The visible hand in economics

Archive for March 2008

From the Hive we see that the government may be having trouble getting its mandatory biofuel regulation through parliament. Anyone that knows me will know that this makes me glad, not because I’m a climate change denialist (I’m willing to trust the experts on this one), not because I’m concerned about biofuel not having a net positive impact on carbon emissions, but because I don’t think the scheme is properly synchronized with the fact that we have a “carbon price” (through the carbon-trading scheme).

Why does setting a price for carbon mean that we don’t need to make biofuel’s mandatory? In order to explain this I’ll look at the three main criticisms I might get for this position (I’m hoping more criticisms can be added in the comments 😉 ):

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Lots of people are ripping in to Monica Prasad after her op-ed in the NYT on carbon taxes. She says that

Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries… [T]he insight they provide is that if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect.

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People are talking insistently about recession in New Zealand. Driving the recent spate of concerns is the deterioration in consumer confidence over the last three months. All three of the indicators we follow (Colmar Brunton, Roy Morgan, and Westpac McDermott-Miller) have shown a significant deterioration in consumer sentiment since the start of 2008.

Now a small part of this decline is seasonal – however even taking this into account, there has been a worsening in consumers current financial situation and a significant fall in consumer expectations of their financial situation over the next 12 months.

Both the Hive and Roy Morgan state that the Reserve Bank needs to look at cutting rates, in order to avoid a recession we don’t need. However this raises the question, do we need a recession?

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I read recently about the Vélib’ program that Paris is running and what a boon it is for the environment. Apparently Ken Livingstone is keen on making London more bicycle friendly, and cities like Copenhagen are already full of cyclists. The decrease in pollution as a result of the reduction in cars must be quite significant. What is it that prevents New Zealand cities from adopting similar, cyclist-friendly inner city roads?

Perhaps it’s not so much a supply issue as a demand issue. Perhaps fewer people want to commute by bicycle in NZ. A major factor in their decision not to use a bicycle might be the requirement that helmets are worn on the road. Read the rest of this entry »

I don’t know why I was reading both the About Town blog and the Times, but I was and now I have to write about it.

Mrs Saunders raises an interesting question, namely:

If, as most people seem to be saying, New Zealand women are a bunch of sex predators who will do anything for a double vodka and almost anything for a mocha latte, how is it that prostitution is still a viable business?

This is a fair question, as she says:

After all, a double vodka costs $7.50 but full sex with a street walker costs $50 – $60 (cheaper in Papatoetoe and deals of 2 for $60 are available if you know where to look). And a mocha latte costs around $3.50 whereas the cheapest sex option costs $20.

However, I think this is a question that we should be able to answer fairly easily with our economist hats on.

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A couple of weeks ago I asked why people might avoid finding out how worthy a charity is. People know that they’ll give to worthy charities and yet they shy away from finding out that a charity is worthy so that they avoid giving. Why might this be?

There aren’t many situations in which rational agents choose to avoid obtaining information costlessly. The times when they might are when it gains them a strategic advantage. However, you’re not playing a game against anyone else when you pass a collector on the street. The only person that you could be said to be playing against is another temporal self. Carillo and Mariotti’s paper on strategic ignorance explains how a person might choose to avoid information in order to gain an advantage over their future self. If you’re keen to get quasi-technical about it, read on. Read the rest of this entry »

The government is introducing ways to reduce the compliance costs associated with building homes. By doing this, the government can increase the supply of properties, lowering the price of houses, and thereby increasing housing affordability.

No doubt this will be an interesting policy to look over, however this is not what I am going to do right now. Instead I am interested in Professor Roy Fleetwood’s (of Victoria University’s Architecture and Design Faculty) dual claims that”the plan risked creating cardboard cut-out houses” and that “the Kiwi dream was to build your own home, but individuality was highly prized”.

