Consumer surplus of event 2

At Offsetting Behaviour Eric Crampton responds to my post on Consumer surplus of events by arguing that what I am missing is that there could be a market failure preventing the realisation of potential consumer surplus.

First I am yet to be convinced that there really are market failures of this type. There are many ways to get people to pay at least some of – enough of - their CS to have an event put on. Second its not clear to me that even if there is such a market failure the use of a government subsidy is the optimal policy response. Think of the argument for the use of tariffs to deal with problems of infant industries. Back in 1969 Richard Baldwin pointed out that even if some form of government action is need to protection infant industries tariffs were a bad way of providing such protection. He argues that what is needed to handle the problems of infant industries is a much more direct and selective policy measure than import duties. I wonder if a similar case cannot be made here. There has to be a better more direct, selective policy response to whatever market failure is occurring than the use of a subsidy. Is there really no way to address the market failure at its source rather than distort multiple markets via the use of subsidies and the taxes to fund them?

What role can trade policy play in the fight against malaria?

May be an odd sounding question, but at VoxEU.org Lucian Cernat argues for greater coherence between trade, foreign investment, and other malaria-related policy initiatives. In particular, technical assistance should prioritise the removal of "killer tariffs" on mosquito nets. He writes,

At first sight one would argue that trade policy cannot be called upon to contribute directly to this important public-health challenge. Yet, trade policy was seen as one additional tool to fight malaria by African leaders. In April 2000, at the African Summit on Roll Back Malaria in Nigeria, 39 African countries have pledged to remove taxes and tariffs on insecticide-treated nets and other malaria-related preventive materials and drugs (WHO 2003).

This was hailed as a quick and effective contribution that trade policy could make towards the eradication of malaria in Africa. But, more than a decade later, it turns out that quite a few countries severely affected by malaria still maintain tariffs on the importation of mosquito nets and other malaria-fighting products and drugs.

According to the information provided by the Malaria Taxes and Tariffs Advocacy Project (a joint project sponsored by the WHO and Gates Foundation), in August 2010, some 30 countries in Africa still maintained tariffs as high as 20% on ITNs.

Imposing a tariff on a life-saving product can be tantamount to a "killer tariff" for some poor African households who would have to choose between food or other essential products and a more expensive mosquito net.

Over 100 million people are living in malaria-endemic countries that still apply a tariff on mosquito nets. For the top African countries with the highest number of reported malaria cases in 2010, tariffs on mosquito nets are still between 5% and 35% and the mosquito net ownership ratios are very low, except in Gambia. The correlation is not very strong since ownership ratios are in some countries largely determined by (duty) free distribution of mosquito nets by donors and international agencies.

It should be noted that several countries (e.g. Kenya, Uganda, Senegal, Ghana, Nigeria) have taken the right steps and have eliminated tariffs on mosquito nets. Furthermore, countries like Nigeria, Ethiopia, and Madagascar have explicitly created several duty-free tariff lines for products including "mosquito net" in their descriptions (thus avoiding customs classification misunderstanding or abuse). Other countries have announced that, even if tariffs are still officially in place, they would waive the tariffs on mosquito nets.

But, as long as some double-digit tariffs persist, several malaria-endemic countries seem to import negligible amounts of mosquito nets in commercial terms, despite low coverage rates among vulnerable groups.

Another reason for free trade.

Yet another benefit of globalisation:

better management practices in firms.

Peter Klein at Organizations and Markets points us to this new paper:

The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries
Nicholas Bloom, Helena Schweiger, John Van Reenen
NBER Working Paper No. 17231, July 2011
We have conducted the first survey on management practices in transition countries. We found that Central Asian transition countries, such as Uzbekistan and Kazakhstan, have on average very poor management practices. Their average scores are below emerging countries such as Brazil, China and India. In contrast, the central European transition countries such as Poland and Lithuania operate with management practices that are only moderately worse than those of western European countries such as Germany. Since we find these practices are strongly linked to firm performance, this suggests poor management practices may be impeding the development of Central Asian transition countries. We find that competition, multinational ownership, private ownership and human capital are all strongly correlated with better management. This implies that the continued opening of markets to domestic and foreign competition, privatisation of state-owned firms and increased levels of workforce education should promote better management, and ultimately faster economic growth. (Emphasis added)

So more evidence that globalisation can be good for your growth.

