Matt Nolan

Migrant outflows to Australia, wages, and productivity: What is going on?

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A rising outflow of New Zealander’s to Australia is causing concern amongst a bunch of people. People move away for a number of reasons, as the Department of Labour nicely points out. However, as economists we like to think at the margin. We are not interested in the general reasons that people are leaving New Zealand, in so much as we are interested in the ‘marginal’ factors that are driving people overseas. The non-policy factors mentioned by DOL are constant, the weather will stay warmer, the country will remain as close, and the culture will remain similar. However, the policy factors (e.g wages, taxes) can be changed, and as a result will have an impact on the ‘change’ in migration levels (beyond some sort of trend).

The Standard provides one piece of the puzzle we require in order to control migrant outflows – we need higher wages. However, the solutions they provide may not necessarily be the correct ones. A important marginal factor in the decision on whether to stay and work in NZ, or do so in Australia is the difference in ‘real disposable income’. Ignoring non-wage income for now leaves us with ‘real disposable salary’. Increasing nominal wages may not lead to an increase in real disposable salary if all it does is increase inflation. If we pay everyone more $$$ but don’t increase the number of goods avaliable to buy, then the price of goods will increase and peoples true living standard will not change.

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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?

Matt Nolan

Ten things people will say economists said

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Over at the Big Picture they are discussing how silly the decoupling thesis is (the idea that that world economic growth now functions separately from US economic growth). Near the end they mention ten things that seemingly intelligent people have said, that have turned out to be complete rubbish, namely:

  1. The Yield Curve no longer matters
  2. Earnings at an unusually high % of GDP are sustainable
  3. The Business Cycle has been defeated
  4. Ignore sentiment readings, the population is just upset about Iraq
  5. Real Income gains are irrelevant
  6. Mean reversion no longer applies
  7. Supply side tax cuts pay for themselves
  8. Dow Theory is a quaint antiquity
  9. The (so-called) Fed Model “proves” equities are significantly undervalued
  10. Despite commodity prices, there is no Inflation.

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Matt Nolan

Relative prices and GST

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Over time we have been covering specific issues with how income tax and GST influence economic activity. This post was supposed to describe how an increase in GST with a proportional decrease in a flat income tax would lead to no change in consumer activity. This required the assumption that the incidence of tax on the household in both cases was equal, which will not be true.

Next we discussed the incidence of income tax in this post, which allowed us to say that some of the burden of the tax falls on labour, but some also falls on the firms that employ workers. The next step is to look at the incidence associated with a goods and services tax, and some of the inefficiencies that this issue causes for this tax type. Read more

Matt Nolan

Moral hazard and central banks

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Central banks have felt obliged to intervene in the recent credit crunch, introducing a bunch of liquidity into European and US financial markets. This has led market participants to say that “It helps with the confidence and the feeling that the Fed is going to help out the financial system“, but is this what the central bank should be doing?

Now some might say that putting a bit of liquidity in the system and risking a bit of inflation might be a small price to pay to prevent the ‘collapse’ of the financial sector. However, this is not the only costs associated with Central Bank intervention, we also have the problem of moral hazard.
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Matt Nolan

Will a fiscal stimulus in the US not be inflationary?

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According to Martin Feldstein (hat tip Greg Mankiw):

“Even if the Fed decides that it should not cut rates further at the present time, it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed’s point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money.”

Just because Martin Feldstein is a far, far, better economist then I will ever be does not mean that I have to agree with him, and here’s why.

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