Matt Nolan

When not to stimulate

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Sorry for linking to the Standard twice in one day, however they have written about a couple of things I wish to touch on recently. In a recent post Irish Bill states that:

One of the things I like about being left wing is how often the best moral decision is also the best economic decision.

Take economic stimulus for example.

Now, on the first point I would state that the best policy decision and the “morally right” decision always match when you are a utilitarian like me. Getting the two to separate in anyway involves making some pretty specific assumptions and what a “economic decision” is and what a “moral decision” is.

Still this isn’t the point I was interested in discussing – I was interested in Irish Bill’s belief that a stimulus package is good policy in the New Zealand environment. In a credit driven slowdown like the one we are facing a stimulus is not the way to fix things as we are not suffering from a “demand deficiency” – or at least not the type that cannot be solved with monetary policy.

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Matt Nolan

Do we want “productivity growth”?

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CPW has requested that we cover the Standard’s coverage of the National-Act coalition agreement, specifically this section:

National/Act agree to close the ‘income gap’ between Australia and NZ by 2025, requiring ‘3% productivity growth per year’. Which is just economic techno-babble. What ‘income gap’ are they talking about? GDP per capita or wages or what? And how would a faster rate of productivity growth close this gap? Anyone who knows what productivity is (the amount of wealth produced in a unit of work) knows that merely increasing productivity doesn’t necessarily boost GDP or wages. GDP = productivity x work done. So, GDP not only depends on productivity it also depends on how many people are in work. And boosting productivity doesn’t lead automatically to higher wages – wages are determined by supply and demand in the labour market, nothing to do with productivity. In fact, productivity grows faster when employment drops because it’s the low quality workers that lose their jobs first and lower quality capital that sits idle first, but wages don’t go up because there is more slack in the labour market.

After reading it we felt that a non-biased explanation of the “economic techno-babble” was in order.

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Matt Nolan

Frogs concern about the Baltic Dry Index

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Over at Frog Blog, Frog discusses the current economic crisis and the magnificent fall in the Baltic Dry index. The sentence that summarised this feeling for me was:

Another part of me says that any indicator that drops 93% in less than six months is reflecting a serious ailment in the global economy

Now Frog is right to be concerned – he is right that this movement indicates a slowdown in global trade, and that any slowdown in global trade will impact on New Zealand by knocking down commodity prices. However, I would like to put the movement in perspective – as a figure such as a “93% drop” may give people the impression that we are in a more dire situation than we actually are.

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Matt Nolan

And back …

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I’m back now, I will attempt to answer the comments that have turned up in posts over the next week.

I’ve noticed that New Zealand elected a National government while I was away – very interesting.  Labour really did get hammered – I think that ridiculous advertising campaign about whether John Key could be trusted backfired.

I also noticed that the other authors wrote a number of very interesting posts.

I have a ton of reading to catch up on now, hopefully I can come out with comments and posts over the next few days.

Matt Nolan

Quote: 9) Robert Solow on Friedman

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Robert Solow:

Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers. (*)

This quote is Solow’s humourus way of reminding us that the study of inflation isn’t the whole purpose of economics.

Matt Nolan

Welfare maximisation as a framework?

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The more I read political blogs in the lead up to the election, the more I realise that media and politicians like to paint issues in a way where they have arbitrary goals – such as “increasing the domestic sale of New Zealand made goods”.

However, there is no reason to presume that these goals should be the purpose of policy – after all we do not know how or why these goals were formed.  The overall goal of policy should be to improve net happiness in society – a broad, and also relatively arbitrary goal.

Now there is no way that people would agree on the set of policies that would do this.  But if we set ourselves up to achieve a certain “goal” then we are implicitly taking into account the costs and benefits of the policies that will achieve this goal.  In current media and political analysis the focus appears to be on the “good” of a policy or the “bad”, which is fine.  However, they don’t directly try to weigh the two before making a conclusion deciding to either go with one or the other.  This is irritating because it is the weighting of costs and benefits that is the primary purpose of the political party – which implies that the functioning of political parties and the media is not transperant.

Ultimately, it is important to remember that whatever party is in power will have certain value judgments surrounding the weight of these costs and benefits, which will be revealed by the way they discuss certain policies.  We cannot trust a single political party or media organisation to give us these weights and as a result the “goals” that they focus on are misnomers – reducing carbon emissions has a cost, getting people to buy domestic products has a cost, there is no free lunch.