Matt Nolan

Missing the point: The emissions trading scheme

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A recent opinion article by Graeme Edwards on the NBR site clearly articulated a critique of the emissions trading scheme that I have heard in various forms over the past year.  Not only have I heard this critique from politicians and the media, but people commenting on the blog and other economists have used this critique.  As a result, it is important to point out why this critique is simply wrong.

The critique is simply that the emissions trading scheme is a “scam” because global warming is not the result of carbon emissions, to learn more about smart and green trading, read here the blog post about how to trade fx with high margins.

Even if we agreed with this view the critique is still wrong.  The reason this critique is wrongheaded is simple – the ETS is not supposed to prevent global warming, it is supposed to raise funds to pay for/reduce a liability we owe thanks to the Kyoto protocal.  Now that we are in the Kyoto protocal, we want to look at two simple choices – what is the cost if we stay in, and what is the cost if we leave?  The ETS was determined to be the least cost way of paying for the liability if we stayed in the scheme, and it was also determined to be of a lower cost than leaving the scheme (relative to losing international prestige and possible new trade barriers if we leave).

As a result, even if it was true that man wasn’t warming the planet with carbon introducing an ETS is still the best policy – as long as we believe that it is of a lower cost than these other potential options.  The debate should lie with the cost of different options – whether global warming actually exists is irrelevant.

Matt Nolan

When not to stimulate

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Sorry for linking to the Standard twice in one day, however they have written about a couple of things I wish to touch on recently. In a recent post Irish Bill states that:

One of the things I like about being left wing is how often the best moral decision is also the best economic decision.

Take economic stimulus for example.

Now, on the first point I would state that the best policy decision and the “morally right” decision always match when you are a utilitarian like me. Getting the two to separate in anyway involves making some pretty specific assumptions and what a “economic decision” is and what a “moral decision” is.

Still this isn’t the point I was interested in discussing – I was interested in Irish Bill’s belief that a stimulus package is good policy in the New Zealand environment. In a credit driven slowdown like the one we are facing a stimulus is not the way to fix things as we are not suffering from a “demand deficiency” – or at least not the type that cannot be solved with monetary policy.

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Matt Nolan

Do we want “productivity growth”?

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CPW has requested that we cover the Standard’s coverage of the National-Act coalition agreement, specifically this section:

National/Act agree to close the ‘income gap’ between Australia and NZ by 2025, requiring ‘3% productivity growth per year’. Which is just economic techno-babble. What ‘income gap’ are they talking about? GDP per capita or wages or what? And how would a faster rate of productivity growth close this gap? Anyone who knows what productivity is (the amount of wealth produced in a unit of work) knows that merely increasing productivity doesn’t necessarily boost GDP or wages. GDP = productivity x work done. So, GDP not only depends on productivity it also depends on how many people are in work. And boosting productivity doesn’t lead automatically to higher wages – wages are determined by supply and demand in the labour market, nothing to do with productivity. In fact, productivity grows faster when employment drops because it’s the low quality workers that lose their jobs first and lower quality capital that sits idle first, but wages don’t go up because there is more slack in the labour market.

After reading it we felt that a non-biased explanation of the “economic techno-babble” was in order.

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Matt Nolan

Frogs concern about the Baltic Dry Index

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Over at Frog Blog, Frog discusses the current economic crisis and the magnificent fall in the Baltic Dry index. The sentence that summarised this feeling for me was:

Another part of me says that any indicator that drops 93% in less than six months is reflecting a serious ailment in the global economy

Now Frog is right to be concerned – he is right that this movement indicates a slowdown in global trade, and that any slowdown in global trade will impact on New Zealand by knocking down commodity prices. However, I would like to put the movement in perspective – as a figure such as a “93% drop” may give people the impression that we are in a more dire situation than we actually are.

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Matt Nolan

And back …

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I’m back now, I will attempt to answer the comments that have turned up in posts over the next week.

I’ve noticed that New Zealand elected a National government while I was away – very interesting.  Labour really did get hammered – I think that ridiculous advertising campaign about whether John Key could be trusted backfired.

I also noticed that the other authors wrote a number of very interesting posts.

I have a ton of reading to catch up on now, hopefully I can come out with comments and posts over the next few days.

Matt Nolan

Quote: 9) Robert Solow on Friedman

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Robert Solow:

Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers. (*)

This quote is Solow’s humourus way of reminding us that the study of inflation isn’t the whole purpose of economics.