goonix

Obvious perverse incentive of the week award goes to…

/8 Comments/in , , , /by

As rightly pointed out over at Kiwiblog, when you make something free you distort incentives around use of that good or service.

The previous Government introduced a Supergold card, offering concessions and discounts on various goods and services. In all their wisdom, they offer free off-peak travel on certain public transport. One such service was the Fullers Ferry to Waiheke Island.

It has now been reported that pensioners flocking to Waiheke Island have delivered more than $750,000 in Government subsidies to Auckland ferry operator Fullers in the first five months of free travel, with an average of 200 pensioners per day taking in the journey.

Who could possibly have foreseen that response?

Matt Nolan

Raising the drinking age: Not a lifesaver

/8 Comments/in , , , /by

Just saw this article courtesy of Greg Mankiw. In the article the authors talk about the impact of rising the drinking age from 18 to 21 in the US. There were two parts – a voluntary lift in some states, and later on a legislated increase for the whole country.

The key bit for me is this (highlighting by me):

The results are striking. Virtually all the life-saving impact of the MLDA21 comes from the few early-adopting states, not from the larger number that resulted from federal pressure. Further, any life-saving effect in those states that first raised the drinking age was only temporary, occurring largely in the first year or two after switching to the MLDA21.

So this isn’t saying that lifting the drinking age is necessarily a bad idea – but that it isn’t necessarily going to save lives either. In the end only the states which did it voluntarily (where it was more of a community effort) had any impact – and even that was only temporary.
Read more

Matt Nolan

Tourism as low skilled and comparative advantage

/5 Comments/in /by

In an interesting piece on the Rates Blog there is a suggestion that the governments focus on tourism doesn’t make sense because it is a low productivity industry.  In the comments there is a lot of chatter about what industries we should invest in – blah blah blah.

The comments and suggestions all sound a bit like central planning to me though.  Read more

Matt Nolan

Consumer prices – not asset prices

/6 Comments/in , , , , /by

Earlier I mentioned a piece by Steven Gjerstand and Vernon Smith that was a bit harsh on monetarism – as it ignored that the monetarist explanation and a economic readjustment explanation could be complements instead of substitutes.

Now Barry Ritholtz points out another interesting point from the piece – their discussion of the fact that house price growth was effectively taken out of the CPI.  The money quote is:

If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%. With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off.

Let’s discuss.
Read more

Matt Nolan

Why freeze public sector wages?

/16 Comments/in /by

I am not a fan of policies that freeze wages. However, the idea that the government will freeze the wages of public sector doesn’t seem to really be being debated – outside of the seemingly biased view of the public sector union.

Now, this is one of those rare cases where I think the public sector union is right – and everyone else supporting the policy is wrong. Freezing public sector wages is a bad policy. (Disclaimer – I work in the private sector, so this really doesn’t impact on me directly).

Currently we are experiencing a sharp re-adjustment in both the size and composition of our economy. Now, in the medium term we expect to return to some level of economic activity – but there are fundamental adjustments between roles that have to occur. This implies that we need some stuff to change in the labour market.

In the medium term there will be some roles that are more highly valued than they are now and some roles that are less highly valued. As a result, we need wages to adjust such that people will train and move into the more highly valued roles. If we freeze wages we aren’t letting this happen. Inside government there are areas where we need more training and where we need more employees – in other parts of government we have staff we don’t need. If the government could recognise this and change wages accordingly (it would be nice to have some market mechanism to do this) then we ensure that our public sector becomes “more productive”.

Now, the government is always complaining about the productivity of the public sector – but freezing wages will not help to improve this. In fact, it is a step in the wrong direction!

Matt Nolan

March NZIER QSBO: Wowsers

/2 Comments/in /by

Ok, all I can say here is that this is a really bad result.

Everyone knew March was bad, the RBNZ said they expected a bad result, but the net 45% of firms expecting a fall in their own activity is an unconscionably bad result.  I must admit that I was a little surprised.

Now, all economists expect March to be the quarter with the sharpest decline – even before this result.  However, WOW.

One positive for me is that firms expect profitability and productivity to remain low.  This may sound weird – but with cost pressures expected to virtually disappear, firms that are willing to put up with falling productivity and falling profits are firms that aren’t going to lay off as many staff.  When we are only looking one quarter ahead, this is actually sorta good news.

Rates Blog discusses the result more here.