jamesz

Bollard on banking

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You’ll have to wait until Matt returns from sick leave to get our perspective on the latest MPS, but I do have a few questions about Alan Bollard’s comments on the banking sector:

The banks needed to weigh their responsibility to their shareholders against their responsibility to the New Zealand economy, [Bollard] said. “We think some pressure on the banks will pay dividends,” he told MPs.

Why is it that Dr Bollard thinks banks should decrease their rates on the basis of ‘social responsibility’? Is he asking private companies to act inefficiently, or is there something else going on? Is he just anxious that banks are not responding as strongly as he would like to monetary policy and trying to muscle them into line? Read more

jamesz

David Bain’s guilt isn’t important

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Is David Bain guilty of murder? No. That’s what a jury of our peers said on far better information than we now have. Did he kill people? Possibly. Does it matter? No.

Our justice system is designed to acquit people when we cannot be sure of their guilt. In its design there is an implicit judgment that errors of wrongful conviction are worse than errors of incorrect acquittal. Let’s think about that judgment. If you acquit someone who committed an offence then the cost to society is only the cost of their recidivism. Given uncertainty about their guilt, the cost is P(guilty) x P(reoffend) x (damage from reoffending). If you wrongfully convicted someone then the cost is P(not guilty) x (damage from imprisonment).

Suppose P(guilt) > P(not guilty) by a little, so the person is not convicted but we think they probably did it. Given that P(reoffend) is probably ~30%, that means that the damage from re-offending would have to be a lot higher than the damage from imprisonment to make it right to imprison the person. Most murderers do not reoffend by committing another homicide so we can class that outcome as highly unlikely. Given the cost to a person of imprisonment it does not seem unreasonable to make the value judgment that we have implicitly made in the design of our justice system.

On the basis of this approach, the question of whether Bain killed his family is only a curiousity. It has little bearing on whether he should be in jail, since any normal person’s answer to that question is based on a ‘balance of probabilities’ approach. It is commendable that the jury took their responsibilities seriously and did not fall into the trap of going with their gut.

admin

Melissa Maths

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Mt. Albert by election hopeful Melissa Lee managed to fit her foot in her mouth once again, telling a group yesterday that she thinks she is “currently on $2 an hour“.

While her intention was to show that they understood the plight of those on the minimum wage, she only managed to illustrate how far removed she is from the working poor.

Her claim is not only demonstrably false, but wrong by orders of magnitude.

Assuming she was referring to a post-tax income not including any entitlements, her $131,000 salary will net her $89,370 each year, meaning to be on $2 per hour she’d need to work over 44,000 hours each year. If we accept that being a hard-working MP, Ms Lee takes no holidays or weekends, she’d still need to work 180 hours each and every day of the year in order to be paid $2 per hour.

For the record, Melissa Lee’s gross hourly wage is closer to $39 per hour (assuming 4 weeks holiday and a 70-hour working week). This is more than three times the minimum wage.

It’s not just that her maths is bad. By suggesting that her pay was less than minimum wage Melissa Lee shows herself to be profoundly out of touch with what a low paying job really looks like.

Robbie

Matt Nolan

Some issues with GDP

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Recently Peter Cresswell from Not PC asked me if I understood the difference between production and consumption.  I know that consumption is what we value and I know that production is what we do in order to achieve consumption.  As a result, I see production as a means to an end – the costly process we take on in order to get what we want.

This brought to my mind some of the issues we need to discuss when looking at Gross Domestic Product.  GDP is a measure of the production in society over a given period of time.  Real GDP gives us a “volume” measure of production, which tells us the quantity of stuff we make in the arbitary prices of some point in time.

Since we value consumption not production we need to remember:

  1. The lifetime consumption associated with a durable good is recorded all in one period – the period it is purchased.  However, the actual value of such a good remains.  During this recession the sale of motor vehicles has collapsed as people have kept driving their old vehicles, as a result GDP states overstate the loss of “motor vehicle consumption” during the recession.
  2. There are many activities that are not recorded in GDP, but provide satisfaction.  Black market drugs, cleaning your own house, and helping your neighbour move are all examples that spring to mind.
  3. In a small open economy like NZ we have a lot of exports and imports.  Now when the terms of trade increases we make relatively more off our exports (and/or pay less for our imports).  GDP does not capture this directly.  For example, if our TOT increases and we just buy imports with the increase in income GDP is unchanged – however, people are getting to consume more because of higher incomes!
  4. GDP is a “flow” of production – not a stock of produced goods in the economy.  It is what we are adding to the set of already produced goods out their (durable goods).  As a result a BOOST or SLUMP in GDP could be the result of timing – not some brilliant/terrible event.

We all overuse GDP.  It is a useful stat, but it is important to keep in mind what it is actually saying, and what society actually wants, before leaping to policy conclusions.

In the housing example this still leads me to believe that house building has a purpose.  Are there enormous issues in the housing market – yes.  Have many households overexposed themselves to housing as a retirement nestegg – yes.  Has NZ inc “over-invested” in housing by borrowing from overseas – at the moment the data suggests not.

I completely agree with many criticisms out there about the NZ housing market, but saying that the countries terrible debt position is the result of a “housing obsession” seems off the mark – as we don’t appear to have overbuilt.

In reality the data seems to indicate that NZ inc has borrowed to fund a whole bunch of business investment that has turned sour – plant and machinery investment has been through the roof and we haven’t done much with it.  Unfortunate, but C’est la vie.

Matt Nolan

The myth of “over-investment” in housing

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I have just been to a lovely presentation for the NZIER forecasts.  However, an issue was raised which brings me to some slight irritation.  During the Q&A session it was suggested that New Zealand “productivity is struggling” because we invested too much in housing and not in productive assets.

Such a load of tripe.  Here are the two reasons I would say why:

  1. Housing is “productive”.  It produces this thing called “somewhere to live”.  When someone consumes the house they are getting this service.  This is just as much of a service as getting a hair cut – the only difference is that it doesn’t require a labour input to keep it going!
  2. We have been told we have a SHORTAGE of housing.  How can we have invested too much in housing if we have too few houses – this is a contradiction.  And before anyone says “we borrowed to buy houses off each other” lets try to remember that if we buy something off someone else in the country it doesn’t change national debt – it is just a transfer.

There are issues with the housing market.  The tax status is a bit favourable and building costs have been held up by consent issues and industry bottlenecks.  But this doesn’t mean we have over-invested in housing – so lets stop propagating this urban myth aye. Click here to see post relating day trading and learn quick ways of making more money.

Matt Nolan

New Zealand budget 2009

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So, we’ve had the Budget.

The one time that we need a shift in government policy – and nothing happens.

Treasury believes that the size of our economy is fundamentally smaller, that there has been a permanent shock to our income. As a result, spending needs to fall or taxes need to rise – 11 years of operating deficits isn’t good enough. And I’m not sure that S&P will let us get away with it …

I don’t agree with David Farrar when he says:

There’s not much one can argue should be done differently.

As a commitment to cut spending or lift taxes from 2011 would have been the way to go. However, he does give a good summary of what was in the budget.

Update: Miguel noticed that S&P put us back on stable outlook. Story here. Good news and congratulations to the team, but to be honest I have no idea why.  Unless …