Note to readers
For practical reasons, I am treating this post as the Monday Forum post. I want to be able to respond to discussion.
In an earlier post,
Economics, public policy and the importance of the small, I referred to the New Zealand model. At the time, I wrote: "Two weeks ago, I was at a meeting. Listening to the discussion, I suddenly said that if we are going to apply the New Zealand model, we needed to be clear on its implications. Nobody had mentioned New Zealand, but most people knew what I meant."
I have since discovered that I was wrong. Most people did not know. Too much time had passed for it to remain in living memory. The head nods meant that I hear you, not that I understand or agree. This lead me to dust off an earlier 2006 post,
Changes in Public Administration - the New Zealand Model.
In the eight years since I wrote that post, many things have changed. Even then, knowledge of the New Zealand model was drifting into history. The difficulty is that concepts and constructs survive as current objects that affect thinking.and hence action. This need not matter if those concepts and constructs have been reworked, re-integrated, refreshed to form a new whole.I'm not sure that that's the case here.
Something similar arises with economic models. By their nature, these models are simplifications of the real world. Their results depend critically on the assumptions used. Sometimes those assumptions become beliefs, carried forward regardless. In this context, Leon Berkelmans had an interesting easy to read short piece in the Lowry blog,
Is capital globally mobile?.
Berkelman points out that the Australian Treasury frequently makes the assumption of perfect international capital
mobility. This means there is only one worldwide after-tax
(risk-adjusted) rate of return on capital. If there were anywhere that offered a
better deal, perfect capital mobility would imply that capital would flow into
that area, until the return differential was arbitraged away. Similarly, if
anywhere offered a worse deal, capital would flow out until, again, returns were
equalised.
In fact, there is a very tight correlation over time between domestic savings and investment, something that appears to contradict the assumption of perfect international capital mobility. If capital were perfectly mobile internationally, you would expect much greater variation in the difference between domestic savings and investment.
This may sound very dry, but it is important because key parts of tax modelling and the policy conclusions drawn from it in areas such as the effect of dividend imputation or changes to company tax rates depend crucially on the international capital mobility assumption. To use an example from our little blogging village, some of the conclusions and prescriptions contained in
Winton's recent posts are based on the modelling done using the international capital mobility assumption. Over to you Winton!
More broadly, in some of the discussions including those that triggered my comments on the New Zealand model, I try to apply what I think of as the
Bob Gregory principle. At seminar after seminar, I saw Bob ask very simple basic questions intended to test and clarify the underlying assumptions and arguments. Bob was not trying to attack, just intellectually curious and seeking to understand. Time after time, I saw intellectual edifices teeter and sometimes fall under this gentle questioning.
Bob's a fair bit brighter than I am. I find the Gregory approach difficult to follow. Sometimes its not just appropriate because things are set in stone. You can't challenge, only modify at the margin. At other times, it can be very hard to articulate the simple questions that will test because the whole edifice seems cloudy, disconnected. Still, I do try, and sometimes (just sometimes), I get a result. Then I smile.