jamesz

Make friends, not dams

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Federated Farmers’ press release:

…if government increase[s] infrastructure expenditure it should spend money on building dams rather than cycle lanes. …Water storage is critical to New Zealand’s future. It is well known that farming is the backbone of the economy. Current run of river water allocation systems see farmers too vulnerable to drought and floods.

The government’s State of the Environment report 2007:

The increase in total water allocation in New Zealand between 1999 and 2006 can largely be explained by the increase in demand for irrigation. The amount of consented irrigated land in New Zealand increased by 52 per cent over this period…

Water is getting scarcer and scarcer worldwide and it’s only a matter of time before NZ feels the pinch, too. Farmers say they should get the water becasue they’re our ‘backbone’; environmentalists throw up their arms in dismay; the government implements ad hoc water restrictions and gets lobbied by everyone.

Luckily, economics provides a solution to the problem: Read more

jamesz

Space: the next to go

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Looks like we narrowly missed by crunched by space debris the other night. Although, in true “tragedy of the commons” style “[a]stronauts routinely trash equipment in space.” So, as the world starts to think about trying to fix the mess we made of the ozone layer, we’re already on our way to trashing another part of the environment that’s common property.

I wonder if it’s actually cheaper to fill it with junk now and fix the problem later. Presumably the marginal cost of the cleanup will be lower when technology improves, and it’s discounted from the current perspective. However, since the problem is not the junk itself but the lack of property rights giving nobody an incentive to do anything, I doubt that calculation is being made by anyone.

Matt Nolan

The Depression and Now: Why we should be concerned?

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As a footnote to todays post on the Depression I feel it is important to add this from Dr Doom, Nouriel Roubini (ht Greg Mankiw).  He puts down four reasons why deflation is now the concern:

  1. (1) a slack in goods markets,
  2. (2) a re-coupling of the rest of the world with the U.S. recession,
  3. (3) a slack in labor markets, and
  4. (4) a sharp fall in commodity prices following such U.S. and global contraction, which would reduce inflationary forces and lead to deflationary forces in the global economy

I think that the only key one is the third one – the goods market is too flexible, the second is merely a means for the other reasons, and the change in commodity prices is a relative price movement again.

Ultimately, if the price in the labour market it too inflexible (wages) we will see a knock down in employment sure – but deflation?  Deflation stems from a reduction in the quantity of money – central banks are going to keep printing all they can to keep price levels up, a factor that will reduce real wages and then in turn reduce the scope for increases in unemployment.

I don’t see deflation occurring when fiscal and monetary policy is determined to stop it.

Matt Nolan

The Depression and Now: Why I’m not as concerned

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Anti-Dismal does a set of posts on this issue which are worth a read (here, here, and here).  I will try to put down my own take on the issues for New Zealand specifically in this post.

When thinking about declines in economic activity I have to think – what is the actual cost to people, what is the issue that concerns people which they didn’t have any control over.  My impression is that the fundamental concern surrounding a big slowdown is unemployment – more so than the decline in average incomes or production persee.

This concern makes sense to me as the labour market is the market that has one hell of a lot of trouble adjusting to a significant change in economic conditions.  During the good times wages increase too slowly – leading people to believe there is such a thing as a “labour shortage”.

When bad times come along wages refuse to head down – a factor that leads to more people being laid off, and thereby leads to a disparity between those that have a job and those that don’t.

Now in the Depression this downside “stickiness” in nominal wages was inflamed by mass deflation.  With the price of everything else falling, labour was become relatively more expensive – and so firms used less of it, increasing unemployment.

In this sense we have to ask – are we going to have a massive deflationary episode?  If we do then we will see unemployment pick up – but those that actually keep their jobs may do alright.  However, given the determination of central banks to print acres of money we are more likely to have inflation and as a result, falling real wages.  This will make workers relatively “cheaper” and will prevent the type of mass layoffs we saw during the Great Depression.

These nominal rigidities in the economy are imperfections – they don’t fit the standard economic models, which is why government policy to inflate prices actually makes sense in a short-horizon.

However, government action can’t do anything to prevent the worst case scenario – when the price of our exports fall through the floor, and household income decline 10%+.  This would be damn ugly, but beyond taking account of these nominal rigidities there is nothing the government can do about it.

This view will be contentious for two reasons:

  1. I am deeming that the short-run impact of inflating prices will be a good thing with no evidence,
  2. I am ignoring confidence and any “demand deficiency” type argument – fundamentally I am saying that as long as the nominal rigidities are not allowed to constrain matters agents will react optimally.

So discuss, surely people would like to have a go at me about this – I will check this when I get back and get involved.

Will Taylor

The myth of the rational voter

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I wish I had time at the moment to read Bryan Caplan’s new book or the piece he has written at Cato unbound on the myth of the rational voter. Having only done the briefest skim I can’t really comment on the conclusions he reaches. However, the title seams fairly self explanatory.

This has really made me think of all the people I saw interviewed during the election night coverage saying they used to vote Labour but had decided to vote for National because it was “time for a change”. When pressed why change was needed not one person had anything to say. I kept joking at the time that it was the  “obama factor” (where in my opinion change was needed). In hindsight I’m concerned that it was. I can’t help but find it slightly worrying that people voted National but didn’t really have a reason to other then “change”.

Agnitio: Happy National are in but worried about how they got there…..

Matt Nolan

Mortgage markets: Australia (and NZ) vs the US

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Following today’s terrible house price figures (I don’t have to see them to know they would be bad 😛 ) I thought it would be appropriate to go back to the comparison of NZ (and Aussie) to the US – at least for housing.

Greg Mankiw links to an article in the Wall Street Journal.  Read this:

When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It’s a neat way of reminding Australians to borrow responsibly.

In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability.

Surely hearing how moronic lending practices are in the US makes us all feel better about the relative outlook for our banking and housing sectors.  Although I bet to spite me that a major Aussie bank has gone bankrupt while I’ve been out of the country 😉 (again this was written on Sunday Nov 2)