Will Taylor

The Greens understand economics

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Or so Russel Norman said when asked by Paul Henry earlier this week what the most common misconception about the Greens is. What do you think? I’m going to try a poll for the first time ever on tvhe, hopefully it works:)

I somehow stumbeled across this article from the greens (don’t ask me how..) which I think illustrates their understanding of economics

http://www.greens.org.nz/node/20081

I’ll be honest and admit I stopped reading the article after the paragraph i’m about to reproduce so I’m open to accusations of trolling, but this was little gem

“Reducing saving by cutting KiwiSaver is the same as increasing debt. It won’t show on the Government’s balance sheet, because Key has swapped Government debt for private debt. Lower savings will show up on households’ balance sheets as increased private debt, which is already too high,” Ms Fitzsimons says.

Two points here:

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Matt Nolan

Does inflation targeting encourage borrowing?

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That is the view put forward on the Rates Blog by Neville Bennett. It is also a view that Berl has enjoyed some airtime with. It is also, in part nonsense from a bunch of very smart people. Lets flesh it out a bit.

The quote that captures the essence of the argument (and the one that I least disagree with):

Its high Interest rates, like NZ’s, encouraged the borrowing of foreign currency.

In part this is could be true – if the Reserve Bank can only control the domestic interest rate then the relative “price” of domestic credit is higher, so banks will substitute to foreign credit. Very good. However, although this initially sounds bad or maybe scary, this factor by itself ignores ALOT about how inflation targeting impacts on the economy. It only tells us that banks MAY source a greater proportion of credit overseas – not more credit.

Furthermore, it gives the impression (which appears to have at least been implied here, and has been fully stated by Berl) that higher interest rates lead to more domestic borrowing. This my friends is complete nonsense. Let me wave my economics wand and show you why 😉

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goonix

Optimal tax theory and ACT’s taxation policy

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Yesterday, the ACT party released their tax policy (further discussion also over at Kiwiblog)

Some key points from ACT’s taxation policy include:

  1. restricting future increases in Government expenditure to inflation and population growth
  2. eventual personal tax rates of 12.5% up to $20,000 and 15% above $20,000
  3. eventual company tax rate of 15%
  4. eventual GST rate of 10%

Tax distorts behaviour. The concept of the ‘excess burden of taxation’ is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. Distortions occur because people or firms change their behaviour in order to reduce the amount of tax they must pay, which results in deadweight loss from taxation.

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Matt Nolan

Growth and resources: Cleaning up a fallacy

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Just quickly, I have to correct this statement by FrogBlog:

In other words if we continue to grow at 3 percent per year every year, as economists would have us do, in 100 years time we will be using and consuming 19 times more than we currently do

No, no we wouldn’t. Remember a little while ago I wrote about technology.

  1. It allows us to create more output with the same input of the resource,
  2. It allows us to access more of the input,
  3. It allows us to speed up the process of creating output from input,
  4. It creates new outputs that can be created with the input,
  5. It creates substitutes for the input.

As a result, even if we assume the worst case scenario that we cannot substitute and that there is no new technology we can discover that will get us access to more resources, technology can help by allowing us to make more with the same level of inputs. Economists target a level of “growth” (when economists have to talk about growth – rather than societies welfare) that they feel relates to growth in resources (such as population) and technology – this does not seem like an unsustainable goal to me.

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Matt Nolan

No emergency cut was the right choice

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I was surprised at the time, but not doing an emergency cut appears to have been the right choice – go RBNZ 😉

I get this impression from here:

Source (NBNZ)

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Matt Nolan

Housing shortage

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Following on from this mornings post on house prices, I thought I should touch on an article in the press today, about an upcoming housing shortage.

I’ll be honest here, terms like “housing shortage” and “over-supply” annoy me a bit – as what people are trying to say is that there are too many (or too few) houses to support the current price in equilibrium.

Now, at the moment “too few” houses are being built given what people perceive the equilibrium price to be. This price depends on the population inflow, and average number of people per dwelling, and the opportunity cost of the land.

I agree with this statement – house building has fallen way below sustainable rates. Read more