Matt Nolan

More on AMI

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I am surprised that no-one has mentioned the idea of a “bank run” on AMI in the comments to this previous post.  Surely the justification for government action is that, without it, non-claimants would pull out of AMI due to concerns about AMI’s stability following the quake.  If AMI was still SOLVENT but lacked sufficient LIQUIDITY to get through this period, they may fail for seemingly no reason.  As a result, the government comes in, provides liquidity, then disappears for no cost!

Now this is the ideal situation and justification that SHOULD have been provided.  All this crap (yes, I’m using a strong word 😉 ) about “giving certainty to the people of Christchurch” is politics in my opinion – they are selling an idea about the bail out being to support a community in an attempt to numb criticism as to whether this is the most appropriate way to help.

I can understand my opinions seem harsh, hell something has to be done right. Maybe something should be done, after all if we genuinely feel concern about the people of Christchurch and think that losses from such an event should be ALL socialised then we should pay for ALL the losses through higher taxes – not just the losses of people associated with one specific insurance company.

I am surprised to see the left come out in support of this.  What about the poor people who were living on the breadline and couldn’t afford insurance – the left is happy to support the middle classes who could afford insurance and are unwilling to take on the risk associated with it, while simultaneously not helping the genuinely poor.  This is the type of left wing view point I grew up hearing.

Yes, the left wing people I grew up with would want AMI bailed out – but they would also want national insurance for all the residents of Christchurch and they would want the Banks and insurance companies nationalised to avoid this “too big to fail” issue althogether (not saying I agree – but at least the views are consistent).

Did AMI need it

So the fact that the intervention is terribly targeted if it is meant to help anyone is one point.  However, lets also ask whether we need a implicit guarantee from government in this case.  Two points to think through:

  1. If AMI is insolvent then no guarantee is necessary – they need to value.  If they are suffering from liquidty, then a temporary loan at market rates of interest which they can choose to go for will be accepted – and all will be well.  This is why I’m confused that the government isn’t calling it a loan.  Another point on this is the the government should expect to lose a grand total of nothing if intervention is necessary.  However, if they are spending money to help provide “certainty for Christchurch” they would be better off … giving money to people in Christchurch, rather than bailing out a firm.
  2. Even if it is a liquidity issue, this doesn’t mean we should intervene.  What happens if another firm can buy them out.  This shows that they are solvent, and it ensures that government (and so society) doesn’t bear the risk – hell, the other firm would get the purchase for a good price, but that is just a loss for the shareholders of said company so who cares 😉 .  Now this is what got me annoyed – Tower is signaling interest.  Now instead of making this the “first port of call” the government has guaranteed AMI, meaning that the shareholders of AMI are unwilling to listen to a Tower offer – a sale should have been the FIRST thing the government looking into, but instead they are effectively BLOCKING one.

Now I have heard mummers they are thinking of a white knight investor now, etc etc – but can’t they see that how they have set up their policies is making this possibility more difficult, not easier.  Hopefully there is a switch of tack, the government can put the hard word on AMI to force it into a sale (if it is truly insolvent).  However, from where we are sitting now I find it important to lay down what I have found inappropriate around recent announcements.

Update:  Eric Crampton discusses here.

Matt Nolan

AMI and moral hazard

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So when a disaster hits, the government is willing to bail out domestic insurance companies to “provide certainty for claimants”.  Ok.

As a result, insurance firms will discount these large scale low probability events – and take on more risk when providing loans.  Their willingness to take on more risk than is socially optimal will be paid for by tax payers.

I wonder how big this effect is – and I wonder why it hasn’t been raised in conjunction with these movements.  If we are determined to provide a backstop for a number of New Zealand industries we will probably need higher taxes – this is something that the government should probably articulate to people if it wants to be transparent – then if society is willing to socialise losses they can …

Matt Nolan

Quote of the day: An excellent conclusion on trade

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This is a point we all need to remember.

Even when the benefits outweigh the costs, the tabulation of gains and losses by groups highlights the facts that international trade has distributional consequences. That realization should not induce policymakers to hinder trade via protectionist measures. Rather it reminds us that transfers from gainers to losers is a prerequisite for trade to be Pareto improving.

