CARBON PRICE COLLAPSE SHOULD REMIND US OF THE CARBON TAX ALTERNATIVE

The NZBR has long advocated a modest carbon tax for New Zealand at $5-$10 per tonne of CO2 rather than the current ETS for several reasons, one of which was that it would provide greater certainty for firms and households than the vagaries of prices struck in thin ETS markets. It was no surprise in 2008 to see the Australian Productivity Commission recommending much the same for Australia – see for example this 2008 media release here]

This Reuter report of extraordinary volatility this year in the international price for United Nations carbon credits is of interest in this context.  I leave it for readers to assess whether the reported record low is a welcome sign that it is much less costly to achieve given emissions targets than has been thought, or whether it reflects the inability of the authorities to indicate with any clarity how many credits will be issued.

HOW GOOD ARE OUR TEACHERS?

I’ve followed with interest the progress of an ongoing Los Angeles Times project investigating and reporting on the effectiveness of the city’s schools and teachers.

Since launching last year they’ve been analysing the last eight years’ maths and English test scores and an array of other classroom data, all of which has been helpfully collected and filed by the Los Angeles School District but never actually put to use.

Individual teachers, they found, make an impact on students’ performance three times greater than that of the schools they opt to attend. Students lucky enough to have teachers in the top 10 percent of effectiveness can expect to be 17 percentile points higher in English and 25 points higher in maths, on average, than those unfortunates stuck with teachers in the bottom 10 percent.

Interestingly, the Los Angeles Times’ analysis could find only a very small correlation between the level of experience, education and training teachers had and their ability to educate effectively. They found instead that good teachers varied hugely in age, style and personality, although they did all tend to set high standards, promote critical thinking and maintain a semblance of order in the classroom. 

The New Zealand public school system – like Los Angeles’ – ties teachers’ salaries to their levels of education and experience, factors easily gauged and processed by a central bureaucracy. Unfortunately, the factors that make some teachers great are not so easily computed, and as a result our system consistently fail to recognise and reward the teachers who actually provide the best value to students.

We have a pressing need for better quality educators for the thousands of children who are underachieving at schools throughout New Zealand.  As in most other professions, principals and parents/students, ie the managers and customers, are surely best placed to gauge the success and effectiveness of teachers. It’s high time individual schools and principals were given the freedom and responsibility to pay top rates to top-performing teachers and attract more, much-needed bright young talent to the profession.

FRIDAY GRAPH: OUR FISCAL DEFICIT MAKES ITALY LOOK LIKE A MODEL OF FISCAL PRUDENCE

Last week’s chart showed what a strong net public debt position New Zealand is in, compared to Italy and most other OECD countries.  

This week’s chart shows that New Zealand is running one of the largest underlying fiscal deficits in the OECD, as a percentage of GDP.

Specifically, New Zealand’s cyclically-adjusted financial balance for 2011 is projected to be minus 5.2 percent of GDP, which is the 5th highest deficit in the OECD, far higher than Australia’s and makes Italy today look like a model of fiscal prudence compared to New Zealand!   For 2012 New Zealand’s projected underlying financial deficit of 5.4 percent of GDP would be the 3rd highest in the OECD.

Much the same rankings for New Zealand for 2011 and 2012 apply for the OECD’s other financial balance indicators – the cyclically-adjusted balance (fourth in both years) and the primary balance (second highest deficit in 2011, no doubt in part because of the Christchurch earthquake, and third highest in 2012).

New Zealand’s underlying fiscal deficit problem arises from the spending excesses post-2005, and the unwillingness of the current government to address the problem more decisively. The latter issue is of particular concern with the government lacking the political will to implement even such obviously necessary measures as eliminating interest-free student loans and raising the age of eligibility for New Zealand Superannuation.

ASSORTED LINKS

- University of Canterbury economist Eric Crampton on government splashing on stadiums and events

- Noel Pearson calls for a new paradigm on closing the gap between indigenous and non-indigenous Australians, based on equality of all 

- The minimum wage is hurting the worst off… in Britain too

- Australia’s pointless carbon experiment: the question, asks Anthony Watts, is how long will this last, and how long will the public tolerate these two kissy faced politicians?

- Complaints choirs around the world – seriously

- Slovakia fetches the Eurocrats a delicious slap across the chops, but the bailouts will go ahead regardless – Hannan

- George Will slams Elizabeth Warren’s claim that the government should take a chunk of entrepreneurs’ profits

- 20% of the world’s 6.9 billion people speak English to some extent

- Does the US economy need a little inflation?  A former chief economist at the
International Monetary Fund says yes, a former Treasury official under
President George W. Bush says no

- Private health insurance increases 400% in Sweden

- Anarchists for good government: interesting perspectives on the Wall Street protests

FRIDAY GRAPH: CIAO DOLLAR?

