Matt Nolan

Kitten demand exceeds supply

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So says this newspaper story.

Does this suggest to anyone else that the price of kittens needs to increase?  Why?

  1. By setting the equilibrium price we ensure that only those with the highest willingness to pay for a kitten receive a kitten.
  2. By increasing the price  to its equilibrium level we ensure that we have the right relative price signal in terms of the allocation of SPCA animals.  As a result, this ensures that relatively more “less desirable” animals find homes – and that the relative allocation of animals is efficient.
Matt Nolan

Falling wage rates: Should we be concerned?

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According to the Employers and Manufacturers Association’s 22% of job types are being done for a lower wage in 2009 then they were in 2008.  Furthermore, according to recent labour market data 1% of actual employees have received a pay cut in the past year.

At first this seems like a bad thing.  Falling wages mean falling labour income.  If other prices are unchanged such movement implies that people will be falling below the poverty line.  Furthermore, it implies greater levels of government spending – as income rebates are negatively related to income.

However, the pain the economy is experiencing is because of the recent recession, and the large shock to activity New Zealand (and the rest of the world) has experienced.  One of the reasons why we often urgently run to government stimulus during a recession is because wages and prices do not adjust to a change in the economic situation.

Specificially, nominal wages are said to be sticky.  If the nominal wage is stuck and we have a recesssion (which reduces the demand for labour) then we end up with a “surplus of labour” – or unemployment.  The less sticky wages are, the less unemployment the economy faces.

As a result, the fact that wage rates have been able to move downwards is a good thing – it suggests that the economy has been able to adjust and keep more people in work (and as a result, keep activity rolling at a higher level) then would have been the case if wage rates hadn’t been adjustable.

Matt Nolan

Should the Bank be responsible for economic structure?

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When discussing the latest OCR decision Bernard Hickey at the Rates Blog suggested that Dr Bollard should lift the cash rate in order to help “rebalance” the economy.

I have heard this suggestion from many, many, other economists as well – suggesting that this view is fairly mainstream.  Furthermore, Dr Bollard does keep mentioning the fact that “consumption” is too high and we need a switch away from consumption to exports and investment.

However, we can tell there is something fishy as soon as we listen to exporters.  They are saying they want a lower OCR, and a lower dollar, in order to stimulate exporting activity.  The fact that both a lower and a higher OCR can be justified on the basis of rebalancing tells us that there is something we are missing in this analysis.

Given my obsession with being contrarian (and the fact I actually do believe a different story this time) lets roll.

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Matt Nolan

October 09 OCR review: Moving forward gradually

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The RBNZ just told us that the OCR is unchanged.  No surprises.  The focus was on what would happen to this statement from September:

We expect such support will be needed for some time. As a result, we continue to expect to keep the OCR at or below the current level through until the latter part of 2010.

Well this happened:

In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010.

So they have moved from implying they won’t lift rates till the last quarter of 2010 to now implying that the 3rd quarter is the most likely.  Could more positive information shift them earlier?  Maybe.  Will we see a rate increase in January (like the market was pricing in)?  Not likely.

Matt Nolan

Legalise drugs?

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That appears to be the suggestion of David Grimmond from Infometrics according to this article (also found here).

How do I feel about this suggestion, well I agree.  Legalise it, that way we can apply standard quality controls, pump out education and information, and place externality taxes on it.

Worst case scenario:  The externality tax makes the drug so expensive that the current gang based supply of drugs (with an associated motive to avoid tax) remains the cheapest option for people – in this case the legalisation makes no real difference.  However, I would still only support bans above taxation here if it turned out that bans were arbitrarily cheaper – as other social outcomes would be the same.

There is nothing wrong with someone making a choice to take drugs when they understand the issues surrounding them.  Legalisation helps us create a situation where people can make well informed decisions regarding drug use.

Furthermore, there is nothing wrong with an individual taking the drug persee – although we may be concerned about how their actions following any use impact on other people.  In this case legalisation, education, and a bunch of taxation will do the trick – the current situation does not target these external activities very well at all.

Matt Nolan

Exchange rates and adjustment: What does it mean?

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With the mass of recent discussion on the exchange rate and the “structure” of the economy (here, here, here, and here) it seems like a good time to discuss exactly how the exchange rate matters insofar as discussing the economy.  Luckily for us, Paul Krugman has already done an excellent job of this.

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