Matt Nolan

NZ budget 2009: Most important since 1984?

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Kiwiblog brings up some great points about the importance of this years budget.

It turns out that the head of Treasury stated that this was the most important budget since 1984.  Wow.

So he’s saying that this is more important than the “mother of all budgets“.  When National came to power in the early 1990’s they faced threats of a credit rating downgrade and forecasts of huge budget deficits – which forced them to cut spending sharply.  In conjunction with HIGH interest rates (even in real terms, we are talking like 8% real!!), a lift in petrol prices because of the gulf war, and weak other commodity prices, this saw the New Zealand economy suffer a huge contraction and unemployment went over 11%.

Now, real economy prospects aren’t quite as bad this time.  Unemployment is at 5%, relative to 7% at the start of the 1990’s.  Real interest rates are very low (hitting at around 1-2%).  Some of our commodities are doing well, and even though some have experienced a sharp fall in price oil prices have also tumbled.

However, obviously there is a feeling that the threat on the currency from government policy is at its highest level since we floated the currency – intense.

Matt Nolan

iPredict return on investment

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iPredict just added a “return on investment” ranking – so that we can see who made the most out of their limited capital.

Although I am not on the list (Note: I wonder why, was my initial investment too low to be included?), I noticed that “Economist” is number 1. Furthermore, I’m relatively sure that the person currently in 3rd place is an economist.

Constantly economists are put down for their lack of forecasting ability – however they seem to be doing pretty well when their is money on the line 😉

Update:  The next day it was updated to include Goonix and myself.  Goonix is 8th, and I’m 19th.  I wasn’t involved in the election trading though so I’m not taking this as evidence of me being the worst economist 🙂

Matt Nolan

Hand waving, model making, and variable lags

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I would suggest that anyone who is interested in economic models reads this post, namely because I agree with it wholeheartedly 🙂

While it might seem cool to run some regressions and get a result that you believe will tell you the future it is important to realise what your implicit assumptions are.  If you add a variable to you model and it is significant but you don’t know what it has to do with anything you should be careful.  This is how using a lag functions.

You need to ask yourself why is this lag significant? what is the process behind it? Data can only really be used when you can frame it with a model of how the world works.

Personally, I hate using too many lags unless I have an understanding of why the lag matters.  When you do an empirical model it isn’t just the “significance of the variables” that matters – it is the believability of the implicit model that it represents.

Matt Nolan

More definitions of economics

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I just asked this new Wolfram Alpha search engine “what is economics”.  It told me:

Economics:  The branch of social science that deals with the production and distribution and consumption of goods and services and their management

This differs from the Robbins definition of economic science:

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses

And it differs from the broadest possible definition that we discussed earlier:

The study of how humans/societies allocate scarce resources.

Given no mention of “human behaviour” or incentives this definition is wider than the Robbins definition.

Is the Wolfram definition any different to our broadest definition?  Well if certain elements are defined correctly I would say they are equivalent.  As a result, it doesn’t tell us what economists do, or what the dominant school of economic thought is.  Wolfram is simply giving us a definition of the broadest scope of what “economics” can be (and has been) seen as – as long as we define the “outputs” (goods and services) as widely as humanly possible.

So, given that the Robbins definition is the one that more fully captures the essence of what economists currently do (with our obsession with methodological individualism) I tried typing “what is economic science” in.  But it told me:

Wolfram Alpha isn’t sure what to do with your input

Matt Nolan

So tired …

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Of productivity talk.  On dicussing the NZIER report (which we discussed here) Kiwiblog mentions:

Productivity growth is all important.

Productivity is a ratio – I could increase it right now by shooting half the population.  It is the output that matters here, and how much we have to sacrifice to get it.  Increasing output (which we value) while sacrificing things we don’t value as much as the output is key – not productivity growth persee.

This distinction is important because “productivity growth” is going to fly up over the next couple of years – as unemployment will rise.  This isn’t necessarily a good thing, and it is not because of any parties polices.

When Labour was in power I was annoyed that output, and productivity, were ignored – as they ignored that in order to gain these “other things” like equality we were sacrificing some output.  Now everywhere I turn ALL I HEAR is productivity.

Why don’t we just learn to look at the trade-offs associated with policies and then do what is in societies interest – instead of targeting arbitrary ratios.

I’ve already talked about this here and in the Dom BTW.  I need a drink.