Matt Nolan

Biofuel regulation and price

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The New Zealand governments biofuel regulation has just come back from select committee. The Hive makes the excellent point that some of the changes to the bill may breach WTO rules. However, my focus here will be on the biofuel regulations impact on prices.

There has been a lot of talk about how mandatory biofuel sales will impact on prices, ranging from a 6c/lt increase to a 4c/lt decrease in prices (*).

Now the first thing to ask when looking at the biofuel regulation and prices is, how will it impact on the fuel companies “marginal cost”. The fuel company will set the price such that it makes the highest profit it can – as a result they will want to set marginal cost (the cost of selling one more unit) equal to the marginal revenue they receive (the return from selling one more). As marginal revenue is falling as we decrease the price there will be some point where they are equal – so the question remains, how could this impact on marginal cost?

I think the answer is that it doesn’t, the marginal cost of selling a litre of petrol will still be the same. Sure having to install a bunch of new infrastructure may be expensive, but this is an increase in fixed costs – the firm will have no incentive to pass this on to consumers, as it should be setting prices at a level that maximises profit.

However, this answer ignores a bunch of extremely important points. Read more

Matt Nolan

GDP preview March 2008

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March quarter GDP numbers are out on Friday. Westpac has a good preview of the upcoming GDP numbers here. They, the Bank, and the market are picking a 0.3% fall in quarterly GDP over the March quarter.

Remember, GDP=C+I+G+X-M (consumption + investment + government spending + exports – imports). We “know” that growth(X-M)<0 and growth(C)<0. With benefit spending falling and limited policy initiatives over the March quarter growth(G)=small if not negative. Also with residential and non-residential wpip coming in negative it appears that growth(I)<0. This is enough to give us a pretty negative result.

However, Investment may surprise if stock levels have risen significantly. For example, the Tui oilfields produced a bunch of oil of March, but the timing of Easter made it difficult for them to ship the stuff out – knocking down exports (X) but potentially leading to growth in stocks.

Update:  For some reason I forgot to mention the downside.  Given how weak partial indicators have been, a fall of 0.6% could be on the cards – however, a bigger fall than that would concern markets.  Note that we had a 1% lift in December, so a 1% fall would put us back to where we were in September (in seasonally adjusted terms).

What do you guys think – will we see a negative quarter, will we see another one over June?

Matt Nolan

In defense of Ricardian equivalence – sort of

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On his blog, Dr Mankiw titled a post “so much for Ricardian equivalence” after noticing that US retail recovered following the government rebates. This off the cuff statement comes from the fact that the government rebate also had no reduction in the long-term level of spending, and so “in theory” consumers will have saved all the tax rebate, realising that they will have to pay this tax later anyway.

The excellent division of labour blog then takes this claim to task stating that the income tax rebate mainly went to low-middle class families, causing a common pool problem with the income tax – as the rebate is temporary, but it is not clear what form the future funding of government spending would take (although I’m not sure if this is actually a common pool problem, it just seems to be to do with giving a progressive rebate and then placing the future spending burden evenly across society, effectively increasing the net tax income of the poor who are liquidity constrained – as long as the amount the poor spends does not impact on the future need for tax income).

However, I don’t see why either side has to be wrong. Read more

Matt Nolan

Discussion on how to screw up a terms of trade increase II

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As promised, I will now discuss Queen Bee’s fear that the Emissions trading scheme will limit our ability to take advantage of the wealth gains New Zealand will get from high food prices.

First we should accept that there is a liability we have to pay. If anyone wants to comment saying we should just not pay our Kyoto Liability, do it somewhere else (If it makes you feel better, we will assume that the world will punish us by more than the cost of the scheme if we drop out). So given that we are looking at the situation where New Zealand has to pay for it, why is there concern around the ETS.

One concern that Queen Bee has, which is of course correct, is that rushing into an emissions trading scheme without thinking about the issues surrounding it is a mistake, but is that what we are doing. Compared to other polices the ETS has had a ton of work done around it, general equilibrium models, real options analysis of forestry stocks, all sorts of stuff. Some of the technical issues surrounding the measurement of liabilities need to be cleaned up, but in the economic sense I’m pretty happy with where we are sitting.

The feeling that we haven’t properly costed the ETS stems from the NZIER GE model on an ETS (something we discuss here). Read more

Matt Nolan

Discussion on how to screw up a terms of trade increase

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According to Statistics New Zealand our terms of trade is now at its highest point in almost three and a half decades. To some degree this lift appears to be structural, with growing demand for protein goods from Asia and the increasing prevalence of biofuels two of the main factors driving up prices permanently.

However, Berl and the Hive have identified what they believe to be the main policy factors that could mess up our chance to take advantage of this national increase in income (h.t. the Hive). These factors were Inflation targeting (Berl) and the Emissions trading scheme (the Hive).

Here I aim to discuss the Berl argument – the warning is that it might sound a bit technical (more down to my inability to explain myself clearly than anything else 🙂 ). After that I will do another post on the argument that the Hive raised, and maybe even state what I think is a major policy risk 🙂

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Matt Nolan

A technical recession in New Zealand: What’s the big deal?

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Since the March quarter retail numbers have been released it has been apparent that New Zealand was heading down the road of a technical recession (two quarters of negative economic growth – seasonally adjusted). This has led the countries finance minister to once again admit that a technical recession is likely – (something he admittedly said earlier in the year, much to my irritation at the time 😉 ).

By Tom Scott 20/06/08 (link)

The fact that we are so close to a recession that it has gotten the attention of foreign economists – in a sense we could be viewed as world leaders, in so far as we are the first developed country heading towards a technical recession 😉

For some reason or another the idea of a recession scares us. For example Queen Bee at the Hive is stating that it is imperative that the Bank now cuts interest rates. However, in order to understand whether cutting rates is appropriate, we have to ask ourselves – why are we suffering from a recession.

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