Matt Nolan

Careful with the paradox of thrift

/14 Comments/in /by

Paul Krugman has just mentioned that the “paradox of thrift” has shown up in the data. Now my opinion has moved over time, and I do think that the US is now experiencing a paradox of thrift – but his evidence appears to have nothing to do with this.

I believe that we are hitting a “paradox of thrift” as unemployment in the US is at 9.5% and rising – that is a hell of a lot of wasted labour input, and implies to me that there is a large failure in the labour market reducing national output. As a result, if lower individual private savings could bring some of these guys back into producing it is possible that total private savings could rise (although it is not a given).

However, Krugman puts in the following graph and says this shows the paradox of thrift:

Read more

Matt Nolan

Where is the externality here?

/21 Comments/in , /by

There have been wild debates surrounding the BERL report into the social costs of alcohol.  I haven’t read the report, I haven’t read the replies, I have to admit I have been busy.

However, in one of Eric Crampton’s many posts on the issue I see that generally an externality from lost output, excessive unemployment, and forgone wages has been assumed in the discussions.  I’m sorry but what?

The labour market is a market, how can we have an externality when there is a market with a market price (wages).  Yes, alcoholics produce less, less of them are employed, and they tend to have lower wages – but this isn’t an externality it is part of the market process.  They are paid less because their marginal product is lower, and they are willing to be paid less because the benefit they receive from consuming alcohol is sufficient compensation – this is a completely internalised decision for the drinker isn’t it, so where is the social cost.

And don’t say it is too the firm – the firm can set a lower wage because of the fact that the marginal product of this worker type is lower.

And if we are going to look at it in terms of society as a whole (which involves moving away from externality logic), sure having a lot of alcoholics lowers our “capacity to produce”, but given that this is the result of a maximising choice by individuals we can say that the benefit of drinking exceeds the cost of this lost production – the fact that people are doing all this drinking illustrates that the drinking is more highly prized among society as a whole than the output they could have produced.

As the ultimate goal of “production” is to lead to create outcomes that satisfy peoples preferences through consumption we can ultimately say that the forgone production is being consumed in an optimal way everytime an alcoholic has a drink – excellent, go alcoholics!

The only market failure I can think of stems from asymmetric information.  A firm hires someone without knowing they are an alcoholic and agrees to pay a wage, through selection we could end up with an adverse selection problem.  But I don’t really buy it, given that these attributes are partially observable, and future wage increases do help us push towards the market clearing price for alcoholic labour.

So convince me that there is an externality here …

Matt Nolan

Not hurting enough?

/22 Comments/in /by

It appears that economists at Infometrics believe New Zealand is not hurting enough from the global recession – that we aren’t noticing the true underlying risk of our debt position.

Well at least that is what the title says.  Reading the article indicates to me that the commentary is not on the current crisis at all – but about how we grow when we come out of it.  Infometrics seems to be of the opinion that once the crisis is over, fundamental imbalances in the domestic and global economies will drive us back to high current account deficits and a worse net debt position.

Once this happens, a global economy that has recently been stung by risk loving behaviour will punish us – forcing us to take on an adjustment that we didn’t complete during the current crisis.

Now I buy that reasoning.  But my only question (which isn’t covered in the newspaper article) is, what are the structural factors in the New Zealand/global economy causing this imbalance.  Is it our artificially high exchange rate (against fixed Asian currencies), is it artificially low interest rates, is it no capital gains tax, is it poor financial education, is it an inherent bias towards housing as an investment vehicle, is it poor investment decisions by firms, is it uncertainty surrounding policy?

Without an answer to this question, how are we supposed to know what New Zealand is supposed “to learn” 😛 .

goonix

Changing tastes and preferences in the market for NZ wine

/18 Comments/in , , , /by

The owner of Montana Wines and New Zealand’s largest wine company, Pernod Ricard, is set to cull its contracts with wine growers in the Gisborne region.

This action is in response to falling demand for chardonnay and sparkling pinot noir wine, both domestically and internationally. Chardonnay exports reportedly fell 12-14% last year alone. The culprit? Chardonnay’s fairer sister, sauvignon blanc. Apparently we are seeing a significant supply-side ‘correction’, as producers respond to a structural demand shock – consumers’ changing tastes and preferences. Indeed, last year sauvignon blanc overtook chardonnay as New Zealand’s most consumed white wine.

Try as they might, Pernod Ricard have not been able to sway the mighty consumer to stick with the product they have contracted for, despite “new product development, innovative packaging, capital investment and changes in wine style”.

I know at least one TVHE author that might be a little disappointed seeing his favourite varietal taking such a pounding. As for me, well I’ll stick with my reds thanks.

goonix

The carbon emission circus is coming to town

/17 Comments/in , , , , , , /by

Late last week the Government announced that they were running a public consultation on the emissions target for 2020.

The Government already have a long term goal of reducing carbon emissions to 50% of 1990 levels by 2050. Long term goals tend to work quite well for Governments as it gives the public the idea that they are proactively doing something but realistically they will never be held to account if and when they don’t meet the target, as they don’t align all that well with the three year election cycle. But I digress.

This consultation process is part of setting the ‘interim’ goal for the year 2020. Environment Minister Nick Smith has quite correctly identified that setting this target requires a trade-off between our economy, our international reputation and, obviously, the environment.

Ultimately this 2020 goal will be presented in international climate change conferences at the end of the year, including the post-Kyoto Copenhagen Conference. I’m sure we will all be waiting with bated breath to see what the outcome of this Conference will be.

Of far more interest are recent ‘cap and trade’ developments around the world. Obama *just* got his bill passed by the House of Representatives while in Australia the proposed Carbon Pollution Reduction Scheme (CPRS) is very much struggling to gain legs.

New Zealand’s version of cap and trade, which will aim to reduce emissions to the 2020 (and subsequently 2050) goal looks set to be determined sometime later this year, although early indications are that it will be somewhat like the Aussie model. To blatantly oversimplify things, the Aussie model is a more politically palatable version of cap and trade, with lots of pressure-group exemptions and handouts to favoured sectors, as compared with the version NZ originally had planned for under the previous Government, which was more of an economically pure ‘you pollute, you pay’ model.

The final design of New Zealand’s scheme will be very interesting indeed…

Matt Nolan

Question on loss aversion

/17 Comments/in , /by

I have a question on loss aversion, as I am confused.  I keep seeing loss aversion defined like this:

our tendency to feel sadder about losing, say, $1,000 than feeling happy about gaining that same amount

But this sounds like diminishing marginal utility to me.  I mean, the $1,000 dollars I’m losing provides me with a greater level of satisfaction than an addition $1,000 would provide me with.

My feeling was that loss aversion was a situation where my satisfaction would be lower in a situation where I lost $10,000 and ended up with $40,000 than it would be in a situation where I gained $10,000 and ended up with $40,000 – even though in both situations my endowment was the same.

I thought loss aversion was about an additional payoff relevant factor (namely that the direction of the change in my outcomes is also payoff relevant, as well as the strict outcomes) not an arbitrary way of framing diminishing marginal utility.

If someone could explain where I am making a mistake it would be much appreciated 🙂