signaling component rather than representing the value of the knowledge that's learned. Caplan closes by arguing that the subsidies to education should be reduced rather than increased.

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