Matt Nolan

July 2008 official cash rate cut: The long and winding road

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So the Reserve Bank has cut interest rates.

If you normally read this blog you will know that this disappoints me – and I am grateful that both of you understand the pain I’m going through 😉

There has been a lot of commentary on the Reserve Bank’s decision, which I will link to before moving into my own discussion (TUMEKE!) (The Inquirying Mind *) (The Hive) (Not PC) (The Standard) (Kiwiblog *) (No Minister *) (Colin Espiner) (Show me the money) (Jafapete). I am happy to see so many New Zealand blogs willing to discuss the issue – even though my views may be quite different 🙂

Now let me tell you what I’m thinking:

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Matt Nolan

July 08 OCR decision: Rates cut to 8.0%

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So the Reserve Bank cut interest rates to 8.0%.

The only new information that has come out since June is a higher inflation outcome as a result of larger than expected increases in petrol and food prices. Furthermore recent increases in funding costs have helped to convince the Bank to cut.

Even ignoring inflation, it appears that the Reserve Bank values the livelihood of those who have mortgages above people who are struggling to pay their food and fuel bills (which will go up, as a lower exchange rate will increase the New Zealand price of both).

Good Bloomberg piece here.

More discussion to come later (the additional discussion has now appeared).

Matt Nolan

Womanomics and sunk costs

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Cactus Kate states that men should pay the bill when taking a woman out – because of the substantial expenses associated with being a woman.

As an economist, I’m not so sure if this does it – after all, aren’t these all sunk costs, which implies that they shouldn’t have any impact on the final negotiation at the end of the night that determines who should pay the bill for the date.

As a result, the demands that Ms Kate place on men to pay the entire bill, based on these costs, may seem somewhat “irrational” (I hate that word).
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Matt Nolan

The lemon hypothesis vs evidence

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Back in 1970 George Akerlof wrote “The Market for Lemons”, where he described a game where if, buyers have less information than sellers, it is possible that mutually beneficial trade may not occur. (Wikipedia)

Now I’ve noticed a bunch of my favourite economics blogs discussing this paper by Arif Sultan, on empirical evidence and the “lemons problem”. (Blogs are Anti-Dismal, Division of Labour, and Marginal Revolution). The paper appears to say that, empirically, the quality of new and used cars is the same – something that would not occur in the case of a “market failure” based on asymmetric information.

Overall I enjoyed the posts offered by Anti-Dismal (descriptive) and the Division of Labour (stating it was an interesting result), but I think Marginal Revolution takes more out of the paper than it actually offers. Read more

Matt Nolan

Diminishing marginal utility, transfers, and prices

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When justifying progressive taxes or any type of transfer people often use the idea of diminishing marginal utility. Now I am not against transfers, I think there are many good reasons justifying transfers, however DMU is not one of them.

We’ve discussed issues with this approach before here and here. Fundamentally these were:

  1. The utility from income differs between people and we can’t observe it. Furthermore, people with higher utility from income will work more – so if there is any “choice” in the work decision then DMU is not sufficient to ensure the optimality of progressivity.
  2. Liquidity constraints and the discrete nature of purchases ensures that even if we have diminishing marginal utility for individual products we cannot assume that marginal utility is falling in income.

Another possible critique of the DMU justification for transfers comes from prices. Read more

Matt Nolan

The Railway buy back decision and economic sense

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Over at the Standard, Steve Pierson points out a TV1 poll that shows that the majority of New Zealander’s are happy with the decision to buy back the railroad at a cost of over $1bn. That is cool, if society is happy with doing something and has full knowledge of the costs and benefits, then it is the right decision. Ultimately, the purpose of government is to maximise social welfare, and as long as the welfare cost to the 24% who don’t like the decision is less than the welfare benefit gained by the 68% of people that are for the decision then this appears like a fair tact to take.

However, I was a bit confused about this comment:

The Government has acted in a way that makes economic and environmental sense. The only opposition has been from the ‘free market is always right’ lobby and National.

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