The visible hand in economics

Archive for October 2008

So National’s redundancy package is out. It is different to my initial impression and slightly different to the Labour package.

As well as randomly asking banks to be generous National said it was increasing the accommodation allowance for people who are made unemployed and also increase working for families for people who are made unemployed – both temporarily.

Again, I don’t agree with temporary stimulus measures, as our high household borrowing levels suggest that we aren’t really suffering from “demand deficiency” IMO.

But how to the scheme compare? Well they cost (about) the same, but the Labour package is less targeted on those who will be struggling. The Labour scheme makes more sense as a long-run adjustment (which it is not) the National scheme makes more sense as a temporary stimulus methinks. However, the Labour scheme seems simpler – which means that it will probably distribute the funds more efficiently. I guess it ultimately depends on where you think any stimulus should go in the face of a recesssion – what you believe is equitable.

These are my first impressions, what do you guys think?

Update:  Kiwiblog gives an excellent breakdown (here).

So Labour is making it that people who lose their jobs during the economic downturn can get the benefit straight away – and over the first 13 weeks no-one will take account of their spouses income (ht the Standard).

Tell you the truth, this sounds a lot better than the scheme National are indicating they will put in place I suspect National is going to put in place – it is less distortionary and actually targets those who are in trouble. Of course, the reason it sounds better is because they are doing less – I still don’t think it is particularly constructive policy.

My only question is, why have no stand-down period during a recession and a stand-down period outside of a recession? Personally I think the two should be consistent. I buy CPW’s argument that a greater proportion of the unemployed are “unfortunate” during a recession and so we want to be lighter on them at such a time – however, again I am torn by the fact that I’m not sure whether society wants the UB as a security net, or as a guaranteed minimum income for people. The way we treat it will differ in each case – and until we are CLEAR about what we have it for, we will continue with inconsistent policy.

Personally, I would make all benefits means tested (taking into account the liquidity of a persons assets) but have them turn up as soon as you are fired (I’m not sure about when you leave a job – I’ll have to think about that one).  Update:  Why has no-one tried to argue this – it is supposed to be contensious.  I blame Friday :P

Lets see what Nationals actual plan today is – then we can “compare”.

So you’ve probabaly read with great interest Matt’s post on the NZ election political quiz. I also noticed that the same quiz has a verison for the US presidential election so I thought it might be fun for us to repeat the exercise.

You may be surprised by the results:)

Agnitio: Obama (79%), Nader (72%), McCain (72%).

Agnitio Comment: Given I voted for Obama (I also hold US citizenship) I’m not surprised by this. I’m also not particularily surprised I have a high rating with McCain given I generally lean a little to the right economically.

Goonix: Barr (73%), McCain (59%), Nader (53%), the other candidate (53>x>38%), Obama (38%)

Goonix Comment: Consistent with my results of the NZ version of the quiz. There is no way I could vote for the economic policies of either major parties’ candidates (especially Obama). Similarly, I could never vote for the archaic social policies of the Republicans, or their pro-war stance (one which Obama seems to be pretty keen on now too). But I still can’t believe Barr is standing as the Libertarian candidate and is anti-choice!

Matt:Nader (68%), McCain (63%), McKinney (60%), Barr (60%), Obama (60%)

Matt Comment: Although my results were in a narrow band the politicians did very differently in the individual components I choose. Overall, this gives me the impression that US politicians are inconsistent “between-issues” at least in my little slice of reality. Thank goodness I live in Aotearoa – where politician’s inconsistency is equally spread between all the facets of governance ;)

According to figures out yesterday, New Zealand corp has greatly increased its spending overseas over the past year.  In part this seems crazy since we have been in a recession over the past nine months – however, there are reasons:

  1. Our exchange rate fell (assuming demand is inelastic – or is not passed on through intermediaries),
  2. The price of imports (specifically food, petrol, and intermediate goods like fertilizer) has risen,
  3. Businesses wanted to invest before our dollar fell below “fair-value”,
  4. Higher prices for our exports have made imports more affordable.

Note that the first two reasons solely drive the increase in prices – while the later two work through greater volumes of imports.  When the terms of trade numbers are out we will be able to see which bit dominates ;)

Furthermore, our recession over the first half of the year was the result of a “temporary” shock – through petrol prices and drought.  As a result of this, people in New Zealand will increase borrowing in order to “smooth” consumption over time – as the goods aren’t here, this involves borrowing to buy goods from overseas.

