The visible hand in economics

Archive for the ‘New Zealand Economics’ 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.
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So we all know that Iceland is bankrupt – what is the situation like for New Zealand?

A few of the stories I saw when Iceland first went into massive trouble were here, here, and here.  At the time the comparison was so popular that there was a Dom Post article on the risks of New Zealand’s current account.

However, I think by now it is obvious that I am not going to agree :P  Our stock of debt is equal to one years income – I don’t see how this is unsustainable!

So tell me – are we heading towards bankruptcy, are we heading towards a bumpy ride, or are we heading towards more “golden weather” :)

In what appears to be becoming a “stand up for the Bank” day, I was surprised to see Steve Pierson at the Standard state that he believes the Reserve Bank cut interest rates too late!

Now, if the Reserve Bank had known exactly what was going to happen in the world and decided to hike rates for the hell of it I would agree – but ex-ante they (like the majority of other people) had no idea what was going to happen.

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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.

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In an interesting speech by the RBNZ governor Alan Bollard we are told that everyone needs to play their part during the economic crisis. Specifically he stated:

We would hope that the electricity industry does not take advantage of its market position and keep increasing rates, that local authorities realise they need to set rates increases below inflation for a change, that the construction materials industry respond to much weaker demand, that the food industry react to lower international commodity prices with price cuts, that petrol companies keep cutting forecourt prices, that the transport industry pass on fuel price cuts, and that the banks pass on interest rate cuts. Only then will all these firms be playing their proper role in New Zealand’s recovery.

Now, putting the hard word on industries that do not face market pricing (like local councils) is fine – but attacking businesses for setting prices in their own interest – what the hell!

Firms aren’t passing on costs because they aren’t. If they had increased prices as strongly as cost pressures demanded on the way up then the inflation figure would be a lot worse than 5.1!

Think of it this way – if businesses are pricing “too high” they will face a situation where prices are “relative elastic”. Then it is “in their own interest” to cut prices. If they aren’t doing so, then prices aren’t too high, and if the RBNZ is really worried about inflationary pressure they should batter away with their own instrument instead of making arbitrary calls about “sharing the pain”. If there is a competition problem, complain to the commerce commission, otherwise stop trying to create scapegoats because of the fear surrounding a potential policy failure!

Other comments: Inquiring Mind, Rates Blog.

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In net terms I am AGAINST the probation policy being put through today. That puts me in a pretty significant minority among my economics peers, oww well it gives us something to talk about. However, I would also add that I am NOT THAT against it – I am only against it in net terms because of value judgments.

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Please, explain to me how the current probation policy is different from the one National is going to introduce!

I know about economics, but these subjective terms like “natural justice” do not have a clear meaning to me :( .

I was all ready to rail against the scheme this morning because I thought they were making probation period compulsory – however, now that I can see that isn’t the case I need to find out more about it before I say what I think.

Tane at the Standard states that:

All National’s proposed legislation would do is remove the right to fair process and natural justice

So how exactly does this impact on policy. What are the definitions of “fair process” and “natural justice”. Once I have an idea I’ll talk about the policy, and I’ll compare it and the current scheme to the extremes of “compulsory” and “no probation” – using economics to frame the issue.

Update: I have been informed that the main differences are:

The 90-day provision will apply to any workers employed by businesses with fewer than 20 staff. Workers who are sacked by their employer in their first 90 days on the job will be unable to challenge their dismissal or take a personal grievance case.

Is there anything else?

Kiwiblog has a good run down here.

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A recent survey stated that New Zealand exports were “resiliant” in the face of a massive global recession.

Now this is something that, at first, might seem unusual. New Zealand relies on exports so much, and if the global economy is collapsing surely we will have no-one left to sell too.

However, it is important to remember the difference between “prices” and “quantities”.

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I see that the PM has been talking about financial economic variables again – this time it is the exchange rate.  Now he says it isn’t a big deal as he didn’t say too much – which is true.  But nonetheless, he is PM, he isn’t supposed to say anything about the direction of monetary policy – which includes interest rates.

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So since the last post I’ve thought of a few other things I could do to get an idea of pricing behaviour.

First, lets compare the price of petrol per litre (excluding tax) to the $NZ price per barrel of oil:

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What the hell is with the headlines saying “Confidence surges post-election” and “New Zealand Consumer Confidence up 5.9 pts to 105.6, after John Key’s election as New Zealand’s new Prime Minister“.

I’ll tell you why consumer confidence rose in November – retail petrol prices fell 15%.  I wouldn’t have minded the random conjecture that a change of government made consumers confident – as I would expect a small boost myself.  However, they completely ignored fuel prices – how can Roy Morgan tell us what to do with interest rates (which he does every two weeks) without understanding the important relationship between petrol to real incomes and confidence.

How can they seriously think that the election was the primary source of this confidence boost – I’m startled!

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A couple of weeks ago the November NBNZ Business Outlook survey was release – and man was it a stinker.

The key point was the decline in own activity expectations – with a net 14% of firms expecting their own level of activity to contract!  In conjunction with the RBNZ inflation expectations number (specifically the surveys wage growth measure) this was one of the “green lights” for the massive rate cut in December.

However, I can’t get past the inflation expectation number from the Businesses Outlook, 3.7%.  This is with the economy having contracted and petrol prices collapsing.  Sure this is a slow moving measure – but it is moving in the wrong direction!

I realise that anyone reading probably cannot understand why I still care about inflation (as seen here) – but I’m afraid that can’t see a massive build up of spare capacity in New Zealand, I don’t see any “demand deficiency”, or “savings glut” (although who knows – maybe I’m suffering from recession fatigue).  Without this, all the Bank can do is focus on its mandate to keep price growth low and stable.

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A lot of people appear to be discussing the RBNZ’s call that the New Zealand recession is over (here, here, and here).

Now I have to admit that I do not find his call ridiculous for a few reasons:

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Today on Breakfast Paul Henry was stating that petrol prices are far too high, given that crude oil has fallen to $40US a barrel. His criticism was that the retail price of petrol has not fallen at the same rate as crude oil – of course this wouldn’t make much sense given that there are other cost components to the sale of fuel than just the price of crude oil.  However, I was wondering if his criticism that prices were “too high” had any merit.

Now, I don’t have any data, or any analysis to fall back on, when looking at whether the price of petrol is “fair”. However, MED does do some work on fuel prices here. Among the statistics they have a “fuel price margin” page, here. This “margin” tells us what residual is left to give to the importers, distributors, and retailers in the petrol market. Lets have a look at the graphs they provide:

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Buy New Zealand made is gone – good.

The stated aim of the campaign was to protect New Zealand jobs – but why would rejecting imports in favour of domestic production save jobs?

If we import things, we have to make more exports to pay for them!  Ultimately, trading with the rest of the world allows us to focus on what we are relatively best at, while they focus on what they are relatively best at – then we can trade and all be better off!

Chris Worthington at Infometrics has discussed this before in the Dom Post.

Of course – we can try to justify the policy on other grounds (I can only think of one that would make any sense though).  But overall I think this is Nationals first good economic policy decission – it doesn’t make up for the “40%” of Kiwisaver in NZ rubbish, but its something :P

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