Thoughts on the price of milk
This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:
Tyler Cowen and others: Lessons from the New Deal
Excellent article by Tyler Cowen in the New York Times. (ht Economists View, Marginal Revolution).
Paul Walker at Anti-Dismal has also covered this issue heavily (here, here, here, here, here, and here).
Fundamentally, for New Zealand, there appears to be no reason for any change to fiscal policy to help deal with the slowdown – something we have discussed here.
Show me the actual “market failure” – then we can figure out how the government can improve outcomes. If there is no market failure, then government action to “stabilise” the economy will simply make matters worse.
Note: This is different to government actions to try and help cushion the impact of a sharp change in fundamental economic conditions. Although a change in the economic situation may change the optimal allocation of resources, a labour market that allows people to upskill and gives them firm institutions to rely on in the bad times will help to reduce the welfare cost associated with the change. This is subtly, but importantly, different from a simple “fiscal expansion”.
And we wonder why interest rates are rising …
It appears that the UK wants to spend their way out of a recession. The US has a plan too, as does New Zealand, Europe, and Australia. Governments all across the world want to spend their way out of a recession – however, there is only three ways they can get the money together.
- Increase taxes – knocking out any stimulus anyways,
- Borrow,
- Print money.
Assume that monetary policy will act to constrain any excessive “money printing” that will be going on this leaves us with borrowing.
If all the governments in the world want to increase their borrowing, this will increase demand for global credit, which will push up interest rates – won’t it? This will lead to an increase in private savings, and will just move around the allocation of resources rather than creating wealth.
There is no free lunch when it comes to “getting out of a recession” – give me the “market failure” we are facing, then we can talk about improving outcomes!
Forcing savers to help borrowers?
Over at the Standard they discuss one of Lord Keynes’s “real ideas” – namely an international organisation that tries to push savers to spend, by buying the things borrowers save. When I put it this way the idea sounds ridiculous – which it is.
This unusual view comes from a belief that a trade deficit or surplus is a “imbalance” that needs to be “solved” by a benevolent organisation. This is of course rubbish, nations, like individuals, should be able to run trade balances or surpluses based on the preferences of the individuals involved.
Now I haven’t heard this idea before, and if Keynes did come up with it I think it has more to do with the elitist world view of the Cambridge school combined with some foggy mercantilist sentiment than with the practical relevance of such a policy.
“Imbalances” that are caused by market failures are the ones we should solve – not arbitrary imbalances that we have assumed exist because we want to regulate.
Ultimately, there has been a disjoint between risk and return in some areas of society, a problem that has been able to occur because of large information asymmetries across the financial market. Transparency of information and wider education surround risk are the best ways to improve outcomes in the financial market – not arbitrary regulation based on a view that “all countries should run a trade balance”.
Frogs concern about the Baltic Dry Index
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.
The paradox of thrift and demand deficiency
The paradox of thrift is one of the key lessons taught to macroeconomics students during their first undergraduate year.
Fundamentally it states that if everyone in society decides to save more right now, then it reduces consumption, with reduces economic activity and thereby incomes – and as a result it may actually decrease aggregate savings, and it will definitely reduce economic activity.
It is still widely applied, with recent Nobel prize winner Paul Krugman appealing to it in order to explain why the US needs to jump on in and get consumers spending again.
Of course this does not mean the theory is necessarily right. The paradox of thrift does not have a supply side – as long as prices and quantities can adjust to an economic shock this paradox, and the suggestion of government intervention in the face of it, does not hold water. For government intervention to be a possible solution we need a MARKET FAILURE, a market failure that causes a special macro-economic situation called “demand deficiency”. (Note: This is effectively the difference between Say and Keynes).