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Apparently Sony has backed down on it’s proposed $50 charge for removing the junkware that usually comes preinstalled on computers. The new Fresh Start option when you buy your Vaio laptop allows you to choose to have a clean OS, without all the usual trial software and other adware, for an extra $50 over the usual price. If you look at Gizmodo’s comments you’ll see the predictable outrage of consumers over having to pay more to avoid something, rather than paying to gain something. However, to an economist, this looks like a simple case of price discrimination much as you see with business class flights on a plane. What’s the difference here? Read the rest of this entry »

The Standard was at Joe Stiglitz’ talk in Wellington last week and was particularly interested an audience member’s question about growth. The question is whether economists focus too much on growth, to the detriment of human happiness. It’s an interesting and worthy question, but not one that hasn’t been considered by economists. There are two important issues around GDP: first, whether it’s a good measure of growth and, secondly, whether growth is particularly important. Read the rest of this entry »

Here I am going to discuss an issue that is way over my head – but is extremely important for the practical application of economic concepts. I am going to discuss how changes in economic policies can influence social structure.

I decided that I would attempt to write about this after reading this post. In the post the daily dissident laments the collapse of community and the movement in consumerism and its impact on individuals.

The first argument against this view is the idea of individual freedom – individuals have the right to make their own choices, and the frame of communal society alienates that right. However, it is possible to look at the idea of community while providing individuals with rights.

The most basic way to frame this problem initially is as a prisoners dilemma. Read the rest of this entry »

It seems Apple’s thinking about giving iPod owners free access to the iTunes download service! Are they just good souls or is there a more sinister, profit-seeking motive behind their announcement (tongue firmly in cheek)? The first thought of every economist when they see something like this is to scream “price discrimination”. It looks like a classic case of a two-part tariff where the marginal cost of providing the tunes to a customer is zero; which it probably is, since Apple will likely pay a lump sum to the record companies rather than a per track sum. However, this is only half the story here. Read the rest of this entry »

Another month, another 75 basis point rate cut by the Fed. This is (close to) what the market expected, so I can’t imagine that it would have much impact on anything. However, the statement was interesting.

Does anyone else find it interesting that the Fed cut rates by 75 basis points but still wrote a whole paragraph (1/3 of the meaty bit) on the risk of accelerating inflation compared to last time when they said:

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

The most interesting bit was:

Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

If the CPI measure ticks up, will this be the end of rate cuts?

Today I noticed two very different stories about the outlook for the New Zealand economy. From Bernard Hickey (h.t. Kiwiblog) we have a dramatised version of what ANZ and BNZ are saying about economic conditions. From Berl we have a more moderate story which is closer in form to all the other analysts (such as RBNZ, Westpac, and Infometrics 😉 ).

Now don’t get me wrong – everyone is expecting a slowdown in economic growth. However, the question currently is, are we going to have a technical recession or not?

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Many critics of economics accuse it of being an amoral pursuit. Conversely, many economists praise the amoral nature of their discipline. It is easy to think that there must be more to this argument than whether economics is morally ‘good’ or not. After all, that seems like an awfully circular and pointless argument. One might ask what characteristics people value that they feel economics lacks. How do people weigh up the characteristics that they throw in a basket termed ‘morals’? Robin Hanson suggests that perhaps, ironically, economists have many of the tools to help them weigh such factors:

Economic analysis tries to infer what people want, largely from actions, and then tries to suggest policies to get people more of what they want… Critics, however, say economic analysis is untrustworthy because it is incomplete, since wants are only one of many moral considerations. But this complaint seems to me backwards… After all, morality is only one of the many ends we pursue. Yes we want to be moral, but we also want other things, and we each choose as if we often care about those other things more than morality.

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I’m suspicious about Dr Cullen’s claim that we are heading for a “technical recession“. I agree that we are heading towards a period of sub-trend growth. We might be heading towards a period where we have a consumption based recession (slow growth, consumption stalls, unemployment rises), which would be a big deal.

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