Matt Nolan

Money supply, leading indicators, and recessions

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Not PC has a very interesting post on identifying recessions. Using a special measure of the money supply as a leading indicator he shows that a large fall in this measure usually implies a recession (*).

This makes sense as a recession is a time when money demand falls rapidly. As the stock of money is determined by an exogenously set price and a money demand curve we would expect “money supply” in this stock sense to fall rapidly.

I disagree with his articles conclusion in the current monetary policy context (“the expansion and contraction of the money supply is the single greatest factor in causing booms and busts“) – but I do think that the method he points out is extremely clever. It is also a welcome reminder that monetary aggregates still give us some information – even if the information is all mixed up by definitional errors and technological change 🙂

Matt Nolan

NZ inflation hits 4% – Ouch

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Other people have more to say about today’s inflation result than I do (Interest blog) (the Standard) (Tumeke). Really, today’s result was pretty much what everyone was expecting – except for a stronger than expected increase in food prices (thanks to a mix of meat and fruit and veges). However, this slight uptick does make my 5% pick for September less extreme 😉

Also for all those people saying that it is only a tradable story – non-tradable inflation was 3.4%. This included some subsidies in education and health last September (so a price level shift), implying that the true rate of non-tradable inflation (growth in price level) was closer to 3.7-3.9%. Yuck.

If you have any questions about today’s inflation result, shoot – however, I won’t be checking my emails for about 27 hours from 5pm today so you better make it quick. (At least one pre-written post will magically appear tomorrow though, thanks to the magic of wordpress 🙂 )

BTW:  If you are interested in inflation, don’t forget about the inflation debate series – we are nearly up to inflation targeting, yippee.

Matt Nolan

The individual rationality of buying small cokes/chippies

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One of the most vexing questions in economics has to be why the price of a 330ml coke is often only slightly less than the price of a 1.5l coke. This issue generalises to other products such as chippies.

Now there are a number of good responses, namely:

  1. Strongly diminishing marginal utility for fresh coke and a very low value on saved coke (or a relatively high cost of storage),
  2. A 330ml bottle is easier to consume than a 1.5l bottle – as a result the value of the 330ml bottle may be higher for people on the move, and so they are priced to service different markets.
  3. The cost of producing a 330ml coke is far more than a 33/150th of the cost of producing a 1.5l coke

These answers seem to satisfy me when I think of coke. However, when I think of chippies I find this explanation sadly lacking.

Downstairs I can buy a little bag of chippies for $1.50 or a far bigger bag of chippies (x3) for $3.00. I always buy the little bag.

Now I will do this each day, and don’t get any less value from 3 day old chippies than I do fresh chippies. Furthermore, I am eating them at work – implying that there is no storage cost and no convenience benefit.

No-one steals my chippies if I get a big packet so its not that. Am I passing up a free lunch here (and thereby not being a utility maximiser as my shirt says) – or is there a reason I buy the small bag instead of the big bag.

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Matt Nolan

The inflation fighting trade-off

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Note: Other posts in this discussion are available under the tag “inflation debate“.

So, after calling on you guys to give me some indication of your views on monetary policy we discussed what inflation is, and then we moved on to discussing the costs that stem from inflation. We are now ready to discuss the big topic – the trade-off between inflation and other things.

I’m glad that we managed to talk about this topic this year, as it is the 50th anniversery of the paper “the Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861-1957” written by our own Dr Phillips. In this paper Dr Phillips found that, over this period, there was a negative relationship between money wage changes and unemployment.

This was eventually broadened to a negative relationship between inflation and unemployement, which gave rise to the Phillips curve. Initially this led economists to believe that there is a trade-off between inflation and unemployment. However, the instability of the Phillips curve when policy analysts tried to take advantage of this relationship (when analysts tried to use the relationship it disappeared), and the popularity of the natural rate hypothesis (stating that there is a “natural rate” that unemployment settles at), led to a movement away from this, and the statement that there is no long-run trade-off between inflation and unemployment! (now viewed as the NAIRU)

Taking this as given, what other trade-offs are there? Read more

Will Taylor

Mallard’s Economics: Making KiwiSaver “fair”

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The one thing I hate about election year is seeing policies which are put in place to win an election and no basing in economic theory.

Reading this quote from Trevor Mallarad made me angry

“…there is no way that it is fair for one employee to be paid less each week in their take home pay than an employee doing the same tasks, simply because they choose to be in KiwiSaver and the other employee doesn’t.”

Either Trevor Mallard is an idiot and he truly believes this, or he’s not an idiot and is doing this to try and win an election.

Just remember Kiwisaver savings are a form of income.  If we give both enrolled and non-enrolled people the same take home pay, then we are effectively saying that people on the Kiwisaver scheme should be paid more for the same task – explain to me why Mr Mallards concept is fair again?

Agnitio

Matt Nolan

Reply: On flat tax

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Over at the Standard they are discussing the perceived inequity associated with a shift from a progressive income tax system to a flat income tax system.

This is an issue we have discussed before in this post. In the post we asked “what is the equality-efficiency trade-off” and “is the tax system the best way to redistribute income”.

The first question matters, because if we are reducing growth in the economy sufficiently by redistributing income it may be the case that lower tax cuts are parteo superior – which implies we could say they were better without having to make any assumptions (apart from the assumption that people prefer more). Even if the efficiency gains are not that strong it does imply that less than 78% of the population (the figure that the Standard states) will have a higher tax bill.

The second question matters as even if we are in a situation where a certain set of value-judgments implies that redistribution is optimal, there may be a better may to do it than through a progressive tax system.

Now even ignoring those two points we have the issue that “fairness” is a value-laden concept.

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