Does the NZ Superannuation Fund recover the deadweight cost of the taxes that funded it?

The $30 billion New Zealand Superannuation Fund is the best performing sovereign wealth fund over the past five years, generating returns of more than 17 per cent a year.

Those returns easily beat all other sovereign wealth funds that publish their figures, according to a global study by JP Morgan. In the last three years alone, the fund returned an average of 21 per cent a year.

Good thing to do considering that the default deadweight cost of taxation is put by that Treasury to be 20%:

As a general rule, deadweight losses should be included if they are of sufficient size relative to the overall costs and benefits of the proposal that they are capable of altering the decision as to whether or not to proceed with the proposal.

Having said this, deadweight losses are notoriously difficult to quantify. Estimates vary from 14% up to 50% of the revenue collected.

Treasury suggests a rate of 20% as a default deadweight loss value in the absence of an alternative evidence based value. Thus public expenditures should be multiplied by a factor of 1.2 prior to discounting to incorporate the effects of deadweight loss.

This deadweight cost of taxation includes funds contributed to New Zealand government owned investment funds. In a speech last week, the Super Fund chairman Gavin Walker warned that the recent high returns were unlikely to continue in the long-term:

The last few years are likely to have been among the best years the fund will experience for some time,” he said. “On average and over the long-term we expect to earn the rather less exciting figure of 8 per cent [per annum] – but which will still provide a handsome return to New Zealander stakeholders.

The New Zealand Superannuation Fund must beat the market every single year to make up for the deadweight cost of its funding, the usual interest rate on borrowed funds, a premium for the investment risk added to the Crown’s portfolio and the cost to New Zealand’s growth rate of higher than otherwise taxes on income, entrepreneurship and investment.

Is investor state dispute settlement a form of overseas development assistance?

Would objections to the Investor State Dispute Settlement provisions in the proposed Trans-Pacific Partnership wilt away if the adjudicating body was the International Court of Justice? The left-wing opponents of investor state dispute settlement genuflect at the very mention of the International Court of Justice and international law generally (unless it is international economic law).

Disputes over the provisions of European union treaties are adjudicated by the European Court of Justice. The judgements of that court brought by individuals against member states so annoy the British that it is a leading reason for many British wanting to leave the European Union and replace the Human Rights Act 1998 with a British Bill Of Rights policed by British courts rather than by the European Court of Justice and European human rights law.

It is routine for any treaty to have some provision for arbitration of disputes. This includes trade and investment treaties.

The World Trade Organisation treaty includes a dispute settlement provision with arbitrators based in Geneva. Some of the more than 400 cases heard have been motivated by discrimination against imports on the basis of a breached environmental protection policies of the importing country.

A number of countries want to ban imports that are produced in ways that upset them. Others want to include labour and environmental standards in trade agreements to impose developed country standards on developing countries in what is a new form of colonialism.

I have previously said that investor State Dispute Settlement provisions have no place in trade and investment treaties between democracies. I must now admit there are good reasons to have arbitration clauses in treaties between democracies.

The puzzle is why refer these trade and investment disputes to a little-known arbitration body adjunct to the World Bank rather than the far more prestigious International Court of Justice.

Perhaps the reason is both sides want an arbitrator who is not too strong and not too credible. It would look very bad if the International Court of Justice was to rule against you.

William Landes and Richard Posner contended that judicial independence maximises the value of legislative deals with interest groups by enhancing the durability of those deals.

Why no International Court of Commercial Law? When deciding what type in judiciary to enforce international trade bargains, the signatories may prefer a less credible adjudication and enforcement mechanism in case they want to opt out of it or chip around the decision.

The jurisdiction of the International Court of Justice is to settle, in accordance with international law, legal disputes submitted to it by special agreement and matters specifically provided for in treaties and conventions in force.

UN member states are the parties to any litigation but that doesn’t stop them raising cases on behalf of individuals. That said, organizations, private enterprises, and individuals cannot have their cases taken to the International Court, such as to appeal a national supreme court’s ruling. Only the states can bring the cases and become the defendants of the cases.

The International Court of Justice is different from the European Court of Justice because individuals cannot easily bring complaints before it. One of the causes of action before  the European Court of Adjusters is under European competition law over member states providing financial aid to industries.

Democratic countries with high levels of economic and  social integration, such as the  European union, do find it in advantage to set up a European wide Court to adjudicate disputes over rights under European law.

