Matt Nolan

Fed cuts rates to 3.0%, GDP growth poor

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As the market expected the Fed cut its Federal Funds rate to 3.0% (down 50 basis points), a full 125 basis points lower than it was at the last meeting.  In the accompanying statement they touched on all the issues that they have previously complained about:  Weak housing market, softening labour market, and the erratic credit market.  The main issue for the Fed appears to be liquidity, as the idea of a financial accelerator comes into play.

They did also mention inflation – they said that they expect it to moderate.  However, any upside shocks on the inflation front could cause concern for the Fed.

On the GDP side the market received a downside surprise, with a growth estimate for the December quarter of 0.6% (this is equivalent to approximately 0.15% quarterly, seasonally adjusted growth).  A poor turnout for residential investment and a strong de-stocking in inventories were the main driver of this easing in growth.  A good description of the data is given by Econbrowser.

What does this mean for New Zealand?  Well our dollar jumped half a cent against the US$ as the yield gap rose, we are now pushing $0.79US again.  The market didn’t seem terribly phased by the GDP figure, given underlying ‘strength’ in consumption and exports.  As a result, commodity prices should hold up at least a little longer 😉

Will Taylor

Kiwisaver and Income Equality: Must not have checked my mailbox…..

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David Farrar links to a Herald article on a report that came out of Waikato University’s management school saying that Kiwisaver is going to increase income inequality.

Their policy analysis that rich people will restructure their activities to get tax benefits in a way that poor people cannot seams relatively sensible. I don’t claim to know anything about the the tax implications of Kiwisaver so I’m willing to trust them on that. This isn’t the only way that rich people can take advantage of the tax system in NZ. Last time I checked to top personal tax rate in NZ was much higher than the company tax rate, and businesses get gst back which gives people the incentive to structure as much under their company as they can. Incentives are king, this kind of behavior is nothing new.

What does bother me about this article is that they conclude that Kiwisaver has not “inspired new saving but rather a “reshuffling” of existing savings” based upon 598 completed mail surveys they sent out. Read more

Matt Nolan

A world scared of recession

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I was just looking at the economics chat meter at 26 econ and noticed this interesting graph:
recession.png

The graph shows the frequency of use of the word ‘recession’ in blog posts since the 2nd of August – a few days after the subprime mortgage market woes began to drag on market confidence.  January has been a ripper of a month for recession talk, with the US Fed cutting rates in a move that smells of panic, and the US government attempting to push through ‘stimulatory packages’.

The world seems scared of recession, should New Zealand be?

jamesz

Have Radiohead shown us the future of music?

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As everyone knows, Radiohead recently released their album ‘In Rainbows’ online for a nominal sum. It was suggested to me today that perhaps that is the future of the music industry and record labels will soon be obsolete. I agree that a release similar to Radiohead’s could be a good move for some groups, but I don’t think it will signal the end of labels as we know them.

I like Radiohead’s strategy because it shows some smart third degree price discrimination (although I think the internet price could have been higher). Read more

Matt Nolan

Discretion vs Rule: The eatery edition

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What do the Reserve Bank and eateries have in common? Both implement rule based policies instead of discretionary policies and both suffer criticism from their clientèle for doing so even though it is in the clients ultimate interest.

I noticed this today when I went to get some food for lunch. A man in front of me was trying to get cash out, when there is a sign that says “no cash out” at the counter. The man was irritated by this rule, he wanted cash and there was cash in the till. The service person tried to explain to him that if they let people get cash out, then they ran out of change in the counter, which causes delays later in the day – furthermore, if they give him cash they run the chance that other people may begin expecting that they can get cash out, and employees would feel more obliged to. As there was a cash machine just outside, the cost of getting the cash somewhere else was very low for the man, however the delays later in the day would have been costly for both the firm and the consumers involved. In this case, the rule improved the social outcome – any deviation from this rule may change peoples beliefs and lead to a case where most people are worse off.

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Matt Nolan

Ignoring costs and misrepresentation – People’s attitude to economists

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One thing that gets to me is the fact that people from both sides of the political spectrum love to avoid costs. As economists pride themselves in discussing the opportunity cost associated with any given policy or action, we end up being attacked by both sides (Update:  Including psychologists it seems.  Dang I thought they were the one social science that understood us 🙁 )

However, the way both sides attack economists is different, equally irritating but different.

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