## Tuesday, November 20, 2018

### I was an illogical ideologue

I recall many heated political and economic discussions with Paul Frijters when I started my PhD. In retrospect, these would simply involve me rambling and him pulling me up questioning the logic of the next line of my argument. I realise now that “younger me” was happy to regurgitate arguments I liked no matter the logical coherence.

But now life is much harder. Being absolutely critical and logical means you don’t believe the same myths as your social groups. It makes you an outsider in the purest sense.

It is also career-destroying. Telling people comforting lies is how you make the big bucks, particularly as an economics consultant.

### You can tax capital gains due to inflation

I’ve never understood the concern adjusting for inflation in the taxing of capital gains. The gain, inflation-adjusted or not, is simply a profit in the year it is realised. Businesses investing in new capital equipment don’t get to say “Yeah, but if I bought this machine today it would cost heaps more, so let me just deduct today’s price as an expense."

### Brexit will not be an economic disaster

If supply chains are so tightly integrated that the British economy will collapse, then it is in the political interests of countries at the other end of these supply chains to agree to reasonable trade conditions so that their countries don't also suffer. Indeed, most of the arguments for Remain are not economic ones. They look and sound like economics, but there is no economic reasoning.

Take this article, which suggests that the need for exports to conform to EU product standards is a scary big cost of Brexit. But by definition, all products currently exported to the EU conform to EU standards. This is a minor administrative change by any stretch of the imagination.

While it is certainly in the interests of the EU bureaucracy to make a Brexit as economically disruptive as possible in order to send a message to other countries, I think in reality this will be hard to do.

Also, calls for a second referendum seem pretty anti-democratic— "democracy is good, except when the stupid people vote for things I don't like".

### Yesterday’s ‘bottom-up’ is tomorrow’s ‘top-down’

Russ Roberts is an excellent interviewer and I thoroughly enjoy his Econtalk podcasts. But every time he talks about ‘bottom up’ solutions to organisational problems I immediately think “here comes tomorrow’s top-down rule that you are going to hate"!

### Nobody is serious about higher wages

If you aren’t interested in unleashing enough government spending to decrease the unemployment rate to a number starting with a 3, or even 2, then you can't be that interested in increasing wages.

We were interested in this once. And being far richer than we were then, we could do an even better job today. If that’s what we wanted.

### Micro-efficiency obsessions are macro-economically inefficient

With such huge macro-level inefficiency from under-utilised resources, we should stop debating the microeconomic efficiency of government spending so much.
• NBN? Just do it. Spend on the best quality stuff now.
• Airport rail? Just do it.
• Clean our city rivers? Plant trees in the catchment and install stormwater filters now.
Just about anything, even digging holes and filling them in, is better than a 5%+ rate of unemployment with hundreds of thousands of underutilised workers.

### High population growth is ideology hiding in economic jargon

Arguments from supporters of high population growth in Australia are that:
• Immigrants are job-creators
• Immigration offsets ageing
• Immigration makes the country richer
Sounds like something our stagnant regional towns could do with more of!

Ignoring the practicalities of internal borders, all of these arguments also favour an “immigrants to the regions” policy. After all, Australian cities are a small global region. Why argue for “immigration to the Sydney region” and not “immigration to the Tamworth region”?

For some reason, this is philosophically wrong rather than impractical, and immigration boosters seem happy to turn their economic arguments 180 degrees when the location of immigration changes.

Also, if you want public support for immigration, don't insult everyone who has concerns about the past decade of record high levels. Has insulting someone ever been persuasive?

1. "With such huge macro-level inefficiency from under-utilised resources, we should stop debating the microeconomic efficiency of government spending so much".

Surely there’s room for more nuance here.

1) Lots of spending, especially the big stuff, just wastes resources and is inferior to cash handouts.
Example: Victoria is removing 50 level crossings at a cost of $7bn or so. The business case, released a year or two after the digging started, showed a 0.67 benefit-cost ratio. Apparently going into debt in order to burn a third of the money borrowed is so wildly popular that, having committed to more or less the highest-priority 50 crossings, they’re now going to tackle some even lower BCR ones. 2) Crowding out. Who can afford to build a house or a factory, let alone commence a new major transport project, when all the construction stuff is fully employed in the existing projects? 3) To achieve macro stimulus the option of debt-financed cash handouts or tax cuts is available. You can guarantee a minimum BCR of 1 from doing that, assuming that people don’t spend the handouts on stuff they don’t actually value. Or cut inefficient taxes. Or pay teachers and cops and nurses more. Or provide cash handouts for poor people to guarantee maximum impact on aggregate demand as well as solving social problems. Some government investment and service spending is inferior to just doling out cash. 4) While we clearly under-analyse big spending, perhaps the kernel of truth in your observation is that we over-analyse small spending. Small spending, when we get the chance to measure it, often has fantastic returns. Cancelling one$7bn project that delivers 0.67 BCR and putting it towards a bunch of social interventions which often see 3+ BCR is worth \$16+bn. I think being less judicious about the small stuff would be a smart rephrasing of your advice. A diversified portfolio of smaller projects with unknown returns within overall policy areas that typically have high returns (health, education, housing, social policy) will trump any transport mega-project even if there are a few blow-outs and dud projects amongst them.

5) Having said all that, I agree with the theme. Macroeconomic inefficiency is the elephant in the room and some of the rigour we put around micro efficiency really feels like rearranging the deckchairs. Regulatory impact assessment, for instance, has worthy aims and some benefits, but the outsized contribution to this task of the time and costs of economists and policy analysts belies its relative unimportance to the economy and to people’s lives. Red tape just isn’t a problem. Hundred of thousands of unemployed and underemployed and insecure workers, and stagnant wages and investment – that’s a problem. Ditto environmental destruction. You often feel the overall economic benefit would be higher if all those regulatory economists and red-tape analysts in each state were just told to down tools and picket Parliament until Newstart was increased.

1. Great comment. I agree, there is some nuance there.

1) The broader point you are making is that there is a ranking of alternative investment decisions with different returns, and we should at least try and spend on those at the top of the ranked list rather than the bottom. That is true. My point is that doing any on the list is better than none, and taking what is politically palatable, even with a low BCR, is preferable to not doing any, because it is not always clear that not doing low BCR investment 'makes space' for high BCR ones.

2) The point is to create wage inflation, so by necessity it means making these investments more costly. When all the construction workers are fully employed it will pay to train more and attract them away into the workforce or away from other jobs.

3) I don't think this distrinction is so clear, but I totally agree that giving cash is in the middle of the ranked list of things to spend money on. The distribution of the cash matters, and I like you idea of paying valued public service workers more.

4) "I think being less judicious about the small stuff would be a smart rephrasing of your advice." Great. I will use that line. Thanks. I think it better captures my point. I don't mind mega-projects if they are new types of production that haven't been done before (starting a space agency, fibre, etc) that might help expand flow-on industrial capabilities. But again, perhaps this type of project is more of a 'program' and comes in smaller chunks anyway.

5) Brilliantly said!