Matt Nolan

An “ecosystem” of relative prices

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I just noticed an article on the industrial research limited site discussing how NZ needs to think.  Money quote is:

What I take from that is we need to think laterally, not literally. When we think about investing in particular sectors, we must realise we will need capabilities that aren’t necessarily obvious to us. We just won’t know what types of knowledge we are going to need to build particular parts of our economy.

The interesting thing is that many economists agree with some of what the author mentions in their piece, in terms of discussing scale and the inter-relationships of firms – but from this loose description there is no clear role for policy, or understanding.

In truth, we need to understand the idea behind inter-relationships in a way consistent with methodological individualism.  Then given that theory, we need to go back to data truly quantify what is going on – given the framework that this theory provides.  From there, we can try to decipher if policy can help of not.

And any such theory relies strong on relative prices – contrary to the inference the article appears to be making, we do not have a command and control economy, and the government is not trying to work out the allocation of resources.  Relative prices, both implicit and explicit, are the driving force of any description of what is going on in New Zealand – and our starting point, and final discussion in terms of policy needs to rely on these.

Think about it, we are told how these firms rely on each other, how they add value to each other, and in each others markets.  This doesn’t make an “externality” in the traditional sense, it just tells us that we have firms whose markets are interconnected – and as a result, there will be some implicit contracts between these firms (and implicit prices) that help to share the surplus of their trade.  In an extreme case, when the benefit is enough, and the outside contracting is weak enough, these firms would horizontally (or vertically depending on the relationship) integrate.

The fact that firms are inter-related doesn’t suddenly provide a role for government.  The fact that scale matters for output does not mean that FORCING an increase in the population distribution will increase welfare.

Update:  Bill discussed this here.  And Eric.  How did I miss it when I read both of those blogs daily … I blame my new Kindle for making me focus on Mill instead of my blog reading.

Sidenote:  I have to mention this statement:

Because New Zealand doesn’t have a truly large city by international standards, we must work harder at innovation to compensate for our economic geography and collaborate as if we were a city of four million people.

I have tried to be kind in the rest of the piece, but I have to admit that this statement is blatantly ridiculous.

Two things:

  1. The benefits of population density in large cities come very much from population density – saying we are a city doesn’t do anything to change this.
  2. More importantly, saying we need to “innovate more” because of our disadvantages doesn’t necessarily make sense – it depends on the marginal benefit of innovation relative to the cost.  If our distance from market reduces the marginal benefit from innovation, then this statement isn’t just wrong – its harmful if its followed through with.

I love to hear scientists describe the potentials for technology, and discuss the production possibilities they face.  But they really should get an economist to join the party when it comes to discussing issues of allocation – given that this is the economists area of expertise.

Matt Nolan

It’s a hard road, trying to figure out what economists love

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Personally, I love movies about epic historical dramas, or potatoes – but this is hardly representative of economists.

And when it comes to economics two things hold true:

  1. Economists actually agree about a lot more things than people realise.
  2. Many of the things people think we agree upon we don’t.

With this in mind I thought I’d have a quick look at the policies economists love that were put up over on Kiwiblog.

The third one states that economists would love if corporate tax was taken away – because it really is double taxation on an income stream, and an inefficient form of redistribution.  This is true.

However, I wouldn’t say that economists widely agree that we should set corporate taxes at zero – especially since there is some debate about whether we should be taxing investment/interest income.  There is an agreement that we should treat all investment classes the same, but less of a consensus about the level of taxation then there used to be.

On that note comes point four.  Yes, economists generally prefer consumption taxes to incomes taxes – but the way to view this is as a cut in the tax on interest income … as a tax on labour income and consumption are equivalent, implying that an income tax in of itself is a tax on labour and interest income.

This comment in particular is disturbing:

Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

A tax on income and a tax on consumption both reduce real after-tax income – by taxing one instead of the other we don’t “magically” discourage different things … this is confusing partial equilibrium logic with a more general view of the economy which is appropriate for discussing tax.

On top of this, a switch from income to GST taxes is an immediate transfer from savers to borrowers – is this fair?

