Matt Nolan

Tobin taxes?

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So the Green’s want a Tobin tax do they (ht Frog Blog and Stephen). Ok, so I’m hoping they aren’t justifying it on externality grounds – this leaves us with the conclusion that they must believe that it is the most efficient means available to make a certain level of government income.

They do seem to follow this point of view when they quote from a Guardian article:

Set at a lower level it would raise considerable sums of money. If a levy of just one basis point (one hundreth of 1%) was placed on all currency deals, governments would find themselves with an additional $70bn a year. At a time when they are chucking vast amounts of taxpayers’ money at the banks, that would be a nice little earner, and might help assuage the concerns that the public are going to pay for the folly of financiers.

I find it interesting that they see the money appearing out of thin air – if $70bn of tax is raised, it must come from some value somewhere. This is the same issue I have with people who like the financial transactions tax (furthermore, the assumption that capital/trade flows would not change when you tax them – even a little bit, is silly, as a result this over-estimates the associated revenue).

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Matt Nolan

Inflation breaks the 5% barrier

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Ok, so our pick of 5%pa inflation by September following the Budget was wrong – its even worse at 5.1%. Largest increase since June 1990!

I blame the re-weighting for the difference 😉

Note it will not stay over 5% for long – underlying “true” inflation (stemming from inflation expectations and its impact on the quantity of money) is closer to 3.5%.  Although I would like to point out that non-tradable inflation is horrendous at 4.1%pa – horrendous!

Matt Nolan

Kiwisaver and the current crisis

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How do we think the introduction of Kiwisaver has influenced the current economic environment?

Well, Kiwisaver will have worked through a number of channels but fundamentally, in the short term, it would have propped up savings (note, when I say savings I am talking about PRIVATE savings, not NATIONAL savings) and thereby reduced CONSUMPTION. Where does it increase savings:

  1. It effectively implies a higher tax rate – as money going into Kiwisaver is money that could have been redistributed through the tax system.
  2. By using tax money as a carrot it increases the incentive to save beyond that implied by the market – fundamentally, the government takes your own money and says it will only give it back if you save.

As we are struggling with a crisis of confidence, a short-term decline in consumption is probably not what we needed 😛

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jamesz

The Greens on economics

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There has been a lot of chatter about the Green’s understanding of economics lately, so I thought it might be apropos to have a look at their economic policy, just released. The key points appear to be:

  • Income taxes cut;
  • Taxes on waste, pollution, speculation and scarce resources;
  • Commitment to buying NZ made and Kiwisaver investment in NZ;
  • Only citizens and residents allowed to purchase land.

Let’s start with the good bits. Read more

Matt Nolan

Bank guarantee “here to stay”

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So says Dr Cullen, and I think his description of why is pretty spot on:

it will be difficult in two years to return to a situation where bank deposits were no longer insured by the government

When financial institution base there decision on the fact that this new framework exists, changing the framework would be problematic and painful – making it harder to remove it. Furthermore, as he says, when every other country has a scheme we sort of get stuck having to have one – or else we have to pay a higher premium on our credit (assuming of course that the private sector can’t provide insurance as efficiently – a debatable assumption).

Dr Cullen also points out a major concern that:

excessive amounts of money that could flow into finance companies to chase the guarantee for two years

In that case, why don’t they let the Reserve Bank adjust insurance premiums based on risk – the companies have to show a credit rating anyway, so the better the rating the lower the premiums. At the moment the larger organisations, which also have better credit ratings, are paying MORE for this insurance – it is ridiculous.

As Dr Cullen has identified the problem, why doesn’t he fix it?

Matt Nolan

Baltic Dry Index collapses

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So the Baltic Dry Index (an index that implies what the cost of shipping for exporters will be – in as far as it represents the fees of the people running ships) has collapsed by about 79% so far this year.

As the supply of ships is incredibly inelastic in the short term, this is probably the result of collapsing world commodity demand (although it could be that a whole lot of new ships came online at the same time – unlikely though).

What does this imply for NZ?  Well the index mainly represents shipping of “hard commodities” – so it tells us that demand for those has invariably fallen.  This implies:

  1. Soft commodities may have fallen further,
  2. Growth in Australia will slow – harming our exports,
  3. Shipping costs (especially for our logs and aluminium) have fallen markedly.

The first two factors are a concern – but the third factor is a bonus.  One of the reasons forestry has struggled is that prices have been depressed (no construction in the US!) while shipping costs have been high/shipping has been impossible to get.  Now ships will come here – and cheaply, making it possible for forestry to get back on the game.

As log prices are not likely to fall further – forestry will benefit from this.  Other commodity sellers may have some trouble (depending on what happens to soft commodity prices).