Why then would a democracy sign up to an investment protection treaty with a developing country? One reason is overseas development assistance.

Developing countries with corrupt and incompetent courts, politicians and bureaucracies sign international treaties as a way of assuring foreign investors and trading partners of some degree of security of their property rights and their ability to enforce contracts with suppliers and buyers.

By folding these assurances into trade treaties, the developing country has a stronger incentive to honour its promises. There will be domestic constituencies wanting to retain reciprocal export market access who will lobby for the honouring of the promises of legal protection to investors and businesses in their home country.

New Zealand signing up to the Trans-Pacific Partnership is an example of this form of overseas development assistance. Exporters and investors from the developing country who export and invest in New Zealand have another reason to support more secure property rights and better enforcement of contracts in their home country as a way of securing their treaty rights to export and invest in New Zealand.

The Left of the political spectrum should be keen on this form of overseas development considering their general belief in greatly increasing the amount spent on overseas development assistance. Rather than pay cash to the development country, the payment is in kind as reciprocal legal promises.

Trade treaties that include investor state dispute settlement are forms of governance assistance to developing countries. The reciprocal exchange of promises about investor protection and the enforcement of contracts and property rights improves the quality of governance in the developing country.

The countries most likely to be subject to investor state dispute settlement are those with weaker governance. Even in the European Union, the member states most likely to be sued are former communist countries. The most common course of action was the cancellation of a licence or permit.

Investor state dispute settlement clauses are no different from any other international treaty include environmental and human rights treaties. All these treaties require countries to give up part of their sovereignty.

Democracies give up their sovereignty in investor state dispute settlement in the hope that developing country partners to the treaty will improve the development potential of their country through better governance and more secure property rights.

That is an overseas development aid objective the Left of the political spectrum should support, but it does not. The Left of the political spectrum is happy to use trade agreements to impose developed country labour and environmental standards on poor countries desperate for access to rich country markets, but is not willing to give up anything in return.

Millennials’ Political Views Don’t Make Any Sense

Millennial politics is simple, really. Young people support big government, unless it costs any more money. They’re for smaller government, unless budget cuts scratch a program they’ve heard of. They’d like Washington to fix everything, just so long as it doesn’t run anything.

Young people lean way left on issues like gay marriage, pot, and immigration. On abortion and gun control, they swim closer to the rest of the electorate.

But on economics, they’re all over the map. You get the sense, reading the Reason Foundation and Pew studies, that a savvy pollster could trick a young person into supporting basically any economic policy in the world with the right combination of triggers. Conservative and liberal partisans can cherry-pick this survey to paint Millennials as whatever ideology they want.

On spending:
Conservatives can say: 65 percent of Millennials would like to cut spending.
Liberals can say: 62 percent would like to spend more on infrastructure and jobs.

On taxes:
Conservatives can say: 58 percent of Millennials want to cut taxes overall.
Liberals can say: 66 percent want to raise taxes on the wealthy.

On government’s role in our lives:
Conservatives can say: 66 percent of Millennials say that “when something is funded by the government, it is usually inefficient and wasteful.”
Liberals can say: More than two-thirds think the government should guarantee food, shelter, and a living wage.

On government size:
Conservatives can say: 57 percent want smaller government with fewer services (if you mention the magic word “taxes”).
Liberals can say: 54 percent want larger government with more services (if you don’t mention “taxes”).

via Millennials’ Political Views Don’t Make Any Sense – The Atlantic and This poll proves that millennials have totally incoherent political views – Vox.

The opportunity cost of expressive politics: fossil fuels disinvestment versus actually doing something that might help

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via Divestment and Symbolic Action on Fossil Fuels | The Energy Collective.

Mises on the dangers of specialisation and economic analysis

Richard Cobden on John Stuart Mill’s greatest mistake

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Mises on why economics analysis is so unpopular

Corporate welfare in New Zealand – 2015 budget update

I have updated my 2014 report on corporate welfare for the 2015 budget. My report was published today by the Taxpayers’ Union.

My key finding was that corporate welfare increased in the 7th budget of the National Party-led Government from $1.178 billion in its 2014 budget to $1.344 billion in the 2015 budget – see figure 1 and table 1.

Figure 1: Corporate welfare, Budgets 2008/09 to 2015/16

Source: New Zealand budget papers, various years.

