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:

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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?

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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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You probably all remember the shady tax deal that Transpower did a while ago whereby they sold the South Island Grid to a US bank who kindly leased it back to Transpower for 100 years.

Well it appears that the credit crunch is hitting Wachovia (said US bank) pretty hard which has called into question the future ownership of the grid. Some people fear that the grid could be used to settle Wachovia’s debts.

Now I don’t know about you, but I’m pretty worried about some greedy creditors overseas either

A) Pulling up the power lines and selling them

B) Being even greedier then our current owners (a greedy bank present)

How do we solve this dilemma and protect our “strategic” asset? Well if you believed that A) or B) were a problem you would nationalize the grid! That will certainly help us attract investment into the country.

At the end of the day, it doesn’t really matter who owns it, Transpower will continue to run it. The assets have little use outside New Zealand (a sunk asset in economic terminology) and thus any other owner would have little option but to also lease the asset to Transpower.

It would be funny if the government nationalized it though!


An excellent, and often forgotten, point in favour of limiting our response to climate change is the opportunity cost of reducing carbon emissions. Opponents of a policy response often point to the monetary cost to the developed world. Proponents reply that you can’t put a monetary cost on saving the planet. As economists we should always try to think about things in real rather than nominal terms, so what is the real opportunity cost of climate change policy? It could be investment in the developing world, reducing the number of people living in poverty or controlling the African AIDS epidemic.

Are the costs of limited climate change enough to persuade you to sacrifice the lives of so many who will die if the funds that could be used to save them are spent combating global warming? Read the rest of this entry »

Yesterday we had the dual announcements of both Fisher and Paykel and ANZ moving work overseas.

The Standard has taken issue with this activity. Particularly, two posts at the Standard lamented the “exploitation” of foreign workers and stated that consumers should stand up to protect domestic jobs.

On a separate note we have seen the closure of a Dunedin knitwear company at the same time, while the D&B payment survey shows that manufacturers are taking a long time to pay their bills, taking 53.6 days on average (can only find old one 😛 ):

What do these stories have in common other than the sad fact of job losses? What do these stories tell us about the New Zealand economy?

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I went to a debate about climate change a few days ago and, uncharacteristically, decided to take notes of my thoughts throughout the talk. In order that they not be wasted I’ve decided to do a series of posts on some of the interesting points that came up in the course of the seminar. Today’s topic is whether it would be less costly to delay doing something about climate change. Read the rest of this entry »

Why is everyone acting so surprised about the fact that biofuel regulation will (and has) led to higher food prices? We said it would in August (well to be fair, Keith Woodford from Lincoln University said it before us, and other people were saying it before that 😉 ).

However, unlike some commentators, we do not believe that the fact that world food prices are rising should impact our decision on whether to make biofuels mandatory (something I don’t agree with), as NZ’s demand for biofuels will be so small that it won’t have an impact on the world price for food.

Also there are some unintended benefits for NZ from the mandatory regulations in the US and Europe. Corn etc has become more expensive, making it more costly for foreign dairy farmers to produce milk. This is part of the reason that milk spot prices have doubled over the last year – injecting a lot of money into the NZ economy.

On that note, I want to complain about this: (h.t. Kiwiblog)

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So we have been talking about asset sales (or the blocking of) in relation to Auckland airport a fair amount lately. As you may or may not have picked up I don’t really have a problem with the idea as the assets in question were already owned by investors and nothing bad had happened. We are talking about two profit maximizing investors exchanging ownership of an asset; they have the same incentives to make money regardless of whether they live here or overseas. We aren’t talking about privatization where the government is selling something to private investors where the incentives between the two parties could arguably be quite different (profit maximization vs. welfare maximization) although they often coincide. That however is a different issue.

I was a bit astounded to read this morning that aparantly the government is unlikely to block the sale of part of our electricity distribution network but not an airport. Not because I have a problem with the sale (I’m perfectly comfortable with it) , more that I think if you apply the same incorrect logic that blocked the AIAL sale, you should be more worried about electricity lines.

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It is well known that the default option for a choice hugely influences the outcome of peoples’ decisions. Governments exploit this regularly by, for instance, using opt-out rather than opt-in schemes for pension plans. The idea here is to encourage people to choose the ‘right’ thing without actually constraining their decisions making in any way. People tend to be comfortable with an arbitrary choice of default option for a new scheme. For existing schemes, a decision to change the default option from the status quo might meet with considerable opposition. However, using the power of the default option to influence peoples’ choices could potentially have a huge impact on problems that our society currently faces. Read the rest of this entry »

WIth inflation heading far outside the Reserve Bank’s target band both Kiwiblog and Kiwiblogblog have had a little to say about inflation targeting.

David Farrar at Kiwiblog states that inflation outside the range is bad, and in fact our relevant target band should be 0-2%. He also states that we can act like the target is truly the point at the middle of the band – ergo we currently have a target of 2% (in the 1%-3% band). David then finishes by saying that current interest rates will have to stay high – something that will be a concern to people.

Wat Tyler (a good historical reference of a left wing blog may I add) disagrees with this way of looking at the target, states that interest rates were higher in the 90’s and so should not be such a concern, and says that a little breakout from the inflation target doesn’t matter – as long as we keep inflation in single digits.

Both sides have points – lets try to dig a little deeper and figure out what my opinion is 😉

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