The visible hand in economics

Archive for November 2008

According to a recent book by Christian Broda and David E. Weinstein (Prices, Poverty, and Inequality: Why Americans are Better Off Than You Think) (ht Marginal Revolution) growth in income inequality was less pronounced in the US because of changes to the quality and cost of goods that “poor” people purchased.

This indicates to me that a tiered consumer price index could be a useful thing.  Currently the household economic survey (HES) provides an annual tiered income measure (where we see the average income of different income deciles).  However, this nominal measure is not particularly useful if the change in prices experienced by different groups are very diverse.

As a result, a similarly tiered CPI measure (so a CPI for each income decile) would actually give us a much better way to figure out change in “real income” and thereby a fairer measure of the distribution of real income – which is something we care about.

Surely the HES has a measure of purchases by different income groups.  As the CPI is broken down into different products it should be possible to take these weights and come up with a loose set of indicies that represent the price inflation faced by different income declines shouldn’t it?

In what could become an awesome resource for creating economics post, we have found Debatepedia.

We discovered the site after we found it linking to a post we did on progressive taxes in support of the argument that “progressive taxes adjust for random factors in wealth“. The full progressive tax debate is here. It is awesome how it provides background and short quotes summarising the arguments – while also providing links for people that want to get their hands dirty.

Truly awesome, and a great way for you guys to quickly find good counter-arguments to any dodgey points I try to make – not that you guys need any help ;)

Michael Lewis:

He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

Found in the December 2008 portfolio magazine (ht Robbie Allan).

In today’s Dom Post column we discuss whether a fiscal stimulus is necessary at the moment – our conclusion is that it is not.

Four criticisms I would have of my own logic are:

  1. There may be distributional reasons why you would want to change spending,
  2. An “improvement” in government spending would be beneficial,
  3. In the face of sticky prices and reference based utility from consumption (that marginal utility from consumption depends on consumption in the previous periods) there could be a role for stabilisation even if the shock is permanent.
  4. Fiscal policy is better targetted.

My answers to these would be:

Read the rest of this entry »

Over at Robert Reich’s blog, there is a discussion stating that now is the time for rising government spending in the US based on the “fact” that the government is the “spender of last resort” and that the economy has plenty of spare “capacity” (ht Mark Thoma at Economists View).

We have discussed fiscal policy before, and will discuss it again tomorrow. Now, I agree with chunks of this logic, but I feel that there is one gapping hole – the behaviour of prices!

Read the rest of this entry »

Garth George at The Herald reckons that the root cause of all abuse and domestic violence is abortion. His position seems largely religious in nature so I can’t argue the point on his grounds. However, I was surprised to see reasonable-sounding commentators at Kiwiblog unsure whether George might be correct. This topic isn’t a new one and the most recent stab at it has been by the famous economist Steven Levitt and his co-author, John Donohue. In their paper they use statistical techniques to show that the drop in US crime in the ’90s was correlated with states’ legalisation of abortion. Read the rest of this entry »

The DomPost contained an article on the potential for metering Wellington’s water supply. The question is asked: should Wellingtonians pay for their water? This issue is a hot topic, having been discussed at Kiwiblog, Infometrics and TVHE earlier this year.

Historically, water has been provided for by the various Wellington councils out of rates. Water is not currently metered, which implies that regardless of how much water each household takes, their rates do not vary. This arrangement has led many to believe water is in some way ‘free’, as they are not forced to pay for their specific usage and the cost is embodied in rates which cover many council services across many households. With water use of 400 litres per person per day in Wellington, relative to the national average of 160 litres, it appears water users here are not internalising the cost of their water usage.

Current arrangements do not allow for the pricing of scarcity. Read the rest of this entry »

This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:

Read the rest of this entry »

Over at the Standard they discuss Bill English’s statement that we will become a “nation of savers”.  Now their attack line is relatively weird, especially given that he is just saying that if we need a bigger deposit to buy a house we will have to save it – he doesn’t say we should take on policy that imply “save more”.

However, he illustrates a strange view that National have of savings when he suggests that tax cuts will lead to an increase in savings – it will increase private savings but it is also dis-savings for the government, hence it will lower national savings (unless you believe it will magically cause a massive increase in economic activity).

Obviously the term “savings” is being used in a loose way – which is also “loaded” in the sense that these people assume that an “increase” in savings is a good thing.

