Welfare maximisation as a framework?

The more I read political blogs in the lead up to the election, the more I realise that media and politicians like to paint issues in a way where they have arbitrary goals – such as “increasing the domestic sale of New Zealand made goods”.

However, there is no reason to presume that these goals should be the purpose of policy – after all we do not know how or why these goals were formed.  The overall goal of policy should be to improve net happiness in society – a broad, and also relatively arbitrary goal.

Now there is no way that people would agree on the set of policies that would do this.  But if we set ourselves up to achieve a certain “goal” then we are implicitly taking into account the costs and benefits of the policies that will achieve this goal.  In current media and political analysis the focus appears to be on the “good” of a policy or the “bad”, which is fine.  However, they don’t directly try to weigh the two before making a conclusion deciding to either go with one or the other.  This is irritating because it is the weighting of costs and benefits that is the primary purpose of the political party – which implies that the functioning of political parties and the media is not transperant.

Ultimately, it is important to remember that whatever party is in power will have certain value judgments surrounding the weight of these costs and benefits, which will be revealed by the way they discuss certain policies.  We cannot trust a single political party or media organisation to give us these weights and as a result the “goals” that they focus on are misnomers – reducing carbon emissions has a cost, getting people to buy domestic products has a cost, there is no free lunch.

Parochial Wellington posting

TVHE is a bunch of current and former Wellingtonians so, via The Wellingtonista, here is a map of how we voted down here.

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Tom at The Wellingtonista has done an amazing job with the data so click the map to see a detailed breakdown by polling booth. Read more

RBNZ Financial Stability Report

This semi-annual report by the RBNZ will take on disproportionate importance given recent events.

It came out yesturday, so what happened?  Is our financial system doing alright?  What do they think are the primary risks?  What do they say about the deposit insurance scheme!?

September quarter retail volumes: The curse of the deflator?

So the September quarter retail figures are out.

I love the quarterly figures because they give us volume and price data as well as the monthly value data.

So how much did retail sales fall by – only a little bit hopefully. Now pull out all those automotive subtypes – how much did core volumes fall by – this is the key figure for me. If they fell by more than, say, 0.6% in the quarter (seasonally adjusted) then I would be concerned.

How about the “deflator” (retail price increases). People in the retail industry say that they are slashing prices to get people in the door – the consumer price index indicated that they weren’t actually doing this. So which is it?

Now we can use the value number for something useful – compare it to growth in hours worked X average hours in the QES (on the third). If the QES number grew by more then it indicates that we may be seeing a sizable increase in savings – some may view this as “demand deficiency” and other may view this as “a required adjustment”. Ultimately, where I sit depends on how big the adjustment is 🙂

So, discuss 😀

In support of progressive taxation

After todays attack on effective “left-wing” politics of blanket transfers and the idea that we need government to save the day, I thought I should come out with a post in favour of other general government action.  So lets looks at progressive taxes.

It is common for economists to attack progressive taxation as it can be seen as:

  1. Unfair, given that some people who work have to get income have to pay a greater proportion of there income to the state (even more than a greater amount!)
  2. Unfair, because we may believe that most of the spending benefits people on lower incomes,
  3. Inefficient, given that we are taxing our “most productive” citizens at a higher marginal rate, reducing their labour supply.
  4. Or inefficient, because if the tax is passed on to the business, we are taxing highly skilled industries more than unskilled industries, which is a distortion.

However, there are reasons why society may want a progressive tax system, and when it would dominate other tax systems:
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The paradox of thrift and demand deficiency

The paradox of thrift is one of the key lessons taught to macroeconomics students during their first undergraduate year.

Fundamentally it states that if everyone in society decides to save more right now, then it reduces consumption, with reduces economic activity and thereby incomes – and as a result it may actually decrease aggregate savings, and it will definitely reduce economic activity.

It is still widely applied, with recent Nobel prize winner Paul Krugman appealing to it in order to explain why the US needs to jump on in and get consumers spending again.

Of course this does not mean the theory is necessarily right. The paradox of thrift does not have a supply side – as long as prices and quantities can adjust to an economic shock this paradox, and the suggestion of government intervention in the face of it, does not hold water. For government intervention to be a possible solution we need a MARKET FAILURE, a market failure that causes a special macro-economic situation called “demand deficiency”. (Note: This is effectively the difference between Say and Keynes).

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