Price seems high

Becker and Elias reckoned that kidneys would trade in the free market in the States for somewhere around $15k. So I'd expect that this proposal would draw rather a few prospective donors:

Sue Rabbitt Roff, a senior research fellow at the University of Dundee, said it was time to pilot "paid provision" of live kidneys in the UK, under "strict rules of access and equity".

She said that letting people sell the organ could help them make money to pay off university loans or simply give them the chance to do a kind deed.

She said that the rate of donation of kidneys from the dead and living had not kept pace with the need for the organs and has plateaued at about 2,000 a year in the UK.

In a Personal View article published on the British Medical Journal website, she suggested a move towards regulated paid provision for live donors' kidneys, with the organs allocated in the same "fair" way as they are now.

She wrote: "One reservation that many people express about such a proposal is that it might exploit poor people in the same way the illegal market does now.

"But if the standard payment were equivalent to the average annual income in the UK, currently about £28,000, it would be an incentive across most income levels for those who wanted to do a kind deed and make enough money to, for instance, pay off university loans."

And, of course, the haters are gonna hate:

The Scottish Council on Human Bioethics (SCHB) said it was very concerned about the proposal.

Dr Calum MacKellar, SCHB director of research, said: "To place a financial value on human beings or parts of human beings undermines the inherent dignity of the human person and the innate as well as unmeasurable worth of all individuals."

The SCHB said it believed that a market for human body parts would only be feasible as long as there were people poor enough to sell an organ and that it was therefore unethical to utilise financial pressures to obtain human body parts for transplantation.

We place a financial value on parts of human beings all the time: an hour is a fraction of a lifespan and we regularly pay people by the hour.

Because folks like Calum would get tetchy and queasy, people die while waiting for donations that won't be made.

HT: @s8mb

Previously...

Of Doomsday Machines and Blogs

If you have a Doomsday Machine - one that will destroy the whole world if anybody messes with you - it would be insane not to tell anybody about its existence. The whole point of the Doomsday Machine is lost if you keep it a secret!

Same for blogs. Why bother having a blog if you don't tell anybody about it?

And so I was surprised to find, in Seamus's post the other day, that the New Zealand Association of Economists has a blog. It isn't updated very often, but it's still there. And I'd thought that Offsetting, AntiDismal, and TVHE were the only non-defunct NZ econ blogs with an academic focus.

Here's Bill Kaye-Blake from back in March giving reasons why folks might blog. He suggests signalling. As signals need recipients, hit his RSS feed.

Why I still can't take the Greens seriously

I love the Greens on civil liberties, or at least relative to most other parties and with a big caveat on their nannying proclivities with respect to tobacco and fatty foods. And they're good on copyright.

But their economic policy prescriptions...egads.

Here's their proposal for ending child poverty.

First, take a program that's meant to provide a wage subsidy to poor workers with children - Working for Families - and extend it to folks who aren't in work. Working for Families is defensible in theory, even if its current application has winds up having rather too high effective marginal tax rates, especially on second earners. But why wreck it by extending it to beneficiaries rather than simply increasing payments under existing social welfare programmes for those not in work? I can see the political reason for it: entrenching it as part of the now untouchable middle-class welfare. Extending WFF to those out of work would make it infeasible to run what I'd view as a much better policy move: strengthening the wage subsidy and eliminating the minimum wage.

Second, better study support for sole parents and beneficiaries. I'm not particularly opposed, but I'd thought that current student loan programmes that provided for living costs already filled much of the hole here.

Third, raising the minimum wage to $15/hr from $13. They say this is worth $60 per week for those working full time on the minimum wage; they're effectively assuming no or negligible disemployment effects of the minimum wage. Labour demand curves are presumably vertical from $13 to $15 per hour. Why not more than $15 per hour? Maybe the curve slopes beyond that point. If you want to help the working poor who have children, do it by making Working for Families more generous. The burden is then borne progressively through the overall tax system rather than falling on disemployed low wage workers and on those consuming the products and services of minimum wage workers; the benefits are also better targeted as they'd hit those workers with children.

Finally, minimum performance standards for rental properties. So landlords would be forced to insulate and heat their homes to standards North Americans would find liveable. It would be surprising if landlords didn't pass along at least some of the cost increase to their tenants: unless the supply of rental housing is perfectly inelastic, some of the cost increase will be passed along. And if demand for rental housing is less elastic than supply, the renters bear the bigger part of the burden. In the alternative, benefit levels could be increased such that tenants could choose to spend the extra money on a slightly better house or on warmer clothes for the kids. Unless we think poor people make worse choices than we could make for them, and the Greens I'd thought eschewed that kind of paternalism, forcing the poor to receive benefits in housing quality rather than in cash isn't likely to be efficient.