I think it would be good if we review a series of posts which was (and eventually will be extended into) our “productivity series“.  In the four posts here we discuss Kiwisaver, national savings, and what savings is.

Read the rest of this entry »

So we’ve been tagged by MandM (explaination of it here).

The rules are:

  • Link to the person who tagged you
  • Post the rules
  • Share seven random or weird facts about yourself
  • Tag 7 random people at the end of the post with their links
  • Let each person know they’ve been tagged by leaving a comment on their blog

So, lets give it a go (note this post is under-construction ;) – we will add “tags” later)

Read the rest of this entry »

I was slightly concerned when I saw the headline on stuff this morning “Nats eye bailout of big business”

If the government is saying ex ante that they will bail out big businesses I would be concerned as this has the potential to cause a moral hazard problem. This is where firms know they will get bailed out and thus make riskier decisions. The actual quotes from Bill English don’t appear the be as explicit as I originally thought they might be

“You’re in an environment when almost anything any government could contemplate doing is getting done somewhere in the world,” he said.

“There is a small chance that events that have transpired elsewhere could transpire here. You can’t ignore that and so we need to give some thought to the extreme event.”

Are quotes like this enough to give the big companies in NZ enough comfort that they will bailed out? Only time will tell….

I’m going with a 75 basis point cut on December 4. Now no-one might agree with this, iPredicit certainly doesn’t (putting the probability at 3% when I looked), but there are reasons:

Update: I brought some 75 shares in iPredict after posting this post – because agnitio told me to.

  1. Petrol price collapse (which might be seen as inflationary),
  2. Mortgage rate collapse,
  3. Wholesale cost of credit is falling.

In fact, I would go for a 50 if it wasn’t for the fact that 2 year ahead inflation expectations tumbled to 2.7% in the December quarter! Let me sort of sketch out why.

Read the rest of this entry »

I have to admit that I am confused. The US wants to pump a bunch of money into the economy in order to get consumers borrowing again – why?

I thought that one of the primary issues was that the US consumer has borrowed too much in the past, supposedly to make up for a “glut in savings”. This had to give way at some point surely.

Of course the Fed and the US Treasury should be looking at loosening credit constraints that have appeared – but are they there. Megan McArdle was able to get hold of a good number of credit cards, and as I noted there seems to be some “throwing of funds” at consumers in LA at least.

Now, businesses over there (and potentially here) are suffering from credit constraints – so why doesn’t the Fed and Treasury work on loosening the constraint on business borrowing, instead of trying to knock down mortgage rates. Businesses that haven’t shut down don’t lay off all their staff!

Apparently the Aussies are blaming Fonterra’s Global Dairytrade online auction platform for lowering the price of milk.

Interesting. If the auction is simply reflecting the true value of milk then the I feel no sympathy. This quote from the manager of the auction system sums up it’s purpose

Fonterra’s global trade managing director Kelvin Wickham said the auction was all about “the international market getting a transparent price” and all global dairytrade was doing was “making it more transparent more quickly”.

As an economist that is music to my ears. On the other hand here’s the quote from the Aussies

“Given things are bleak with the economic outlook, people are holding back on purchasing to see what happens with the auction,” Ms Bills said.

“Mostly, the price doesn’t recover. It is fine to want to have a transparent price system, but why not open at the closing price? If you put a price out there for something in an auction, people see it as a reserve.

“Buyers are waiting to see the price from the auction before they make their purchase.”

So basically they want the auction setup so that it props up the price of milk, can’t say I really have much sympathy for that view….

The Standard don’t see the point in them and Fletcher Building would  rather have a standard construction contract that doesn’t transfer  risk to them and doesn’t require them to incur costs setting the arrangement up.

I’m FAR from an expert on the issue of PPPs, and there may be some valid concerns using them for roads in New Zealand. However it is important to recognize that PPPs can take many forms with different levels and types of risk shared between the two parties. One of the key purposes of a PPP is to let the party that can best manage  each source of risk bear it. if designed properly this doesn’t sound like a bad idea, if they aren’t designed properly it’s a bad idea!

Anyways, sorry I can’t provide more definitive commentary about this, if anyone wants to learn more about PPPs and there purpose/benefits I recommend checking out this report from Deloitte. It’s a couple years old now and I haven’t read it in a while so can’t really comment on its contents, but I remember it being a good coverage:)

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