goonix

The funniest part about the UK budget 2011

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Since I am the UK correspondent for TVHE I thought I had better contribute something to the blog. Then I stumbled across this gem from today.

One of the centre-pieces of the budget was the reduction in fuel tax (it has had a lot of media coverage). Not only was the fuel tax increase cancelled, fuel tax was in fact decreased by 1p per litre. According to Chancellor Osborne, this move would lead to motoring costs falling for families and businesses.

Given the budget was a fiscally neutral one, in that all additional spending/tax cuts come from spending cuts/tax increases in other areas, how is this cut in fuel tax being funded?

By an increase in taxes on North Sea oil production, from 20% to 32%.

I’ll leave it to the reader to think about what effect this increase in production tax might have at the petrol pump.

Matt Nolan

Remember what inflation is

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There are a larger and larger number of analysts and journalists complaining about inflation at present.  The view seems to be that since the price of some goods are increase (fuel and food primarily) there is an inflation problem, and “something must be done”.  Because people have heard the RBNZ mention inflation they figure that the Bank should do something.

But I’ll tell you right now, as one of the most hawkish people I know I still do not see an inflation problem.  Yes, GST has pushed up the price level.  Yes, food and fuel prices have spiked – and they are hurting peoples real incomes!  But none of this is inflation.

What is inflation?  Inflation is the trend rate of growth in the price level.  In less wonkish terms, inflation of x% is when the price of all goods and services rise consistently by x% excluding any changes in “relative prices”.

The increase in GST was one-off, so its not inflation.  The increase in petrol and food is a relative price increase because petrol and food are relatively more scarce.  Does the increase hurt the economy and the people in it – hell yes.  Does it lower our real incomes and welfare – yes.  Can we do anything about it – no.

Unless the Reserve Bank can discover a large oil deposit and process it for our use they can do nothing about this.

So what we have at present IS NOT an inflation problem.  What we have is a negative economic shock, where we are being forced to reduce our standards of living because the resources we use are more scarce.  Having the price represent this scarcity means that we will take that into account, try to substitute away from the good, and hopefully come up with technologies that reduce our reliance on it.  But there is nothing the Bank can do about this.

Will Taylor

Quote of the Day: Nordhaus and Samuelson

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Regular readers of the blog will understand why I instantly thought of Matt Nolan when I read this quote:)

Economics cannot answer questions of how much poverty is acceptable and fair, but it can help design more effective programs to increase the incomes of the poor

Matt Nolan

What’s going on with the dollar?

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There was an interesting little shift in the dollar recently – one that was a little bit surprising at first look.

In the past month the dollar has been falling, first as a result of the Canterbury earthquake, then due to the 50bp cut in the official cash rate by the RBNZ.  This all makes sense.  But then the dollar dropped very sharply from around the 15th of March – this was well after the MPS, and nothing had happened in NZ.  What was going on?

Read more

jamesz

Just because there’s a reason doesn’t mean you should

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There was an interesting comment from Andrew Coleman on a recent post of ours in which he laid out the reasons he sees for government intervention in saving behaviour. As I read it he put forward four reasons:

  1. People are time inconsistent
  2. People are poor at choosing good investment options
  3. People underinsure against catastrophe
  4. People take advantage of government intervention

The first three pertain to cognitive biases that may justify intervention to correct. There is widespread debate about whether such biases warrant intervention and, if so, what sort. However, what I want to draw attention to here is the fourth point: when governments intervene they often give people perverse incentives to take advantage of the system that then require further, costly intervention to remedy. Even if the intervention seems justified it may be that the mechanism implementing it is so costly to administer or enforce that the intervention ends up being costly to society. Read more

Matt Nolan

Words of wisdom on St Patricks day

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Happy St Patrick’s day all.

On this fine day, there is a song I’d like us all to remember – Seven deadly sins.  My favourite part of the song goes:

Some say that drinking’s a sin
But a gargle is fine now and then
For drinking has been in this world
For ever and ever amen

No if it wasn’t legal then the lawyers they would sue
And the prison would be full of folks who had a drink or two
And if they didn’t like it then away the girls would run
And if it wasn’t plenty the poor folk would get none

If you’re not sure, have a read over a few more of our posts on the issue(*, *, *).  Or for more advice from the Dubliners go here.

See you all next week!