Matt Nolan

Interesting critiques from LAANTA

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Over at the excellent LAANTA blog, Terence has written a couple of posts discussing issues I have raised here.

The first post covers our discussions on Utilitarianism. Fundamentally I think we have reached a point where our only disagreement stems from value judgments (specifically what we view as the fundamental measure of value, something I plan to write about separately another time) – which implies that his post is a good place for us to leave it.

The second post argues that goods and services taxes are infact regressive, contrary to my own musings. This is something I will discuss in this post.

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Matt Nolan

Employer contribution and Kiwisaver

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Tracy Watkins indicated that the National is in a pickle surrounding compulsory employer contributions in Kiwisaver. One way of keeping these contributions and regaining the support of business would be for National to allow wage cuts on the basis of entry into Kiwisaver (with its compulsory employer contribution). The Standard laments such a move, however there are two reasons why I don’t think it’s a big deal:

  1. In most cases such a policy won’t change anything,
  2. In this cases where the policy leads to lower wages it may actually be “fairer”

Let me explain myself:

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Matt Nolan

OCR review preview – June 2008

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Well we have had an action packed quarter haven’t we – bad employment numbers, bad retail numbers, bad inflation numbers, and tax cuts.

Of course I’ve stated that all these things imply more inflation, but its not what I think thats important – its what the Reserve Bank thinks that matters. On June 5th we get to here what there outlook for economic activity really is – and as a result we will get an idea about how their view of future monetary policy easing has changed (from September 2009 as a starting point in March).

So what is going to happen? The Reserve Bank will heavily reduce their growth forecasts (I’m guessing 0.9% growth over the March 2009 year – with a technical recession over the first half of 2008). A weaker labour market outlook and a downturn in global growth forecasts will be major factors behind this shift – along with a sharper housing market correction. The delay of the ETS will lighten up inflation forecasts while additional fiscal stimulus will lift it again – fundamentally inflation will cross 4% in September, but head under 3% by June.

It is possible they may state that fiscal policy changes (ETS and tax cuts) cancel out – especially given that most of the tax cuts appear out in 2010 – and approximately 50% of consumers are supposed to act in a manner that is “liquidity constrained” (so will not borrow on the tax cuts which are coming).

With inflation expectations elevated and the dollar threatening to bolt with three months of potential rate cuts the Reserve Bank will probably implicitly time rate cuts from March 2009 in the MPS – however with some (real) risk of cuts occurring earlier.

Personally, I think inflation pressures are far more endemic – but I believe that the Bank believes that the risks to growth are too strong to ignore. If this is the way things go down I would expect a short rally in the dollar – before the realisation that the RBNZ was just treading water sets in, dragging the dollar back to where it started.

Matt Nolan

Collusion, multiple equilibrium, and petrol prices

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Conjecture is rife regarding why petrol prices have risen so strongly. There are a number of common explanations:

  1. Rising demand for oil,
  2. The weak US dollar, increasing the US$ price,
  3. Peak Oil (Infometrics article requires a subscription),
  4. Negative real interest rates in the US (as not mining the oil is the same as investing in inventories),
  5. and speculation.

All these factors are playing a part in the saga of ever rising oil prices. However, Calculated Risk has suggested another, highly interesting way that fuel prices could have risen – a backward bending supply curve and multiple equilibrium.

This idea is pretty cool – so I thought I would spend a little bit of time explaining how it could work.

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Matt Nolan

What is this savings problem?

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So far we have discussed Kiwisaver and national savings in fairly loose terms. We know that (part of) the purpose of Kiwisaver was to increase national savings and that our interest in national savings stems from the fact that we want New Zealand to have more productive capital.

So before we can discuss the myriad of burning questions surrounding these issues – and more broadly surrounding New Zealand’s productivity (such as if Kiwisaver achieves the greater capital goal even if it theoretically doesn’t increase savings) we need to ask, what is the savings problem?

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Matt Nolan

Why do we care about national savings?

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In another of our warm up posts for discussing productivity we are going to discuss why national savings are important.

As Fred states in this comment, savings are effectively deferred consumption. The incentive to defer consumption is based on individuals wish to “smooth consumption” over time (which relies on their time discount rate and expectations of future income) and the return available on these savings. Now the reason that it is possible to make money off your savings is because these savings are used by other agents in the economy who have the ability to pay you back later on – fundamentally these savings are used to invest.

Going back to our good friend supply and demand we know that the supply of funds for capital investment is a function of the interest rate and peoples willingness to smooth consumption while the demand for capital investment is a function of the interest rate and the expected return from the investment. As savings increase in the interest rate (for those who care, assume that the substitution effect dominates the income effect of a higher interest rate) and investment decreases with the interest rate (or at least the expectation of the equilibrium interest rate) we know that there will be an interest rate that makes supply and demand equal.

Fundamentally, the government may want to increase national savings if they believe that current national capital accumulation is sub-optimal for some reason – as in some sense savings=investment. Again I’m going to ask a question which I would love for everyone to have a go at answering – why may the government believe that the current rate of capital accumulation is sub-optimal?