Five is tax carbon because it’s “bad”.  But is this really the reason?  I was under the impression that in a small open economy like NZ we tax carbon due to raise funds for a potential Kyoto liability – as any “externality tax from global warming” would not do anything because we are so small.  Hence why there needs to be international co-operation.

Six is legalise weed.  There is wide agreement here that something should be done, and a general swing towards legalisation and treatment of addicts as suffering from a mental health issue rather than a criminal one.  There are so many medical benefits that can be obtained from cannabis and to get more information about strawberry cough weed you can check this out. Legalising canabis can be beneficial for many people but I’m pretty sure we could also find many economists that feel that legalising may provide an inappropriate signal that could lead to worse outcomes – after all, it is well known that when you explicitly give something a price people do treat it differently.

Note:  I am pointing out there are issues here – even though many of these policies are central to my own view of what is appropriate.  See, I can attempt to be objective 😉

Matt Nolan

The tyranny of New Zealand’s middle classes

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I expect a lot of abuse for this, so don’t feel that you have to hold back.  Here is my Dom post article (that was supposed to be) from the prior weekend.  It kicks off as follows:

The statement that we are worse off than we were is false, and society’s willingness to believe it is a clear example of the unwarranted victim mentality taken on by the middle classes in New Zealand. In truth, the middle class is better off than it ever has been – due to a mix of economic growth, and by extracting resources from the rich and poor of New Zealand.

Personally, I 100% agree with myself – which doesn’t often happen.

In fact, take this song by Janis Jopin:

Replace lord with government, and you have the attitude of a surprising number of people in New Zealand at present 😉

Eric Crampton explained this phenomenon well in a couple of tweets:

First cut: narratives around deserving and undeserving poor resonate strongly with our moral intuitions.

Left has mushed those two groups together. WFF is classic transfer to “deserving”, hard-left says “unfair”.

Personally I find the distinction between deserving and undeserving poor to be both a poor black and white analogy, and a morally abhorrent way of viewing things.

How can anyone judge who is worthy of a better or worse living standard?  What sort of delusion do we live in if we think we can justify poverty for some, as we demand hand-outs for others who are significantly better off.  I find the entire viewpoint distasteful.

I would also note that this point of view doesn’t imply that I don’t believe there is a case for some redistribution to the middle classes – as I mention in the article.  Instead, I point out that we have had significant redistribution, the middle classes in NZ have done pretty damned well.  Increasing effective taxes on investment to redistribute to the middle classes at this point seems excessive in its costs – and in many cases (eg in terms of transportation and housing) this may merely be leading to higher prices instead of actually improving anyone’s living standards 🙁

Furthermore, the simultaneous demands for further income boosts to the middle classes and income cuts (and harsher criterion) on the poor is a massive step too far – we are going past describing anything that resembles fairness towards inappropriate punitive punishment of solo-mums and people suffering from addictions.

Matt Nolan

Has inflation fallen below the Bank’s target?

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I’ve heard people suggesting that the RBNZ has failed its mandate on the downside, eg this tweet by Vernon Small.

If inflation is 0.6 excluding excise on fags and the RBNZ looks thru Govt charges then hasn’t it just breached 1-3% band on the downside?

Now, I don’t mean to come out to defend the Bank as they can do it fine on their own – but there are a couple of clear issues with this claim I can comment on.

Firstly, as Eric Crampton suggests, the Bank is supposed to aim for inflation outcomes that settle in this range “in the medium term” – moving outside of this range for a single quarter doesn’t imply that they’ve failed anything.

The logic here is that the relative price of goods and services may change, and “unexpected” things may happen that the Bank did not foresee.  If these things happen, then the RBNZ does not want to look backwards – it wants to tell firms and households clearly that they can expect average price growth in this range in the future.

Now, there are a number of indicators of what is expected for inflation – my favourite is the adjusted Labour Cost Index, as it comes from actual behaviour rather than arbitrary reporting by individual firms and households … so what has that been doing?

So in this sense, things look pretty good – in least in so far as the inflation mandate is being met given the current credibility and policy of the RBNZ.