Consumer surplus of events

In my recent posting on World cup costs and benefits I made mention of the Ph.D. thesis of Sam Richardson from Massey University. Richardson’s thesis was on "Assessing the economic justification for government involvement in sports facilities and events in New Zealand".

On taking a quick look at the thesis the following comment stood out for me:

The final analytical contribution of this research involves the estimation of consumer surplus benefits from a demand model for representative rugby in Wanganui. The consumer surplus benefits are then compared to the cost of local government involvement in the upgrade of the playing facility to evaluate whether the council’s involvement was economically justified. (Emphasis added.)

What I don’t see is why you would compare consumer surplus (CS) to costs to evaluate the council’s investment.

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

Of course I could just be missing something obvious.

EconTalk this week

Keith Hennessey of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the debt ceiling and the budget process. Hennessey, who worked for Senate Majority Leader Trent Lott on budget issues in the late 1990s, explains the politics of the debt ceiling and the budget process. Using his past experience as a staffer, Hennessey gives those of us on the outside a window into what is actually going on in the hallways, who has power, and how information flows up and down in the chain of constituents, members, party leaders. The conversation closes with Hennessey's best guess of which outcomes of the current negotiations are most likely and why

Interesting blog bits

1. Karyn Scherer writes about Roger Kerr: The happy warrior

   Government indifference, public hostility, even cancer - despite it all, the Business Roundtable's Roger Kerr can't help being an optimist

2. Mark Pennington on What Ha Joon Chang Doesn’t Tell You about ‘Free Market Economics’

   Professor Ha Joon Chang has become something of a hero to those who champion heterodox economic theory and who rail against the supposed intellectual hegemony of ‘neo-liberalism’. In a number of books such as Kicking Away the Ladder Chang sets out to overturn the alleged orthodoxies of mainstream economics by questioning the case for free trade as an appropriate development strategy in poorer countries and more widely making the case for a high regulation/big government agenda. These themes are vividly on display in Chang’s latest best seller 23 Things They Don’t Tell You About Capitalism. Unfortunately, also on display in this book is Chang’s penchant for misrepresenting opponents, the use of straw man analyses and claims to theoretical innovation for what amounts to ‘re-inventing the wheel’.

3. Tim Worstall notes that The Washington Consensus Works

   I know this isn’t what Dani Rodrik is trying to point out in this blog post but it is the lesson that I take away from it

4. Art Carden has a few Thoughts on Liberty and Society

   I spent this week teaching at an Institute for Humane Studies “Liberty and Society” Summer Seminar. The weekend closed with a panel wherein the members of the seminar faculty answered questions about the importance of liberty, strategies for advancing liberty, our worldviews, and so on. Here are a few thoughts based on the questions that jumped out at me.

5. Tony Wrigley on Opening Pandora’s box: A new look at the industrial revolution

   Before the industrial revolution, economists considered output to be fundamentally constrained by the limited supply of land. This column explores how the industrial revolution managed to break free from these shackles. It describes the important innovations that made the industrial revolution an energy revolution.

6. Matt Nolan on Keeping NZ inflation in perspective

   Holy shit. Since I’ve started getting the chance to read opinion pieces again I’ve noticed one extreme theme running through them – a sharp and angry fear of inflationary pressures

7. David Friedman on Austrian Fantasy

   Browsing the web, I came across the following claim by Lew Rockwell:
   
   " Need I note, as this article indirectly indicates, that the whole world is reading Rothbard, but that Friedman is almost a nobody outside of mainstream academic economics?"

8. Eric Crampton on A public responsibility?

   When we have a public health system, and when folks worry about costs others impose through the health system, all kinds of private behaviours have external effects.

9. James Otteson on Stiglitz on Deregulation and the Rich

   Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”
   
   As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.

World cup costs and benfits

Eric Crampton at Offsetting Behaviour notes this piece about Massey University economist Sam Richardson who is taking about the benefits (or otherwise) of the rugby world cup.

Dr Richardson, who researched public spending on major sporting events for his PhD, says the $507m to $700m [in economic benefits] bandied about is a lofty and unrealistic figure.

[...]