Rauparaha at TVHE says pretty much the same thing.

Choice among points on an equity-efficiency frontier; we can argue about that over beer. Policies that keep us inside the frontier just seem silly.

Critical mass ... or not

Imagine a population, 90% of whom are truth-seekers who generally believe B to be true but have weak priors and 10% of whom are committed to that A is true. The 90% cannot distinguish other truth-seekers from advocates. Equilibrium then has to be that everyone converts to believing A is true. If you're a truth-seeker and you meet someone claiming better knowledge that A is true, and you believe his knowledge claims, you upweight A.

Pretty trivial. But a few folks who I'd thought otherwise sensible have read a bit too much into this kind of result.

Here's the original paper by a couple of physicists showing that in a world similar (but not identical*) to the one characterised above, the transition to everyone believing A is really fast if 10% are committed A-believers. Fair enough. But it has nothing to say about anything interesting in the world, like how beliefs might be updated if there are also a similar proportion of committed B-believers. Or if the truth-seekers can identify the committed.

Folks seem to be taking the result as saying something like "If only me and the few folks like me keep advocating really hard, eventually everyone will agree with us!" Give your heads a shake.

*It's not quite a Bayesian framework. Agents randomly meet and express an opinion from a list. If you hold opinion B and meet an A agent, you then hold AB. If you meet another A agent who says A, you then hold A; if you instead meet another B agent who says B, you then hold B. If you hold AB, you're randomly likely to voice A or B at your next meeting. But if you are committed, you only ever voice A. Repeat interactions until everyone believes A. This is the nonsense that happens when physicists try social science.

A Diatribe Against Capital Gains Taxes-Part II.

I noted yesterday that the main argument put by proponents of capital gains taxes is that they are needed to encourage savings into productive investments rather than into chasing capital gains. This sounds plausible on the surface, but I’m not sure that those making that argument have fully stated their implicit assumptions.

The first thing to note that “investment for capital gains” is not unproductive investment, it isn’t investment at all, at least not in the economics sense of the word investment—the creation of capital goods for the purpose of producing a flow of newly produced goods and services in the future. One can imagine government policy designed to improve the quality of investment, such as by creating a legal environment under which investors have confidence that they will be able to retain the returns on that investment, or more simply by removing policies that subsidise uneconomic uses of resources. But when a saver “invests” (in the household sense of the word) for capital gains by purchasing an existing physical or financial asset expected to increase in value, he is not diverting resources into the production of an unproductive asset, he is simply changing ownership of the existing stock. The best that can be said about a link to real investment is that if real investment in New Zealand is an increasing function of New Zealand savings (i.e. that firms here do not face a perfectly elastic international supply of lending) and if the pursuit of capital gains results in a reduction in the New Zealand savings rate, then the quantity not quality of real investment could be reduced by the absence of a capital gains tax.

But how reasonable is that assumption that the pursuit of capital gains results in a reduction in savings? For savings to have been reduced it must be the case that consumption has increased. How does that happen? Consider a saver who has to choose between lending to an investor or purchasing an existing asset. Whichever he chooses, he has devoted the same amount of his income to the savings, and so his consumption is not affected. If, however, he chooses to purchase an existing asset, he will need to induce its current owner to sell. What that owner does with the income from selling (i.e. whether he consumes or saves) is what determines whether the transaction has led to an overall increase in consumption. Now typically, when someone sells an asset, it is because they are seeking to earn the true return (consumption) from a previous decision to save, but that doesn’t mean that the pursuit of capital gains has induced an increase in consumption. We need to ask why the marginal asset seller was induced to sell as a result of a saver’s decision to seek capital gains rather than lend directly to investors. Presumably, the marginal seller was induced to sell because the additional demand increased the asset’s price, which would mean that the change in the observed price has changed his assessment of the asset’s value.

This is getting complicated, but when you put it all together, this is what it seems to me must be the story you have to tell if you believe that the absence of a capital gains tax is harming productive investment:

1. there are some canny savers out there who know which assets are going to appreciate in value; 
2. some of the owners of those assets are not so canny and believe that their assets are worth less than they actually are based on the current price;
3. in the process of bidding for those assets, the canny investors push up their price, inducing some of the non-canny owners to save;
4. when the non-canny owners sell at higher prices, they discover that their portfolios are more valueable than they thought;
5. as a result of this higher perceived permanent income, they increase their consumption;
6. as a result, the total flow of savings in the economy is reduced;
7. investing firms are not able to replace this reduced flow of savings from off shore;
8. even though the increased consumption in point 5. is the result of non-canny asset owners receiving better information about their true wealth, this change of behaviour is a bad thing;
9. somehow a capital gains tax will act to prevent this better information getting through to uncanny asset holders, even though anything less than a 100% capital gains tax would provide an incentive for canny investors to exploit undervalued assets! 

