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Presidential candidate tax plans and economic growth
06 Mar 2016 Leave a comment
in applied price theory, economic growth, fiscal policy, macroeconomics, politics - USA, public economics Tags: 2016 presidential election, taxation and entrepreneurship, taxation and investment, taxation and labour supply
General government expenditure as % of Portuguese, Italian, Greek and Spanish GDP since 1960
24 Feb 2016 Leave a comment
in economic growth, economic history, Euro crisis, fiscal policy, macroeconomics, public economics Tags: Greece, growth of government, Italy, Portugal, size of government, Spain
I do not think any of these countries have governments who can really handle managing half of national income on a regular basis. The Italian, and I assume Greek GDPs at least are topped up quite considerably to take account of their underground economies. The top up for Italy is 20%.
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Data extracted on 23 Feb 2016 07:45 UTC (GMT) from OECD.Stat.
Greece should have defaulted several years ago rather than have raised taxes
24 Feb 2016 Leave a comment
in currency unions, economic growth, Euro crisis, fiscal policy, macroeconomics Tags: Greece, sovereign debt, sovereign defaults
John Cochrane is the latest to join the list of economists who pointed out that Greece should have defaulted several years ago rather than put up taxes. Tax rises just made everything worse and put off the day when Greece had to reform through deregulation and privatisation.
Source: Renowned U.S. Economist Says High Taxes Squash Greece’s Prospects for Recovery | GreekReporter.com.
As early as 2011 , Jeffrey Miron was arguing the best way forward for Greece was to default and leave the Euro:
If Greece defaults, the country gets immediate relief from the crushing interest payments on its debt, leaving it with a relatively modest primary deficit which excludes the big interest payments Greece is faced with now.
In such a scenario, the pressure for austerity would therefore diminish. This would allow Greece to choose policies that encourage growth, rather than ones that shrink the deficit but retard growth by imposing higher taxes.
By abandoning the euro and adopting a properly valued currency, Greece can restore its international competitiveness. This means greater employment demand from both domestic and foreign sources.
The potential negative of default is that Greece will likely lose access, for a while, to international credit markets (although it will be a much safer investment after default than it is now).
But being cut off from foreign lending for a few years is not a disaster; if anything, it might encourage cuts in the wasteful components of government spending.
A bigger risk of default is that ending the crisis might reduce pressure for Greece to address the economy’s fundamental problems: crony capitalism, a Byzantine tax code, excessive regulation, and a bloated government sector.
If Greece fails to reform, it will suffer slow growth and a new crisis soon, regardless of what it does now.
Arellano, Conesa, and Kehoe explained in Chronic Sovereign Debt Crises in the Eurozone, 2010–2012 that the post-GFC recession in many Eurozone countries created an incentive to gamble for redemption. This gamble for redemption is betting that the post-2008 recession will soon end:
- If Greece sold more bonds to smooth government spending in the interim, and if the Greek and EU economies recover, the stronger revenue growth will pay off the enlarged Greek government debt.
- Under some circumstances, this policy is the best that a government can do for its country, but it carries a risk!
- If the recession goes on for too long (and it did in southern Eurozone), a government will either have to stop increasing its debt or default on its bonds.
The global bond markets will anticipate this prospect of default as a country’s government debt accumulates and will seek higher and higher interest for new bonds, and importantly, to roll over existing Greek Government bonds.
EU policies that result in lower interest rates and lower the cost of a sovereign default provide incentives for a government to gamble for redemption. The interventions taken to date by the EU and the IMF – lowering the cost of borrowing and reducing default penalties, the bailouts and the 50% write-off of the existing Greek government debts – encourage southern Eurozone governments to gamble for redemption.
Through history, sovereign defaults come in clusters. Is Greece the start of one? on.wsj.com/1V3XkxR via @WSJ http://t.co/Oy9aMPoHrt—
Greg Ip (@greg_ip) July 15, 2015
Greece and a few others are gambling for redemption by betting that the recession will end soon, selling more bonds to smooth government spending in the interim, and reducing the enlarged debt if their economies recover. The Greeks initially did a fine job in squeezing huge subsidies and debt write-offs!
