FRIDAY GRAPH: US vs EU (and NZ)

Today’s Friday Graph is courtesy of prolific chart-maker Mark Perry:

In a New York Times editorial last year titled ‘Learning from Europe’ Paul Krugman wrote:

The story you hear all the time about Europe– of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation – bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. The European economy works; it grows; it’s as dynamic, all in all, as our own.

The BEA recently released data for the amount of GDP produced by US states in 2010, which allows for an updated comparison with European countries (and Japan and Canada).  See the table below (international countries are adjusted for PPP).  Key findings:

1. The European Union as a group ($32,700 GDP per capita in 2010) ranks below America’s poorest state, Mississippi ($32,764).

2. Even relatively wealthy (by European standards) Switzerland would rank #32 as a US state, behind Georgia.  The countries of Belgium and Germany would rank even lower at #46 and #47, and the United Kingdom, Finland, and France would be close to the bottom of American states, below #48 South Carolina.

3.Spain, Italy, Greece and Portugal all rank below America’s poorest state (Mississippi) for GDP per capita.

On a similar PPP basis, New Zealand comes in at US$27,700, between Greece and Portugal.

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FRIDAY GRAPH: NEW ZEALAND’S SPEND-UP

Here is a graph from the latest OECD Economic Outlook.  It’s an illustration of how much more OECD governments are projected to be spending in the year ahead compared with average levels of spending in the period 1993-2012.  The government spending data are on the OECD basis which is standardised across OECD countries, and includes for New Zealand central and local government.

The chart shows that for the current year, government spending in New Zealand is at an all-time high.  It currently stands at 46.2% of GDP, over 2 percentage points of GDP higher than the 1993-2012 average.  Spending has gone up by more than the OECD average, and only by slightly less than Greeceand Portugal, which is food for thought. Sweden has done best to rein in government spending, albeit from a high long-term average.

No OECD country has achieved sustained rapid GDP growth (4% per capita or more) with government spending at New Zealand’s current level of over 40% of GDP.

FRIDAY GRAPH: THE GREAT SPEND-UP

The following chart uses Treasury–Statistics New Zealand long-term time series to show that the increase in real tax revenues per capita during the Clark-Cullen period rivalled the increased taxation to fund World War II and the first Labour Government’s big spending programmes. Quite a remarkable ‘achievement’, in peacetime.  (The dollars are June quarter 2006 dollars).  A grand opportunity for tax cuts during a period of strong economic growth was sadly missed. 

FRIDAY GRAPH: STUDENT LOANS

Here is another graph from last week’s Budget.

The accompanying text states:

In 2010/11 the Crown will lend almost $1.6 billion to assist students, up 50% over the past five years. There are currently more than $12 billion of loans outstanding. However, at present, for every dollar lent out the Government receives only around 55 cents back in 2011 dollar terms.

The previous government (Steve Maharey) maintained that making student loans interest-free (first, while students were studying and then on an open-ended basis) would not encourage students to borrow more.

This was the height of naivety.  Economics teaches that incentives matter.  The skyrocketing amounts borrowed were utterly predictable.

Debate about taxpayer subsidisation of higher education should focus on fees: how much should students pay for the private benefits they enjoy from higher education, and what should taxpayers contribute on public benefit or equity grounds?

The loans scheme is not the right vehicle for subsidisation.  Interest on loans should approximate market rates, otherwise over-borrowing and other distortions are inevitable.

Other than in an economic crisis, will a future government be able to overturn this egregious 2005 election bribe?

FRIDAY GRAPH: THE FAILED POLICIES OF THE PAST DECADE

The following page from yesterday’s budget illustrates the dismal economic trends of the past decade.

Click to enlarge

The text on the previous page elaborates on these charts:

Real GDP per person has not grown since 2004. The economy was in recession even before the global financial crisis. The downturn in economic performance coincided with:

  • a construction and housing market boom, with the prices of existing houses increasing 115% between 2001 and 2007. Household debt as a share of disposable income rose from 105% in 2001 to almost 160% in 2009
  • a significant increase in government spending. Core Crown expenses as a share of GDP are 6% of GDP (about $13 billion) above the 1994 to 2004 average
  • a sustained high real exchange rate, with the average level of the real exchange rate over the five-year period ending in 2010 being the highest since the 1960s
  • real export growth averaging just under 1.4% a year, compared with 5.4% in the previous 15 years, and
  • a decline in national savings, reflecting an initial steep decline in household savings, followed later by a decline in government savings. This was reflected in the current account deficit averaging 8% of GDP from 2005 to 2009.