Table 1: Corporate welfare in Budgets 2008/09 to 2015/16, $million

08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16
Arts, Culture & Heritage

3

11

19

10

29

4

4

42

Commerce and Consumer Affairs

6

6

6

6

7

7

6

7

Communications

0

25

39

150

178

205

215

190

Economic Development

372

419

446

379

332

284

280

297

Finance

16

44

3

108

15

210

0

0

Primary Industries

700

0.3

14

0.0

43

65

77

180

Science and Innovation

0

4

0

0

0

112

219

269

Tourism

76

94

119

113

98

124

124

121

Transport

578

530

376

510

680

119

255

239

Total $million

1,751

1,134

1,022

1,277

1,382

1,130

1,178

1,344

Source: New Zealand budget papers, various years.

Corporate welfare has ranged between about $1 billion and $1.4 billion per year in each of the seven budgets presented by the current National-led Government – see Table 1 and Figures 1 and 2.

Figure 2: Corporate welfare, Budgets 08/09 to 15/16 by Vote

Source: New Zealand budget papers, various years; note: Vote Commerce and Consumer Affairs omitted in all years from Figure 2.

The predominant recipient of corporate welfare in this year’s budget, and all of those since 2008 is KiwiRail. Vote Transport accounts for a third of all corporate welfare – see Figures 3 and 4. Vote Economic Development is the next largest source of corporate welfare and accounts for 28% of the total since 2008 – see Figures 3 and 4.

Figure 3: Distribution of total corporate welfare across votes, 2008/09 to 2015/16

Source: New Zealand budget papers, various years.

Figure 4: State-owned enterprise welfare, Vote Transport and Vote Finance (KiwiRail), Budgets 08/09 to 15/16

Source: New Zealand budget papers, various years.

$280 – $450 million in corporate welfare has been under the patronage of the Minister for Economic Development over the last eight budgets – see Figure 5. In this year’s budget, corporate welfare under the Minister’s hand has increased slightly from $280 million to $297 million.

Figure 5: Corporate welfare, Vote Economic Development, Budgets 2008/09 to 2015/16

Source: New Zealand budget papers, various years.

Up until the 2013/14 budget, science and innovation spending was targeted at research that would not find private sponsors because it could not capture the returns from their discoveries – see Figure 6. Figure 6 shows that there is being rapid growth within Vote Science and Innovation of various forms of start-up and commercialisation grants in recent budgets.

Figure 6: Corporate welfare, Vote Science and Innovation, Budgets 08/09 to 15/16

Source: New Zealand budget papers, various years.

Figure 7 shows that the Government is getting back into the business of subsidising agriculture. The Primary Growth Partnership (PGP) is an R&D grants programme for the primary industry sector. There are 18 PGP programmes underway with a funding commitment from government and from industry combining to $708 million by 2017.

Figure 7: Farm welfare, Vote Primary Industries, Budgets 08/09 to 15/16

Source: New Zealand budget papers, various years.

Figure 8 shows that the National Party-led government is a major investor in ultrafast broadband – going where private entrepreneurs fear to tread.

Figure 8: Corporate welfare, Vote Communications, Budgets 08/09 to 15/16

Source: New Zealand budget papers, various years.

The corporate welfare in the Budget 2015 adds about six percentage points to the company tax rate. Should these corporate indulgences should continue or should the company tax rate drop six percentage points?

If that six percentage points on top of the company tax rate was renamed a business subsidies levy, how many businesses would want to pay it rather than developing their own business under much lower company tax rate?

The scramble for Africa 1880 – 1913

Should economic reform have been slower in the transitional economies?

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via Normal Countries: The East 25 Years After Communism | Andrei Shleifer.

A Quick Question for All Advocates of Minimum Wages

via A Quick Question for All Advocates of Minimum Wages.

Does Inequality Reduce Economic Growth: A Sceptical View

Tim Taylor, the editor of the Journal of Economic Perspectives, has written a superb blog post on why we should be sceptical about a strong relationship between inequality and economic growth. Taylor was writing in response to the OECD’s recent report "In It Together: Why Less Inequality Benefits All,".

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Taylor’s basic point is economists have enough trouble working out what causes economic growth so trawling within that subset of causes to quantify the effects of rising or falling inequality inequality seems to be torturing the data to confess. The empirical literature is simply inconclusive as Taylor says:

A variety of studies have undertaken to prove a connection from inequality to slower growth, but a full reading of the available evidence is that the evidence on this connection is inconclusive.