If the recession continues for too long, the government will have to stop increasing debt or default on its bonds. Greece has been in default in more than 50% of the time since it became independent in 1822.
Greece’s problem is that it is 119th in the 2014 index of economic freedom, just ahead of India. The World Bank ranks Greece 161st in the world for ease of registering property and 91st for enforcing contracts; it takes an average of 1,300 days to enforce a contract through the Greek courts. This low base says something about how Greek politics works and will work for some time to come.
Cristina Arellano in a recent paper pointed out that if default is inevitable, raising taxes just makes everything worse:
Fiscal defaults occur because of the government’s inability to raise tax revenues. Aggregate defaults occur even if the government could raise tax revenues; debt is simply too high to be sustainable.
In a quantitative exercise calibrated to Greece, we find that our model can predict the recent default, but that increasing taxes would not have prevented it. In fact, increasing taxes would have made the recession deeper because of the distortionary effects of taxation.
More on honest @BernieSanders and his voodoo economics
24 Feb 2016 Leave a comment
in economic growth, economic history, macroeconomics, politics - USA Tags: 2016 presidential election, grates, left-wing populists, Paul Krugman, quackery, rational irrationality
Edward Prescott and @BernieSanders compared
23 Feb 2016 Leave a comment
in applied price theory, economic growth, fiscal policy, macroeconomics, politics - USA
https://twitter.com/TheNewDeal/status/696864555658539008
As a contrast against the Bernie Sanders tax-and-spend high-growth plan, the Edward Prescott plan is:
- mandatory savings for retirement;
- Eliminate capital income taxes;
- Broaden tax base and lower the marginal tax rate;
- Phased-in reforms so all birth-year cohorts are made better off;
- Left welfare programs and local public good shares the same; and
- Savings not part of taxable income, saving withdrawals part of taxable income – with these changes U.S. income tax would be a consumption tax.

Source: Edward C. Prescott – Importance of Good Governance for Economic Prosperity.
The difference between the Prescott and Sanders plans is Prescott delivers high growth through massive supply-side reforms that include the abolition of taxes on income from capital, mandatory savings for retirement along with much lower marginal tax rates.
The Sanders plan argues that if you tax people a lot more, there is more growth, more investment, more innovation and entrepreneurship and greater labour supply. There is no historical precedent for that as an outcome from higher taxes.
In the case of Prescott, the disagreement is over how large are his growth dividends. In the case of the Sanders band, only one economist agrees that his plan will increase growth. Despite that, he is still voting for Hillary Clinton.
Why @NZGreens @GreenpeaceNZ are enemies of workers & poor
15 Feb 2016 Leave a comment
in applied welfare economics, economic growth, energy economics, environmental economics, environmentalism, labour economics, macroeconomics, politics - New Zealand Tags: expressive voting, Greenpeace, Leftover Left, New Zealand Greens, rational irrationality, Twitter left
GDP per hour worked across the OECD
13 Feb 2016 Leave a comment
in economic growth, labour economics, labour supply, macroeconomics Tags: labour productivity
Once were Sweden! New Zealand, Swedish and Australian general government expenditure as % of GDP since 1986
12 Feb 2016 Leave a comment
in economic growth, economic history, fiscal policy, macroeconomics, politics - Australia, politics - New Zealand, public economics Tags: Australia, growth of government, lost decades, size of government, Sweden
I came across this data showing that New Zealand and Sweden had the same sized public sectors in the mid-1980s some years ago. The data could not be found again for a long time in the OECD statistical databases. One reason was the OECD changed its name to general disbursements.
Data extracted on 12 Feb 2016 08:45 UTC (GMT) from OECD.Stat.
The size of the public sector in Australia has not changed much for 30 odd years. The public sector has been in a long decline in Sweden and New Zealand since peaks as a percentage of nominal GDP in the late 1980s and early 1990s respectively.
I know of no comments on the large size of the New Zealand public sector as measured by general government expenditure in the late 1980s. Its contribution to the stagnant economic growth of that time is worth exploring.