“Maybe the Government shouldn’t talk about economic impact,” he says. “I do not think we should be using economic impact as a justification for hosting sporting events. Maybe we should forget the magic figures and focus on the long-term benefits.”

Dr Richardson is sceptical of any argument that suggests we are going to get something tangible out of hosting events. “The bottom line is yes, we are going to bring in visitors, and yes, they will spend money. We also know that the taxpayer will pick up a sizeable chunk of what is expected to be a loss of around $40 million.

[...]

He says research from the United States shows the real figure could be gained by moving the decimal point one place to the left.

“Based on the original figure, this would give us $50.7 million – there is an element of truth to that view,” he says. “But we cannot confidently say it is going to bring in so many dollars. If we are justifying government spending on these numbers, it tends to become a creative accounting exercise.”

Richarson's PhD thesis was done on, "Assessing the economic justification for government involvement in sports facilities and events in New Zealand". Perhaps the takeaway line comes from the abstract, where he writes,

Findings of the research suggest that the economic impact argument for government involvement in the construction of sports facilities and the hosting of internationally oriented events is generally not justified [...]

If only central and local government could understand this point as such an understanding it would save the taxpayers and ratepayers of New Zealand a lot of money.

Contemporary work in Austrian Economics

Contemporary work in Austrian Economics is the title of a new working paper by Anthony J. Evans, Associate Professor of Economics, ESCP Europe. The paper is based on a talk given as “Austrian Economics: Past, Present and Future”, The Adam Smith Institute, St Stephens Club London, September 23rd 2010.

The abstract reads,

This article provides a brief survey of contemporary developments in the Austrian school of economics, signalling that: (i) the amount of Austrian research and the number of Austrian researchers is growing exponentially; (ii) good Austrian economists are not being marginalised by the economics profession; and (iii) there have been significant advances in our understanding of economics made recently. Scholars can embrace the second revival of Austrian economics and look confidently hat the increasing academic credibility of the school.

When discussing Organisational culture & management Evans writes,

Paul Dragos Aligica (2007) uses Misesian notions of human action to explore the role of scenario-building as a tool for decision-making, whilst in Capital in Disequilibrium, Peter Lewin (1999) analyses the subjective nature of capital, how it fits into a firm’s organisational structure, and how capital is evaluated and allocated ina world of disequilibrium. Fred Sautet’s (2000) An Entrepreneurial Theory of the Firm shows how firms flatten their organisation structure to benefit from entrepreneurial alertness, and Charles Koch (2007) creates an Austrian theory of management and shares the results of applying it to the world’s largest private company. Nicolai Foss and Peter Klein’s (forthcoming) book, The Theory of the Firm highlights an exposure to uncertainty and thus resource ownership as the key aspect of entrepreneurship, to develop an entrepreneurial theory of judgment.

This is interesting because I would argue that the Austrian theory of the firm, or theory of organisations in general, is one of the lest developed areas of Austrian economics. The Austrian approach to markets is much more developed than the their approach to the suppliers and demanders (firms and households) within those markets.

Evans ends on a positive note by saying,

Any half-decent economist should be able to quibble with my list, and I’m sure it reflects a bias towards my own research interests and background. I also recognise that I have missed out an even newer generation of Austrian economists. This all serves my point – Austrian scholarship is a spontaneous order and younger academics are constantly pushing out the boundaries of what can be accomplished. They are demonstrating that it is possible for Austrian school economists to take a seat at the top table of the professional debate without compromising their message - it just takes the right attitude and a lot of work. I’ve provided evidence of the remarkable progress that’s been made since the first revival, and will continue to be made. The academic wing of the Austrian school is flourishing, and the future of good economics is Austrian.

Do parents matter? Q&A with Bryan Caplan

Reason's Nick Gillespie interviews Bryan Caplan about Caplan's new book "Selfish Reasons to Have More Kids: Why Being a Great Parent Is Less Work and More Fun Than You Think".

The youth unemployment scandal

Roger Kerr has blogged on the following graph from the recent New Zealand Institute publication "More ladders, fewer snakes: Two proposals to reduce youth disadvantage."

Kerr writes,

But the chart shows that it is New Zealand that stands out with youth unemployment being 45% of total unemployment, the worst outcome in the OECD.

