Matt Nolan

Hand waving, model making, and variable lags

/in , /by

I would suggest that anyone who is interested in economic models reads this post, namely because I agree with it wholeheartedly 🙂

While it might seem cool to run some regressions and get a result that you believe will tell you the future it is important to realise what your implicit assumptions are.  If you add a variable to you model and it is significant but you don’t know what it has to do with anything you should be careful.  This is how using a lag functions.

You need to ask yourself why is this lag significant? what is the process behind it? Data can only really be used when you can frame it with a model of how the world works.

Personally, I hate using too many lags unless I have an understanding of why the lag matters.  When you do an empirical model it isn’t just the “significance of the variables” that matters – it is the believability of the implicit model that it represents.

Matt Nolan

More definitions of economics

/9 Comments/in , /by

I just asked this new Wolfram Alpha search engine “what is economics”.  It told me:

Economics:  The branch of social science that deals with the production and distribution and consumption of goods and services and their management

This differs from the Robbins definition of economic science:

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses

And it differs from the broadest possible definition that we discussed earlier:

The study of how humans/societies allocate scarce resources.

Given no mention of “human behaviour” or incentives this definition is wider than the Robbins definition.

Is the Wolfram definition any different to our broadest definition?  Well if certain elements are defined correctly I would say they are equivalent.  As a result, it doesn’t tell us what economists do, or what the dominant school of economic thought is.  Wolfram is simply giving us a definition of the broadest scope of what “economics” can be (and has been) seen as – as long as we define the “outputs” (goods and services) as widely as humanly possible.

So, given that the Robbins definition is the one that more fully captures the essence of what economists currently do (with our obsession with methodological individualism) I tried typing “what is economic science” in.  But it told me:

Wolfram Alpha isn’t sure what to do with your input

Matt Nolan

So tired …

/3 Comments/in /by

Of productivity talk.  On dicussing the NZIER report (which we discussed here) Kiwiblog mentions:

Productivity growth is all important.

Productivity is a ratio – I could increase it right now by shooting half the population.  It is the output that matters here, and how much we have to sacrifice to get it.  Increasing output (which we value) while sacrificing things we don’t value as much as the output is key – not productivity growth persee.

This distinction is important because “productivity growth” is going to fly up over the next couple of years – as unemployment will rise.  This isn’t necessarily a good thing, and it is not because of any parties polices.

When Labour was in power I was annoyed that output, and productivity, were ignored – as they ignored that in order to gain these “other things” like equality we were sacrificing some output.  Now everywhere I turn ALL I HEAR is productivity.

Why don’t we just learn to look at the trade-offs associated with policies and then do what is in societies interest – instead of targeting arbitrary ratios.

I’ve already talked about this here and in the Dom BTW.  I need a drink.

Matt Nolan

The durable drop and timing

/in /by

So according to the Stats NZ figures, the quantity of durable consumption goods (cars, appliances, furniture, drills etc) purchased fell very quickly during the March quarter. Now they have been dropping for a while – but this drop was off the charts.

Durable goods are seen as a “leading indicator” (in combination with durable investment products). It appears that the sharp falls for durable consumer goods have only just got kicking, while the sharp falls in durable investment goods started only mid-late last year. Since the recession started in the March quarter of 2008 this is all a bit surprising.

Given that unemployment has only hit 5%, and non-residential building has yet to fall (both lagging indicators), as well is this indicating that the recession is only really beginning for NZ. Has the past 15 months been some type of rebalancing that wasn’t really a recession – and is the recession coming now.

I think that is the worst case scenario we could pull out of recent data – if we really wanted to 😉

Matt Nolan

Low prices and anti-competitive action

/22 Comments/in , /by

Over at Anti-Dismal, Paul Walker states the following when discussing anti-competitive action against Intel:

The whole point of market power is to raise prices, and thus profits. But how can Intel be accused of anti-competitive behavior when it was giving “hidden discounts” to computer makers? A real anti-competitive monopolist, with real market power, acting in a truly anti-competitive way, would be in a position to raise prices, not lower them.

However, they are being attacked for predatory pricing – which means the “high prices” we are discussing have to be compared to the appropriate counterfactual.

At some level prices have been falling because of improving technology – so looking at the CPI figure is not exactly what we want to do.  We want to look at what Intel is supposedly doing to cause the complaint of predatory pricing.  Now Intel is suspected of predatory pricing because it is giving kickbacks (and so effectively lower input costs) to people who use their chips.

If doing this is sufficient to prevent the entry of some competitors (because of significant fixed costs of entry – something that seems descriptive of the micro-chip industry, both from setting up factories and getting downstream firms to integrate your product), and thereby keep prices higher than they would have been in the case with competition, then it is a legitimate complaint.

Another way of viewing it is – has Intel set itself up in such a way that it credibly commits to the threat of a new entrant.  If we can make this case predatory pricing could exist.

Now I am not saying that the this is necessarily what is happening – but in a global industry with only 2 (maybe 3 😛 ) firms it is definitely worth looking into.  Personally I believe that there could be economies of scale, or that it makes sense to have a “benchmark chip” which Intel currently has patent over.  But there is a genuine case for an anti-trust case study here.

Matt Nolan

Does attacking bank profits makes sense?

/30 Comments/in /by

I was surprised to hear Bill English come out and tell banks to reduce their profitability.  This statement is ridiculous – it is like telling people to go out and cut their wages.

However, Bernard Hickey bet me to the punch in criticising this.  This quote sums up how I feel:

I actually like that our banks are profitable. The alternative is unprofitable banks that collapse at the slightest breeze

There is one more issue though.  The RBNZ feels that banks are not being competitive.  [Note:  I am not bringing up the deposit guarantee scheme.  If the government is not charging an appropriate fee for the guarantee then they are being silly – we shouldn’t attack the bank’s for that.]

Now, if there is a competition issue there could be scope for intervention.  But wait a second, Kiwibank and PSIS are offering lower floating rates (5.99% and 5.75% respectively) – why isn’t the existence of this competition driving down prices?  If we believe that people are willing to pay a margin on their floating rate if they go with a big bank then we have to ask “do we think Kiwibank and PSIS are being uncompetitive” – as they are setting the floor for interest rates.

I’ll tell you why floating rates are so much higher than near term fixed rates – uncertainty.  People are willing to pay a premium on floating as they are uncertain about the degree with which rates will fall in the future, so they value the flexibility.  Furthermore, the return on floating rates will be volatile (as they can change at any moment) so banks want to charge a premium – as they are facing uncertainty (people value a certain return above an uncertain return).  I don’t see what is unfair here.

If we force the banks to cut rates (with the same cost structure), they will reduce lending FFS.  Is that really what we want in the middle of a long-recession?