Matt Nolan

OCR review preview: a surprise cash rate cut in the US

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Tomorrow will see the Reserve Bank decide whether to lift the official cash rate.  Pushing them towards lifting rates will be a high CPI reading (although non-tradables was weaker than expected), the strong inflationary pressures illustrated in NZIERs quarterly survey of business opinion, and the fact that inflation expectations are threatening to become entrenched at high levels.  Possibly preventing them from hiking will be a weakening housing market, the potential for slowing world economic growth, and today’s shock inter-meeting cut by the Fed.

Today’s cut by the Fed is especially important, as it will help put upward pressure on the New Zealand dollar, at a time when it looked like it was easing.  This will, at least in the short term, give the Bank some room to breath in terms of tradable inflation.

Overall, the Reserve Bank seem unlikely to lift rates tomorrow.  However, the market still expects a hawkish tone from the Bank, if they don’t get this expect some renewed downward pressure on the dollar.

jamesz

Intervening against a strawman

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Sometimes, when you read a whole lot of polemic, you end up thinking in black and white terms. It’s nice sometimes to be reminded that ideological conflicts are not as black and white as many combatants would like to paint them. Here on this blog we like to talk about government intervention in markets. Arnold Kling reminds us that not everyone who opposes intervention is a blinkered idealist who thinks that markets are perfect:

There is an old joke about two men who discuss what they would do if they were to encounter a bear in the woods. One of the men says that he would run. The other one says, “You know, you can’t outrun a bear.”

The first man replies, “No, but I can outrun you.”

Similarly when someone says to me that “markets fail,” I say… that government intervention will tend to make matters worse.

If you want to advocate intervention in a market it is not enough to simply point out that there are market failures: you have to show that your intervention will actually improve things. Often, one market failure will create another market to solve the problem. Intervention can only be judged ‘good’ if it is somehow better than the market alternative. Too often you hear people point to the imperfections in one market and use that as a rationale for government involvement. We must strive to be better than that and avoid arguing against strawmen of our own construction.

jamesz

The morality of discounting

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There’s a showdown at Overcoming Bias between Eliezer and Robin over discount rates. Eliezer says,

I’ve never been a fan of the notion that we should (normatively) have a discount rate in our pure preferences – as opposed to a pseudo-discount rate arising from monetary inflation, or from opportunity costs of other investments… If you wouldn’t burn alive 1,226,786,652 people today to save Giordano Bruno from the stake in 1600, then clearly, you do not have a 5%-per-year temporal discount rate in your pure preferences.

While this is music to the ears of environmentalists everywhere, Robin replies,

Very distant future times are ridiculously easy to help via investment. A 2% annual return adds up to a googol (10^100) return over 12,000 years, even if there is only a 1/1000 chance they will exist or receive it.

So if you are not incredibly eager to invest this way to help them, how can you claim to care the tiniest bit about them? How can you think anyone on Earth so cares? And if no one cares the tiniest bit, how can you say it is “moral” to care about them[?]

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Will Taylor

Housing Affordability: A Vicious Cycle

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The Herald has reported on the results of a recent survey which show that New Zealand is now the least affordable place to buy a house in the world. The study reaches this conclusion by examining average wages and house prices.

Given the well documented gap between wages in New Zealand and overseas, the housing bubble and some of the worlds highest interest rates it isn’t really surprising that we have the least affordable houses in the world. The problem is of course exacerbated by the the fact that our Reserve Bank is mandated to control inflation and thus the increase in house prices has caused interest rates to rise: It sucks to buy a house right now!

So we know why houses aren’t affordable, but should we really be the least affordable place in the world to buy a house? It’s not like we are struggling for land to build houses on: We have the population of Sydney spread over roughly 20 times as much land. This is why the authors of the study suggest that freeing up more land on city limits could help solve the problem, something that Don Brash has apparently suggested previously. This seams like a logical solution for a country like New Zealand.

One can only wonder where the government got it’s advice for the Housing Affordability Bill. The Property Council and Master Builders Federation point out that requiring developers to include low cost houses in any new development will just force the developers to subsidize this by increasing the price for the other houses in the development. The best this policy can achieve is a zero sum.

jamesz

Protectionism: it’s instinct

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Steven Landsburg has an opinion piece in the NY Times today in which he extols the benefits of free trade and rails against the protectionists:

Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

This strikes me as a bizarre analogy: how often does a community rally in support of local businesses when Wal-Mart or Woolworths moves in and puts the local dairy out of business? We read about such stories all the time in the newspaper and unsurprisingly so. Read more

jamesz

Expensive tomfoolery

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I’m always told about how bean-counters everywhere like to cut costs, but every now and then something slips through the net. Apparently Japanese researchers are developing a paper airplane to fly from the International Space Station to Earth! As much fun as that sounds, I am baffled as to how they got funding.
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