Matt Nolan

Get the right counterfactual!

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Arnold Kling makes an important point when discussing market failure on Econlog:

Instead, it says that every industry is dysfunctional in its own way. But every industry is dysfunctional.

He points out that this may lead people to the conclusion that:

And in every case, experts wielding the power of the state are presumed to make things better.

Now, to the sheer majority of people this conclusion would seem suspect – which in itself tells us that there is something amiss.  The “something” that is missing is the imperfection of government policy.

Yes markets fail, but the state isn’t able to perfectly correct for such things.  In order to justify intervention, we need to be able to say that the cost of market failure exceeds the costs associated with government intervention.

This raises an interesting issue – if it is up to policy makers to make a judgment call on these costs, and for some reason they believe that their abilities are greater then they are are (say because they don’t face punishment if they fail, and so never have to update their beliefs with regards to their abilities) then we are more likely to get government intervention when it is inappropriate then no intervention when it is appropriate.

That is just a little point to keep in mind – and is probably one of the justifications for having a Treasury department that looks at the quality of spending rather than just balancing the books.

Matt Nolan

Competition for Ecstasy

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Via Dim Post there is an article from the Herald discussing competition in the illicit drug market.  The main point is:

Ecstasy dealers are competing “like Pepsi and Coke” to sell their drug

Now, after reading this statement my first reaction was “good!”

Why?  Well, if their is competition in the industry it will improve quality – ensuring that the current information problem in the market, that leads to a lower quality and possibly more damaging product, are being circumvented by the competitive process!

Of course, the article doesn’t take this tack.  It says something about blah blah blah, people are taking drugs, blah blah blah, drugs are bad, blah blah blah, talking about drugs is immoral, blah – I don’t know, I sort of got bored of the article once I realised it was talking a load of sh*t.

So, in conclusion, competition for the provision of drugs is good – long live sites where people can compare experiences and provide information for future potential drug takers, so that they are fully informed and can make a sensible decision.  Furthermore, long live competition in the industry – ensuring that we get a more efficient allocation of drugs in society.

Matt Nolan

Housing and “production”

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So, a while back a post on housing and production got criticised, but I didn’t notice.  I shall respond now, as I need something to post on. (I would also note that there are 1 million brilliant comments in the initial post – good stuff guys.)

In a strict sense building a house doesn’t increase measured productivity – however, when making my statement that was never my claim.  My claim was that housing was productive – my intent was to show that a house could be seen as investment as it creates a stream of value.

Now, I was obviously far too unclear, and I’ll admit that for sure – so slap me down and take a point off me.

However, I was so loose with my terminology because I’m lazy … but also because I see the “focus on productivity” as inherently silly.  We don’t value the “productivity”, we don’t go around doing things with “productivity” per see – I would love higher productivity, as it means I get more stuff for the same inputs.  But I would love it because I get more stuff, not because I get more productivity statistic.

And this is the essential issue that is missed when looking at housing.

Read more

Matt Nolan

Compulsory taxi cameras: Crampton translates

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Eric Crampton translates a NBR article on the introduction of compulsory cameras in taxis.  My favourite bit:

“In-vehicle cameras are widely supported among the industry as a way of preventing competition by new rivals, and while drivers can never be 100 percent safe, these measures will make a significant reduction to the risks competition that drivers face.”

I cannot understand how the government convinced itself this was good regulation – I suspect the industry told them that it would “look like” they were saving lives, a political win, and so they just went for it.  Fail.

Matt Nolan

A note on GDP

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Anti-Dismal points out the fact that Colin James seems to have run into a little confusion around the GDP statistics.  Now, I can understand this confusion AND I agree that we need to think more sensibly about what income is before we run around making comparisons.  In this sense, all I want to point out is how the confusion came about.

Now it is true, Australia releases production, expenditure, and income measures of GDP.  However, I would note that they set the chain volume measure of these indicators equal with a “statistical discrepancy” figure.

In New Zealand, our statistics department releases production and expenditure GDP, but does not force them to be equal.  They state that they believe the production figure is more reliable overall – and that is why people discuss this figure.

Of course, GDP misses many “non-market” forms of value-added, it is a measure of “production” so misses the fact that a higher terms of trade increases NZ’s implicit income, furtermore it misses “international transfers” which are highly negative for an indebted nation like NZ.

Furthermore, we have to ask why we are looking at the figures.  Is our concern that someone in the same role gets more $$$ in Aussie and so has the incentive to move over there?  If that is the case, why not just compare the PPP adjusted wages for those professions?  Simply looking at GDP misses the fact that our two economies produce different things, and hire different types of labour.

I am not a fan of cross-country comparisons at this type of aggregate level, and I think we should be thinking carefully a little more carefully about what our concerns are regarding the NZ economy directly – rather than focusing on the arbitrary target of our relative living standards compared to other nations.  I realise these relative standards might give us some information on “what we could do” – but unless we are careful when looking at the NZ economy they will lead us towards policy mistakes.

Matt Nolan

Welfare working group says what?

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So the Welfare working group has come out with their first piece (main site, ht Welfare Watch).  Did they have any sort of point, or were they just getting paid on the basis of how many times they could mention “welfare dependency” and “getting people into work”? 😀

However, I jest.  I can’t judge their policies at present, as there aren’t any – they have just released a first document outlining the issues they think will need addressing before they think about policies.

I can say that I found the lumping together of sickness, invalid, and unemployment benefits a bit disconcerting.  And I can also say that, contrary to their language, I think the idea of welfare dependency is being overplayed as an issue – but if we get some cleaner evidence out I’d be willing to change my mind.

The thing that most scared me in the report was the discussion on “poverty” and getting people to “work their way out”.  I hate it when people go on about poverty traps, and then turn around and say we should get these people into work by “cutting benefits” or “tightening eligibility”. But note, they have not said this yet – and I am not keen to put words in their mouth.

Now hopefully they didn’t mean it this way.  Hopefully what they mean is that there are major issues in the labour market, which can make it difficult for people to move back in after a sustained period outside of the workforce.  If the welfare working group is interested in increasing the integration between the labour market, welfare policy, and education then that is a good thing.

But if, as I’ve heard a lot in the past, we are going to get told that benefit eligibility should be cut so that people have to get jobs, because “it will be good for them” I fear we are just going to hurt a lot of people – like we did in the early 1990’s, but without the excuse of international credit markets threatening to devalue us.

Note:  Also, try to remember that a social safety net is part of our social contract as a society – it is something we agree to as a group of disparate individuals.  If we want to debate the size and scope of this safety net as a society then that is reasonable.  But lets not move down the road where our sole focus falls on “benefit abuse” – as it leads us to forget about the far larger group of people who we are intrinsically willing to help.

And don’t forget that the “labour market” is only really voluntary if we believe labour has an outside option.  The benefit provides this outside option – and in theory it should be funded by a tax on land.  But I digress again 😉

Note 2:  Why are we so willing to focus our attention sharply on how injured people “should” be working (even if the opportunity cost of doing so is very high for them) – and yet we are unwilling to cut back on working for families, which is largely welfare for the middle classes?

If you are worried about whether government can balance the books, if you are concerned that there are government policies that are distorting investment and spending decisions, if you fear the fact that some transfers appear “unfair” – the primary target of your ire “should” be working for families, not invalid benefits.

Update:  Sue Bradford and Dim Post comment.  I agree largely with what they are saying – but in defence of the welfare working group, they weren’t really providing “policies” just outlining the data.