Matt Nolan

Why the Fed shouldn’t worry about inflation – but should we?

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Complaining about inflation now may seem to be similar to the captain of a boat complaining about pushing the engine too hard when the ship is sinking – but I’m going to do it anyway 😉

Bank in September Fred Mishkin wrote an article for the Wall Street Journal (ht Economists View and Greg Mankiw).  In it he mentions that the concern should not lie with headline annual growth in the consumer price index, but a more generalised and persistent increase in the price level.  Looking at core inflation, nominal wage growth, and the such in the US indicates that they are not truly suffering from an inflation problem.

Heading into the recent crisis this still seemed to be the case.  The October NBNZ Business confidence survey (which I will discuss tomorrow) still had elevated inflationary pressure, and I suspect the labour market data we have seen today and back on Monday (note that I haven’t seen this data when I wrote this) would indicate a strong inflationary undercurrent.

The truth is, even with a drastic slowdown in domestic economic activity, there is the risk that some form of underlying inflation mark-up is occurring during the wage negotations of the firm and the price setting behaviour of other firms.  I think this is evident in changing marketing strategies – with a “fixed price contract” now seen as an amazingly special deal by electricity retailers.  Purging this from the economic environment is difficult and costly – and is the ultimate cost of loose policy over the past six years.  If our recession is deeper than that experienced by the rest of the world, we can probably put it down to a historical failure by our central authorities.

The US may be able to relax about inflation – but we still can’t 🙁

Matt Nolan

September quarter HLFS: Whats with this unemployment?

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What happened in the HLFS – let me make some guesses.

So I’m guessing that quarterly employment declined this quarter – and pretty sharply, following last quarters large increase. This series is truly jumpy as hell – did the participation rate fall as well 😛

And let me guess, all the banks are saying that the fall in the participation rate is due to the “discouraged work effect” – truly they make me giggle 😀

Still, in all seriousness the increase in the unemployment rate is a true indication of where things are going – so what was it, how far over 4% has unemployment gone?

This is the series I would keep an eye on (although with annual average growth in employment – it is a slow moving indicator but less jumpy). If the unemployment rate has jumped by over half a percent (which I now expect) then this is definite sign that the labour market is softening.

Keep in mind though that the “natural” unemployment rate in NZ is 5% – as long as we are below that the labour market is still tight. I wonder how long till we cross it – March?

Note: If the unemployment rate does not rise (or falls) this is a VERY strong result – implying that our economy was on a strongish footing going into the recent credit crisis.

Will Taylor

Com Com investigating mobile termination rates

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For those of you who don’t subscribe to the Commerce Commission’s media releases, they have just announced that they are investigating mobile termination rates. (Reasons here). In simple terms, the termination rate is what vodafone charges telecom every time a telecom customer calls a vodafone customer and vice-versa. The CC has decided that the rates are probably too high so they have launched an investigation.

What is particularly interesting is that they are including Fixed to mobile (FTM) as well as Mobile to mobile (MTM) in this investigation. This is interesting because they already investigated FTM back in 2004 (see the ridiculous amount of submissions that occur ed during that investigation here). So pretty much everything is on the plate this time round. It will be interesting to see what happens:)

Agnitio

Matt Nolan

Conception of economics: Comment from Andrew W

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In the same post that Dr Doyle commented on, Andrew W linked to an article which he wanted us to discuss here (article is here).

As a critique of applied economics I accept the article (as there is definitely issues associated with the desimenation of economic tools into policy making), as a critique of economic science the article is horrendously off the mark.

One of the main issues I have with the article is the way it view economics vs physics – it is far too simplistic.  For example, the article states:

But statistical regularities should emerge in the behaviour of large populations, just as the law of ideal gases emerges from the chaotic motion of individual molecules

That is just the thing – the behaviour of individuals is not equivalent to chaotic motion (although I am sure many people would disagree 😛 ) because individuals make choices.  This additional element makes the whole study of macroeconomics (which I believe they are attempting the criticise) that much more difficult.

The “axioms” that the article criticises are all assumptions about this choice – factors that economists decided over 100 years ago that they would have to assume because they CANNOT observe choices in a sufficient fashion.  Of course, since then empirical and observational techniques have improved such that “the observation of the process of choice” is becoming avaliable.  As a result, these axioms will be (and in fact are being) challenged and changed.

I think it would have been good for the article to look at work on the methodology of economics before assuming that they could just pull out the critique of 17th century science and apply it directly here.

Will Taylor

Keeping it Kiwi/Asset sales

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I’m certainly glad we are keeping it Kiwi….

http://www.stuff.co.nz/4750128a13.html

At the end of the day, I feel that people don’t analyse government asset purchases or sales properly. People get fired up about asset sales and make arguments like “National sold our state assets too cheap” to support the argument that asset sales in general are a bad idea (this argument is a personal pet hate of mine). Similarly I can see people will latch on to this announcement about kiwi rail and use it as an argument that the state shouldn’t own  these assets.

People need to seperate the poor implementation of an idea from the idea itself.

Agnitio

Will Taylor

LEANZ Auckland November Seminar

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Next Law and Economics Association of New Zealand (LEANZ) seminar in Auckland:

Using the law as a last resort in policy making: challenging the ‘Working for Families’ redistributive package (Child Poverty Action Group (CPAG) v the Attorney General, 2008)

Speakers: Dr Susan St John, University of Auckland Business School

Date: Thursday 13 November 2008

Venue: Buddle Findlay, Level 18, PriceWaterhouseCoopers Tower, 188 Quay Street, Auckland

Time: 5.15 pm for 5.30 pm start, followed by refreshments

RSVP and topic details below

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