Most discussions of the link between inequality and growth are notoriously poor of theories connecting two. There are three credible theories in all listed in the OECD’s report:

The report first points out (pp. 60-61 that as a matter of theory, one can think up arguments why greater inequality might be associated with less growth, or might be associated with more growth. For example, inequality could result less growth if:

1) People become upset about rising inequality and react by demanding regulations and redistributions that slow down the ability of an economy to produce growth;

2) A high degree of persistent inequality will limit the ability and incentives of those in the lower part of the income distribution to obtain more education and job experience; or

3) It may be that development and widespread adoption of new technologies requires demand from a broad middle class, and greater inequality could limit the extent of the middle class.

About the best theoretical link between inequality and economic growth is what Taylor calls the "frustrated people killing the goose that lays the golden eggs." Excessive inequality within a society results in predatory government reactions at the behest of left-wing or right-wing populists.

Taylor refers to killing the goose that laid the golden egg as dysfunctional societal and government responses to inequality. He is right but that is not how responses to inequality based on higher taxes and more regulation are sold. Thomas Piketty is quite open about he wants a top tax rate of 83% and a global wealth tax to put an end to high incomes:

When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much).

It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive…

The left-wing parties don’t say let’s put up taxes and redistribute so that is not something worse and more destructive down the road. Their argument is redistribution will increase growth or at least not harm it. That assumes the Left is addressing this issue of not killing the goose that lays the golden egg at all.

Once you discuss the relationship between inequality and growth in any sensible way you must remember your John Rawls. Incentives encourage people to work, save and invest and channels them into the occupations where they make the most of their talents. Taylor explains:

In the other side, inequality could in theory be associated with faster economic growth if: 1) Higher inequality provides greater incentives for people to get educated, work harder, and take risks, which could lead to innovations that boost growth; 2) Those with high incomes tend to save more, and so an unequal distribution of income will tend to have more high savers, which in turn spurs capital accumulation in the economy.

Taylor also points out that the OECD’s report is seriously incomplete by any standards because it fails to mention that inequality initially increases in any poor country undergoing economic development:

The report doesn’t mention a third hypothesis that seems relevant in a number of developing economies, which is that fast growth may first emerge in certain regions or industries, leading to greater inequality for a time, before the gains from that growth diffuse more widely across the economy.

At a point in its report, the OECD owns up to the inconclusive connection between economic growth and rising inequality as Taylor notes:

The large empirical literature attempting to summarize the direction in which inequality affects growth is summarised in the literature review in Cingano (2014, Annex II).

That survey highlights that there is no consensus on the sign and strength of the relationship; furthermore, few works seek to identify which of the possible theoretical effects is at work. This is partly tradeable to the multiple empirical challenges facing this literature. 

The OECD’s report responds to this inclusiveness by setting out an inventory of tools with which you can torture the data to confess to what you want as Taylor notes:

There’s an old saying that "absence of evidence is not evidence of absence," in other words, the fact that the existing evidence doesn’t firmly show a connection from greater inequality to slower growth is not proof that such a connection doesn’t exist.

But anyone who has looked at economic studies on the determinants of economic growth knows that the problem of finding out what influences growth is very difficult, and the solutions aren’t always obvious.

The chosen theory of the OECD about the connection between inequality and economic growth is inequality leads to less investment in human capital at the bottom part of the income distribution.

[Inequality] tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole

I found this choice of explanation curious. So did Taylor as the problem already seems to have been solved:

There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages.

All high-income economies are relatively open to foreign trade. In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.

In New Zealand, interest free student loans are available to invest in higher education as well as living allowances for those with parents on a low income. There are countries in Europe with low levels of investment in higher education but that’s because of high income taxes not because of inequality.

The OECD’s report is fundamentally flawed which is disappointing because most research from the OECD is to a good standard.

via CONVERSABLE ECONOMIST: Does Inequality Reduce Economic Growth: A Skeptical View.

Mises on the Great Fact

The first citizen initiated binding referenda will be on…

The Conservative Party of New Zealand in the 2014 general election was very much formed around the notion of introducing citizen initiated binding referendums in a country with the Parliament is sovereign. The first referendum is likely to be on one of the following:

· decriminalising marijuana,

· banning smoking,

· voluntary euthanasia,

· a living wage,

· life means life in prison,

· same-sex marriages,

· marriage is between a man and a woman,

· entrenching the Treaty of Waitangi,

· abolishing the Maori seats,

· entrenching the Maori seats,

· stop school closures, and

· capital punishment; and

· future referendums not be binding

Binding referenda are unworkable. Parliament can’t amend them later as we learn from the implementation of the law and unintended consequences arise. Every new law is riddled with unintended consequences and blow-backs.

