All in all, Italy and Greece are a dog of a place to enforce a contract. The long-suffering taxpayer is better off paying taxes in Greece than in Italy! Not surprisingly, trading across borders is the greatest strength in doing business in the PIGS. The European Union does have some benefits.
Figure 2: Doing Business rankings, Greece and Italy, 2014
All in all, Italy and Greece are equally bad places to do business and Italy is much worse when it comes to taxes. About the only saving graces of Italy is the registration of property and the protection of minority interests in companies.
Figure 3: Doing Business rankings, Spain and Portugal, 2014
…the poorest 30 percent of households receive significantly more in cash benefits than they pay in tax. The next 10 percent receive on average £596 pounds a year more in cash benefits than they pay in tax, and the top 60 percent all pay more in tax than they get back in cash benefits.
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.
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.
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”).
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
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.
Moretti focused on the impact that restrictions on land supply have on the ability of workers to move to higher productivity cities. Moretti is the second best urban economist working at the moment. The best is Ed Glaeser. Moretti concluded that
A limited number of American workers can have access to these very high-productivity cities
He concluded that a more efficient distribution would be “a general benefit for the entire economy.”
The secret of his analysis was to look at how different US cities, the high productivity cities, contributed to national economic growth. He then explore the implications of fewer and fewer workers been able to move to these cities to take advantage of the great productive potential. The barrier to them moving was high housing prices and high rents.
For example, labour productivity grew quickly in San Francisco, New York and San Jose overt 45-years. All of these cities are famous for their human capital-intensive industries including technology and finance. These cities weren’t America’s growth engine:
The reason is that the main effect of the fast productivity growth in New York, San Francisco, and San Jose was an increase in local housing prices and local wages, not in employment.
Despite the large difference in local GDP growth between New York, San Jose, and San Francisco and the Rust Belt cities, both groups of cities had roughly the same contribution to aggregate output growth.
The drivers of US growth between 1964 and 2009 were southern U.S. cities and 19 other large cities. These cities attracted many residents because of good weather and abundant supply of cheap housing.
The lesson both the US and for New Zealand, and Auckland in particular, is this reallocation of population away from the expensive cities with restricted land supply reduced national output because these population movements bring workers to cities "where the marginal product of labour is low."
In a technology boom town such as San Francisco, it is now what like New Zealand will be as Generation Rent runs its course – 65% of residents are renters:
Over the past year, the City and County of San Francisco boasted the second strongest labour market in the nation, adding 25,000 new jobs. Yet only 2,548 new housing units were permitted and even fewer were built.
Just think: 25,000 new workers and their families have been knocking on San Francisco doors, but there are new units for less than 10 percent of them. It is not surprising that apartment prices get bid up.
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.
In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in “finding topics of conversation fit for the entertainment of rational creatures.”
“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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