With the price and availability of credit now rising, and the exchange rate below fair value, I would expect import values to start declining – what do you guys think?

The Fed lopped 50 basis points off its cash rate, taking it to 1%.  With real interest rates already well in negative territory I’m not sure this sort of action is really necessary – maybe they want to stabilise consumer confidence or something of the like.

Anyway, our concern here is New Zealand – so what did it do?  The TWI went up to 59 from a low of 56 – the $US/$NZ got to $0.59 from a low around $0.54, so it helped to stabilise the FREE-FALL in our currency lately (just before I’ve gone on holiday).  Oil prices also bounced back – but still lie at the “relatively” low level of $67US a barrel.  For New Zealand this might imply some stability in our commodity prices – this is an essential issue so we can only hope!

All this is a sign that the market has initially taken the rate cut well, with the DOW now up 1200 points from its low about 36 hours ago (*).  If this lasts, then we could finally be in for a time of stabilisation – if it doesn’t, who knows :P

All I know is that the Fed will print as much money as it can to prevent a “Great Depression”, ignoring the future consequences.  I will aim to discuss this more next week.

For those of you who missed the magic, before the credit crisis we were worried about a property crisis.  In the midsts of this madness Matt Nolan was itnerveiwed by Paul Henry on breakfast.  I was bored so I thought I would track down this video and relive the magic.  At Matt’s gesturing I’m posting the link on the blog so that we can “make fun of how wrong I was (as house prices are already down 5.8% on a year ago) :P”

So here it is

http://tvnz.co.nz/view/video_popup_windows_skin/1638250

I don’t claim to know much about the proprty market,so instead I’ll make fun of his hair, watch the video to see Matt’s long (OK it’s not THAT long…) flowing mane of hair, then click below the flap to see Matt’s photo from the Infometrics website to see what he looks like these days

Agnitio

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Greenpeace’s environmental plan has just been released and it says pretty much what you’d expect: be more sustainable. The thing about it that intrigues me is the presence of an emissions trading system, efficiency standards for all energy consuming appliances and legally binding targets for renewable energy usage.

The point of trading systems is to internalise the costs of emissions in the most efficient way by allocating the costs through a market mechanism. Why would you then try to second guess the market by forcing emissions standards and renewable energy targets on people? Read the rest of this entry »

We have discussed where we stand on the political spectrum before, but now it seems that there is a quiz that tells us where we stand (ht Kiwiblog). Below I will tell you the results of the different authors here:

Matt: National (83%), United (73%), NZF (64%), ACT (63%), Labour (61%), Progressives (50%), Greens (46%)

Matt Comment: Very surprised with my results – I didn’t think that my views were so close to those of other parties. My main focus was on economic/employment issues along with the environment.

Goonix: ACT (82%), National (62%), UF (55%), NZF (48%), Labour and Greens (35%), Progressive (28%).

Goonix Comment: The quiz results are pretty much bang on for me. The high ACT score demonstrates my broad alignment with libertarian principles while at the same time my fundamental distaste for military action (the primary area that I disagree with ACT on). The rest of the order makes sense and I’m very happy that I’m less than half aligned with NZF/Labour/Greens/Progressives. :)

Agnitio: National (72%), UF (71%), ACT (69%), NZF (62%), Labour (55%), Progressive (49%), Greens (40%).

Agnitio Comment: I didn’t know United future stood for antyhing so I’m surprised by by 71% rating with them! Other then that no surprises I guess. Interesting thing about the Greens is I agreed with them 92% on environmental issues yet they still come in on 40%, just shows how crazy I obviously think the rest of their policies are! Bring on the Blue-Green party!

Rauparaha: Labour (66%), United Future (65%), National (61%), Greens (60%), ACT(59%), Progressives (58%), NZ First (46%)

Rauparaha Comment: I seem to have a fairly uninformatively narrow spread. Parties are either too socially conservative for me or too economically prescriptive. It’s nice to see that I at least don’t side with Winston on many things.

Today National released their corrections policy, which would allow the private sector to tender for the management of prisons.

