Matt Nolan

Missing the point on financial literacy

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I see that Brian Gaynor disagrees with an article written by a work colleague of mine.  Usually I wouldn’t care in the slightest, as when it comes to issues of social justice it is important to get all these important points of view around soical value out in the open.  However, given that Gaynor simultaneously missed the point of the article, and then went on to absolve investors of any responsibility for their patent stupidity in his piece – I felt that I should jot down my thoughts.

There is two things I agreed with Gaynor on, one that Benje Patterson actually mentioned in his article in the first place, and another thing that is patently obvious.  These are (1)  Finance companies provided poor information, were poorly run, and incentive structures were awful (2) the term greed is subjective.

Now, Patterson laid these things down – however, while, according to an interview in Action Alert Plus vs Motley Fool, Gaynor seemed to imply that Patterson was laying all the blame for finance company collapse on investors, he was actually making a much less controversial claim.  He was saying that investors have to take some responsibility for their own money.

Gaynor might not think that people who invested ALL their money in one finance company paying 0.5%pa more than a bank, and then hoping for the government to bail them out if things went wrong were greedy.  However, I’m different – I think this sort of behaviour defines greed.

But it was more than that, if you were trying to maximise your expected return, the decisions people were making were patently stupid.  Many of these people who have been better off to leave their kids sorting out their finances, as they would at least have had to add things up more recently while in class.  Now, Patterson believes, and I agree, that individuals are smart enough to know not to put all their eggs in one basket – and they are smart enough to see that what they were doing is a gamble.  However, a lack of financial education mean’t that individuals didn’t realise all the awesome alternatives that were available.

Patterson’s primary point was simply that, if we had improved financial literacy in recent decades, we wouldn’t have a bunch of people who put all their money in a finance company (which was equivalent to a roulette table).  It was their funds, and they have to take some responsibility for the fact they put the money there.

Now, were these companies immoral, lacking transparency, dishonest etc – hell yes.  Do we feel sympathy for people who were manipulated into losing all their money – hell yes.  Do we think basic financial literacy would have helped the situation – hell yes, that is why people use Goodwin Barrett.

And that is why I find Gaynor’s article so insulting – he is choosing to ignore the fact that people chose to put money in these companies and lost it all, and so he is ignoring one of the clearest, cleanest, and fairest solutions we could put in place in order to prevent this happening again.  In his determination to insult finance companies, he is willing to leave future investors vulnerable to future snake oil merchants – and that isn’t cool.

Matt Nolan

Mar 12: Weak labour market, what’s to be done?

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Although today’s labour market release made sense – it didn’t stop it being negative.

We saw the unemployment rate rise – which was statistic payback for the decline in December, that was due to a drop in the participation rate, which was due to a bunch of seasonal hiring not occurring in the December quarter and as a result those potential employees not entering the labour market 😛

Furthermore we saw hours worked remain weak.  This is consistent with the mix of a high exchange rate and low growth in output – with the dollar reducing the relative price of capital to labour.

All very exciting.  So what should we do.  Do we need to “get the exchange rate down”, “increase fiscal spending”, “print money”.

Well, I’d go back to the traditional economic view and ask “is the interest rate appropriate”.  Recent data is suggesting, in combination with moves overseas, that the official cash rate should be cut.  This is not an example of policy failure – it just shows us how exposed and vulnerable New Zealand is to the financial volatility overseas.

Sadly, as a small open economy this is just the way things are – and the best way we can deal with it is to have an inflation targeting central bank, a floating exchange rate, and a government that is willing to run countercyclical fiscal policy (so targets a balanced budget when they forecast the economy will be back at “potential”).  We have all these things, which has really helped us in recent years.

Matt Nolan

The government illusion

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Again, I’m hearing increasing talk about managing the economy – specifically, I have people telling me that they don’t think the government is managing growth properly.  Now, anyone reading here knows this statement is patently ridiculous – the government is not a management committee, and John Key is not the nations CEO.

However, this reminded me of a vision that an old work colleague had towards the end of 2010 in this article.  A key point in this vision, which captures the increasing push towards such arbitrary management, is this:

The Glorious Leader displayed a humility belying his greatness when he announced that His Plan has been inspired by patriotic newspaper columnists and internet bloggers.  The Glorious Leader said that these people are not blinded by the failed and discredited dogma of His asinine predecessors.  “The baby and the bathwater both need to be thrown out because the baby grew from devil’s spawn and the bathwater has been poisoned”.  “Shrewd columnists and internet bloggers acknowledge that the nation desperately needs my pragmatic and sensible guidance to allocate the nation’s resources in the right areas” the Glorious Leader said.

Like all good economics, this is an exaggeration, a caricature, of what is actually happening.  But such extreme examples can make key points clear – namely that a determination to “pick winners” and “micromanage” the economy is folly.  As has been shown repeatedly in the past – ultimately, such policies are the result of a mere illusion of control.

