Matt Nolan

Baltic Dry Index collapses

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So the Baltic Dry Index (an index that implies what the cost of shipping for exporters will be – in as far as it represents the fees of the people running ships) has collapsed by about 79% so far this year.

As the supply of ships is incredibly inelastic in the short term, this is probably the result of collapsing world commodity demand (although it could be that a whole lot of new ships came online at the same time – unlikely though).

What does this imply for NZ?  Well the index mainly represents shipping of “hard commodities” – so it tells us that demand for those has invariably fallen.  This implies:

  1. Soft commodities may have fallen further,
  2. Growth in Australia will slow – harming our exports,
  3. Shipping costs (especially for our logs and aluminium) have fallen markedly.

The first two factors are a concern – but the third factor is a bonus.  One of the reasons forestry has struggled is that prices have been depressed (no construction in the US!) while shipping costs have been high/shipping has been impossible to get.  Now ships will come here – and cheaply, making it possible for forestry to get back on the game.

As log prices are not likely to fall further – forestry will benefit from this.  Other commodity sellers may have some trouble (depending on what happens to soft commodity prices).

Will Taylor

The Greens understand economics

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Or so Russel Norman said when asked by Paul Henry earlier this week what the most common misconception about the Greens is. What do you think? I’m going to try a poll for the first time ever on tvhe, hopefully it works:)

I somehow stumbeled across this article from the greens (don’t ask me how..) which I think illustrates their understanding of economics

http://www.greens.org.nz/node/20081

I’ll be honest and admit I stopped reading the article after the paragraph i’m about to reproduce so I’m open to accusations of trolling, but this was little gem

“Reducing saving by cutting KiwiSaver is the same as increasing debt. It won’t show on the Government’s balance sheet, because Key has swapped Government debt for private debt. Lower savings will show up on households’ balance sheets as increased private debt, which is already too high,” Ms Fitzsimons says.

Two points here:

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Matt Nolan

Does inflation targeting encourage borrowing?

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That is the view put forward on the Rates Blog by Neville Bennett. It is also a view that Berl has enjoyed some airtime with. It is also, in part nonsense from a bunch of very smart people. Lets flesh it out a bit.

The quote that captures the essence of the argument (and the one that I least disagree with):

Its high Interest rates, like NZ’s, encouraged the borrowing of foreign currency.

In part this is could be true – if the Reserve Bank can only control the domestic interest rate then the relative “price” of domestic credit is higher, so banks will substitute to foreign credit. Very good. However, although this initially sounds bad or maybe scary, this factor by itself ignores ALOT about how inflation targeting impacts on the economy. It only tells us that banks MAY source a greater proportion of credit overseas – not more credit.

Furthermore, it gives the impression (which appears to have at least been implied here, and has been fully stated by Berl) that higher interest rates lead to more domestic borrowing. This my friends is complete nonsense. Let me wave my economics wand and show you why 😉

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goonix

Optimal tax theory and ACT’s taxation policy

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Yesterday, the ACT party released their tax policy (further discussion also over at Kiwiblog)

Some key points from ACT’s taxation policy include:

  1. restricting future increases in Government expenditure to inflation and population growth
  2. eventual personal tax rates of 12.5% up to $20,000 and 15% above $20,000
  3. eventual company tax rate of 15%
  4. eventual GST rate of 10%

Tax distorts behaviour. The concept of the ‘excess burden of taxation’ is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. Distortions occur because people or firms change their behaviour in order to reduce the amount of tax they must pay, which results in deadweight loss from taxation.

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Matt Nolan

Growth and resources: Cleaning up a fallacy

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Just quickly, I have to correct this statement by FrogBlog:

In other words if we continue to grow at 3 percent per year every year, as economists would have us do, in 100 years time we will be using and consuming 19 times more than we currently do

No, no we wouldn’t. Remember a little while ago I wrote about technology.

  1. It allows us to create more output with the same input of the resource,
  2. It allows us to access more of the input,
  3. It allows us to speed up the process of creating output from input,
  4. It creates new outputs that can be created with the input,
  5. It creates substitutes for the input.

As a result, even if we assume the worst case scenario that we cannot substitute and that there is no new technology we can discover that will get us access to more resources, technology can help by allowing us to make more with the same level of inputs. Economists target a level of “growth” (when economists have to talk about growth – rather than societies welfare) that they feel relates to growth in resources (such as population) and technology – this does not seem like an unsustainable goal to me.

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jamesz

The pitfalls of political punditry

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Matt Yglesias puts his finger on why you can’t trust political pundits to tell you what’s happening in an election race:

…ordinary people ordinarily just don’t pay attention to politics at all. They don’t think it’s interesting. But … [t]he political press, by contrast, finds electoral contests to be a kind of fascinating game about which it’s amusing to do tons of stories regarding the ins-and-outs of tactical gambits…

The kinds of people who are political reporters are self-selected to enjoy commenting on the race as if it’s a game, simply because talking about politics day in-day out requires them to do just that. To think that they are, in their view of politics, remotely representative of the voting population is ridiculous. In fact, their analysis of political events is highly unlikely to represent the views of the average voter. Read more