Matt Nolan

Biofuels and food

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Good article from the Economist on the impact of compulsory biofuel regulations on food prices.

We commented on this a while back.

Biofuel regulations are an undeniable “structural shock” which will lead to “structurally higher” food prices.  What do I mean?  The price of food relative to other things is likely to stay higher than it would have in the absence of biofuel regulations.

Now, I don’t think these regulations are the main driver of the recent price volatility – that would be droughts and economic conditions.  But we can expect the relative price of food products to stay above historical averages.

How far above is a different, and very difficult, question 😉

Update:  Discussion on the issue at Anti-Dismal.

jamesz

On pricing and altruism

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The aftermath of the Christchurch earthquake has seen much of New Zealand pulling together to help out affected residents who are in need. It has also seen a scarcity of many essential items as supermarkets close and water is switched off. In particular, queues at petrol stations have been huge and that has prompted Eric Crampton — a Christchurch resident himself — to call for higher petrol prices. He is concerned that people with the greatest need for fuel will not get it if there is a shortage. Rather, the people most able to queue for a long time will get the limited amount of petrol and those may simply be the people with the least pressing need to be elsewhere. In summary, he is worried that the petrol will unfairly go to those who may not have the greatest need of it.

In reply, Keith Ng’s attack on economists mischaracterises the discipline and then erroneously attempts to refute Eric’s argument. Read more

Matt Nolan

Crisis and policy: A couple of notes on NZ policy

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Christchurch has had an earthquake, and this has lead to the discussion of a couple of policy issues.  Lets discuss.

RBNZ will likely cut the OCR.  However, I can see them waiting till their meeting – so they can fully explain what is going on.  The reason this matters is:

  • They will want to cut to help restore confidence – the demand element of the shock, not the supply/capacity element.  As a result, they will want to explain how they will reverse policy, and why they are doing this (in order to avoid overreaction).
  • They may want to manage expectations with regards to the exchange rate and other nominal variables – a sudden cut, without a full set of forecasts, may not be the best way for the Bank to say “hey, we are cutting rates now but will reverse this emergency cut once consumer confidence has stabilised”.  With their MPS so close, they must have decided to wait – or perhaps they have decided that the impact on confidence will not be sufficient to justify a cut.  We will have to wait and see.

“Rebalancing policies can be poorly timed too”.  On Twitter Alex tweeted “the basic issues on imbalances nz faces are as relevant today as last week key says”.  However is this really true?

In part it is, we are still in a position of deficient demand and so it is still a poor time to be instituting these sorts of structural issues.

What do I mean?  Well, the point of “rebalancing” is shifting NZ away from consumption towards exports and some types of investment.  I don’t really agree with everything that has been said, but if I did there is an issue – why are we aiming to knock down consumption when we already have weak domestic demand and elevated unemployment.  Even if the structural change is right in the long-term the transition path matters – and ignoring it will merely lead to a repeat of the mistakes of the late 1980 and early 1990s.

Why do I say mistakes – well because many of the policies instituted during this period were technically “right” but the timing was poor.  When unemployment is near normal levels, and economic activity is back towards trend, THEN we can think about structural change – introducing such change now will simply exacerbate a cyclical slump.

Matt Nolan

Reminder: Quakes aren’t stimulus

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During this undeniably tragic time I’ve noticed a little fallacy flying around again – that the latest quake will at least be good for the economy.

This is of course, not the case.

Not only does the recent earthquake have massive social costs, but even if we force ourselves to ignore all the pain inflicted on individuals by this disaster and decide to focus narrowly on measured economic activity this is a net negative.

Yes, economic growth will accelerate a year from now as Christchurch rebuilds (after slowing in the near term mind you).  However, a ton of Christchurch’s capital stock – its firms, its homes, its offices – have been destroyed.  Rebuilding them is akin to taking on a cost just to try and get back to where you were before you lost the properties.

We will get some “unemployed resources” into work in a year’s time because of the crisis – but these people will be rebuilding what we have lost, not “adding new value” to what was available prior to the earthquake.

Furthermore, people who are focusing on the stimulus are ignoring the massive negative impact right now – even in strict financial terms, the negative impact on consumer confidence and on capacity in Christchurch will smash economic activity.  In essence this has made some sort of double dip recession a near certainty – even if we don’t quite technically have one.

Matt Nolan

Prices and scarcity: Milk

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I see I see, Fonterra and supermarkets have decided to freeze the price of milk.

Now if that is what they want to do, I’m sure they have good reason.  However, lets all remember one thing:  if Fonterra decides to sell milk in NZ more cheaply than it does overseas it is taking a litre of milk that would have been more highly valued by a non-New Zealander and giving it to a New Zealander.

There is no free lunch.  If we were to force Fonterra to do this transfer we are not only transferring funds from farmers to domestic consumers – we are taking away the value that would have been created when Fonterra sold the milk to someone who genuinely values it more highly than the domestic consumer does.

Now Fonterra appears to have done this voluntarily (although who knows what pressure there was in the background), so I am sure there is some sort of … reason.  Still, lets not take this as a indication that price freezes, or closing off from international markets, is a good thing.

Matt Nolan

Bollard’s crystal ball, my tarot cards

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Given that Alan Bollard felt compelled to get out his crystal ball when it comes to discussing the next year, I feel like I should get hold of my tarot cards to see what the year ahead holds.

As I have said previously, the general justification for tarot card reading is the same as for any sort of forecasting, or even policy analysis – it provides a framework, which is objectively verifiable, which you can hang your value judgments off and get conclusions from.  Tarot cards use theoretical archetypes as its framework, while economic forecasting uses supply and demand and a bunch of measured data.  We may not feel that the framework used in tarot card reading is particularly well suited to this task – as it isn’t.  But that isn’t going to stop me trying.

So without further adieu, here is the Celtic Cross reading for the New Zealand economy over 2011 – with a specific focus on the labour market.

Note:  I read the CC differently to those instructions – all will be explained.  The main difference is that the “cross” is treated as a self-contained general reading, while the “staff” is a ‘sort of self-contained’ specific reading – in this case solely on the labour market.

Note 2:  In case it isn’t obvious, the comparison between the relatively holistic tarot card reading framework and the more reductionist economic framework is meant to be facetious

Note 3:  No offence intended for professional economists or tarot card readers 😉

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