Matt Nolan

Taxing congestion: Is it helpful?

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A number of fine authors have come in behind taxing congestion today – namely Greg Mankiw and Stephen Dubner.

The justification for “taxing congestion” appears to be Pigovian – someone clogging up the road has a negative externality on everyone else, and so we should tax that externality. However, I feel that this is just half the story.

In the case of congestion, everyone else on the road is also holding up that one person. In fact, on average, one person on the road is suffering the same negative externality as they are providing. As a result, doesn’t the existence of congestion effectively cancel itself out? Sure putting a toll on will reduce congestion – but if we already have the optimal solution why would we want to introduce a tax on top of it. Note: It may be efficient to actually have some congestion, as the goal of policy is to maximise welfare – not minimise congestion.

Now I have made the argument for an externality in the past (here and here) – my thinking was that the externality fell outside of the drivers and on other areas with which driving was a means to (eg work). Of course, I can’t think of a single situation where there isn’t a “price” mechanism to sort this out (eg with work people wages will adjust to sort out the optimal labour market solution in the case of the “externality”).

I would like to hear if anyone has an externality justification for toll roads – bonus points for using the term “non-linearity”.

Will Taylor

The elasticty of petrol demand: Boy (and Girl) Racers

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But most of the time we assume (or have evidence that? -Matt?) petrol demand is fairly inelastic (hence the proposals to vary GST on petrol). With this in mind I was quite intrigued to see this article about Nikki who switched to driving her van when petrol prices soared and has since switched back to her EVO VII now that prices have fallen.

Her demand for being able to drive everywhere is inelastic, but her derived demand for petrol appears to be quite elastic:)

Matt Nolan

A critique of the Austrian and Chicago schools?

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Over at Economist’s View there is an interesting piece from a book named “History of Economic Thought: A Critical Perspective”.

Now I don’t disagree with large parts of this. It is indeed fallacious to state that any CONCLUSION is value free – as it never is.

However, I feel that the piece mixes up its attack on the conclusions of the Austrian and Chicago school with the general neo-classical method – which is, in itself, closer to value free and objective. As the actual article says:

Their science applies everywhere because it applies nowhere. Most theorizing by these schools is purely tautological.

Now this may make the descriptions “unscientific”, but conveniently it also makes them value free.  Remember, the purpose of these “tautologies” is to create statements that we can use to show relationships between things in logical terms – they create a framework that allows us to then apply value judgments and reach conclusions.  Currently, this is one of the main roles of economists – to create a framework that can have value judgments added to it to create descriptions and predictions.  Economists often move a step further and create testable hypotheses, hypotheses that are supposed to describe, or possibly even predict what is going on.  However, another set of value judgments is then required to “prescribe” policy given these descriptions or predictions – this is a bigger step than some economists realise.

Still, for now let us take the implied “argument” that Austrian and Chicago economists are said to use in the above linked article, and see if we can adjust it to suit the way I see things 😛

Read more

Matt Nolan

Paymark and December shopping

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In an article filled with interesting facts, James Weir from the Dominion Post looks at the Paymark data.  This data gives a strong indicator of what happened to eftpos sales over a month – which is probably relatively similar to what happened to retail sales itself.

Now, I agree with them that these numbers indicate relatively flat volumes – as even with the collapse in petrol prices, total retail prices are up by at least 3% on a year earlier.

Furthermore, their point about the excessively strong appliance sales figure is very apt.  Prices are down but values are up 15% – that is some strong volume growth.  The reason for this is probably precautionary – all the statistics suggest that people believe now is a good time to buy appliances, but in a few months it won’t be.  Interestingly, this is not what we would normally expect during a recession – especially a credit driven one!

One thing I want to point out in the article though is the perceived “strength” of food and grocery sales.  Sure the value is up 10% – but so are the prices!  As a result, volumes would have been flat.

Still, these are some interesting numbers – and they are extremely timely!

Matt Nolan

What happened with Boxing day?

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The news stories all seem to indicate that Boxing day was a huge success for retailers (*,*).  If this is the case, then the rapid slowdown in retail spending recorded over November and early December may have been the result of timing issues and price expectations, rather than poor consumer sentiment.

What do I mean?  Well, it is possible to delay transactions – buying the same thing tomorrow is a substitute for buying it today.  As a result, if consumers thought that there would be big sales on boxing day, they may have put off purchases earlier in the month.

Now, if this is the case, retailers appear to have caught the consumers here.  When I went shopping, the sales appeared to be little different to the sales available prior the Christmas.

Even with the lack of cut price deals, people obviously still went out and bought things – I couldn’t even find monopoly at the Warehouse 🙁

What was your impression of the boxing day sales?

Matt Nolan

Are we overplaying the crisis

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I noticed that there were some end of 2008 articles by Michael Laws and Fiona MacDonald.

Both take economists to task, one for doomsaying and one for obsessing about growth. Fundamentally, both articles have one theme in common – economists are exaggerating the impact of the crisis for the man on the street.

Sure, there is always some truth in this. Not everyone will be made worse off – in fact, many people will actually end up better off as a result of the recession (namely those that can keep their jobs and elevated wages). Anyone that reads this blog can tell that the authors here do not feel that the impact on New Zealand will be as severe as it will be for the US or UK. However, New Zealand is not immune to the gyrations of the international economy!

A collapse in the price New Zealand receives for the things it sells overseas is now a distant possibility (infact, in some respect it has already happened). Furthermore, New Zealand has borrowed a lot – with overseas investors now more nervous about lending this is bound to lead to some hardship.

Stating that things will be fine, or that we need further increases in real wages to remove our debt (which have been rising strongly in New Zealand, contrary to the authors statements), illustrates either a misunderstanding of what is going on or a blatant disregard for the risks we face. I would rather listen to the educated panic of the Bernard Hickey’s and Gareth Morgan’s then the arbitrary rambling provided by Michael Laws. Of course, I am an economist 😛