Why are our political parties not talking about this appalling state of affairs? One reason is that many of them are complicit in bringing it about. The abolition of the youth minimum wage, sponsored by the Greens and Labour, is clearly a major contributing factor to the surge in youth unemployment. National in office has declined to reintroduce youth wages. The New Zealand Institute in its report also ducked the issue.

The Economist magazine has also noted that The ratio of youth to adult unemployment worsens. Their graph is

The Economist notes,

In New Zealand, Sweden and Luxembourg, the youth-to-adult unemployment ratio is more than four.

For the data used in the Economist graph the adult unemployment rate as around 5% with the youth rate at over 20%.

Kerr ends by noting that with regard to youth unemployment,

This conspiracy of silence on the subject is an indictment of New Zealand’s seeming inability to face up to grim social realities.

Protectionism rises in response to pessimistic prospects for growth

In the VoxEU.org audio Simon Evenett talks to Viv Davies about the 9th Global Trade Alert report that suggests that G20 governments’ resolve to resist protectionism has faltered since the Seoul G20 Summit. Evenett describes murky protectionism, the impact of the crisis on the BRICs and the least developed countries, and how WTO rules are being circumvented.

Growth and taxes – the evidence

At the IEA blog Patrick Minford takes a look at the ever controversial question of the relationship between taxes and growth. With reference to work done by Minford and Jiang Wang (see Sharper Axes, Lower Taxes) Minfords writes,

Our aim was to construct some simple tests of whether ‘activist’ policies (of government spending on R&D support or on investment subsidies) or ‘incentivist’ policies (reducing the barriers to business entry/exit and also taxes on business people’s incomes) are the cause of growth. We followed the standard practice of gathering data on growth rates of many countries (approximately 100) and many periods (three decades, the 70s, 80s, and 90s); and similarly gathering data on these candidate variables. We then asked whether growth was related to one or to the other, or to neither, using standard tests of statistical significance.

In this sort of study the data you gather is the key ingredient. We treated the gap between home real interest rates and world real interest rates as the measure of investment subsidy: the government can by a variety of interventions, especially exchange controls, keep down the cost of capital (basically because home savers have Hobson’s choice and foreign lenders’ money can be subsidised to keep it low). For R&D subsidies we had measures of how much governments spent on R&D. In some separate work we also looked at education spending and infrastructure, as other activist policies.

For the business tax rate we used two main elements: the rate of general tax (which we set equal to the share of government spending in GDP – this can be thought of as the underlying tax rate that must be levied, whether today or later when compounded by interest payments) and also the loading of costs onto business through restrictions on entry and exit. The first came from the Penn Tables, the second from the World Bank.

The resulting ‘business tax rate’ is an amalgamation of the two.

Results?

When you relate growth to this business tax variable you get a strong negative relationship. When you relate it to the activist measures, in no case do you find any relationship at all. These statements remain true however you ‘control’ for other possible factors driving growth.

This is a case of "so far, so good" for those who think incentives are important for growth. And who doesn't? But in Minford's view there is still work to be done to settle the matter. The problem is that you can get correlations between many variables, apart from measures relating to incentives or teaxes, if you are willing to work hard enough at gathering ‘helpful’ data.

For example, take the case for education or ‘human capital’ as the cause of growth: human capital is hard to measure and with not too much effort one can find a measure that is correlated with growth. The same goes for such things as the level of infrastructure, or R&D. How then to distinguish between these causal theories? Here is an example of the difficulty: do education levels cause growth and then growth cause barriers to business to come down? Or do barriers coming down cause growth and growth then cause there to be more education spending?

In further work we hope to refine these tests. Our basic idea is that you can set out each theory of the economy with its different growth mechanism and explanation of the other ‘factors’. Then you simulate the behaviour of each type of economy and see which comes closest in its simulated behaviour to the behaviour in the data. We are at a fairly early stage in this work. So we must conclude in the time-honoured academic way: ‘more work is needed’!

Of course if more work wasn't needed many academics would be out of a job!

Peer review: not what it once was

At the Organisations and Markets blog Dick Langlois writes,

Glenn Ellison has a paper in the new issue of Economic Inquiry called “Is Peer Review in Decline?” Here’s the abstract.

