The visible hand in economics

Archive for the ‘Macroeconomics’ Category

I see there is some talk of compulsory redundancy payments after this sad story.

Now even though it would be nice if those people hadn’t been left high and dry after all their years of commitment, it is important that we try to get an objective idea about the costs associated with the scheme.
Read the rest of this entry »

I have no doubt that my views here will be contentious – but they need to be put forward nonetheless.

I think that Treasury (or some mix of part of Treasury and IRD) should function at arms length in the same way as the Reserve Bank, and that they should set tax rates in the same way that the RBNZ sets interest rates.

Now, let me discuss why.

Read the rest of this entry »

Yesterday I said that I thought the Bank’s speech on bringing down the price level was ridiculous. Not only is asking for a decline in prices a strange thing for a central bank to do, the mentioning of “oil companies” was slightly off the mark – given that they have slashed prices in the face of falling crude oil (although to be fair the Bank was just asking them to keep going – it was the Dom Post that exaggerated it – or maybe I was being generous!).

Now I am going to defend it.

Read the rest of this entry »

Over at Financial Armageddon they state that:

Analysts naturally factor in the number of people who are out of work when they try to figure out future consumption patterns. But there is more to it, of course. People who are afraid they might lose their job are just as likely to economize or clamp down on spending as those who have no real choice in the matter. In fact, some might say that changes in the attitudes and behavior of the 85-95 percent (depending on which statistics you believe) of those who are employed matter much more than the financial wherewithal of those who aren’t

Now this implies that analysts don’t look at the feeling of those who are employed and as a result will not expect as sharp a fall in consumption. However, as an analyst I can say that we do pay attention to this fact – which is why we put such a weight on the unemployment rate when we forecast.
Read the rest of this entry »

With the official cash rate set to fall even further later this week, shares become relatively appealing when compared with other financial instruments, such as bonds and term deposits.

The old adage of ‘buy low, sell high’ seems fitting, given the battering shares the world over have taken in the past while. The NZX and Dow Jones industrial averages, for example, are both down around a quarter from their respective values six months ago.

But just when is the market ‘low’?

I don’t know! If I did, I’m sure I’d be a lot wealthier than I am. However, I thought it would be useful to write a blog entry to stimulate discussion and debate on what TVHE readers are picking for the sharemarket:

  1. Is now a good time to buy?
  2. What industries/companies would you consider investing it?
  3. What factors are influencing your decisions to invest, or not?

I look forward to hearing our readers’ views on the current state of the sharemarket.

Copyright tvhe.wordpress.com ©

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?

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 »

Excellent article by Tyler Cowen in the New York Times. (ht Economists View, Marginal Revolution).

Paul Walker at Anti-Dismal has also covered this issue heavily (here, here, here, here, here, and here).

Fundamentally, for New Zealand, there appears to be no reason for any change to fiscal policy to help deal with the slowdown – something we have discussed here.

Show me the actual “market failure” – then we can figure out how the government can improve outcomes. If there is no market failure, then government action to “stabilise” the economy will simply make matters worse.

Note: This is different to government actions to try and help cushion the impact of a sharp change in fundamental economic conditions. Although a change in the economic situation may change the optimal allocation of resources, a labour market that allows people to upskill and gives them firm institutions to rely on in the bad times will help to reduce the welfare cost associated with the change. This is subtly, but importantly, different from a simple “fiscal expansion”.

The world price of oil has now declined to under $50US a barrel, a third of it’s peak value (live prices here).

This takes me back to a post we did at the end of May – when fuel costs were pushing up at a rate of knots. The topic was covered in the name: Collusion, multiple equilibrium, and petrol prices.

Read the rest of this entry »

After todays attack on effective “left-wing” politics of blanket transfers and the idea that we need government to save the day, I thought I should come out with a post in favour of other general government action.  So lets looks at progressive taxes.

It is common for economists to attack progressive taxation as it can be seen as:

  1. Unfair, given that some people who work have to get income have to pay a greater proportion of there income to the state (even more than a greater amount!)
  2. Unfair, because we may believe that most of the spending benefits people on lower incomes,
  3. Inefficient, given that we are taxing our “most productive” citizens at a higher marginal rate, reducing their labour supply.
  4. Or inefficient, because if the tax is passed on to the business, we are taxing highly skilled industries more than unskilled industries, which is a distortion.

However, there are reasons why society may want a progressive tax system, and when it would dominate other tax systems:
Read the rest of this entry »

The paradox of thrift is one of the key lessons taught to macroeconomics students during their first undergraduate year.

Fundamentally it states that if everyone in society decides to save more right now, then it reduces consumption, with reduces economic activity and thereby incomes – and as a result it may actually decrease aggregate savings, and it will definitely reduce economic activity.

It is still widely applied, with recent Nobel prize winner Paul Krugman appealing to it in order to explain why the US needs to jump on in and get consumers spending again.

Of course this does not mean the theory is necessarily right. The paradox of thrift does not have a supply side – as long as prices and quantities can adjust to an economic shock this paradox, and the suggestion of government intervention in the face of it, does not hold water. For government intervention to be a possible solution we need a MARKET FAILURE, a market failure that causes a special macro-economic situation called “demand deficiency”. (Note: This is effectively the difference between Say and Keynes).

Read the rest of this entry »

This from the Minneapolis Fed:

Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of nonfinancial businesses to borrow from households is highly questionable

There are two ways I can read this quote, one that I agree with and one that I dispute. The first way is that “this isn’t the end of the world” – I agree with this, and I still think that people too closely linked to the financial markets are expecting worse outcomes for the global economy than will actually occur.

However, I think the Minneapolis Fed’s paper overplays it a little and suggests that there is no credit rationing element – only a risk-price element.
Read the rest of this entry »

Over at Econlog Arnold Kling takes to task virtually all mainstream Macroeconomists for there “description” of the current economic crisis. This combined with my reading last night on reductionism in economics (I think it was Robert Frank Kevin Hoover – although I have now forgotten as it was an essay in a larger book) currently has me on the back foot – even though I’m a strong methodological (and even an ontological) individualist there are obviously issues with the current application of reductionism in economics.

However, let met put down some of the key bits from the Kling.

Read the rest of this entry »

To put my personal value judgments out initially, I generally DO NOT think that government (through fiscal policy) can be blamed for inflation. However, among many people, and even many economists there is a feeling that government is to blame in some way. Personally, I completely blame monetary policy for the failure to control inflation – and although I think they are behaving in an appropriate way in the current crisis – I think that policy was too weak in the past, which has made things more difficult now.

However, the view that it is “the government fault” is not completely without merit. Iprent at the Standard asked me to link to a discussion of how this COULD happen, and as a result I will write a post and link to it here :)

Read the rest of this entry »

Yesterday, the ACT party released their tax policy (further discussion also over at Kiwiblog)

Some key points from ACT’s taxation policy include:

  1. restricting future increases in Government expenditure to inflation and population growth
  2. eventual personal tax rates of 12.5% up to $20,000 and 15% above $20,000
  3. eventual company tax rate of 15%
  4. eventual GST rate of 10%

Tax distorts behaviour. The concept of the ‘excess burden of taxation’ is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. Distortions occur because people or firms change their behaviour in order to reduce the amount of tax they must pay, which results in deadweight loss from taxation.

Read the rest of this entry »


Add to Google
Follow

Get every new post delivered to your Inbox.