The visible hand in economics

Archive for April 2008

Given my uncertainty about who to vote for the the next New Zealand general election I’ve been exploring registered political parties wikipedia pages. While looking I noticed that a number of smaller parties tended to favour a financial transactions tax (Progressives, Alliance, Democrats, and Direct Democracy). Looking at the parties websites, the only party I could find that mentioned the Financial Transaction tax was the Democrats.

The reasons they gave for the tax were:

  1. It will reduce businesses compliance costs,
  2. Reducing collection costs by having the tax administered through banks,
  3. It will increase everyones spending power as the tax rate will be lower than the GST rate but raise the same amount of revenue.

However, I’m not sure I entirely agree, here is why:

Read the rest of this entry »

As may have noticed I find the whole “strategic asset” thing a little ridiculous. If I thought the situation was stupid before, you can imagine how I felt when I read Dr Cullen saying that the law actually states that it must be a “strategic asset” on “sensitive land”. Where sensitive land is “defined in the Act, it borders reserves, or foreshore and seabed, or whatever it may be.” In the words of the good Dr Cullen.

Wow. So AIAL couldn’t be sold because it is on some pretty land despite the fact that if everything goes to hell we could build an airport at Whenuapai. What happens if the Wellington electricity network is run down? Someone else can’t exactly come in and build another network. But apparently it’s not whether the land is the only place the asset could be, i.e is the land “strategic”? which I think the land the power network is on is and the airport isn’t (the motorway from the city doesn’t connect to the airport, it’s does my head in). Instead it is whether the land gives us warm fuzzies?

Read the rest of this entry »

There is talk in the air that the New Zealand government may one day look at “income splitting” as a form of providing tax relief.

Income splitting changes the fundamental economic unit that is taxed from the individual to the household. The most likely form of income splitting we could see in New Zealand would see the gross income of the main income earner and their partner (either through marriage, civil union, or some other definition) aggregated and then split evenly between the two partners before being taxed at the individual tax level. As tax rates increase with income, this would lower the tax liability of all two-person households.

However, is this policy fair, or even sensible?

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Being urged to blog, I shall respond with a counter-knee-jerk against kneejerking by others. is a link to a great DomPost article, one of the most recent in a series that reports on the rising outrage amongst the New Zealand population as petrol prices rise. Does anyone else get the impression that New Zealanders believe they have a human right to cheap petrol? So we’ve constructed whole aspects of our economy and society around cheap petrol. So now we’re feeling the pinch in a whole lot of ways… Well, cry me a river, people! Granted that the effects of a price rise are likely to cut the deepest on low-income families who aren’t those driving Pajeros to the dairy and back, isn’t it about time we started paying something even approaching the true cost of this environmentally disastrous stuff? We’ve no entitlement to be profligate with fossil fuels when their use is threatening our climate system (a.k.a. the thing what makes the earth a liveable planet). If it takes a price rise to wean New Zealanders off the private car and onto walking or – shock, horror! – public transport, then it’s a damn good thing.


In a widely expected move, the RBNZ left the official cash rate unchanged in April. As a result, primary interest turned to the statement.

In the statement the RBNZ admitted that economic activity has weakened more markedly than they expected in March. However, they placed the labour market, government spending, and commodity prices that will keep inflation outcomes elevated.

The most significant change in position came from there weighing of the risks: Read the rest of this entry »

I’ve talked a lot before about hyperbolic discounting, time inconsistency and smoking. Reading a paper by Gruber and Koszegi on the topic yesterday, I came across an interesting little aside.

They point out that, for an addict, smoking in different periods is complementary. That means that taxes to overcome time inconsistency problems are substitutes: if your tax in one period is too low then you can compensate by raising it in another period. The same holds in a spatial sense: if you can’t prevent smoking in the home then this rationale suggests that over-regulating smoking in public places is optimal. It’s an interesting way to look at banning smoking in public places because it is specifically targeting the welfare of the smokers, not considering externalities to third parties.

Tomorrow will see the Reserve Bank make a decision on whether to change the official cash rate from its current level of 8.25%.

Although some commentators believe that the slowing pace of domestic economic activity merits a rate cut, most economists agree that leaving rates unchanged at the moment would be prudent. Here’s why:

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