Matt Nolan

Cigarette taxes

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An Otago university study that was sponsored by anti-smoking groups found that cigarette taxes should be increased.  We know that an externality tax is a good thing, however 70% of the price of cigarettes is made of of taxes already.  The question then is, do we need more cigarette taxes to set the social cost of smoking equal to the social benefit, are we at the social optimum, or have we already gone too far. Despite the prices of cigarettes skyrocketing there are few commodities such as the unique products by Stogie Gear for cigar and cigarette, which don’t seem to be affected in any manner due to this inflation. Where the price is relative to the social optimum is an important question.  If the price of cigarettes is already at or above the socially optimal level, further cigarette taxes will be inefficient.

Now I have no idea where we are in terms of social cost and social benefit.  Ultimately, if the money from cigarette taxes can cover all the additional health expenditure from smoking, then the tax is sufficient.

People know they are killing themselves with cigarettes, so if that is what they want to do we should let them.  The problem is that they negatively influence other peoples health and put a drain on the health system by getting sicker than people who do not smoke.  If the tax on cigarettes already covers all this, then I don’t want them to lift taxes anymore.  The goal of the cigarette tax should be to cover the externalities of smoking, not trying to stop consumption completely.

Now tell me how cigarettes being an addictive good influences this analysis 😉 .  Bonus points for discussing how cigarettes may be complements to other externality creating goods.

jamesz

Why is torture such a dirty word?

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I’ve been intrigued by the recent posts at Overcoming Bias on the topic of torture. The proposal is that torture could replace imprisonment for many offences. While my initial response was repugnance at the idea, that may reveal my biased perspective of imprisonment.

As James Miller points out

…both prison and torture impose costs on criminals. Why is one type of cost crueler than the other? If a convicted criminal is indifferent between …torture or being imprisoned …then why would it be excessively cruel to torture but not to imprison?

In New Zealand we distinguish between preventive detention for those who pose a risk to society, and imprisonment as punishment for a crime. Could it be that torture is a cheaper and equally effective way to achieve the goals of our justice system in the latter case? It certainly achieves the goals of punishment and retribution for the crime. The sticking point for me is that torture does not aid in rehabilitation of a convict. However, I’m not persuaded that the current justice system does much of this anyway. It seems to me that people are more likely to find it hard to lead an ‘honest’ life after a long period of imprisonment than after a brief bout of torture. This is particularly so when the money saved in running prisons could be spent on genuine rehabilitation programs.

Is this a case where economists are as guilty as anyone of shying away from an efficient solution because of the moral biases involved? Or is there a real reason why torture is shunned by our society while, simultaneously, calls for harsher prison sentences grow ever stronger?

Matt Nolan

Was Greenspan a big softy

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Yves Smith think so. His argument is that, even though we didn’t fully appreciate it at the time, Greenspan really really cared about equity markets. He was scared of them, and he didn’t want to go out there and nail them as much as he should have. By being ‘hostage’ to the equity markets, Greenspan surrendered some of the Central Banks integrity. He gave up the hard arse, anti-inflationary image of the Central Bank that Paul Volcker had created.

I’m not sure I agree completely, I mean Greenspan did have the ability to keep inflation in the bag for 19 years. However, his unclear style of speaking and his refusal to target a clear level of inflation did create unnecessary uncertainty in the marketplace, and to some degree, may have damaged the inflation fighting power of the Federal Reserve.

A Reserve Bank governor needs to be a clear speaker, who finds the mere idea of inflation repugnant. That is why Don Brash did such a good job.

Matt Nolan

Working out your level of attractiveness

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I was having a discussion with my girlfriend yesterday on a blog post by Tyler Cowen. There are a lot of interesting points in the post, but the one that struck me and led to the discussion was:

“The median photograph of you is probably the best approximation of your physical attractiveness ”

The reason Tyler gives for this is that there is a random sample of photos taken of a person, so on average a photo will show what you look like. Compare this to the method we actually use to judge how good we look; the mirror. In the mirror we make ourselves look as good as we can, so it gives us an upwardly biased sample of how we look. So based on this, we should use photos to tell how good we look, a scary thought.

This is where the discussion between my girlfriend and me appeared. She said that the sample of photos was biased, as people often know there photo is going to be taken and act appropriately. We interpreted this in two different ways:

Matt: So the sample of photos is biased upwards, since people pose when they are having their photo taken. As a result, I look even worse then my average photo!

Rosie: It depends on the person. When Matt knows a photo is going to be taken he makes stupid faces. As a result, the sample of photos is biased downwards.

I don’t know. I don’t think any of this bodes well for my attractiveness. At least I have economics 😉

Matt Nolan

The Teachers union should sit in on some 5th form economics classes

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So teachers want a pay rise.  This isn’t really surprising given the inflationary pressure in the economy.  Now I don’t know too much about teachers pay, but I did find it interesting that the teachers union is saying that teachers wages should increase by 7.5%, and that this would reduce the average size of the classroom.

We know why teachers are saying this, they want parents and students to support them, so they have to make it sound like it is in their interest.  However, this isn’t the way I understand the situation.  If teachers pay is increased, and the government does not completely fund it, then less teachers will be hired.  With less teachers and the same number of students, schools will ended up with more students per class.

One possible counter-argument is that we have a skill shortage for secondary school teachers, and as a result by increasing wages we can get more teachers into jobs.  This presumes that schools have the resources to hire more teachers, at a higher wage, which would imply that we have a shortage of secondary school teachers.  But we don’t.  We are on the border of having a shortage of teachers, schools can find the number of teachers they need, but it does take time (average fill rate for secondary teaching jobs is 70%).

As I doubt the government will be stump up all the cash for a 7.5% jump in teachers wages (there are other groups they have to bribe first and foremost), schools will be stuck trying to come up with more money to pay teachers.  Fewer teachers will be hired and class sizes will rise.

Matt Nolan

Property finance Ltd goes bust

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So that makes it six finance companies in 15 months. What does this mean for the NZ credit market?

NZ banks should not be significantly effected. Banks are in relatively good shape, and all the recent trouble in secondary, non-bank financial institutes, is likely to increase demand for low yielding, low risk bank products.

However, non-bank financial institutions are going to have one hell of a time trying to find funds in the current tight credit market. The failure of so many finance companies is likely to make thing more difficult for them, by increasing investors level of risk aversion. Without a steady stream of deposits, some efficient and well managed finance companies are going to be flushed down the toilet. That is what happened to Property Finance.

My concern is that this may make it difficult for firms to borrow money. NZ currently has a tight labour market, and NZ firms are making low margins. In this sort of situation, firms are unwilling to remove staff, and as a result need to borrow to stay afloat. Now, something will have to give, either the flow in the credit market will improve, unemployment will creep up, or firms will be run into the ground. Only time will tell I guess.

Update: A couple of finance companies say they are feeling good. They expect regulation to occur, but how should we regulate the non-bank financial sector?

Update II:  So Five star consumer finance has gone under.  Guess it wasn’t really five star 😉 .  Look I’m an economist with no sense of humor I just had to say it.  But it didn’t deserve a new post, as the company was small and not that exciting.  It might scare people, but I suspect it was just dead wood.