Matt Nolan

High dollar is a symptom, not a cause

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BERL’s (cheif) economist Ganesh Nana has been telling people that the Reserve Bank needs to act to get the exchange rate down. I disagree in the most part and agree in another arbitrary part.

The fact is that the “high” NZ dollar is the result of a bunch of factors: peoples willingness to lend to us, the willingness to take on risk, our own willingness to accept their credit, a high terms of trade, our higher real interest rates, and a belief that the asset value of our dollar is higher than it was in the 90’s. There is no issue with the dollar doing what it does here.

I do agree that we have an issue of “production” vs “consumption”, namely we are taking on a great amount of debt and as a country this makes us vulnerable. But in this case the questions should be “why are we taking on all this debt?’ and “is there a problem with this debt accumulation?” (like we asked here) – not “is the dollar too high?”.

The Reserve Bank should not move to crack the $NZ down, instead we should all ask why New Zealand as a whole has taken more debt on and figure out if their are any structural issues in the economy that a change in government policy can improve.

Note: Another thing I would note is that the RBNZ can lower the dollar by trying to temporarily lower real interest rates (by printing money and dropping the nominal interest rate). This again promotes consumption above investment, and surely wouldn’t help correct any “imbalance” that we are focusing on here! Let us not forget the impossible trinity here (we discussed this here).

Focusing on the dollar is like focusing on easing a patients symptoms while leaving the underlying disease untouched!!

Update:  Scott Sumner does a small discussion on prices.  The exchange rate is a price, as he notes the important thing is “why the price has changed” not what the price is per see.  The price is not the underlying issue but the factors driving the price.

Matt Nolan

The basic frame of a firm: Cournot

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It seems that the debate about the fundamental “theory of the firm” is going on. Now there are issues with the theory of the firm, things that economists have been busy plugging away on for a long time now – but the critique that Steve Keen has put forward is not one of these issues. In this post I will attempt to discuss his push to change the Cournot model, which I don’t agree with. This will give us scope to discuss perfect competition another time.

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Matt Nolan

In defence of the neg

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Both Tyler Cowen and Andrew Sullivan have turned on the attack against the “dating game”, specifically the “neg“.

Now any attack on moral grounds could be justifiable (as could any defence), it is just about personal value judgments. But both authours mention that they see the neg as a suboptimal strategy. On these theoretical grounds I do not think they are quite right.

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jamesz

Can free markets punish racists?

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The Standard mentions the writings of Richard Epstein on racial discrimination and says:

A charitable reading of Epstein’s work is that he believes employment law stopping employers from putting “No Blacks or Jews” on their situations vacant ads is ineffective and counter-productive. Instead, we should allow employers to openly discriminate against people on the basis of race, age and sex because the free market will punish them for their irrational choices.

It’s a very interesting topic on which I’m no expert, so I shan’t wade into the debate on affirmative action. However, the latter sentence quoted just makes no sense from an economic perspective. Read more

Matt Nolan

Deadweight loss, debunking, and strawman micro

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In a recent post, Paul Walker criticises the idea that “deadweight loss wouldn’t exist if we had a government monopoly”. He is right but in another idealistic sense the idea of no dead-weight loss is also correct right.

If the government acts as a monopoly we will still have dead weight loss, as it comes from the “loss of surplus” relative to the situation where “surplus” is as large as possible (given demand and the monopolies cost structure).

But if government blatantly sets price equal to the marginal cost of the last unit dead weight loss will melt away. This does not imply that profit is dead weight loss in any sense of the word, and it does not tell us that the solution will be “dynamically efficient” (where is the incentive to invest, to develop), but it does tell us that a government that is behaving this way could achieve the “perfectly competitive” price and quantity.

However, this is all 100 level stuff that I don’t particularly care about. My interest lies with the “debunking of microeconomics” that Steve tries to achieve on Paul Walker’s blog.

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Matt Nolan

My recent addiction

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Following today’s discussion on an addiction study I have realised that I must have an addition.

For the last 2 months I have been painfully addicted to a horrendous substance – not drinking (except for this one intervention that was staged about 3 weeks ago).

It has had all the negative impacts associated with addiction:

  1. It has visibly negatively impacted on my health – I have had the flu a few times after all,
  2. The longer I haven’t drunk the harder it has been to go out and drink (a sure sign of addiction, and in conjunction with funky discounting this could lead to time inconsistency),
  3. It has caused externalities (namely my complaining to other people).

All I know is that I’m personally concerned about this addiction, and I’ll be doing what I can to solve it tonight.  Even so, can the government really trust an irrational agent like me to drink enough?

Given this I think I need some government intervention.  How about the government subsidises my alcohol and the Law Commission pushes for the regulation of alcohol towards me.

Note:  The only parties I’m making fun of in this post are the government, the Law Commission, and myself (for not drinking for 9 weeks) – not any of the economic analysts.

And don’t try to convince me not drinking isn’t an addiction – I seriously have been struggling to break it!