The GST and the hidden economy

John Quiggin4 Comments

This SMH report says the GST has done nothing to reduce the size of the hidden economy. I haven’t seen the original research on which the report is based. Also, although the reported method of looking at the volume of “unexplained” cash is widely-used in the literature on tax evasion, I have some technical difficulties with it. But the basic result is entirely predictable, and was in fact predicted by every competent economist who looked at the problem. Simon Grant and Stephen King (both then at ANU) did a nice analysis and someone else (can’t recall name right now) published much the same thing in the Economic Record.

I gave a less formal exposition in the Financial Review in 1996. The key point

The silliest of the claims made in support of substituting a GST for income taxes is that it will put a stop to tax evasion, of the kind practised, for example, by plumbers who are willing to charge a lower price in return for payment in cash. It should be obvious, at least to anyone trained in economics, that a change in names will change nothing; plumbers who fail to report their income to the Tax Office will also fail to report their sales to the officials responsible for the GST. For those who prefer a formal general equilibrium analysis, a paper by Simon Grant and Steven King proves that replacement of an income tax by a GST will make no difference in the extent or incidence of tax evasion.

It looks as if the data is finally in on this one.

Word rates

John Quiggin6 Comments

My model in work is Anthony Trollope who turned out 50 or 60 three-volume novels despite having, for most of his life, a full-time (admittedly, not very demanding) job at the Post Office (he invented the pillar-box). According to his autobiography, Trollope achieved his output with a writing stint of three hours per day, starting at 5am. He set a target rate, with the requirement to write more if he fell behind for a couple of ideas.

All of this sounds crass, at least to those impressed with the Romantic notion of spontaneous expression, but, for those of us who aren’t tortured genii, I think Trollope’s rules are spot-on. To adapt a favorite maxim of the Labor Party, write early, write often and write lots.

That said, I can’t really believe Trollope’s claim that he regularly wrote 250 words a quarter-hour for a three hour stretch. I imagine my methods are similar to his, in that I have my pieces turning over in my head for a fair while before I sit down to write them, and so, when things go well, I’m basically constrained only by typing speed. I can manage about 30 wpm with moderate error count, so that, in principle I ought to be able to beat Trollope’s output rate handily, 450 words to 250. But even the most modest cleaning up – correcting typos and grammatical errors, rearranging clumsy sentences and so on, is going to take 5 minutes in every 15, which cuts my maximum rate to 300 words per quarter hour.

And, while I’m not Flaubert, agonizing over “le mot juste”, I care about picking the right words and so, pretty clearly, did Trollope. I spent 30 seconds or so in the previous para thinking about whether to write “typos” or “minor errors”, and this kind of delay is bound to hit you every few sentences, even when you have the main ideas clear before you start.

All up, I consider myself pretty satisfied when I can turn out a 750-word column in an hour and a half, which is a rate of 125 words every quarter hour, or half what Trollope claims. Given that Trollope was writing by hand, and had to rewrite anything he wanted to change, I don’t believe he could consistently achieve twice that rate.

Trollope described his methods in his Autobiography, which he ensured was published posthumously. He knew that his production-line work ethic would shock the Victorian public, and I suspect he stretched the truth a bit to increase the shock value. (425 words, 45 minutes!)

Fixing the Murray (updated)

John Quiggin10 Comments

The need to rescue the Murray-Darling river system has given rise to some fairly outlandish cost estimates, as well as to the usual extremes of overdone pessimism and Panglossian optimism.

I thought of the following as a back-of-the-envelope exercise in cost estimation. Suppose the government bought back 1500GL of water at $40/ML/year, this would be an annual payment of $60 million, which could be financed from a capital sum of $1 billion at 6 per cent interest. I’d guess that increasing natural flows would solve about half the problem, which would imply a total cost of the order of $2 billion. This is incredibly crude, but I’d think the order of magnitude $1 billion – $10 billion is about right, and that we are likely to end up spending something around the low end of this range.

Update: My estimate doesn’t look too bad according to this report

Gary Sauer-Thompson has responded, arguing that the mess we’ve made of the Murray

puts into question the deployment of the modernist conception of the Baconian Enlightenment project by the liberal state to make Australia modern. This use of modernist science (reductionist and elimination of old ideas by new ones) involved an ahistorical, instrumental reason to improve the human condition coupled to an appeal to a tacit notion of progress. It has been thrown into question because its categories got things messed up

Liberia

John Quiggin12 Comments

Everybody on both sides of the Iraq debate now seems to be agreed that the war wasn’t about weapons, and most people seem to be agreed that it wasn’t about terrorism. What’s left of the overt case put up before the war is the humanitarian argument that Saddam’s regime was so murderous that it needed to be ended, even if thousands of civilians and thousands more Iraqi soldiers died in the process. This was a minor element in the case put up by Bush and Howard, but a fairly major argument for Blair.