There has got to be a better justification for capital gains taxes than this. Is there an economist advocate for such taxes out there who can enlighten me?

A Diatribe Against Capital Gains Taxes-Part I.

(Warning: this is a large and somewhat geeky post).
I noted in my post on Labour’s tax policy here that there were arguments on both sides for capital gains taxes. This was a euphimistic way of saying that there are economists who I respect who are in favour of capital gains taxes, so I wouldn’t want to dismiss the idea out of hand, but I have a hard time understanding how they could come to that conclusion. So I am going to lay out the case against in a couple of posts. Most of the points below are standard fare but a couple of them I haven’t seen before.

One thing to note in the discussion of any tax is that all taxes created bad effects, and so it is not sufficient to show that a particular tax has bad effects: those effects have to be compared to the alternative source of revenue. Capital gains taxes are taxes on assets, and so part of the general taxation of capital income. Most studies of tax systems have concluded that the long-term distortionary costs from taxing capital income are greater than those from taxing labour income, so that, from the standpoint of efficiency the optimal tax system would have lower tax rates on capital than on labour income. Equity considerations might lead one to favour eschew this result and favour income and labour income being treated identically. It would be difficult, however, to make a case for higher tax rates on capital income than on labour. Note, however, that in an unindexed tax system, this is what we see. Because it is the nominal interest rate that is taxed, not the real rate that subtracts off the rate of inflation, the effective tax rate on capital income is greater than the headline rate in the presence of inflation. In particular, consider a tax system with a 40% tax rate on all labour and capital income and a real interest rate of 5%. Every percentage point of inflation increases the effective tax on capital income by 8 percentage points, so that if inflation were at 2%, the effective tax rate on capital would be 56%. It is against this backdrop that capital gains taxes need to be considered.
First, let’s start with an incorrect, but not necessarily misleading, example given by Rodney Hide showing how we implicitly already do have a CGT. His example was a variant on the following. Imagine that a no-tax world in which the risk-free rate of interest is 5% and you have an asset expected to pay $100 per year in perpetuity. The asset price would be $2,000. Now let there be a surprise increase in the payment of the asset to an expected on-going $200 per year. This will result in the asset price increasing to $4,000, a capital gain of $2,000. Now consider a world with a 40% tax rate on interest income. In Hide’s example, the asset would pay after-tax returns of $70 and $140 before and after the productivity gain, giving before and after asset prices of $1,400 and $2,800. In this example, the tax on the assets income results in the capital gain being only $1,400, and so has effectively been taxed at the 40% tax rate.
The error in this example, as pointed out here by Bill Kaye-Blake, is that it ignores the effect that taxes have on the risk-free interest rate. If the 40% tax rate applies to interest income as well as the flow of earnings from the asset, then the after-tax risk free rate of interest would be 3%, and the before and after prices of the asset would be $2,000 and $4,000, exactly the same as in the no-tax case.

But this doesn’t mean that Hide’s analysis is wrong. It is true that taxes applied equally to fixed interest and asset earnings would not change the capital value of an asset, but it does change the implied income from the an asset of a given value. Consider someone who owns the above asset and will continue to own it. They are earning $100 per year of which $40 per year is paid in taxes. After the increase in earnings, they pay $80 per year in taxes. What is the fairness justification for also taxing them on the capital gain, which is simply capitalises the future earnings, which are going to be taxed anyway? To draw an analogy, consider a tradesman living in Christchurch who suddenly finds that, due to the post-earthquake rebuild, his future wage income deriving from his human capital will increase. As he earns more he will pay more in income taxes; should he also be taxed on the increase in the value of his human capital?

At this point, the riposte might be that capital gains taxes are typically only applied to realised gains, so that the above asset holder would not be taxed unless he sold his assets just as the tradesman is not taxed on the unrealised value of his human capital. So, now imagine that the asset holder were to sell the assets whose value has appreciated in order to purchase an alternative portfolio of assets. He will still in expectation be earning $200 per year paying $80 per year in taxes, up from the $40 per year in taxes before the gain. There is still no compelling argument for taxing that increased earnings twice. Of course, he might choose to consume the gain rather than reinvest, but that is just the distortion introduced whenever capital income is taxed.

Furthermore, taxing just realised but not unrealised gains introduces other distortions: it creates an incentive for investors to hold on to assets rather than adjusting their portfolio mix to suit changing circumstances; if capital gains are taxed but capital losses are not subject to an offsetting negative tax, it implies a higher overall tax on savings, but if capital losses are treated symmetrically, canny investors can structure their investments to ensure a mix of capital gains and losses, and then realise their capital losses while retaining assets that have made a gain.

