Matt Nolan

Why I’m not holistic

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A lot of New Zealand policy discussion and debate is holisitc – we say we want a set of outcomes, these outcomes are desirable, these are the outcomes we need to achieve.  In essence, they are saying there are a set of states “we” could be in as a society and we should strive to be in the “one” they are talking about.

Note:  There are elements of holism that are ESSENTIAL, but I see them as part of reductionist philosophy as well.  For example, the idea that the state of the world influences payoffs beyond the actions of individuals is fair.  Also the idea that we can’t compute everything is acceptable.  My argument is against the idea that we start with a “target” (top down) rather than starting with “guiding principles” (bottom up) when designing policy.

What is an example, lets say “sustainability”.  The idea of being sustainable, of having sustainability, sounds nice – it is an overaching state that some people want us to have.  If they are forced to define sustainability they will say it has a whole bunch of characteristics – however, why these characteristics are good is never touched – just the fact that it takes us to this “state” of the world that they normatively believe is desirable.

However, I’ve never, not even as a child, found such descriptions convincing.  One of these states must be reducable to the sum of its parts, there must be a set of causes that lead to that state – either that or it is an impossible pipe dream.

This is part of the reason I found economics so attractive when I was young – just think of the production possibility frontier.

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Matt Nolan

A couple more points on milk

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We wrote about the milk price investigation here, all very exciting.

However, a new article on the stuff site started with this:

Dairy market heavyweight Fonterra is artificially inflating the price of milk in New Zealand in a deliberate campaign to lessen competition

What?  This is beyond my understanding – I need someone to get in here and explain to me how increasing the wholesale price of milk will lead to a reduction in competitive pressures.

My first thought was that there was some Green and Porter esque competition issues (eg – such that the loss of competition is the result of tacit collusion) – then I realised that we are saying Fonterra is a monopoly, so I can’t see too much in the way of strategic interaction …

[Update:  Glad to see that Anti-Dismal also finds the claim strange (here and here), especially since he is actually an industrial economist – which implies he has more idea about these things then I do.]

Anyway, on the note of Fonterra setting prices there is this interesting point from Fonterra:

New Zealand manufacturers have to pay the same price Fonterra pays its farmers for export returns.

Given that the export prices are set on world markets where Fonterra’s market power is severely crimped (due to competition, or effective competition, in many markets) and given that this is the price it is sold at in NZ – we can say that Fonterra is effectively competitive right.

So if we are going to moan about milk prices we have to blame supermarkets, which I’m still not convinced on to be honest.

Matt Nolan

Thoughts on milk

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There is talk about the Commerce Commission investigating milk prices in New Zealand.

An interesting passage from this piece states:

At the moment, we basically have a monopoly supplier of milk and two supermarkets selling it,” she said. “I think an inquiry could be a really good thing for consumers.

I think this is a bit over the top, and plays on how poorly the idea of a monopoly is understood in general parlance.  There is a general impression that the existence of a “monopoly” along some attribute indicates that we need government intervention – when the case is actually a lot more complicated then that. We need to ask why the market has a monopoly, what the characteristics of the market mean, and whether there a policies that can then genuinely improve outcomes – in many cases there are not.

Now note that I don’t necessarily disagree there might be issues – but we can’t just scream monopoly to ask for intervention.  So lets do a primary run down ourselves shall we 😉

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Matt Nolan

Fiscal spending: Cycles and structures

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No, I’m not talking about the cycleway – although if Bill English does want to cut “nice to haves” surely this is a place to start 😉

I’m talking about this comment from Ganesh Nana, where I both agree with him and disagree with him simultaneously.

The plans (to cut spending) were criticised by BERL chief economist Ganesh Nana, who said cutting more state sector jobs and squeezing spending further at this point in the cycle risked keeping the economy down for longer.

It is true that when we have a cyclical downturn, cutting spending without a coordinated cut in interest rates from the central bank is likely to exacerbate the cycle.

And it is true we are in a cyclical downturn – output in the economy is below its potential level.