F A Hayek – Unemployment And The Free Market
12 Feb 2016 Leave a comment
in applied price theory, Austrian economics, business cycles, economic growth, F.A. Hayek, fiscal policy, job search and matching, labour economics, labour supply, macroeconomics, unemployment, unions Tags: job search, mismatch unemployment, search unemployment, union power, union wage premium, waiting unemployment
Sugar taxes and expressive politics
11 Feb 2016 1 Comment
in applied welfare economics, economic growth, health economics, liberalism, politics - New Zealand, population economics, Rawls and Nozick

The sugar tax championed by among others the Morgan Foundation is the latest manifestation of do-gooding that dates back to sumptuary laws of mediaeval times. Black’s Law Dictionary defines them as
Laws made for the purpose of restraining luxury or extravagance, particularly against inordinate expenditures in the matter of apparel, food, furniture, etc.
These early attempts through sumptuary laws to regulate how people live their lives to make sure that they did not dress above their social rank as well as risk hellfire and damnation has been critically applied include alcohol prohibition, drug prohibition, gun control laws, bans, and restrictions on dog fighting.
The sugar tax attempts to save us from a bad diet because others know how to run our lives better than we do despite having never met us, much less lived our lives and dreamed our dreams. The calling of the do-gooder is a busy vocation.
The do-gooders want to stop smoking, overeating, and the partaking of too much sugar but undoubtedly support the decriminalisation of marijuana because of the futility of prohibition.
The right to get stoned is a civil liberties issue but sugar is a legitimate topic of public health regulation. Those who do not want to save people from sugar are ignorant or steeped in moral turpitude, preferably both.

We live in an age of obesity. When I was a kid, the poor were thin, they are now fat. I can still remember the names of the 2 boys in my high school class who were in any way overweight. Now the majority of school kids are overweight.
Sugar taxes are also when the Left stage a temporary conversion to supply-side economics. When you tax something, less will be supplied. The Left are surprisingly unwilling to admit that unless it suits their agenda of the day.
The Morgan Foundation is a curious position of advocating a great big new tax: a comprehensive capital taxation. It is also arguing that sugar taxes will cut consumption. I wonder what it estimates to be the response of saving and investment in its capital tax. Does it take the conservative estimates, or the liberal estimates of the responsiveness of savings, investment and labour supply to higher taxes?
Sugar taxes are a blunt instrument. They tax fat people, thin people and the potentially fat of tomorrow. They are not like alcohol and tobacco taxes which are narrowly tailored to taxing sin. Richard Posner said that
People who crave sugar will find no dearth of substitutes for sugar-sweetened sodas. Moreover, most consumers of these sodas are not and never will be obese. They may well be overweight, but all that that means is that they are heavier than the “ideal” weight calculated by physicians; if they are only slightly or even moderately heavier, the consequences for health or social or professional success are apparently slight. To the extent that a soda tax would cause substitution of equally sugared foods, it would not only have no effect on obesity; it would yield no revenue…
Last time I looked, people enjoy food. Some enjoy food quite a lot.
We are in a free society where some people are just simply like eating while others have a bad draw of the genes. Others like to exercise. As Richard Posner said:
The obese are people who by dietary choice and preference for a sedentary style of life have traded off the costs of obesity against the costs of being thin and have decided (at least in a “revealed preference” sense–they may not have consciously chosen a style of life that predisposes them to obesity) that the costs of thinness preponderate over the benefits. And in general we do not try to prevent people from making such trade-offs.
But there are two situations in which preventing people from choosing the style of life that maximizes their utility can be defended (provided certain assumptions are made about cost and efficacy) on economic grounds.
One is where consumers are unable to evaluate a product or to act upon their evaluation; another is where a voluntary transaction imposes costs on other people which the transactors do not take into account.
The fact that car unhealthy lifestyles may impact on the public health budget is not much of an argument for intervention. Private insurers are quite capable of working out whether they need information on people’s lifestyle and diet or not.

If you are to provide people with universal health insurance at the expense of the long-suffering taxpayer, you should at least have the decency not to try and take over their entire lives so that you can be a social justice warrior on the cheap.
