The 1826 Billionaires in the Forbes 2015 list are classified as rich through political connections if they made their money through past political positions, close relatives or friends in government, or questionable licenses, privatisations or resource extraction industries.
All privatizations were included in the politically-connected/resource-related category despite my data source acknowledging the possibility that the new owners may have transformed the company. Resource billionaires were all deemed to be lucky or cronies by my data source rather than diligent as some most certainly were. This is something of a slur by my data source given the industriousness of some resource billionaires some of whom were even geologists.
Political cronyism is a path to billionaire wealth mainly in the developing countries. Less than 10% of Chinese billionaires made their money through political connections, which is surprising.
Things are pretty grim when your ideas for fixing child poverty by throwing a lot more money at the problem are easily outclassed by the Greens in terms of economic rationale, fiscal sense and political practicality.
But that is the case for Gareth Morgan’s proposals for a universal basic income for New Zealand. His proposal for a universal basic income funded by comprehensive capital tax make much less sense than those of the Greens for giving the in work family tax credit for those do not work but are on a welfare benefit.
The Greens have a far superior proposal for reducing child poverty and a far better chance of getting it implemented in parliament. Their proposal is simply to introduce a parental tax credit and give the in work tax credit to those currently on the benefit to increase their incomes.
Gareth Morgan’s solution to child poverty is to give billions of dollars to adults not in poverty and leave those who are in poverty worse off under the universal basic income. It is obvious which of these is more likely to attract political support and provoke resistance from taxpayers and political parties willing to court those are opposed to great big new taxes.
One of the economic reforms in the 1980s and 1990s that saved the welfare state was more efficient taxes and more efficient government spending. The targeting of government social spending reduce growth in the overall tax burden and therefore the political resistance it provoked.
Government spending grew in many countries in the 20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups. Sam Peltzman argues that:
governments grow where groups which share a common interest in that growth and can perceive and articulate that interest become more numerous.
The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg. After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution.
More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.
Gary Becker and Casey Mulligan in Deadweight Costs and the Size of Government (NBER Working Paper Number No. 6789) concluded that flatter and broader taxes encourage bigger government. This is because taxpayers offer less resistance to increases in flat tax rates than to more onerous and less efficient forms of taxation. Any decline in the resistance of taxpayers to taxes leads to larger governments since an endless number of groups lobby to divide up the large revenue base.
An inefficient tax system or spending program from the standpoint of optimal tax theory can improve taxpayer welfare this so-called inefficient system creates additional political pressure for suppressing the growth of government. Inefficient taxes do not raise much revenue and therefore do not support a large sized government.
A switch to more efficient taxes through tax reforms allows governments to raise the same amount or larger amount of revenue for the same level of political resistance from taxpayers. This is because less revenue and output is wasted by discouraging labour supply, investment, savings and investment in capital with high marginal rates of tax on narrower tax basis.
The rising deadweight losses of taxes, transfers and regulation all limit the political value of inefficient redistributive policies. Tax and regulatory policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.
Everyone can gain from converging on more efficient modes redistribution. The tax burden is less than otherwise. Government spending is more than a wise because taxes are raised with less deadweight social costs.
An improvement in the efficiency of either taxes or spending reduces political pressure from taxed and regulated groups for suppressing the growth of government and thereby increases total tax revenue and spending because there is less political opposition. Improvements in the efficiency of taxes, regulation and in spending reduce political pressure from the taxed and regulated groups in society.
The post-1980 reforms of Thatcher, Reagan, Clinton, Hawke and Keating, Lange and Douglas and others saved the modern welfare state. Their moves towards more efficient taxes and better targeted social spending did reduce growth in government spending but also prevented even larger cuts to social spending since 1980 at the behest of the increasingly restive taxpayer.
Social spending growth did temper after 1980 but the level of spending was larger than otherwise because of the extra revenue raised through more efficient taxes – more efficient taxes which provoked less political opposition.
More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups while still supporting extensive but more tempered social spending.
Governments everywhere hit a brick wall in terms of their ability to raise further tax revenues. Political parties of the Left and Right recognised this new reality. Gareth Morgan has not when he proposes a great big new tax to fund his universal basic income.
Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies – Groucho Marx
Which has more political legs? The Greens’ proposal to raise taxes by $1 billion to fight child poverty or the proposal by Gareth Morgan to raise taxes by 10 times that and have less impact on child poverty?
The current and future governments of New Zealand have enough on their plate to work out how to fund a universal old age pension and health spending without giving away billions of dollars to the non-poor through an universal basic income.
One of the many drawbacks of the universal basic income is it will induce the recipients to cut back on their labour supply. There are studies of this labour supply effect through the study of what happens when people win the lottery – either the big one or a small prize.
Winning the lottery is the equivalent of winning an annuity equal to whatever annual income you can get it current low interest rates and share market returns.
A surprisingly number of people on the Left who deny that taxes have significant labour supply effects will nonetheless accept that winning the lottery will induce people to quit work permanently or cut back at least. The most likely reason is they buy lottery tickets too.
A study has just come out on the labour supply effects of winning the Swedish lottery. The sample in this study was really big: several million Swedish lottery winners.
Sweden seems to be like the USA in that both are awash with interesting economic data to the many other countries do not collect. Moreover, they were able to study these Swedish lottery winners over a 5 to 10-year period. Labour supply detail at that level is like going to heaven for an empirical labour economists.
The researchers found that in common with a previous study of the labour supply of lottery winners after their win that there were
modest reductions in labour earnings suggesting every dollar of universal basic income would reduce labour earnings by roughly $0.11.
The new research also found productivity losses of $1.40 for every hundred dollars of lottery winnings and that the partners of the lottery winners cut back on their labour suppliers well. No surprise there. Taking all these labour supply effects into account, our researchers concluded that:
every dollar won in a lottery reduces lifetime after-tax labour earnings of winners by $0.10-$0.20.
All in all, the universal basic income will be a negative productivity shock built on a negative productivity shock. First of all, there is the great big new tax to fund the universal basic income. Then the recipients of the basic income will cut back on their labour supply further compounding the massive social costs of the universal basic income.
A universal basic income is a bad idea from start to finish and that is before you consider the many advantages of encouraging people to work for their living. Working for your living is a central expectation of adult life.
UPDATE: what is the magnitude of this labour supply drop from universal basic income? The usual labour supply effect of a recession as recently summarised by Richard Rogerson is as follows:
Consider by way of comparison the labour market fluctuations associated with the business cycle. Going from normal times to a fairly severe recession is usually associated with a drop in total hours worked of about 3 percent.
A universal basic income will push the New Zealand economy into recession off the back of labour supply effect from the windfall increase in incomes alone. That is before you consider the massive productivity shock pushing the economy down further through a massive increase in the taxation of capital, which is the most inefficient form of taxation.
The union movement posted two excellent charts during the last election showing how well things have gone since the 1980s economic reforms and their consolidation in the early 1990s.
The charts show that real wage growth returned in the early 1990s after the passage of the Employment Contracts Act and the consolidation of government finances. This was after two decades of wage stagnation in what the unions regards as the good old days.
Furthermore, as the union chart shows, the average incomes of the top 1% in New Zealand is a pretty stable for several decades. Whatever else is happening New Zealand, you cannot blame it on the top 1% because they are lazy. What increase there was in average top incomes in New Zealand was followed by the return of real wage growth in New Zealand and a long economic boom where the unemployment rate drop below 3.5%
The main bugbear is housing affordability which is a result of the Resource Management Act passed in 1993 as the union chart shows. The unions, the Labour Party and Greens all support the laws that result in this housing unaffordability.
As for New Zealand, the main difference between 70% collective bargaining agreement coverage in 1990 and less than 20% collective bargaining coverage in 2011 is real wage growth returned to New Zealand in the early 1990s after 20 years of wage stagnation. The major economic event of the time was the passage of the Employment Contracts Act.
Why Evolution is True is a blog written by Jerry Coyne, centered on evolution and biology but also dealing with diverse topics like politics, culture, and cats.
“We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert”. - J Robert Oppenheimer.
Utopia, you are standing in it! 
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