For these reasons, economists often express a preference for a capital gains taxes that tax both realised and unrealised capital gains. This is one area, however, where the politicians have it right and the economists wrong, in my view. Taxing both realised and unrealised gains is the more efficient policy, but such a tax has nasty implications for basic property rights when it creates situations where asset owners are forced to divest themselves of assets that might have high personal utility value (family holiday homes, businesses that one started, etc.) simply to meet a tax liability. Furthermore, there are the implementation and compliance costs from measuring unrealised capital gains.

So what are the arguments in favour of a capital gains tax? Let’s consider it against the criteria of efficiency (including enforcement and compliance costs), equity (vertical and horizontal), and respect for rights. Working backwards, I noted above why, respect for property rights leads real-world tax systems to only tax realised capital gains. But this creates its own problems with definitions, and potential for tax avoidance. An accountant friend of mine recently described a court case taken by the IRD against a group of accountants, in which the issue to be determined by the court was not what actions the group had taken, but whether their actions did, in fact, constitute a violation of the law. Legal processes where one can be hanged on a comma, are not ideal for a society based on the rule of law.

On equity grounds, since the income stream from assets will be taxed when they occur, at the same marginal rate as labour income, there is no obvious vertical equity imperative for capital gains taxes. It is true that the nature of having traded assets sold in competitive markets is that the benefits of future expected gains and the costs of future expected downturns in value are always captured or borne by the current owners of the assets, so that a comprehensive system of taxing capital gains with negative taxes on capital losses might serve a social insurance role, but there is no clear equity benefit.
Finally, on efficiency grounds, the complications that arise from trying to solve other problems give rise to a tax system with higher compliance and enforcement costs per dollar raised than other taxes, and also introduce other efficiency-reducing distortions.

Against all these arguments is the only serious argument I have seen in favour of capital gains taxes: that they are needed on efficiency grounds to make sure that savings is directed into productive investment rather than into chasing capital gains. This is a complicated issue that merits a separate post. More on that tomorrow.
In the meantime, let me propose a simple alternative to a normal capital gains tax that maximises benefits with none of the above costs. Take a tax system with a 40% tax on labour income and nominal capital income. Introduce a 13% tax that will apply to realised capital gains but also give a negative 13% tax on realised capital losses, and will only apply if the gains (losses) result in an increase (reduction) in consumption rather than being reinvested. (This removes the incentive to cash the losses and run the gains.) Finally, reduce the overall tax rate on nominal capital income so that the effective tax on capital income with an interest of 5% and an inflation rate of 2% is only 43% not the 56% it would otherwise be. And do all of this with a simple tax system with very low transactions and compliance costs. It seems too good to be true, but it can be achieved simply by reducing the tax rate on all income from 40% to 31% and replacing it with a 15%, no-exemption GST! Put another way, we already have a very good capital gains tax in New Zealand without any of the downside costs.

A reasonable nudge

I've two main worries about nudges. They're often a fair bit more coercive than the word "nudge" suggests; and, if they fail to yield the planners' desired outcomes, they may only be harbingers of more forceful interventions.

But this one seems exceptionally mild: drivers in the UK are required to tick either Yes or No in the box indicating whether they'd agree to be organ donors when getting their drivers' licences renewed. The story says similar moves in Illinois did wonders for donor enrolment.

I don't think a similar move in New Zealand would do much absent legislative changes requiring that organ transplant units deem licence enrolment constitute informed consent. From the NZTA FAQ:

Your driver licence is not informed consent

If you've indicated on your driver licence that you wish to be a donor, this does not count as 'informed consent' for your organs and tissues to be retrieved for transplant purposes in the event of your death.

If a person gives 'informed consent', this means that they have enough information to fully understand what they agree to, and that their agreement is given willingly. It's very difficult to prove the circumstances or level of knowledge a person had at the time of making their licence application.

Discuss your decision with your family

Ticking the 'Yes' box on your driver licence form only means that you have indicated your wish to be identified as an organ and tissue donor. It does not automatically mean that your organs or tissues will be donated in the event of your death. In practice, your family will always be asked for their agreement to organ and tissue donation.

If your family knows what your wishes are in regard to donation, they will be more likely to follow them through in the event of your death. Having your wishes displayed on your driver licence is just one way of making them known to your family. You should also discuss your decision with them.

If you would like to donate certain organs or tissues but not others, make sure that you discuss this with your family, too.

A "No" effectively counts as informed consent; a "Yes" doesn't. Great system.