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 »


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