As for children seeing advertising for sugar, the sugar tax and a ban on advertising is a token gesture. You trying to take over from their parents. As Gary Becker noted:
Many doctors and others who advocate taxing sugared beverages and fast foods at heart do not believe that consumer taste for sugar and fast foods should be taken into account in devising public policy.
Until the nanny state brigade and sugar tax advocates address that simple question, they have no standing in a public debate. Like all the prohibitionists who came before them, they are simply unwilling to admit the people like food, drink and sugary things.
Women demonstrating against Prohibition, 1932. https://t.co/xE30ApkNBB—
Historical Images (@Historicalmages) January 29, 2016
Until they put forward a way of balancing that common preference to enjoy life including food and risk against their meddlesome preferences in their role as the great central planner of our lives, they are just having us on. As Richard McKenzie said recently
The people most concerned with the country’s weight gain—self-appointed “fat police”—have favoured supposedly easy and direct policy solutions: tax and ban high-sugar and high-fat products.
Such policy courses are a snare and delusion, especially if Americans’ cherished freedoms of choice, which are at the heart of the country’s economic engine, are to be preserved.
The great driver of obesity is prosperity, not sugar. People can simply afford to buy more and enjoy the food they have more.
John Rawls argued that people should have every right to live their lives according to their own lights. In nanny state brigade just do not accept that point of view.
Rawls believed the most distinctive feature of human nature is our ability freely to choose our own ends. The state’s first duty with its citizens is to respect this capacity for autonomy.
Instead, the fat police and the do-gooders want to engage in the futile gesture of pestering you and taxing you when you buy a sugary drink even though there are almost unlimited alternative supplies of sugar laden products.
The fat police are far too busy feeling good about themselves in the expressive politics of public health. They cheer for sugar taxes, boo obesity and feel good about themselves for having told other people how to live their lives better. A good number of them then celebrate by lighting-up a joint. Many of the rest have a wine, not beer.
The particularly annoying ones ride a bike, which is a dangerous activity, or are so boorish as to exercise in a public place, much to the annoyance of the rest of us who are getting on with having a good time.

The Inability to Understand Exponential Growth
05 Feb 2016 Leave a comment
in applied price theory, economic growth, macroeconomics Tags: endogenous growth theory, great stagnation
Why @garethmorgannz wants his great big new tax @geoffsimmonz
21 Jan 2016 Leave a comment
in economic growth, fiscal policy, labour economics, labour supply, macroeconomics, politics - New Zealand, public economics Tags: Gareth Morgan, optimal tax theory, taxation of capital
Source: Poll Results | IGM Forum.
New Zealand inflation rate adjusted for CPI measurement bias since 1970
20 Jan 2016 Leave a comment
in applied price theory, business cycles, economic growth, economic history, macroeconomics, monetary economics, politics - New Zealand Tags: CBI bias, inflation rate, measurement error, price indexes
1% to 1.5% is the usual estimate of bias in the consumer price index because of the introduction of new groups and quality upgrades in existing goods. I have adjusted the consumer price index inflation rate back to 1970 in New Zealand by 1.5% to see how long ago prices became stable. I know this is a rough adjustment, but it is still informative. If anything, the bias in the consumer price index from new goods and product upgrades is increasing rather than decreasing.
Source: Reserve Bank of New Zealand.
Prices have been stable or falling in New Zealand’s for at least three years now once bias in the consumer price index is taken into account. Despite this deflation, the economy seems to be getting along pretty well. There is also a long period of more or less stable prices in the 1990s once bias is taken into account in the measurement of consumer prices by the Statistics New Zealand.
EU late joiners relative labour productivities @NickCohen4 @iainmartin1 @CapX
17 Jan 2016 Leave a comment
in currency unions, economic growth, economic history, international economics, macroeconomics Tags: Common market, customs unions, European Union, trading blocs preferential trading agreements
Original EU Labor Productivities Relative to U.S. @NickCohen4 @iainmartin1 @CapX
17 Jan 2016 Leave a comment
in currency unions, economic growth, economic history, Euro crisis, international economics, macroeconomics Tags: Brexit, Common market, customs unions, European Union, free trade agreements, preferential trading agreements
Source: Edward Prescott.


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