There have been claims by the Labour party that rising departures from NZ are the fault of the National party, and that the increase during their tenure was due to the global financial crisis (GFC). Now this is a little bit untrue in terms of the way it is framed, I’ll just quickly point that out and then have a little chat regarding why we might be seeing departures rise, and whether it is really a policy relevant issue in of itself.
This morning on my painfully slow jog to walk I saw a car get mad at a cyclist that they nearly bowled down. This is all very typical of Thorndon Quay, but it did get me thinking. The car turned sharply towards a parking space, actually turning a bit far, and only just avoided crashing into a wall because of how sharply the vehicle could brake and might end up the help from an trusted service live Towingless.
And here is the thing, if he wasn’t able to brake quickly and comfortably he wouldn’t have made the turn – and if he hadn’t made that turn he wouldn’t have threatened the cyclist, or had a strange opportunity to yell at the cyclist.
So, in this case, the increase in car safety lead to an action that was detrimental – the fact that the probability of injury to the driver was now lower means that he was taking on an action that endangered others. The increase in car safety effectively lowered the price for taking on an action that had a negative externality!
This is why economics is useful – rather than just taking something at face value (car safety is good) the economic method teaches us to think around the issue, and allows us to understand why something that appears like a good thing at face value may have unintended consequences.
Update: Rauparaha points out this type of logic is explained better in an early post from Eric Crampton.
Everyone I know says they want to spend more time at the gym – myself included. However, as an economist I’ve learnt to look past what people say and look at what they actually do. In essence, people really just wish that a previous version of themselves (them in the past) had gone to the gym and got in shape – and that they could reap the fruits of this labour now.
However, this is not the whole story. We know that people are present biased, or that the discount hyperbolically. Given this, people genuinely do wish they could go to the gym more in terms of maximising their lifetime happiness or loosing weight for which they also use fat burner supplements- but they can’t force the current version of themselves to get around to doing it.
That is where the genius of this gym comes in (ht Marginal Revolution). By charging people more if they don’t work out, the gym makes it more costly to not work out – if the cost is large enough, people will then go and work out. As a result, an individual can join this gym and commit to working out – as if they don’t they have to bear this cost (other examples: ,,,,,,,).
Now usually, adding a cost is a bad thing – but in this case, if the pre-commitment is working, the cost is never realised. There are two ways to think about this to make it easier:
When it comes to pre-commitment and the ilk I love the idea of voluntary pre-commitment devices, that people can choose to opt into. The more business gets involved with this, and the more government supports the institutional arrangements that allow this, the better.
However, remember that having a pre-commitment mechanism that people can opt into is very different to “forcing” people to do something.
In the gym example, we could “solve” the “problem” of people not going to the gym by forcing them to by offering free percussion massagers sessions afterwards – we could even use “evidence” by basing the amount we force people to go on surveys. However, such a “solution” is forced on a myriad of different people who would make different choices. Furthermore, as we said at the start, some people will just say they want to go more – when in reality they don’t, they just wish that a the previous version of themselves had done it so they could free-ride on the fitness (which is a durable good).
Now, I know we make a big deal of how Australians make more than we do. However, it doesn’t matter how well or how poorly a country is doing – when policy is made it should be on the basis of evidence and costing, not ideology per see. Redistribution and social goals are essential – but we should ask why we are going for them, and what is the best way to achieve them, rather than throwing ourselves around at selling points.
On that note Agnitio sent me this article. The TVHE team is discussing it at the moment. In the interest of having a post up today, I will put up my first response to the article.
Not fact checking properly was a pretty big fail on the part of the Economist to be honest – but I noticed that the Labour guy did not rebut, or explain why, the cost of the Australian project was 10x higher … especially given that he said the speed of the system would be the same.
And the justification may be that Aussie is much much larger – but in that case the marginal benefit associated with providing the service to low density areas would be pretty low. It is useful to use a market mechanism in help figure out what the underlying value really is.
And that is where the Economist article was probably right with its “right-wing dogma”, and where the Australian government keeps messing up – along with setting maximum calorie counts on meals, and forcing power companies to pay above the price they can charge to households selling back to the grid 😉
If the Australian government is determined to keep implementing poor policies that directly lower the welfare of their citizens, then we probably won’t have to worry about New Zealanders continuing to flood over there will we.