You always see economists arguing.  But you would be hard pressed to find an economist who objected to this concept – they may argue about magnitudes, but there is a broad agreement with regards to this idea.

Matt Nolan

Quake levy and timing

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Kiwiblog states that he disagrees with the Herald on a tax levy being introduced now.  I think his points on it slowing the economic recovery are valid – increasing taxes to pay for investment when the government can borrow the money at a lower rate of interest AND many consumers are actually locked out of credit markets AND incomes are well below what the economy can achieve is bad policy for economists of all political stripes (ceteris paribus).

But lets say that we currently have spending and taxes balanced over their lifetime IGNORING one-off events.  As a result, we want to pay off one off events with a temporary levy.  Ok, I’ve assumed that.  Now assume that we want two other characteristics of the levy:

  • The current generation wants to pay for the rebuild – even though it is their capital stock that got smashed.  As a result, it must be a relatively short-term levy.
  • We are concerned about the economic recovery, and would prefer to not delay it if possible.

Ok, so I’ve made a bunch of huge assumptions that point to us, at some point, HAVING to have a temporary earthquake levy.

However, even with these big assumptions there is no reason to put in such a levy right now.  We should say “we will introduce the levy on consumption goods from December 2013 till blah which is the period when we think the economy is back at its “potential” level”.  Advantages are:

  1. The impact on economic activity is indeterminate instead of negative.  Future wealth for this generation is lower, however the relative price of consumption now is lower.  As a result, the net impact on spending could go either way – when we have insufficient aggregate demand having an indeterminate impact is better than having a negative impact.
  2. This is a relatively short time horizon, so the current generation is paying for it.
  3. We make the levy money.

So if we have to have a levy, why don’t we do it when the economy is on an even keel – rather than during a point in time when we are in a historically potent recession.  Unless the people claiming that we need a levy don’t actually think the recession is particularly large … in which case a lot of other things that have been said about NZ’s economic performance by these people would be inconsistent 😉

Update:  Eric Crampton covers the issue more widely here.

jamesz

Beauty and brains

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It is well known that beautiful people earn more, which goes some way to explaining Matt Nolan’s success in his stage career. What is apparently more difficult to understand is why they earn more. A paper tries to split out two effects: productivity and discrimination. For instance,

…lecturers who are viewed as better looking receive higher instructional ratings by their students. Then, ceteris paribus, these higher ratings translate into higher salaries, because US university administrators pay attention also to teaching quality in setting salaries. However, the question remains on whether students are simply discriminating against ugly professors by reacting to an irrelevant characteristic, or if they do really learn less from them.

The researchers find that the additional wages of lecturers are due to productivity gains rather than discrimination but what confuses me is the difference between the two! The wording implies that productivity gains are independent of discrimination when, really, it is just a different form. Read more

Matt Nolan

Looking at the wrong place on inequality

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Via Bernard Hickey’s Twitter feed I saw the following from the IMF:

But this globalisation had a dark side — a large and growing chasm between rich and poor. While trade globalisation is associated with lower inequality, financial globalisation — the big story of recent years — increased it.

Even ignoring other important policy elements, does it make sense to say we should be restricting elements of globalisation in order to “reduce inequality”.  So here, I’m ignoring the efficiency costs, I’m ignoring the fact that any arbitrary restrictions will have an arbitrary welfare cost on individuals – but I’m still not convinced.

Why?  The problem is too little globalisation, not too much.  We need to open the borders – after all nations are just large labour unions, they benefit their members to the detriment to the REAL poor people in the world – those that live in the third world.

But instead of focusing on opening up borders, and helping those that are genuinely poor, the IMF is more interested in complaining about the fact that financial deregulation has made it easier for those who are willing to save to save – and for those who are impatient to get themselves into debt.

Putting on my normative hat, I have close to no sympathy for those who couldn’t find a way to save in the first world relative to the sympathy I feel for those who are born into abject poverty.