The visible hand in economics

Archive for December 2007

Today’s Balance of Payments release put the current account deficit at 8.3% of GDP.  This was right on the button of market expectations, however some interesting issues cropped up which will be important for tomorrows GDP release.

The actual current account deficit was a touch worse than market expecations, enough to make the deficit as a proportion of GDP 8.4% if market expectations for tomorrows GDP result held.  By itself this would indicate that either:

  1. GDP growth was above market expectations for the quarter (0.3%), or
  2. The GDP deflator is higher than we anticipated

Both of these results would cause a headache for the Reserve Bank.  However, the story becomes a little more complicated.

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Following on from our post on the minimum wage yesterday, the government decided to announce an increase in the minimum wage to $12, from $11.25.

The money-quote from the stuff story has to be:

“Initially business groups were opposed to lifting the minimum wage, which was set at $7 an hour when Labour took office in 1999.

However, in recent years they became more relaxed as the labour market tightened and hiring staff became more difficult.”

This tells us that the minimum wage increases are unbinding for a lot more groups than they used to be, and as a result the effect of the policy will be minimal.

Lets try to discuss this increase in regards to yesterdays conditions for a minimum wage to ‘increase’ employment.

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Over at Not Sneaky they are discussing how a higher minimum wage may lead to higher employment when we have a firm that has market power in the labour market (hat-tip CPW). The argument is a very interesting one as economists often view a minimum wage as a way of placing a price floor, which leads to a lower level of employment and social ‘surplus’.

On the blog he uses this fine graph to explain the result. The purple line illustrates the path of wages and employment. According to that, there is a range where higher wages create greater employment in the labour market. Let me attempt to explain this.

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Over time we have been covering specific issues with how income tax and GST influence economic activity. This post was supposed to describe how an increase in GST with a proportional decrease in a flat income tax would lead to no change in consumer activity. This required the assumption that the incidence of tax on the household in both cases was equal, which will not be true.

Next we discussed the incidence of income tax in this post, which allowed us to say that some of the burden of the tax falls on labour, but some also falls on the firms that employ workers. The next step is to look at the incidence associated with a goods and services tax, and some of the inefficiencies that this issue causes for this tax type. Read the rest of this entry »

Central banks have felt obliged to intervene in the recent credit crunch, introducing a bunch of liquidity into European and US financial markets. This has led market participants to say that “It helps with the confidence and the feeling that the Fed is going to help out the financial system“, but is this what the central bank should be doing?

Now some might say that putting a bit of liquidity in the system and risking a bit of inflation might be a small price to pay to prevent the ‘collapse’ of the financial sector. However, this is not the only costs associated with Central Bank intervention, we also have the problem of moral hazard.
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The US Federal Reserve cut their cash rate and discount rate by 25 basis points. In the statement the Fed said the following about inflation:

“Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation … some inflation risks remain”

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Sticking to the recent theme of externality taxes, some researchers from Perth suggested that Australians should ‘fine’ parents for each kid they have above two. Now we know I’m a big fan of externality taxes, but I’m not too sure about this one.

As we have already established a carbon trading scheme, this externality tax is not being used to cover carbon creation from the consumption or production of certain goods – the kids will pay for all of this when they grow up. This leaves us with the carbon emissions that the child makes from living, by doing things such as breathing.
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