goonix

Hangovers, Nurofen and product differentiation

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In my horribly hungover state, the first thing I did when I got to work this morning was go looking for pain relief. Excellent, I thought, there is some Nurofen in the cupboard. My initial exuberance was soon allayed as I saw we only had Nurofen ‘Back Pain’ medication, not what I was after, while the Nurofen ‘Migraine Pain’ packet was cruelly empty. A closer inspection of the packets, however, revealed the two contained exactly the same ingredients!

Matt Nolan

More quality quotes from the civil service

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As if they were inspired by yesterday’s post – some civil servants from Housing New Zealand dropped this train of thought:

The submission said listing housing projects as nationally significant would help prevent the delays and extra costs caused by objections from neighbours – “a situation commonly referred to as NIMBY [not in my backyard] opposition”.

So the government should be able to force projects through without regards to the impacts on individuals they aren’t interested in – doesn’t sound like social welfare maximising policy to me.

At least National came out and said this was a bridge too far. Seriously though – where the hell do some of these people get off talking like this. Do they not listen to what they say …

Matt Nolan

From a negative OCR to negative interest rates …

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Earlier we discussed a negative OCR as a way to push us towards the “zero bound” on interest rates.

But Greg Mankiw has brought up an interesting point – what happens if we want negative interest rates?

Mankiw admits that we could have a lottery scheme where some currency gets knocked out of circulation randomly – making the return on currency negative. However, he comes up with an interesting point if we just wanted to lower interest rates through a negative OCR.

If reserves earned a negative return at the margin, banks would have more incentive to lend (which is the motivation for these proposals). But more lending might not be the outcome. Banks could instead discourage deposits by, for example, passing the reserve fee on to depositors. Deposits would then earn a negative return, which would give households an incentive to hold currency rather than bank deposits

If the return goes negative for banks they may just pass it on to households who will “horde currency”.

However, I have to ask – will household’s just hold currency as savings? Read more

Matt Nolan

A good question for civil servants

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From the excellent Overcoming bias blog (ht Offsetting Behaviour):

This is a great test case for paternalists; if you feel that your superior minds justify ruling the lives of others, would do you accept having your life ruled by future folk with greatly enhanced minds?

To all those civil servants who tell me we should introduce regulation X because the average person is stupid and it is for their own good – think how you would feel if the shoe was on the other foot.

Also stop being arrogant arseholes who think they are smarter than everyone else – actually try talking to these people you are judging and you might be surprised with their abilities …

Matt Nolan

UK continues to dig a bigger economic hole

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In a sign of the times, the government in the United Kingdom is talking about increasing the top tax rate from 40% to 50% to fund part of their burgeoning budget deficit. A few points about this they may have forgotten:

  1. High income earners are likely to be more responsive to an increase in tax rates (at the margin) – as a result, by increasing tax rates at the top, we are pushing our most talented workers out of the labour force,
  2. The deadweight loss of taxation increases at a faster than linear rate – implying that for each 1% of tax we add we get a greater level of lost surplus than for the previous 1%.
  3. Highly skilled labour is more mobile – as a result, a lift in tax rates for the highly skilled will lead to them moving overseas. When the UK does this it is a good thing for countries like Aussie and NZ – but not for the UK.
  4. Highly skilled labour is able to “move income about” more easily. For example, if the corporate tax rate remains well below 50%, highly skilled individuals may find ways to set up companies and shift part of their income into the corporate tax bracket (Note this relies on being able to include a lot of spending as a business expense methinks). When this occurs corporate tax take will rise, but the increase in income tax revenue will be much weaker than expected.
  5. An income tax is also a “tax on business” – the relative split depends on the “incidence of tax”. As a result, a lift in the top tax bracket implies that there will be more pressure on firms that hire skilled labour – not really the best move when these industries are already credit constrained …
  6. By increasing the tax on income we will drive down the incentive to invest.
  7. Skilled and unskilled workers are complements – by reducing the incentive to hire skilled workers, you also reduce the incentive to hire unskilled workers. As a result this will drive down demand for unskilled workers, lowering wages and increasing unemployment.

Thank goodness economic policy in New Zealand makes more sense 😉

The Times joins in the fun.  And the Guardian illustrates that it doesn’t understand point 7 (among other points).

Matt Nolan

Caricature of the libertarian, economist, statist divide

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In my mind there is a simple distinction between the broad brush strokes of libertarianism, the underpinning beliefs of economics, and statism as statements for the scope of government. It goes like this:

Libertarian:

  • Market prices are a good allocation mechanism – therefore market prices make sense.
  • Initial endowment of resources is fair – therefore no need to redistribute initial endowments.

Economist:

  • Market prices are a good allocation mechanism – therefore market prices make sense,
  • Initial endowment of resources is unfair – need a democratic state to define what is fair and redistribute endowments.

Statism:

  • Market prices are a poor allocation mechanism – therefore market prices are not necessarily any good and pragmatic government shifts to prices make sense,
  • Initial endowment of resources is unfair – need a democratic state to define what is fair and redistribute endowments.