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This GREAT quote from a commenter on this marginal revolution post:
I’ve always felt that macroeconomics was not economics the way astrology is not astronomy. (*)
That is brilliant. I have to admit, I work doing Macro, but I heart Micro.
So the Fed cut rates to 4.5%, and the US commerce department released a GDP estimate of 3.9% annualised growth (about 1.0% quarterly growth).
That growth figure was on the back of another negative contribution by the residential construction market, and was thanks to exporters and consumers. The Feds tone was relatively neutral, giving everyone the feeling that, bar a big shock, interest rate cuts are done for now.
What does this mean for little old New Zealand, higher world demand, higher commodity prices, and a higher exchange rate. Pretty much 🙂
I’ve noticed that a lot of people seem to view Halloween as pointless celebration that is used to help businesses sell candy. Now I don’t think is particularly fair on those who see it as a religious holiday, where this type of celebration can be compared to the way western society celebrates Christmas. However, according to Greg Mankiw, Halloween may be inefficient.
According to a number of religious people, there is a Jesus economics. Now I don’t agree with their idea of the sort of economics Jesus presented at all, that may be because I’m not a religious academic, or it could be that these people just didn’t understand what economics actually is (for example they complain that we study scarcity, when Jesus economics is about abundance. That is silly, economics is the study of scarcity. Just because its Jesus economics doesn’t mean it can break literal definitions.)
Time is tight so I can’t do a real blog post just now. However, I thought I could mention oil shocks and the difference between their impact in the 1970’s and now.
Oil prices have gone through the roof in recent times as a result of high world prices. In 2006, New Zealand was also suffering from its own oil shock, with world prices high and our dollar falling. However, we haven’t really seen much of an impact on the domestic economy, other than a slight fall off in domestic consumption. Compare this to the 1970’s, when oil shocks caused periods of massive inflation, forcing economists to see that the Phillips curve idea didn’t hold up in a dynamic setting.
Greg Mankiw goes on to discuss three reasons why oil shocks haven’t lead to massive inflation (note that the current oil shock will be severe in the USA, as their dollar has fallen strongly and world prices have risen):
If I find time, I might try to talk about these issues, and how I think oil price shocks influence the NZ economy, but don’t count on it 🙂 . So, does anyone have anything to say about oil price shocks (preferably not about peak oil, but if you really have to 🙂 )
Update: There was a fourth reason in the Mankiw article. 4) The increase in oil prices was not as sudden, giving economic variables the chance to adjust (this concept comes from his New Keynesian belief in sticky wages and prices).
Update 2: Even NZPA has something to say about Oil prices and inflation, it might be a hot topic.
Update 3: Looks like the topic of Oil prices is making its rounds on the blogsphere. With US economic growth at 3.9% (this is an annualised rate, it is equivalent to have just under 1.0% quarterly growth in terms of how we measure GDP in NZ) with these high oil prices, it looks like this will be an important and interesting issue.
There seems to be a significant debate between the left and right wing blogs about whether Bloomfield Hills is over-taxed or not. However, there is one thing that both sides agree on, if taxes are cut by $1,000, this gives people $1,000 more to spend. This is the point I’m going to discuss.
Households receive a net wage, which is their gross wage – income tax. The household requires a certain net wage before it will enter the labour market (say the benefit + the opportunity cost of leisure time), and may also require a premium to choose one firm before another firm (when labour supply is restricted).
Now the gross wage + non-labour costs (which we will assume are exogenous, even though they aren’t really 🙂 ) is the cost to the firm of hiring that employee. If taxes fall, the net wage the household receives would be higher. However, the relationship between employers and employees determines the gross wage. If the employer knows that taxes will fall, they can reduce their employees gross wage and leave their net wage the same (I know that firms often can’t do this because of labour laws and wage stickiness, however in a dynamic sense they could just reduce the rate at which they increase an employees wage). Ultimately, the division of the tax depends on the relative bargaining power of the different agents.
If there were ‘many’ firms and ‘many’ employees, the incidence of tax would depend on the relative elasticities of demand and supply for labour. Often labour demand is assumed to be relatively elastic while labour supply is highly inelastic. In this case most of the tax is borne by the employee and so a cut in taxes will mainly benefit them.
However, if we have a high rate of unemployment, labour supply will become relatively more elastic, which implies that some of the burden shifts onto employers.
If we have a monopoly firm and many (homogeneous) low-skilled employees (flat labour supply curve) the tax burden will be fully taken up by the firm. This is because the monopoly will only want to pay enough to get the employees to work, and so the net wage will be set at the reservation level. If you cut taxes you cut the gross wage required to get this net wage. Note: This result would not hold with asymmetric information (worker effort) or heterogeneous agents (as a higher net wage would then be required to intice more workers – labour supply would be upward sloping).
Ultimately, where the burden of income tax falls is a difficult issue, and depends on the specifics of the labour and goods markets. However, it is not clear cut that if my taxes are cut I would end up with that much extra money. As a result, we have to realise that a cut in income taxes will result in a reduction in firm costs as well as an increase in consumers spending power.
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