Matt Nolan

A problem with “advertising bans”

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Over at Offsetting, Eric mentions that there is a view that we need to start banning fast food advertisements.  Personally I think this is a dumb idea, but when it’s people’s job to make up arbitrary interventions to “save the world” they will.

More importantly, it reminds me of one of the first posts I wrote on the blog:

So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

Advertising creates value.  Also, I haven’t mentioned here that advertising provides information.  There may be a case to regulate advertising given perceived misinformation, or we could even stretch this to a concern about children (as long as we are honest that this belief is based on targeting “bad parents”).  However, even when we head this far an advertising ban is overkill.

Remember, the goal of policy is to “maximise happiness”, where what gives people subjective happiness may differ from what we believe or assume – not to make people do the things we want, and target things we don’t like.  This involves using mechanisms that allow people to reveal preferences (markets for example), and avoid bans and direct regulation as a last resort.

Matt Nolan

Justifying macroprudential policy

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Here is a good post on VoxEU, that aim to give a strong conceptual framework for justifying macroprudential policies:

The purpose of macroprudential policy is to reduce ‘systemic risk’ …

It is common to distinguish two key aspects of systemic risk. One is the “time-series dimension”: the procyclicality of the financial system, that manifests in excess risk-taking in booms and excess deleveraging in busts. Another is the ‘cross-sectional dimension’: the risk of contagion due to simultaneous weakness or failure of financial institutions. Accordingly, macroprudential policy it thought of as a set of tools that help reduce these two forms of risk (Borio 2009; Bank of England 2011).

Yet thinking about macroprudential policy by looking solely at these two dimensions of risk is unsatisfactory. First, this view, per se, does not provide a justification for regulatory intervention. For example, is it really desirable to avoid any form of cyclicality and have a zero risk of contagion in the financial system? Second, it is not a priori clear what can macroprudential policy achieve that traditional micro-prudential regulation cannot.

In a recent IMF study (DeNicolò et al. 2012), we aim to tackle these questions. We start by articulating that, as for any form of regulatory intervention, the objective of macroprudential regulation must be to address market failures.

Following the crisis we have heard many commentators demand something should be done.  Those with more of an economics bent could see the value of macroprudential policies, however regulation shouldn’t be based solely on the intuitive feel of economists and analysts – instead we should use the descriptive economic framework to help us understand what issues may exist in the financial industry, and then ask whether policy can help to improve outcomes.

Whether the externalities they have identified are fair is another question, one day I will read the paper and have a think – although I probably won’t post on this.  However, actually looking at regulation through a regulatory framework instead of screaming about large movements in arbitrary aggregates is the appropriate way to think about direct regulation in the financial industry (along with a recognition that we provide these firms implicit insurance) – a point of view that has been missing from some writing about the introduction of any such measures.

Matt Nolan

More on the economics of love

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There is an excellent article on the Stuff website about the economics of love, an issue we’ve written about a couple of time before.

While I enjoy using economic concepts to describe relationships, I hadn’t actually considered the fact that we have a lot more cold hard data now-a-days with online dating!  I quite enjoyed this:

Economist and chief executive of economic consultancy Lateral Economics, Nicholas Gruen, agrees internet dating has increased the efficiency of the market for love, but hints at a harsher reality for love-seekers.

”One obvious point is that online dating generates vastly more hard data about dating – so we’re getting much better information than we used to have. It’s showing that dating is very like a market with strong ‘objective’ values around which assortative mating takes place.’’

Assortative mating is the idea that people with highly valued attributes, such as good looks or intelligence, tend to pair up with similarly endowed partners. Most people think they are ranking people according to their own subjective values, says Gruen.

“But if you look at the evidence, there is a very strong assortative mating going on, so the best footballers typically have the best looking girlfriends and all that sort of stuff.

‘‘You mightn’t think it’s counter intuitive, but it’s certainly counter to the narrative of love – depressing for those of us who would like to buy into the idea of love as sui generis, but not so surprising if we look around.’’