Although not a completely ‘new’ concept for New Zealand (Auckland Central Remand Prison was privately run under the last National Government) it nonetheless raises the issue of when is it appropriate for such services to be ‘contracted out’ rather than provided ‘in-house’ by the government.

Hart, Schleifer and Vishny’s “The Proper Scope of Government: Theory and Application to Prisons” asks the question when should a government provide a service in-house, and when should it contract out provision? (Anyone interested in the full article may be able to locate it here).

The authors’ develop a model for asset ownership (in this instance a prison), which can be owned by the private sector, who contract back to the government, or alternatively can be owned outright by the government.

The central finding of the paper is that the private sector has relatively stronger, but seemingly contradictory, incentives to both reduce costs (driven by a profit motive, which comes at the expense of quality) and increase quality (to get a higher price from the government, who is an ongoing buyer of the service). In this instance the quality of a prison entails order in the prison, amenities that prisoners receive and rehabilitation.
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Or so say economists at Infometrics (a organisation I am involved with :P ).

Why should we expect another recession over the first half of 2009 – especially when we are coming out of a drought!

Well one justification could be that households are highly indebted, and the price of that debt is going up – so now households will want to pay some of it off.  When households are paying off debt they can’t consume – a factor that will reduce economic activity.

Discuss :P

It appears that National intends to do just that following this election – providing grants to individuals who lose there job beyond the unemployment benefit, but only for “during the recession”, and only “needs based”.

This is probably one of the most ridiculous ways anyone could try to deal with the current recession – although I guess increasing taxes, slashing spending (especially on the supply side), and then hiding it under the PM’s pillow would we a little sillier.

Lets think about this grant a little – what is National trying to say?  Do they think the unemployment benefit is too low?  That is supported by this quote:

The support plan was designed to help them remain confident and carry them over until they got another job.

If so, why don’t they just increase it, instead of fluffing around with “grant schemes”.  Or do they believe that unemployed people will be worse off during the recession than not in the recession – because that doesn’t make much sense to me.  I thought the cost to households in the recession stemmed from unemployment and lower real wages – being “unemployed” is just as bad in any state.

If National actually wants unemployment benefits to be partially time limited – then introduce that scheme, instead of some fluffing grant. Either they are introducing that policy, or they are trying (unsuccesfully) to sound like they are dealing with the financial crisis.

Overall, what the hell are the parties doing – is any party actually going to try to do what is best for the country in the face of this external shock … didn’t think so :(

Lionel Robbins (*):

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses

This is the fundamental definition of economics that I adher to when I write here. In all honesty this is not the sole definition of what people “see” economics as – however, it THE definition of what I would term “economic science”.

This definition fits neatly with the theoretical and applied versions of micoeconomics – however, without appropriate “microfoundations” it is hard to decide whether marcroeconomics sticks to this definition of what economics is – is macroeconomics raising the TRUE trade-off between scarce resources in the entire economy?

Ultimately, Milton Friedman felt we make macroeconomics consistent with this view (and useful) bu focusing on predictive accuracy – like many economic models, this made sense once you converged to your result, but not out of equilibrium :P

Kevin D Hoover:

The claim that representative-agent models provide micro-foundations succeeds only when we steadfastly avoid the fact that reporesentative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models

Kevin Hoover is a professor at Duke University.  I put down this quote as I believe that the modern day process of macroeconomics is likely to come under scrutiny following recent global events – and Dr Hoover’s writing has convinced me that the representative agent model isn’t really the same as reductionism/micro-foundations.

Microeconomics is beautiful descriptive discipline, macroeconomics needs to either find ways to apply it, or use a different holistic method to explain what it is doing – doing something that is (possibly) half and half might not cut it in the end.

So investors are “rushing” to finance companies to invest money.  One of my economist friends just told me he tried to invest money in a finance company, just to be told that they were “over-subscribed”.

I have two concerns stemming from this:

  1. Moral hazard:  Finance companies will invest in higher risk ventures to get the return – knowing that there downside is covered by the government.
  2. Bank funding:  Given suggestions that banks may face a funding crisis, a movement of funds from banks to finance companies can’t be a good thing :P

I suspect that Bank’s decision to charge a premium based on the quality of investments will have some impact – however, is the premium high enough to solve these problems?  I guess we will know once we see the new set of deposit rates that finance companies come out with.


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