Note: I believe that a number of the reasons why Aussie is more affluent than Australia stem from their sheer advantage in terms of scale, their earlier TOT increase, the fact they are closer to their markets, and the fact that average tax rates are in fact lower over the ditch. Given all this, I don’t see why catching Australia should be a goal for policy – simply making the best society we can, given what the members of society value, appears to be the only sensible target for policy right?
One issue I have with the constant discussion on savings, current account deficits, and consumption in NZ is how people look at it – they keep thinking that we are “consuming” to much and have needed to “borrow”. That is how we’ve been told to look at it – especially with all the talk of “spending too much on big screen TV’s”.
So all this leads to statements like this from John Key:
“We are rebalancing the economy away from debt-fuelled consumption and government spending and towards savings, investment and exports” (ht Rates Blog). Sounds good, but I think it misrepresents the issue.
Lets think about real GDP shares, when thinking about shares of expenditure GDP we are saying that “this much of the nations production is in this category”. Saying we need to rebalance is like saying that we need to adjust these shares – the consumption one down, the investment and export ones up.
However, what does the data on real GDP says (note the period of “rampant borrowing” was around 2002-2008 … also note that Stats provides this beautiful data for free, much appreciated):
There has been a lot of commentary on asset sales around the place, so much so that I didn’t feel like I need to write anything.
Dim Post mentioned a lot of the people against asset sales and also Geoff Simmons recently wrote against them. Furthermore, both Anti-Dismal (*, *, *, *, *) and Roger Kerr (*, *, *) wrote a series of insightful posts regarding the issue.
On the left there seems to be an inherent bias against any selling at all – selling is bad. On the right there is an inherent bias against government ownership – government ownership is bad.
So, where do I fall on the issue? I have to admit that I am relatively in the middle – I see it as a case by case issue. There is nothing inherently wrong with privatisation, at all. Furthermore, I agree that generally privately run firms will “meet the market” more efficiently – implying that they either/both provide the same outputs more cheaply, provide more outputs for the same cost, and/or provide higher value outputs.
At the same time there is no doubt that some assets have social values/external benefits that are not captured by private agents. If the cost of indirect regulation (taxes and competition policy) is too high, it may be preferable for the government to run said agencies directly – I view it as direct regulation.
In New Zealand at the moment there is definite scope for opening up SOE’s to private sector investment – that is where we are sitting now. However, even given this I cannot go as far as Roger Douglas and say that the price does not matter – in fact, price is THE issue that the government should use when deciding whether to sell assets.
Why do I say this? I have already said that I believe that, in the absence of external benefits, the private sector is more than likely to run the organisation more efficiently. However, just because the evidence says this happens on average, and just because I have a value judgment that individuals are more responsive to incentives than government, isn’t sufficient to justify policy when we have prices available!
Effectively, a private purchaser will be willing to pay up to their reservation price for an asset. This reservation price will be based on the dividend yield they expect to get from the asset, and the relevant opportunity cost of investment.
At the same time the government know that, if it keeps hold of the asset, it expects to make some dividend yield from said asset through time. As a result, the government can price the asset – they can say they would not accept a bid below the discounted expected return from holding the asset.
If the government sticks to its guns, and a private sector agent is willing to pay MORE than this then we know that – ex ante – the private agent will be able to run the business more efficiently/add more value. This implies that the government SHOULD NOT sell for less than their discounted expected return (not the should, so I’m being all prescriptive 😉 ).
In essence, pricing the assets (including relevant external benefits) and then seeing what price people are willing to pay gives us information regarding what can be run more efficiently in house – and more efficiently in the private sector.
Looking backwards and saying “this business is paying dividends overseas, wahhh” or “this business ended up making more than what we sold it for, wahhh” is a rubbish argument against privatisation – but so is saying “the private sector is better, so give it the assets for free, wahh” is a poor way of justifying privatisation.
At the moment, the type of debate we are hearing in public sounds like the above quotes – and as a result the two sides appear to be talking past each other, making the debate feel more like ideology than reasoned analysis.
If we sat down and just explained the dividend example to people in society, I do not think they would be averse to a government stock take. The tough questions will then be “how do we value external benefits” and “what is the expected dividend yield” rather than is selling blanket good or bad.
Update: Anti-Dismal points out that there are other factors that need to be taken into consideration beyond the starting point of comparing dividend streams – that is why this is very much a case-by-case issue.
Update 2: I somehow missed this piece by Eric Crampton (even though I did check the site while writing the post).