Will Taylor

Permanent and Temporary Shocks: Buy No Petrol Day

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I saw an interesting piece on Breakfast this morning (now that I have a “real” job I’m actually up that early) about how today is buy no petrol day.

Apparently the idea is if we all buy no petrol today this will “hit the petrol company’s bottom lines” and make them clean up their act or something like that. This just reminded me of my honours macro course when we talked about the different effect permanent and non permanent shocks have on the economy. To cut a long story short, temporary shocks have no real effect while permanent ones d0 (if tax cut today will be followed by a tax rise next year you save now to pay for the tax rise later (i.e no change in consumption), if the tax cut is going to be permanent then you will probably spend more (i.e consumption increases, the economy is stimulated and everybody is happy).

Applying this logic to our current situation, everybody not buying petrol for one day, while a great way to raise awareness (it made breakfast!), is not going to have any effect on the oil companies behaviour if the people who didn’t buy petrol today are simply delaying filling up until tomorrow. 

In summary if people want to change petrol companies behavior by hurting them financially,  it needs to be done by a permanent decrease in petrol consumption as this will have a non transitory effect on profit, not just be a blip on the radar that is gone the next day.

I haven’t had a coffee yet so I don’t have the energy for sarcasm

Agnitio 

Matt Nolan

Sweeney Todd’s welfare policy

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alg_sweeney_todd1.jpg

After recently watching the movie ‘Sweeney Todd‘ one question popped into my mind, is the welfare policy he derives optimal? Below the flap I will discuss his welfare policy – if you haven’t seen the movie or watched the broadway show then read at your own risk. Although I don’t talk about the movie itself, and the welfare policy won’t tell you anything you wouldn’t find by watching the trailer.

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jamesz

Cap-and-tax vs carbon trading

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The Congressional Budget Office reported recently on its comparison of a cap-and-trade program to a carbon tax program. The one-line conclusion is that carbon taxes are cheaper and simpler, but caps give more certainty. Read more

Matt Nolan

Torres and inflation expectations

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I am a Liverpool supporter (the football club), I’m proud to admit it 🙂 . While I was reading an interview with Fernando Torres today, I ran into this gem of a line when discussing Benitez’s rotation policy:

“It is normal to rest. We players never want to, but if the manager says so, you have to. If everybody accepts that is the way forward, the atmosphere doesn’t suffer.”

This reminds me of inflation expectations. If the Reserve Bank (the manager) says that it is commited to making inflation zero (for arguments sake), then individual agents accept that the Bank will do whatever it takes to achieve that target (hiking interest rates), and inflation expectations shift to zero. If this is the case, there is no need for a costly adjustment to the new equilibrium (atmosphere), as inflation expectations drive the true rate of inflation.

Ok, the two arguments are a bit different, but I still think that Torres would make a great economist 😉

Matt Nolan

The economist’s economic growth bias

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Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither rauparaha or myself defined what ‘growth’ we were talking about. Like all economists, we took ‘Growth’ to be synonymous with growth in gross domestic product.

Could this possibly imply that economists such as rauparaha and myself have an inherent bias when discussing normative statements about welfare that points us towards pro economic growth policies – even when there is a hefty trade off in other social values. Do economists focus too strongly on technical and allocative efficiency without taking social efficiency and equity into account?
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jamesz

The birth rate vs the growth rate

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Stats NZ reports a marked increase in the NZ birth rate. There are three ways to view this: first, you could use it as Quest does to suggest that maths and equations are stupid and we should just trust the politicians’ instincts. Unfortunately for Quest, there is no statistical evidence for that position 😛

The Standard claims that an increasing fertility rate is a signal of the good economic times brought about by the Labour government. This connection seems a bit results driven to me. Particularly so when the correlation between per-capita GDP and fertility is strongly negative worldwide. It may be the case that Labour’s policies have encouraged people to have children, but that’s hardly the same as signalling a rosy future for the NZ economy.

Finally, one might ask what economic theory has to say on the issue. While the theory on growth economics has a patchy empirical record, it does have an explanation for the negative correlation between fertility and GDP per capita. Essentially, higher fertility rates mean that the resources of the economy have to be spread across more people. Those people do create value but, since productivity has decreasing marginal returns, they don’t create as much extra capital as they consume. Thus, higher birth rates lead to an increase in GDP, but a lower GDP per capita in the long run. So perhaps the increased birth rate doesn’t bode so well for NZ after all.