Do you really want to have to have another referendum to undo a binding referendum that turned out to be a bit of a mistake? One of the few redeeming features of the Parliament that is sovereign – a parliament for can make or unmake any law whatsoever – is it can repeal its mistakes quickly.

The first citizens initiated referendum was held on 2 December 1995. The question was

Should the number of professional fire-fighters employed full-time in the New Zealand Fire Service be reduced below the number employed in 1 January 1995?

Turnout was low as the referendum was not held in conjunction with a general election, and the measure was voted down easily, with just over 12% voting “Yes” and almost 88% voting “No”.

The key to constitutional design is not empowering you and yours – it is how to restrain those crazies to the Left or the Right of you, as the case may be, when they get their hands on the levers of power, as they surely will in three, six or nine years’ time.

The one inevitability of democracy is power rotates – unbridled power and binding referenda lose their shine when you must share that power with the opposing side of politics who put up their own referendum question.

Constitutions are brakes, not accelerators. Much of constitutional design is about checks and balances and the division of power to slow the impassioned majority down.

Constitutional constraints are basically messages from the past to the present that you must think really hard, and go through extra hurdles before you do certain things.

The 18th and 19th century classical liberals were highly sceptical about the capability and willingness of politics and politicians to further the interests of the ordinary citizen, and were of the view that the political direction of resource allocation retards rather than facilitates economic progress.

Governments were considered to be institutions to be protected from but made necessary by the elementary fact that all persons are not angels. Constitutions were to constrain collective authority.

The problem of constitutional design was ensuring that government powers would be effectively limited. The constitutions were designed and put in place by the classical liberals to check or constrain the power of the state over individuals.

The motivating force of the classical liberals was never one of making government work better or even of insuring that all interests were more fully represented. Built in conflict and institutional tensions were to act as constraints on the power and the size of government.

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Representative democracy is a division of labour in the face of information overload. John Stuart Mill had sympathy for parliaments as best suited to be places of public debate on the various opinions held by the population and as a watchdog of the professionals who create and administer laws and policy:

Their part is to indicate wants, to be an organ for popular demands, and a place of adverse discussion for all opinions relating to public matters, both great and small; and, along with this, to check by criticism, and eventually by withdrawing their support, those high public officers who really conduct the public business, or who appoint those by whom it is conducted.

Representative democracy has the advantage of allowing the community to rely in its decision-making on the contributions of individuals with special qualifications of intelligence or character. Representative democracy makes a more effective use of resources within the citizenry to advance the common good.

Members of parliament are trustees who follow their own understanding of the best action to pursue in another view. As Edmund Burke wrote:

Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices ought to guide, but the general good, resulting from the general reason of the whole.

You choose a member indeed; but when you have chosen him, he is not a member of Bristol, but he is a member of parliament. … Our representative owes you, not his industry only, but his judgment; and he betrays instead of serving you if he sacrifices it to your opinion.

Modern democracy is government subject to electoral checks. Citizens do have sufficient knowledge and sophistication to vote out leaders who are performing poorly or contrary to their wishes. Modern democracy is the power to replace governments at periodic elections.

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The power of the electorate to turn elected officials out of office at the next election gives elected officials an incentive to adopt policies that do not outrage public opinion and administer the policies with some minimum honesty and competence.

Richard Posner argued that a representative democracy enables the adult population, at very little cost in time, money or distraction from private pursuits commercial or otherwise:

  1. to punish at least the flagrant mistakes and misfeasance of officialdom,

  2. to assure an orderly succession of at least minimally competent officials,

  3. to generate feedback to the officials concerning the consequences of their policies,

  4. to prevent officials from (or punish them for) entirely ignoring the interests of the governed, and

  5. to prevent serious misalignments between government action and public opinion.

Enough of politics and elections, I have a life to lead. Don’t you? Too many want to remake democracy with the faculty workshop as their model.

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Such deliberation has demanding requirements for popular participation in the democratic process, including a high level of knowledge and analytical sophistication and an absence, or at least severe curtailment, of self-interested motive. The same goes for citizen initiated binding referendums.

Bill Easterly on the other people are stupid fallacy

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via William EasterlyNYU Development Research Institute | NYU Development Research Institute.

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