The latest tragic turn of events in Liberia gives us a good test of the extent to which Bush takes this argument seriously. The humanitarian payoff to intervention in Liberia would be far higher than in Iraq, and the cost far lower. Moreover, having been in effect the colonial power, the US could be expected to intervene even under the Cold War era rules where national sovereignty was supposed to preclude intervention except in cases, like the present one, of state failure.

When Bush went to Africa, he seemed set to announce a commitment, but now he looks to be going cold on the idea. A decision to do nothing would be a disaster for the US as well as for the Liberian people, especially if things turn really bad as they did when the French sat on their hands in Rwanda.

By comparison, Howard is looking relatively good. The decision to duck out of reconstruction in Iraq, about which I was pretty scathing at the time, can be justified in the light of the commitment to the Solomons.

Public choice = Marxism

John Quiggin12 Comments

Henry Farrell at Crooked Timber posted some critical remarks on public choice theory, and Kieran Healy chimed in with a piece on “Shake’n’Bake social theory” of the general form “A is really B”. For example, public choice theory can be stated as “politics is really a market for votes”. All of this can be applied at the meta-level, in the form “Theory A is really Theory B, with a change of names”. As it happens, I’ve used precisely this move to argue, that “Public Choice theory is really the Marxist theory of the state, and the associated political program is really Leninism”.

The central points of the Marxist theory are

(1) Politics is about struggle between economic classes. The state acts in the interest of the capitalist class as a whole, and arbitrates differences among Îfractionsâ of capital;
(2) Political ideas (except Marxism) are Îideologiesâ designed to rationalise class rule;
(3) The masses acquiesce because of Îfalse consciousnessâ associated with submission to a dominant or Îhegemonicâ ideology.

Translating to public choice theory, we get:

(1) Politics is about the struggle between interest groups. The state responds to the pressure of organised interest groups, typically tight coalitions of producer groups. Log-rolling between these groups produces an outcome which benefits them collectively at the expense of taxpayers and consumers;
(2) Political ideas (except free-market ideas) are ideologies designed to rationalise policies serving various interest groups;
(3) Voters acquiesce because of Îrational ignoranceâ which leads them to take little in-terest in politics and makes them easily subject to manipulation by political interests.

On the Leninist implications of both theories

If ideas do not matter, free speech is at best a luxury and at worst a distraction. Even if speech is not actually suppressed, it is debased. When political debate is seen as a charade by its participants, it naturally becomes one. Furthermore, since the system cannot be changed by reason, some form of ‘short sharp shock’ is required. The result is a cult of ruthlessness (the catchphrase here is ‘tough decisions’). Since opposition to oneâs policies is interpreted as a sign that interest groups are being hurt, it may be taken as evidence of correctness. The correct response is not to persuade oneâs opponents, but to override them.

This was in a piece published in, of all places, the Centre for Independent Studies journal, Policy. The editor in those days, Michael James, was an interesting person – too interesting for the CIS in the end, as I recall.

I’ve done one piece of historical revision in the above story. I didn’t explicitly identify authoritarian Marxism with Leninism in this piece, and I owe the idea of ‘Market Leninism’ to New Zealand economist Brian Easton.

If you want to read the entire article, it’s posted below.

Read More »

Findings from America

John Quiggin6 Comments

I’m on my annual visit to America. Although I’m literally inside the Beltway as I type this, I might as well be back in Brisbane as far as contact with the centres of power are concerned. (Actually, except at the very top, most of the powerful seem to live outside the Beltway, and commute). So I’ll just give some general impressions of how my slice of America seems on this visit:

1. Friendly. I made good friends when I lived here nearly 15 years ago and have kept them. In my experience, America is a really friendly place. Of the Australian cities I’ve lived in, only Brisbane has been friendlier (YMMV).

2. Fat. Even on the shortest of visits the prevalence of severe obesity is striking. Australia is said to be catching up on this respect, but on my unscientific sample we’ve got a long way to go.

