Will Taylor

Fonterra auction to blame for low dairy prices??

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Apparently the Aussies are blaming Fonterra’s Global Dairytrade online auction platform for lowering the price of milk.

Interesting. If the auction is simply reflecting the true value of milk then the I feel no sympathy. This quote from the manager of the auction system sums up it’s purpose

Fonterra’s global trade managing director Kelvin Wickham said the auction was all about “the international market getting a transparent price” and all global dairytrade was doing was “making it more transparent more quickly”.

As an economist that is music to my ears. On the other hand here’s the quote from the Aussies

“Given things are bleak with the economic outlook, people are holding back on purchasing to see what happens with the auction,” Ms Bills said.

“Mostly, the price doesn’t recover. It is fine to want to have a transparent price system, but why not open at the closing price? If you put a price out there for something in an auction, people see it as a reserve.

“Buyers are waiting to see the price from the auction before they make their purchase.”

So basically they want the auction setup so that it props up the price of milk, can’t say I really have much sympathy for that view….

Will Taylor

PPPs? Yes, please…..maybe

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The Standard don’t see the point in them and Fletcher Building would  rather have a standard construction contract that doesn’t transfer  risk to them and doesn’t require them to incur costs setting the arrangement up.

I’m FAR from an expert on the issue of PPPs, and there may be some valid concerns using them for roads in New Zealand. However it is important to recognize that PPPs can take many forms with different levels and types of risk shared between the two parties. One of the key purposes of a PPP is to let the party that can best manage  each source of risk bear it. if designed properly this doesn’t sound like a bad idea, if they aren’t designed properly it’s a bad idea!

Anyways, sorry I can’t provide more definitive commentary about this, if anyone wants to learn more about PPPs and there purpose/benefits I recommend checking out this report from Deloitte. It’s a couple years old now and I haven’t read it in a while so can’t really comment on its contents, but I remember it being a good coverage:)

Matt Nolan

British use the environment to promote protectionism

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So the British are increasing the international departure tax, and stating that it is an “externality tax”.  What spectacularly wrong-headed logic.

The externality they are talking about is “carbon emissions” – now as long as they tax the fuel that airlines use the externality is accounted for, as the carbon emissions stem from fuel use.  Adding a tax on top of an efficient externality tax is not efficient.

The real reason the British government is doing this is straight out protectionism – they believe that the impact on “outflows” from Britain will exceed the impact on tourist “inflows”, a factor that would improve net exports and help to “protect” the retail industry in Britain.  Beyond this, the increase in tax is also a simple tax grab – one that taxes tourist industries the rest of the world over.

No wonder we in New Zealand are unhappy (*, *)

Matt Nolan

Inflation expectations beginning to moderate?

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So the survey of inflation expectations are out and … median two-year ahead inflation expectations have surrendered 0.3 percentage points to lie at 2.7%. This takes this measure back to its March 2008 level.

This is ok, however the big kicker for me is the average hourly earnings outlook, with expectations of hourly wage growth over the next year falling from 3.9% to 3.0% – the lowest level since June 2004! If this translates into an actual decline in wage growth then we know inflationary pressures are coming off the boil.

This will make the RBNZ feel a bit better about cutting. Caveats on any cutting behaviour may be discussed later in the day 😉

Matt Nolan

How does a fiscal boost work?

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This is an important question, given that we are in a situation where governments around the world are looking to loosen fiscal policy. Tyler Cowen succinctly lists the four (five) ways that fiscal policy influences the economic situation – note that this ignores issues of the quality or distribution of spending. These are:

  1. Generate some investments which are worthwhile on their own terms,
  2. If the broader monetary aggregates are falling, because of either a credit crunch or a liquidity trap, a fiscal boost can keep aggregate demand from deteriorating,
  3. fiscal boost can provide a beneficial “sunspot” in a multiple equilibrium model, thereby moving everyone to the higher output equilibrium,
  4. If spending needs to fall, a fiscal boost can postpone this fall,
  5. The economy needs a boost to aggregate demand and since monetary policy isn’t working any more, fiscal policy has to step in (which he notes requires 2 and 4 anyway).

So what do I have to add – only a little bit.

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Matt Nolan

Administration things I would like to see from National

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Labour did some things that very much improved the accessibility of information about the New Zealand economy – namely make information from Statistics New Zealand free at Infoshare!

However, the removal of health sector productivity statistics was a concern. This concern appeared again in the back of my head when hearing about National’s plans for health.

Now that National is in, there are a couple of major analytical releases I would like them to produce (that they should be able to make without too much hassle):

  1. Productivity measures for different government sectors,
  2. A Treasury created measure for analysing the quality of government spending (as suggested by ANZ),
  3. A independent board/organisation that creates a measure of the quality of government spending.

There has been a lot of talk about taxes, however the purpose of taxes is merely to raise revenue for some target level of government spending. We have been unable to discuss whether the spending is appropriate (especially given the cost of raising the tax revenue) because the benefit of the spending has not been transparent.

Adding transparency here would increase the quality of policy – and would allow the democratic process to properly represent how much government spending society is willing to pay for.