A spate of Sovereign credit downgrades is occurring, with Italy featuring prominently this week following New Zealand’s downgrades the week before.

This week’s chart shows how fundamentally different the situation is in one vital respect between New Zealand and Italy.

In contrast to Italy, and the OECD as a whole, New Zealand does not have a public debt problem (yet, but watch this space given our underlying fiscal deficit).

Whereas 11 countries in the chart have net public debt at or above 50 percent of GDP, New Zealand’s ratio is only 4 percent of GDP according to OECD projections for 2011.

New Zealand has been downgraded for external debt reasons, but since the vast bulk of this debt is between private borrowers and lenders–who have every reason in 2011 to balance risk and return carefully and judiciously–this is a very different situation from that facing Italy and the ten other countries in the chart where government debt is clearly the problem.

ASSORTED LINKS

    • Magician, and H.L. Mencken Research Fellow, Penn Jillette on Capitalism, Magic and Morality

GIVING BACK VS CREATING WEALTH

Attempting to sell his new jobs bill earlier this month, which would include new taxes and fees focused on wealthier Americans, President Obama said:

All I’m saying is, if you’ve done well — I’ve done well –
then you should do a little something to give something back.

Elizabeth Warren, a former assistant to the President and now a candidate for the United States senate, was widely quoted recently expanding on the same theme:

You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

This line of thinking portrays business owners as free riders who have ridden to success largely at the expense of the rest of the community. It suggests that investors in a successful business benefited from publicly-provided goods and services “that the rest of us paid for” and provided no compensating benefits to the community in return.

This representation is wrong on both counts. First, business activity is taxed all the way along the line. Imagine if the factory that Warren was describing were located in Manukau. The owner would have paid business, personal income tax, indirect taxes, ACC levies, and local authority rates. It would also pay the pre-tax wages of employees, thereby enabling governments to collect taxes on employment incomes. The taxes the government collects from investors in the business and the incomes drawn by its owners and employees will have continually contributed to the provision of all the goods and services mentioned by Warren.

Second, Warren’s statement ignores the contribution a successful business has already made to the wider community through the benefits it has conferred on its customers.
Economists commonly represent the benefit a business activity confers on the community as the sum of the surpluses accruing to consumers and producers. The consumer surplus is the difference between the benefit conferred and the price paid; the producer surplus is the difference between the price received and the cost of supply.

These surpluses are illustrated by the chart from Wikipedia below:

As competing businesses find ways of lowering the cost of supply, the supply curve in the diagram will move down, leading to a lower equilibrium price and an ever larger consumer surplus. Competition is a major mechanism for transferring the benefits
from productivity improvements from producers to consumers (and workers).

It follows that successful businesses “give back” to society every day by creating the very goods and services that allow people to be more productive, stay healthy or simply enjoy life, and commonly selling them for less than customers would be willing to pay.  While successful entrepreneurs often become rich, the amount they earn in their lifetime is likely to be only a fraction of the wealth their businesses generate for society at large (further reading on this point can be found in William Baumol’s book The Free-Market Innovation, Machine: analyzing the growth miracle of capitalism).

Notice also that the producer surplus will accrue to investors, which frequently include small investors and pension funds as well as the wealthy individuals that are the target of Warren’s statement.

I covered this issue in more detail some time ago in a speech on business as a vocation.

Warren’s arguments also assume that the best way to give back to society is by paying more tax or donating to charity (though it’s clear she strongly favours the former over the latter).  I’ve said before (for instance, here) that Bill Gates has contributed much more to the world through the creation of Microsoft’s software than he can possibly hope to achieve through his philanthropy. Andy Kessler makes the same point when writing about Wilson Greatbatch, the inventor of the pacemaker, who passed away last week:

History has proven that the road to increased standards of living and wealth was built on productivity—doing more with less. It was the Industrial Revolution that got us out of the growing fields and into factories, which allowed us to pay for roads and teachers and civil servants. And now the move out of factories into air-conditioned offices is creating anxiety. It shouldn’t. Labor replacement is productivity. James Spangler’s vacuum cleaner. The Walker brothers’ dishwasher. Clarence Birdseye’s flash freezing. DuPont’s Kevlar. And John Simpson’s guidewire catheter for angioplasty and heart stents — the list goes on. Each invention generated wealth because it improved our lives, not because someone “gave back”.
Aside from outsized government-assisted profits (think US telecom, asbestos removal and Derek Jeter), it is the delivery of these productive goods and services that increases our wealth. The inventors get wealthy but society gets wealthier. No forced giveback needed.

As we approach this year’s general election, it’s worth understanding which parties
are focused on increasing our productivity and which believe we need to “give back” more of our wealth. The former will help us move forward. The latter will result in the opposite.