In summary, the economy continued to perform relatively well in the first years of the decade aided by the economic framework established by the earlier reforms, a cyclical rebound after the Asian economic crises and a buoyant world economy.

From about 2004, however, the impact of the Labour-led government’s focus on income redistribution rather than economic growth, with ever-higher government spending and costly regulation, began to be felt.

The economy entered a recession in 2008, before the global financial crisis hit, and the government is still struggling to reverse these trends.

This was unquestionably the worst period of economic mismanagement since the Muldoon years.

FRIDAY GRAPH: MANUFACTURING SHARE OF GDP

Another graph courtesy of University of Michigan professor of economics and finance Mark Perry and his blog Carpe Diem.

The chart above shows manufacturing output as a share of GDP for both the world and the United States using United Nations data for GDP and its components at current prices in US dollars from 1970 to 2009.

Perry notes:

We hear all the time from Donald Trump and others about the “decline of U.S. manufacturing,” about how nothing is made here any more, and how everything that used to be made here is now made in China …  In reality, the decline in U.S. manufacturing as a share of GDP is really a global phenomenon as the entire world becomes increasingly a services-intensive economy.

As a share of GDP, manufacturing has declined in most countries since the 1970s.  A few examples: Australia’s manufacturing/GDP ratio went from 21.3% in 1970 to  9% in 2009, Brazil’s ratio went from 24.6% to 13.3%, Canada’s from 21.7% to 11.3%, Germany’s from 35% to 19%, and Japan’s from 35% to 20% …

The standard of living around the world today, along with global wealth and prosperity, are all much, much higher today with manufacturing representing 16-17% of total world output compared to 1970, when it was almost twice as high at 26.7%.  And for that progress, we should applaud, not complain.

The same trend has occurred in agriculture in most countries over the last 100 years – there has been a dramatic decline in agricultural employment.  Would we really be better off if more people worked on farms?

Note also that the decline in the manufacturing share of GDP is to some extent a statistical artifact.  Many functions, such as accounting and IT, that were once performed in-house by manufacturing firms have been outsourced to service sector providers.

Using Mark Perry’s numbers, the share of manufacturing in GDP for New Zealand has fallen from 21.6% in 1970 to 14.9% in 2009.  Manufacturing is still a major sector in the New Zealand economy and bigger as a share of GDP than in the United States and Australia.

FRIDAY GRAPH: TAX RATES AND TAX REVENUE

In a recent article Is ‘Tax the Rich’ Good Policy? (ODT 25 April 2011), I made the point that those in the top income brackets in New Zealand are already taxed relatively heavily by international standards.

I also noted that because cuts to high tax rates encourage economic growth and reduce tax avoidance, they may actually produce more government revenue.

And I quoted President John F Kennedy who said, when cutting US tax rates in the 1960s, “It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run is to cut rates now.”

This chart from Mark Perry’s blog Carpe Diem illustrates these points.

 

As Perry comments:

The chart above shows the relationship over time (from 1979 to 2007) between: a) the top marginal income tax rate, and b) the share of total income taxes paid by the top 1%). In 1979 the top marginal income tax rate was 70% and 18.3% of the total taxes paid were collected from the top 1% of taxpayers. By 2007 the top tax rate was 35% (half of the 1979 rate), and the tax share of the top 1% had more than doubled to 39.5% (from 18.3% in 1979).

The historical record shows an inverse relationship between the highest marginal income tax rate and the share of taxes collected from “the wealthy.” It’s a relationship to keep in mind during the current tax policy debate, where Obama wants to increase tax revenues by raising tax rates for “the rich,” and Rep. Ryan alternatively suggests a cut in the top marginal rate to stimulate economic growth, which would likely increase tax revenues from the wealthy, and increase overall tax revenue.

Note that this is not a Laffer curve argument that tax cuts are self-funding.  Normally they aren’t.  However, the loss of revenue over time from cutting inefficient taxes is less than the initial static loss because they encourage economic growth and expand the tax base.

Note also that higher income people pay more – a lot more – even with a flat or proportional tax.  Leaving aside the likelihood in practice of more favourable treatment for those at the bottom, a person on $25,000 pays $2,500 in tax under a simple flat 10% rate whereas someone on $250,000 pays $25,000.