The visible hand in economics

Archive for August 2008

Although the blogs appear to be quite quiet about it, I’ve heard a number of people complaining about the government compensating people for the impact of the emissions trading scheme.

Effectively, people who are unhappy about it are telling me that such compensation appears to be pointless as it “cancels out the effect” of pricing carbon in the first place. Ultimately, we can discuss the issue in a little more detail then that. Lets try to figure out how it works – and discuss what this compensation implies, both in terms of achieving carbon/Kyoto liability funding goals, and in terms of social welfare.

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July discussion here.

I don’t usually talk about the Business outlook stats – but I did last month, and I should this month (*).

Own activity expectations moved back into positive territory, business confidence is at its highest rate since November, and inflation expectations are at record levels (3.79% – even higher than the expectation numbers reported by the RBNZ for the September quarter).

This is a surprising result for the market, and makes our blogs pick of an economic recovery from September and annual consumer price index growth of 5% in September both seem a little more likely ;)

Lets ask if these numbers describe any of the issues we mentioned in July:

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Over at Econlog Bryan Caplan asks a good question – he asks why economists who often rail against the free market will also often state that they strongly support civil liberties. Fundamentally he is asking, why do these people not support freedom to trade but do support freedom of expression.

Now I agree with Dr Caplan that economists should use the same tools to discuss civil issues as they do trade issues – any limits on civil liberties should be the result of externalities, asymmetric information on the value or relevance of ideas, or the undue power of an idea which in turn reduces social welfare (in the same way that in trade, people will rally against externalities, asymmetric information, and undue market power).

However, this does not suddenly imply that I am a stanch supporter of a completely free market – in the same way that I am not a stanch support of blanket calls to remove regulations that reduce civil liberties. Ultimately, in both cases there are trade-offs, and our ultimate goal is to maximise social welfare.

Lets discuss the “social-democrat economist’s bias” a bit more below the flap:

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According to this Herald article the fact that annual food price growth fell from 8.2% to 7.6%, and the fact that increases stemmed from a lift in fresh vege prices implies that food price inflation is now cooling. Lets investigate this claim a little bit. (Note: I am ignoring the title “Relief on way for families as record food costs set to ease” as it is just silly – the economist they interview says food price growth will ease to 4%, not that the actual cost is going to ease.)

First the fresh vege claim. Lets try to remember here the the food price index is not seasonally adjusted. As a result there is an increase in these vege prices every July. To account for the seasonal pattern we can compare how much vege prices were up on a year earlier – in June they rose 8.7%, in July 5.4% (source). As a result, blaming vege’s for the increase in the food price index seems a little dishonest.

Now that we know this, we can just discuss the deceleration in annual food price growth.

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Over at the Paul Krugman blog Dr Krugman criticises “conservatives” for treating capital gains as savings.  This criticism followed an article by Tyler Cowan stating that people have treated capital gains as savings (article is found here).

Now pinch me if I’m wrong, but I can’t see the issue with

  1. People assuming that other people treat capital gains as savings if they do,
  2. People treating capital gains as savings if they expect them to be maintained

I do understand that their is a policy issue if peoples expectations that capital gains will be maintained is not realistic.

There is a difference though – both the above articles seem to be criticising people for the very idea of using capital gains as saving, or assuming that people do.  However, sustained capital gains are savings, as it is additional wealth that is not used for consumption.

If we believe that there is an issue, it probably has to do with expectations.  In the case of housing we have had a “bubble” where expectations were pushed away from fundamentals and towards speculation.  In this case the problem does not stem from treating capital gains as savings – it stems from unrealistic expectations about the future price of the asset!

So why did peoples expectations of future house prices get out of whack in the USA, and now in NZ?

It is good to see the Frog Blog discussing happiness and policy – as fundamentally the goal of policy should be to promote the highest social happiness, not necessarily to promote the largest GDP number.

The article that Frog links to can be found here, and on Saturday there was an article in the paper by Chris Worthington on the subject as well. However, I get the feeling that Mr/Mrs/Miss Frog interprets this policy implication a little differently to me (and both are different to this previous post) – lets discuss.

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Technology and the limited nature of non-renewable resources is an important issue in economics, the social sciences, and general policy making. It is an issue where each side of the political spectrum feels that the other side is stupid.

In an article we have linked to here, there are people that feel economists ignore the concept that our natural resources are limited (something that would be quite a fail, given that economics is the study of scarcity). However, there are also many people that feel a stroke over-confident about the ability of “technology” to evolve in a way that will allow us to substitute, easily, and cheaply away from these resources when the time comes.

In truth many people sit between these two extremes, believing that non-renewable resources will run out, there will be some cost, but that technology will provide some type of substitute. However, the value judgments involved in this opinion, especially when looking at technology, are not entirely clear. As a result, lets have a look at “technology” in more detail and see what framework we can come up with.

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