Over the past decade, there has been a decline in the fraction of papers in top economics journals written by economists from the highest ranked economics departments. This paper documents this fact and uses additional data on publications and citations to assess various potential explanations. Several observations are consistent with the hypothesis that the Internet improves the ability of high profile authors to disseminate their research without going through the traditional peer review process.

The explanation put forward is that this has to do with the relative costs and benefits of the review process. The argument is that the editors of the top field journals, in particular, have been wanting greater revisions more often. Because the costs of the review process are high and the benefits modest for prestigious authors, they increasingly avoid these journals.

So changes in technology, the internet in particular, has altered the relative costs and benefits of peer review for the top researches in such a way that they increasingly avoid it.

Interesting blog bits

1. James Banks, Zoë Oldfield and James P Smith ask Do differences in childhood circumstances explain US-England health differences at older ages?

   How much of our health in adulthood and old age is determined by our childhood? Using decades of data from the US and England, this column shows that the US excess in disease is common throughout the age distribution of the population. Moreover, poor childhood health tends to worsen adult health more in the US.

2. Amanda Goodall asks Physician-leaders and hospital performance: Is there an association?

   Are hospitals better run by former doctors or by specialist managers? This column looks at the top-ranking hospitals in the US and finds that hospital-quality scores are about 25% higher in physician-run hospitals than in the average hospital.

3. Simon J Evenett warns us that Resolve against protectionism weakens since the Seoul G20 Summit.

   Despite the public commitments made at the Seoul G20 summit, this year protectionism has slipped off the work programme of G20 nations. The latest evidence published in the 9th Report of the Global Trade Alert, summarised here, shows that government resolve against protectionism has weakened as global economic prospects have dimmed. The global trading system is not out of the protectionist woods.

4. Tim Worstall on African Free Trade Zone

   For some reason I’ve never really understood a certain sort of person gets all agitated if you suggest that free trade might solve some of Africa’s problems.

5. Matt Nolan comes out In defence of government funded tertiary education

   As a young child I was told repeatedly that education was a right, and that society should pay for it – not just at the primary level, not just at the secondary level, but at the tertiary level as well. Being an argumentative child I disagreed repeatedly.

6. Gavin Kennedy notes that the Repair and Renovation of Adams Smith's Panmure House Approved! (at last)

   It has just been announced (11.30 am this morning!) that the Scottish Government has approved the proposals from Edinburgh Business School (Heriot-Watt University) for the sympathetic renovation of ‘Panmure House’, just off old Edinburgh’s historic Royal Mile, where Adam Smith lived from 1778 up to his death in 1790.

7. Kurt Schuler on Free banking and the historical gold standard

   Over at his recently established blog “Uneasy Money,” David Glasner has a post on “Gold and Ideology.” (He has started fast out of the gate, writing prolifically; I hope he doesn’t burn out, but there’s a lot to write about when the subject is money.) He claims that “the gold standard never managed itself; in its classical period from 1870 till World War I it was under the constant management of the Bank of England with the occasional assistance of the Bank of France and other major banking institutions.” I disagree.

Bruce Caldwell - why economics needs the history of thought

Unfortunately history of thought is a hard sell these days in economics. But if anyone can make the sale Bruce Caldwell can.

John Taylor as anti-keynesian

A Economics One John Taylor writes

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

TEDTalk – Trial, Error and the God Complex

This is a video of a TEDTalk by Tim Harford on Trial, Error and the God Complex

The "Out of Africa" hypothesis, human genetic diversity, and comparative economic development

This is the title of a new NBER working paper by Quamrul Ashraf, Oded Galor. The abstract reads:

This research argues that deep-rooted factors, determined tens of thousands of years ago, had a significant effect on the course of economic development from the dawn of human civilization to the contemporary era. It advances and empirically establishes the hypothesis that, in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity and has had a long-lasting effect on the pattern of comparative economic development that is not captured by geographical, institutional, and cultural factors. In particular, the level of genetic diversity within a society is found to have a hump-shaped effect on development outcomes in both the pre-colonial and the modern era, reflecting the trade-off between the beneficial and the detrimental effects of diversity on productivity. While the intermediate level of genetic diversity prevalent among Asian and European populations has been conducive for development, the high degree of diversity among African populations and the low degree of diversity among Native American populations have been a detrimental force in the development of these regions.