3. Philanthropic. Visiting the Washington Mall and the National Gallery of Art, it’s striking that the building and all the paintings in it were donated. And of course admission is free, all in striking contrast with Australia. As Tim Dunlop observed to me when we had lunch (in person!), philanthropy has its limitations. It’s much better at providing ‘club goods’ enjoyed by the relatively well off than it is at transferring resources between social classes. I may post more on this some time

4. Fading flush of prosperity. The effects of the big boom are still evident but are fading. Beggars had disappeared from the streets last time I visited, but are now coming back, though still in small numbers compared to the early 90s. At the University of Maryland, where I’m visiting, spending cuts of the kind familiar to Australian academics are being imposed for the first time in years, but buildings commissioned during the boom are still going up.

Calling for volunteers

John Quiggin12 Comments

In keeping with the idea of slow blogging I mentioned a while ago, I’m going to respond to this two-week old speech by Costello, although other bloggers have already covered at length (From this large set, I’ll link, more or less randomly, to Steve Edwards).

Anyway, Costello is talking about social policy and volunteering and I just wanted to emphasise the point that the application of New Public Management/neoliberalism to the voluntary sector, exemplified by competitive tendering programs like the Jobs Network, makes volunteering utterly pointless. The only effect is to save money for the government while delivering a predefined set of services. In most cases, volunteers would be better off working overtime and sending a cheque to the Treasury.

I developed this point at length last time Costello had a progressive spell and I think the intervening period has only strengthened my case. Here’s the conclusion:

The core of the social contract was that those willing to make contributions of time and money were able, to some extent, to influence the aims and outcomes of public policy, and the way in which public services were delivered. Broadly speaking, government took responsibility for the delivery of basic services, and the efforts of the voluntary sector played a major role in determining what additional services were provided.

As far as monetary contributions to charitable causes are concerned, this is still the case. Although there are plenty of issues regarding the specific design of tax expenditures to promote charitable contributions (why, for example, a deduction rather than a rebate), the basic point that such expenditures are desirable has been accepted even by the dry economists of the Productivity Commission. Moreover it is clear enough that, if governments seek excessively tight control over the direction of subsidies for charitable contributions, the result will be to reduce the amount people are willing to give.

Unfortunately, the same logic has not been applied to voluntary contributions of time and effort. Governments have withdrawn from their role as a provider of core services and have cut back the provision of grants to voluntary groups and non-government organisations. Instead, they have instituted a regime of competitive tendering. In this system, voluntary groups are invited to bid to provide core public services at a lower cost than competitors which may be either for-profit private businesses or commercialised government businesses.

In this competitive environment, the main advantage possessed by non-profit organisation is the availability of volunteers willing to work unpaid, and of idealistic employees willing to accept less-than-market wages. By harnessing this source of unpaid or underpaid labour, governments can reduce the cost of service delivery.

In the long run, however, this is killing the goose that lays the golden egg. As competitive pressures are tightened, the original goals of voluntary organisations are subordinated to the need to meet tender specifications at the lowest possible cost. In the end, it does not really matter whether the tender is won by a voluntary organisation or a profit-oriented firm – the services delivered are those specified in the contract.

All of this is fine from the viewpoint of governments reaping cost savings, but what about the volunteers? Their unpaid labour is being used, not to provide additional services to the community, but to enable the government to provide existing (or, more often, reduced) services more cheaply. The ultimate outcome is to finance tax cuts for those who have chosen, in line with the government’s real beliefs, to maximise their own market incomes.

From the viewpoint of volunteers, this makes no sense. Even supposing they felt impelled to improve the government’s bottom line, they would be better off working overtime in regular jobs and sending the extra pay straight to the Treasury.

In practice, people are not so rational, and the tradition of voluntary effort will be eroded only gradually, but the growth of self-seeking over the past decade or so is plain for all to see. Governments of both political persuasions have promoted self-interest as the engine of progress, and leading political figures on both sides have embodied it in their personal behavior. At this point, calling for volunteers is the last refuge of a scoundrel.

Time and distance

John Quiggin19 Comments

The frontpage of Monday’s SMH has a link to a multimedia piece, entitled “Journey to the Centre of the Universe”. I couldn’t make the link work, but the teaser text says everything I needed to know anyway. I reproduce it without comment

Take a spectacular 3D tour to the centre of our solar system. Normally it would take you 50 million light years, but we can get you there in three minutes.Ê

Monday Message Board

John Quiggin10 Comments

I’m not sure if it’s time for Monday Message Board, as it’s still Sunday in Maryland. But I guess blogging has its own time, and this is an Australian blog. So open up with your comments on any topic (civilised discussion and no coarse language, please).