However, there are three factors that could well justify SOME cuts to government spending – as long as they don’t try to close the deficit immediately.

  1. The Reserve Bank still has the ability to respond by loosening monetary policy (although the effectiveness of cutting at current lows is a matter of debate),
  2. The cuts are focused on extremely low productivity elements of spending, as a result the contractionary impact will be smaller than in the case of indiscriminate cuts.
  3. Most importantly, the focus of the cuts are to remove the “structural” deficit.

The third point needs more explanation.  Fundamentally, the “potential size” of the New Zealand economy is now believed to be smaller than it previously was.  As a result, in order to have government taking up the same share (a share that is determined by the tax take, which is hopefully set according to the share society desires) the level of government spending does need to be lower – or else we run a structural deficit.

Structural deficits are not cool, it implies that the government won’t balance the books over the economic cycle and will cause unnecessary disruption to economic activity when it does try to – and as a result, it is often seen as a good idea to minimise them.

Now, for an economist I am actually relatively comfortable with short-term structural deficits.  I believe that estimating “potential” is tough, and as long as spending is transparent small structural deficits and surpluses are hard to separate from cyclical ones.  However, while the government should buffer the economy over the “cycle” it is true that in its structural sense it does need to balance its books like a household.

As long as any tightening is based on the three points listed above, I don’t think Dr Nana needs to be too concerned regarding the impact on the broader economy.  However, if they do go further just for the kicks, then his concerns are very relevant.

Matt Nolan

Why we always need a “why”

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I found this write up strange.  We are being told that student that are overseas should pay back their student loan more quickly to “help Canterbury”.  We are told that it is a “win-win” because it gets money into the economy, it lowers the budget deficit, and it means the students don’t need to pay back the interest as quickly.

Typifying this is the quote “It’s in your own interest, but an opportunity to be seen as a hero.”

This is where doing things without a full model/conception in mind is problematic – there is no such thing as a free lunch.

The student isn’t paying back the interest, because they are making sacrifices now to pay back the debt.  The government gets the cash now instead of later, so the cash balance improves but the set of non-cash assets declines – given that the interest exceeds inflation the real value of their asset position is likely to be lower.

What we SHOULD ask is:  Why aren’t the students paying it back now?  Is the policy that was introduced sensible?

Students overseas aren’t paying it all back now because the cost of doing so exceeds the benefit.  If we were to start pushing them to pay it back, we would likely be causing harm on New Zealander’s who have moved overseas – is that something we want to do?

If we don’t think that it is “fair” that students are paying back their debt at the rate they are, and we think the rate of interest is favourable (it definitely is on students who have stayed in the country) then isn’t the solution to increase the interest rate – not to start dancing around and talking about the deficit and Christchurch to guilt people into it.

Now just talking at people doesn’t cost much – there isn’t a policy failure from doing that.  But it doesn’t make it a “win-win” that we are missing out on – if students aren’t paying off their loans, they will have a reason.  Trust me.

Matt Nolan

A wager: Price growth of 15% between Dec 10 and Dec 15

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In the comments of this post, Andrew Coleman and myself decided to place down a little wager on price level growth during the next five years.  The bet goes as follows:

If the CPI grows by more than 15% between its December 2010 level and its December 2015 level (excluding any changes to the GST rate), Matt pays Andrew $100 (in Dec 2010 prices)

If CPI grows by less than 15% during this period, Andrew pays Matt $100 (in Dec 2010 prices).

We put down this bet just to show that we believe our own positions enough to stake money on them.  He believes there is some probability that the Reserve Bank will allow prices to grow at more than 2.8%pa during the next five years, and that this probability is sufficiently high for him to be willing to make this bet.  On the other hand, I do not think this will happen.

Update: Eric Crampton has also joined the bet, sitting on Andrew’s side.  So it is my $200 against $100 from each of them.  Confirmation here – combined with an explanation why.  I use the same explanation if I ever bet against the All Blacks in the work pool.