If right, then this research suggests history - in terms of genetic diversity - really does matter!

Important for the Asharf and Galdor argument is that there exists an optimal level of genetic diversity for economic development which reflects the interplay between the conflicting effects of diversity on the development process. The adverse effect pertains to the detrimental impact of diversity on the efficiency of the aggregate production process of an economy. Heterogeneity increases the likelihood of mis-coordination and distrust, reducing cooperation and disrupting the socioeconomic order. Greater population diversity is therefore associated with the social cost of a lower total factor productivity, which inhibits the ability of society to operate efficiently with respect to its production possibility frontier. The beneficial effect of diversity, on the other hand, concerns the positive role of diversity in the expansion of society’s production possibility frontier. A wider spectrum of traits is more likely to be complementary to the development and successful implementation of advanced technological paradigms. Greater heterogeneity therefore fosters the ability of a society to incorporate more sophisticated and efficient modes of production, expanding the economy’s production possibility frontier and conferring the benefits of increased total factor productivity. Higher diversity in a society’s population can therefore have conflicting effects on the level of its total factor productivity. Aggregate productivity is enhanced on the one hand by an increased capacity for technological advancement, while simultaneously diminished on the other by reduced cooperation and efficiency.

May be the Productivity Commission should be researching New Zealand's genetic diversity.

EconTalk this week

John Taylor of Stanford University talks with EconTalk host Russ Roberts about the state of the economy and the prospects for recovery. Taylor argues that the design of the fiscal stimulus was ineffective and monetary policy, so-called quantitative easing, has also failed to improve matters. He argues for a return to fiscal, monetary, and regulatory normalcy as the best hope for economic improvement. The conversation concludes with a discussion of the impact of the current crisis on economics education.

A land tax

TVHE's Matt Nolan has been arguing for a land tax. Why?

A land tax is appealing is that there is a fixed amount of land in New Zealand. As a result, if you tax land the price of land will fall, but the amount of land being used will not change. In contrast, a tax on labour income will lead to some people working less, and a tax on capital will lead to lower levels of investment in New Zealand. This attribute of a land tax means that it is more “efficient” than other taxes, implying that for any given amount of revenue the government wants to raise this tax will do it for a lower cost to the rest of us.

So it is efficient. And economists love efficiency! But is it fair? There are two main questions with regard to fairness, or claims Matt: 1) How can we justify taxing people based on the land that they own? and 2) Is taxing people who own land instead of income fair?

With regard to the first question, there are a few basic government powers that limit the land owners right to absolute control of their land – and one of those is taxation. I would argue that this is akin to stating that society owns land while individuals that hold the land title are in effect given rent-free permanent leases and the right to use the land within certain conditions.

The concept of permanent lease allows for clear property rights so that people have certainty when using the land for their own purposes, such as erecting or renovating buildings, growing crops, or farming animals. But it should also allow for the government to charge rent on the land on behalf of society, which in essence what a land tax would be.

Although this justification for a land tax appears a bit strange at first, it is in fact no different to one of the common justifications for income tax. Society helps individuals to develop their skills and ability to earn income by providing public hospitals, schools, and other infrastructure. A tax on individual labour income can in turn be seen as payment for these services and for the opportunity to develop skills and ultimately earn a greater income. If we accept this justification for income taxes, it would seem reasonable to also apply it to land taxes.

But is it fair to shift the burden of taxation from income to land?

There are winners and losers from any change in tax policy. If we were to introduce a land tax and reduce income taxes, people who hold a significant amount of land would lose out, while young people with their working lives ahead of them would gain. Furthermore, individuals that own land but have variable income year-to-year may suffer from cash-flow issues under a land tax. Finally, following a drop in land prices, financial institutions exposed to lending on land would also suffer loses.

However, changes in wealth as a result of the imposition of a land tax will only happen once. As a result, it would be possible for the government to compensate the immediate losers of the changes through lump-sum payments if it deems the adjustment to the new tax unfair.

For example, if we believe that a land-tax really hurts people who have retired but own their land freehold government could send them a one-off payment to make up for this.

By doing this society gets the gains of a land tax in terms of efficiency without hurting the worst off in society.

Hopefully next week Matt will argue for a poll tax, which is also efficient!