The visible hand in economics

Archive for July 2007

I’ve always had a soft spot for the idea of creative destruction, even though my understanding of the it is well below par.

I found the following article interesting, in the way it used the idea of job creation and destruction to describe the process of changing unemployment.  It gives us a good idea about the massive flows associated with input changes in the labour market.

Using this concept, it describes how the composition of employment in NZ is changing, with more highly paid, high value jobs being created, at the expensive of low value, low skill jobs.  In my opinion, and the opinion of the article, this is a good thing.  What do you think?

“New Zealanders have been showing early signs of moderating their borrowing.”

Does anyone know what these early signs are. From what I can tell, the growth in household borrowing is at record highs, in fact todays M3 data confirms that. If anything, household borrowing seems to be accelerating, I’m sure it will slow eventually, but why did the RBNZ say that if they didn’t mean it.

My suspicion is that the RBNZ wanted to talk the exchange rate down. They said that the level of our exchange rate was the result of New Zealanders borrowing too much, and buying things from overseas. As a result, higher interest rates will stop New Zealanders doing this, helping the exchange rate.

Now that is a load of crap. Our Reserve Bank needs to take a big long look at itself, and realise that it has been acting like a 14 year old girl who got a pimple just before the big ball. Stop making excuses for our inflation and just deal with it! I wish the Reserve Bank governor was a computer.

So, our dollar has fallen 5% against the US, and 8% against the yen in the last few days. While some people may think that the prospect of no more interest-rate hikes is the driver, the truth is that market participants have become a bit more risk-averse.

A little bit of wobblying in the US stock markets, and suddenly a bunch of people have decided to unwind carry trades, and as we are the number one carry trade country, our exchange rate eased. That is why we are only down by 2% against the Aus$ since Thursday, they were a carry trade currency as well.

I expect us to stay around in the mid-70’s, we might even climb up a bit against the US. After all, this new found risk is based on subprime lending worries in the US, and the fundamentals of the strong NZ$ (high interest rates, strong commodity prices) are still in place. However, if asset prices (especially housing) start to ease too quickly, our exchange rate might be in for a bumpy ride.

I was reading a quick little post on Econlog. In it they say that you should not tax income, you should tax consumption. Ergo we should remove income taxes and replace them with a higher rate of GST.

The main criticism I often hear about this is that GST is regressive. Now I used to spout that line as well, after all poor people have a lower marginal propensity to save then wealthy people, as a result they spend more of their income, and so more is taxed.

However, then I was told to think about it a different way. Over our lifecycle we should spend all our money, so that we are on the boundary of our budget constraint. As everyone spends all their income over their lifetime, GST must be a flat tax.

Now you could make GST a progressive tax by having a higher rate of tax on luxury items (although that distorts the market by changing the relative price of goods). As a result, changing from income taxes to GST seems to make sense, if you think it is more efficient.

In the above article they said that income=consumption+savings+charity. They said that savings and charity should not be taxed, and that is why we need a GST tax. Now, as we have said that savings become consumption over time, that doesn’t hold, and you can get tax rebates on charity. As a result, the only reason I can see to switch to an only GST tax will be if it is easier and cheaper to administer, and I seriously doubt that setting up a progressive GST schedule will be easy or cheap to administer.

Note: The labour market distortion still exists with a GST tax, since even though your disposable income is higher, the cost of everything is also high, so the real return for an hour worked is the same.

Arnold Kling at EconLog isn’t impressed by Planktos who claim to

…restore damaged habitats in the ocean and on land. Through iron-stimulated plankton blooms in the oceans and afforestation projects in Europe, we are able to generate carbon credits. We then sell these offsets to individuals and businesses that are looking to reduce their carbon footprint and lower their impact on climate change.

He claims that this ‘nonsense’ is the product of artificial markets created by the government and should really be the preserve of charitable organisations. I can’t see how leaving the externality damage of markets to be cleaned up by charities is a particularly efficient solution. Surely, the creation of these ‘artificial’ carbon markets internalises the pollution externalities and results in increased market efficiency. It’s a textbook government intervention to correct a market failure. Planktos’ idea seems to be the exact sort of thing that everybody hopes such markets will generate, and excellent evidence that they work to stimulate innovation in environmental protection. The sooner NZ gains a few of these artificial markets, the better, I say.

Well, I don’t always agree with Gary Becker but he has a nice post on carbon taxes and why they could be George W Bush’s friend. He says

A tax on carbon emissions from business and household production would not only help reduce global warming–by how much is still controversial–but it would also lower the world prices of these fuels through reducing the demand for fossil fuels. Lower prices would cut the revenues received by Middle Eastern states from the sale of oil and natural gas. This is why a carbon tax receives support from many environmentalists and national security advocates.

National security isn’t such a big deal for NZ when it comes to energy supply, but it’s nice to know that even conservative economic commentators in the US are starting to favour emissions taxation. Hopefully the NZ government doesn’t need quite as much prodding as Dubya before it implements a decent scheme to meet our Kyoto obligations.

  • An increase in the OCR to 8.25%, on the back of increases in food and oil prices
  • The year end merchandise trade balance worsened to -$6,230m
  • The exchange rate broke through $0.81US this week, just to fall back to $0.78US now.

As most analysts expected, the RBNZ lifted interest rates. They also said they were unlikely to raise them again. The big jump in the merchandise trade deficit was the result of a fall in export value from March, following a fall in Dairy volumes. This isn’t particularly surprising as this quarter often provides low dairy volumes, and high dairy prices had lead to a run down in stocks earlier in the year.

I’m not too concerned about exchange rate movements, except against the AUS.  Have you seen the volatility in NZ$/AUS$ trading today, its been crazy.  I just don’t like volatility, hurts my head.


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