But even in terms of our measures of what “has happened” with inflation, did inflation actually slip temporarily out of the Banks target band?  As I have mentioned before annual growth in the CPI is a poor measure of what “inflation” really is – we want something like the RBNZ’s dynamic factor model (here).  So what is the sectoral factor model telling us?

Now, there is some end-point bias in this (the nearer periods will change as we get more data), but it doesn’t seem to suggest that inflation feel out the bottom of the band – even with the domestic economy, labour market, and global growth all disappointing heavily.

As a result, this type of criticism of the RBNZ doesn’t seem to be warranted.

Matt Nolan

Explaining the food headlines

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Yesterday we were told two things in media headlines:

Dairy weighs on food

Food prices up 1.4% in June, biggest monthly rise in a year

So what is it, did food prices go up lots or did they fall?  Who was right, Stuff or NBR?

Well, they were both right – although Stuff was a bit more right 😉

I remember this time last year, people were saying that we had massive inflation on the way – as shown by the price of tomatoes.  This was a load of bullocks, and in the same way the idea that the 1.4% lift in food prices we saw in June is inflationary is bullockey … as food prices tend to rise sharply in June.  Adjusting for the normal seasonal bit, prices were only up 0.2%.

Now Statistics New Zealand doesn’t like to seasonally adjust these figures for a reason – the actual seasonal pattern can be a bit weak and variable.  As a result, we should treat any adjustment with care, and also compare prices now to where they were a year ago – in this way we can note that food prices were down 0.2% from last June.

Falling dairy prices have been a big part of the weakness – as has the fact that we haven’t had a repeat of the Queensland floods from last year, which had pushed up prices for fruit and vegetables significantly!  All in all, the only thing we can take out of the data is that food price growth is really pretty weak.

As a result, if I had to pick which organisation was more accurate with their headline – it was stuff.co.nz.  But neither organisation was completely wrong.

 

jamesz

Palmy: better with economists

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A couple of weeks ago Matt and I had the pleasure of attending the annual NZAE conference in Palmerston North. Attendance was disappointingly low, which I blame on Palmy, but it was great fun nonetheless. For that we can thank Seamus, who blogs at Offsetting Behaviour: he organised the whole thing, presented a couple of papers, and somehow didn’t end up looking frazzled the entire time. In fact, it ran incredibly smoothly from the perspective of an attendee, with only a few minor hiccups at the conference awards that I’m sure were intentional gags to provoke a few laughs! So thanks to Seamus and the organising committee for an excellent event and we look forward to seeing more of you there next year.

I didn’t manage to see everything I wanted to but here are a few highlights. I’m sure Matt will want to add a few of his own, too.

  • The blogging session was novel and saw a great presentation from Berk Ozler. If you’re not already reading his blog, Development Impact, you can read what he had to say about the conference here. The following panel discussion was interesting, although it would have been nice to have more time for comments and discussion from the floor. I hope it encouraged a few more people to comment on the NZ economics blogs; I’ve certainly seen a few attendees of that session jump into our comment threads since, which is great!
  • The keynote’s I saw were all fantastic. Lutz Kilian’s presentation on oil markets was more interesting than oil market econometrics have any right to be. He’s also a very forceful and persuasive presenter; I certainly wouldn’t want to be on the other side of an argument with him, that’s for sure! Leslie Young’s comment on the complexity of financial systems and the differences between China and America’s markets was also very insightful.
  • Watching Andrew Coleman advocate for a capital gains tax, followed immediately by Seamus putting up a slide entitled ‘Capital gains taxation is an insidious taking’, was entertaining. I don’t think they actually had a substantive disagreement but it’s always fun to see two excellent economists take opposing sides in a debate.
  • Arthur Grimes’ presentation on wellbeing indices brought interesting empirics to the discussion of their value over and above GDP measures. I think that’s worthy of a blog post on it’s own.
  • But the best part of a conference isn’t the papers, it’s the people. NZ economists are an incredibly friendly, knowledgeable, and welcoming bunch so I highly recommend turning up next year, if only for the beer and banter!

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