Matt Nolan

Breakfast tomorrow: Defending the 24% increase in house prices

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I will be on Breakfast tomorrow (at 6.50am) defending Infometrics pick of a 24% increase in house prices over the next three years.

Although the last pick was a little off, house prices still only feel a little bit more than we stated (falling 10% vs our 5% – although if you look at median house prices the decline was only 5.4% :P) and this was really the result of a collapse in credit markets – something that had not fully eventuated at the time.  Once the credit crisis stepped up following Lehman Brothers we moved into the 10% fall camp.

Anyway, feel free to complain about things I say here – until I get a post up discussing what I went over.

The Hand

Bank runs and TARP

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This is a Hand post, but it is actually just the normal authors of the blog.  We all had the same idea at the same time 😀

Over at Anti-Dismal, Paul Walker reaches the conclusion that

The moral of the story, markets can deal with asymmetric information

In the case of bad and good banks.  He states that banks are able to signal whether they are strong or not, and so government intervention is unnecessary.

However, this doesn’t seem to weigh up properly with the vast amount of literature that points out that bank runs are a concern resulting from asymmetric information (and multiple equilibrium – for economists this is because withdrawal decisions are strategic complements) and that a small amount of government intervention can help prevent said negative outcomes (here and here are seminal pieces).

Now there is a way that we can put both points of view together. Lets look at how the market is overcoming the asymmetric information problem:

At least one major US bank is advertising the fact that it refused TARP funds.

So the market was only able deal with asymmetric information in this case because the government created a mechanism that allowed banks to credibly signal (the TARP program).  It is ONLY because the government created this mechanism that the individual banks could signal their “strength” credibly, thereby preventing an inefficient bank run equilibrium.

So I would change the moral of the story slightly to

markets can deal with asymmetric information, when the institutions are in place that allow them to credibly signal quality – an issue government can sometimes help with

Matt Nolan

“Mobility of labour” is not a reason for favouring GST

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There has been a bunch of good stuff written out there about the trade-offs between using GST and a (flat) income tax to raise government revenue.  However, there is one point I think has been slightly exaggerated – the mobility argument for a lift in GST.  An example of this comes from an excellent article by Vernon Small.

Put simply, since people can leave or  go elsewhere – and so can investment  dollars – they should be taxed the least.

On the other hand, local consumption – which attracts GST – can by definition only happen here.

Now the first paragraph has a lot of truth in it.  But in reality the idea that “people can leave” in the face of tax and the idea that “consumption can leave” in the face of tax are equivalent.

Why?  People value their income only insofar as they can buy things with it.  As a result, if someone is forced to either stay at home or move overseas then a GST rate of 25% is equivalent to a tax of 20% on labour – as both taxes drive a wedge between what an employer is paying and what real goods and services a employee is receiving.  This point was also raised by the Tax working group.

So remember, it is not true that switching a “flat” component of income tax to a GST rate will necessarily lead to fewer New Zealanders going overseas.  If it does anything it will change the timing – leading to more New Zealanders staying around to save up income, and then moving overseas to spend it.

Matt Nolan

NZ/Aussie Optimum currency area

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There is a little bit of talk about a ANZAC currency I see.  Lets be honest here, this effectively implies that New Zealand would be adopting the Aussie dollar. I remember arguing about this with my brother a while back, he was pro I was against.  Nowadays, I’m not sure – I’d like to see a few studies on it first.

Now there are costs and benefits from such a currency union.  Pages 633-634 in “Foundations of international macroeconomics” by Obstfeld and Rogoff covers these off as follows:

Benefits

  1. Lower transaction costs.  As Aussie is our main trading partner this is a biggie.
  2. Removes exchange rate risk for trade between nations, both in terms of relative prices and account reporting.
  3. Prevents damage from exchange rate verring from fundamental level.
  4. Makes trade protectionism more difficult.
  5. Added I would also add that, in this case, having the Aussie dollar will reduce the risk premium we have to pay for credit

Costs

  1. Can’t use monetary policy to compensate for region specific shocks – dairy price crashes and we can’t use a lower interest rate to help buffer the fall.  This is the primary concern.
  2. Can’t use inflation to lower public debt – our monetary policy is now determined by Aussie.  However, we don’t do this so it doesn’t matter.
  3. As fiscal policy is independent it can cause issues with splitting “seigniorage revenue“.  With a low inflation target this is not a biggie at all.
  4. Speculative attacks prior to the union.
Matt Nolan

Quote of the day: On subjective experience

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As we’ve said before, the first port of call for economists is trying to frame an issue as objectively as possible.  However, in a practical sense many economists can’t help jumping in and adding some conclusions along the way.

Now, I’m no philosopher so I find it handy to keep some rules of thumb in mind when trying to figure out what value judgments seem “reasonable” to me.

the frailty of life matters more when you are on the wrong side of it

(Unattributed as I can’t remember)

This quote makes me think of two important issues when I use value judgments to reach a conclusion:

  1. Value is subjective and built on experience, so how something makes a person feel and how it came to make feel that way does matter.
  2. My own values are subjective and built on experience, so I need to correct for my personal bias when I initially look at an issue.

This is something that some other analysts need to think about, especially when they make comments like:

Being drunk in a public place should be made illegal and fines should be given to those caught

Matt Nolan

Social harm and drugs: Is something missing?

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In a recent article on Cannabis seizures the police said:

Based on the New Zealand Drug Harm Index, it was estimated that $379 million worth of social harm had been prevented by the operation

So I looked up the drug harm index and found a release from BERL that stated:

Cannabis is estimated to cause harm of $11,800 per kilogram

Now, I’m confused here.  By social harm do we mean that this is the externality associated with a kg of weed?  If so that is huge and I am not sure where that is coming from.

If that is the total cost associated with weed it is largely policy irrelevant as (depending on market segmentation), I suspect, that this would mainly be the size of the private cost of buying weed.  Given that the transaction is voluntary as, I guess people must get some satisfaction from it when they consume it, this cost must provide a lower bound to the size of the satisfaction associated with the consumption.

In this case the police should say “we prevented $379m of pain AND $400m of pleasure” – when it is put this way it doesn’t sound quite as flashy 😉