Another example where looking at cold hard incentives trumps over believing there is some other guiding force that will magically help us out – superb.  Maybe I shouldn’t be so mean about the idea of hope – but to be honest, hope is more about consumption value than anything else right 😉

Update:  On rereading, some people may find that statement a lot harsher than I intended.  All I was meaning was that love and relationships do be appear to be based on preferences and choices, rather than appearing at random – and I’m generally a fan of being able to conceptualise things which makes me happy.

Let’s just hope that a recognition of the objective factors that are valued in the marketplace to relationships doesn’t lead to government interventions – or taxation … although I wonder if anyone will try to point out market failures in the dating market.

Will Taylor

Ch-ch-changes – new theme/commenting system

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Howdy loyal TVHE readers.

We’ve just done a bit of an upgrade/refresh to the blog theme and commenting system.

The two major changes are:

  1. The theme is “responsive” so should re-size and look normal on any device
  2. Comments are being done through Disqus which allows a little more interactivity.

Comments can still be left with just a name and email address allowing anonymity for those who choose etc… but if you want you can use twitter/FB or use a Disqus account.

Let us know if you have any issues with anything. If people have problems with Disqus we can pretty easily go back to the native WP system.

Matt Nolan

Journalist ideological, can’t read

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This seems like an insulting and bigoted statement – and it is.  It is an arrogant statement that reflects more poorly on me than anyone I could be writing about!

I just felt that if I was going to write about this piece discussing inequality in healthcare provision by Auckland University, I should start with a title that is in the same vein as the authors first sentence:

Economists have proven it’s cheaper to let Maori children die than spend money to provide equitable health treatment.

Seriously, they are writing about a piece that identifies inequities in the provision of healthcare services, and states that the cost of ensuring equal treatment would cost $25m (in net terms).  If we take treatment of other groups as the level of treatment we want to provide to be “fair”, then this is the cost of ensuring that this fairness is given to all groups – given whatever reasons they’ve identified for unequal treatment in our healthcare system.  The press release by Auckland University is here.

Do you get any of this from the journalists article?  No, not really – they even mess up the tenses, essentially stating that the government “would save” $25m by putting inequalities in place … when the research is merely describing inequalities and talking about the costs of remedying them.  There is further discussion on “economic impact” which try to sell why we should change policies, and I wouldn’t want to go into them in detail without looking at the work – however, giving the impression that these authors want to perpetrate further inequality through this first sentence is insulting, not just to the academics involved but to anyone who does this sort of work!

I would normally ignore the nonsensical ramblings of a journalist on issues they don’t understand, but they had to go and attack “economists”.  We get this crap all the time, the very fact we are willing to discuss and mention trade-offs makes people who can’t be bothered thinking convinced that we cause the trade-off.  By daring to say that increasing the provision of healthcare costs money, the journalist has decided to give the impression that the economist at Auckland Universtity (who was working in conjunction with people from other disciplines) is immoral.

Personally, I think writing articles piled with misinformation based on an unwillingness or inability to read a university press release has a larger degree of “immorality” than an economist discussing trade-offs.

Matt Nolan

Where are we with the Eurozone at the moment

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It’s been a while since I’ve written down my impression of what is going on and what is happening with New Zealand – because things are just not changing.  The events in Europe continue to have a significant impact on what is going on in New Zealand, both by lowering businesses willingness to invest in staff and other forms of capital and by lowering the returns to exporters (more than its reduced the price of our imports).

However, we are currently in the middle of a fascinating example of political economy – something I am poorly versed in, and so will instead just link to.

The Eurozone needs a lender of last restort, a credible lender of last resort.  The weird actions going on in Europe are indicative of some institutions recognising this, while other groups who have to take on any perceived risk (eg Germany) are less than willing to do so.

Of course, the belief that the Eurozone needs a lender of last resort depends on the “multiple equilibrium” view of credit markets in Europe – are these banks truly insolvent, or do they just look insolvent because of liquidity/expectations.  If you are in the first camp there is a burden that must be shared in some way, if you are in the second camp there is much less of a real burden – and a strong requirement of a lender of last resort.  The different things being said by different people inside and outside of Europe are not just a result of a normative belief in what is a “fair distribution of the burden”, but also a different implicit model which implies different costs and benefits from different policy actions.

No wonder agreement has been so difficult.