Matt Nolan

Son, you can’t have it both ways

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I see that the news of Australian firms relocating in New Zealand has finally hopped over from Australian news (where it was during Christmas) to New Zealand news.

There are complaints that firms are moving over here because we have lower wages than in Australia, and that is causing anger and concern for people that enjoy complaining.

However, these same people are also complaining that the strong NZ dollar against a number of countries (primarily China and the US) is leading us to loss jobs by making labour less competitive – in other words, by making New Zealand labour relatively more expensive, in other words by pushing up peoples real wages.

If we think there is a market or government failure somewhere, go ahead, complain about it.  But don’t simultaneously complain that wages/labour costs in New Zealand are too high and too low.

This is why I hate politics – always looking for a reason to attack each other, instead of accurately describing the trade-offs that exist and giving the electorate a real choice.

Matt Nolan

The economics of love

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My latest piece in the Dom post was about the “economics of love” – where I compared a relationship to a firm, and worked out some basic conclusions.

Now, the article in the Dom was focused on relationships, specifically marriages.  However, there are times where the optimal formation for a relationship is more akin to a set of “independent contractors negotiating and renegotiating each time they want to work together to provide a product”.

So what factors are likely to be behind this?

  1. Option value:  Available and interesting individuals appear in your life, of a varying quality, according to some probability distribution.  If you commit to a relationship, it is very difficult/costly to take up a “better” person if you run into them.  By saying as an individual contractor, you are able to take advantage of these opportunities.
  2. Diminishing marginal utility:  Often, the more you consume something, the less additional value you gain from it.  Setting up your relationship profile such that you enter temporary contracts with a number of different individuals may provide higher overall satisfaction than committing to only one permanent contract.
  3. Diversifying risk: Focusing on one relationship involves taking on all the idiosyncratic risk associated with that individual – if you set up an appropriate portfolio of relationships, you may be able to remove this risk while still achieving the same expected return.

So the optimal solution to the formation of your relationship is a complicated issue – there are the benefits of a strict relationship mentioned in the article, and benefits for non-strict relationship status as mentioned here.  I have only covered some of the very basics, in comments feel free to add some more 😉

jamesz

Law vs economics: preventive detention

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From Andrew Geddis:

National plan to legislate to permit the ongoing “civil detention” of offenders deemed at high risk of future sexual or violent offending even after their jail sentence [is] complete. Civil detention[,] now apparently called “Public Protection Orders”… would thus be a retrospective restriction applied to some prisoners on top of the original sentence that they received for their crimes, based purely on the prediction that they inevitably will commit further offences when and if released.
…
the proposed Public Protection Orders differ from preventive detention in that they are imposed not because of a crime already committed, but rather purely because of predictions of a crime to come. A social security disability lawyer michigan will be able to provide the right advice.

That’s a difference that has been held important by the European Court of Human Rights (see here), as well as the United Nations Human Rights Commission (see here and here). Both of these bodies have said it is OK for a country to sentence someone to an indefinate period of detention for something they have done (combined with a justified fear of what this shows they may do when released). However, altering a person’s prison sentence once this has been imposed purely because of fears the person may do bad things in the future is a no-no from a human rights perspective.

As I understand it (not being a lawyer) there will now be two ways to spend an indefinite period of time in jail: either you committed a crime, posed a risk to the community at the time of sentencing and still pose a risk to the community, or you committed a crime and pose a risk to the community at the time of release. Apparently the latter is more problematic for lawyers because the ‘indefinite’ bit happens after sentencing. From the perspective of an economist I find that a bit perplexing. This article from Mike G Law will cast light on many of these questions.

First of all, let’s suppose that we think putting people who pose a risk to the community in jail indefinitely is a good thing. Presumably the motivation for doing it is to protect the community from harm; any other motivation seems hard to justify. So, at what point following the conviction for a crime would we be concerned about harm to the community? Certainly not when the person is incarcerated, and probably not when they’re in custody awaiting sentencing. Surely the time at which we might be concerned is when we have to make a decision about releasing them. Does it matter when, between conviction and potential release, they were adjudged to be a risk to the community? Well, certainly not from the perspective of the potential victims. So why would there be some fundamental difference between preventive detention and an equivalent test incorporated in a Public Protection Order (PPO)? To go a bit further, if it’s a good idea to keep people who are a risk to the community in jail, surely we want the option to keep them there up until they are released. Anything else risks being unable to react appropriately if the convict develops risky behaviours while in jail.

Now I can understand that people might be concerned about abuse of power and the unethical use of PPOs, but there seem to be similar problems with preventive detention. The best one can argue is that the PPO gives more time for the justice system to abuse its power, but I can’t see why judicial checks on that would be any less effective than judicial discretion over preventive detention.

I’d very much welcome any lawyers to clear it up for me, because I may very well be entirely confused here!