Will Taylor

Portugal: Lessons on Drugs and Statisitics

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The Liberal Conspiracy has interesting article on the drug decriminalisation in Portugal. Two highlights for me.

The opening paragraph:

The right predicted Bad Things: Drug use would explode, tourists would travel from far and wide to get high on the streets of Lisbon, law and order would collapse, and people would start riding around in modified cars and fighting in Thunderdomes

This just made me laugh:)

Now what made me cringe was the stats from a Cato paper looking at Portugal:

Prevalence rates for the 15–24 age group have increased only very slightly, whereas the rates for the critical 15–19 age group—critical because such a substantial number of young citizens begin drug usage during these years—have actually decreased in absolute terms since decriminalization along with increase in the establishment of residential drug rehab in CA so that the drug users can be treated before they get addicted too much.

Perhaps most strikingly, while prevalence rates for the period from 1999 to 2005, for the 16–18 age group, increased somewhat for cannabis (9.4 to 15.1 percent) and for drugs generally (12.3 to 17.7 percent), the prevalence rate decreased during that same period for heroin (2.5 to 1.8 percent), the substance that Portuguese drug officials believed was far and away the most socially destructive.

If you feel confused after reading that paragraph don’t worry. The Liberal Conspiracy’s description of this passage hit the  spot for me:

What the above basically demonstrates is that if you cherry-pick the right start years and end years for an age-group, you can get almost any result you want

Lies, damned lies and statistics….

Matt Nolan

Why we have to be careful equating CPI growth to inflation

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We have previously mentioned how important it is to interpret CPI growth carefully. Inflation is the trend rate of growth in the “general price level”, and as a result there are other factors that get caught up in our attempts to measure inflation.

James Hamilton at Econbrowser pointed to a paper by Reis and Watson which points out just how essential this difference is in a “low inflation environment”. The money quote from the abstract for me:

We find that pure inflation accounts for 15-20% of the variability in inflation while our aggregate relative-price index accounts most of the rest.

The pure inflation mentioned above is the fundamental increase in the general price level we often complain about as economists. “Inflation” in this paper is growth in the private consumption expenditure deflator (which is similar to the CPI – except that the bundle of goods is not fixed).

Now we don’t want to try and prevent relative price shifts – as that is the whole purpose of the price signal. So understanding this distinction is important. Very interesting.

Update: I don’t think I was clear enough on where I think the value is here. The paper seems to indicate to me that movements in the CPI and PCE deflator are relatively poor indicators of the magnitude of any change in inflation. This is a very good point, and I love it that this paper was able to mince the data up and show this.

Update 2:  Paul Walker blogs on a pre-release of the paper here.  Paul concludes:

They found that once they controlled for relative price changes, the correlation between (pure) inflation and real activity is essentially zero

That is true.  But let us be clear here, this implies that there is no money illusion (which economists currently assume), and so all quantity issues stem from nominal rigidities in prices (which we have discussed).   As a result, even pure inflation is still costly, as nominal rigidities exist causing a mis-allocation of resources (since relative prices get messed up).

Another interesting conclusion in the paper is that the rigidities in the labour market aren’t as strong as we would expect.  If this is shown to be the case over time it would change my implicit view of the economy.  Man I wish I could do a study like this for the NZ economy 🙂

Matt Nolan

Inverted commas don’t look good on economists …

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I don’t like to do this, but I’m getting a bit sick of bank commentary following the HLFS release.  This is specifically from ANZ’s weekly report this morning:

While employment tumbled 1.1 percent in Q1, the unemployment rate “only” rose to 5.0
percent as a number of workers leaving the labour force limited its rise

Three things:

  1. The participation rate fell after SPIKING LAST QUARTER.  It is still up on a year earlier.  The employment and PR series are notoriously volatile while unemployment is a fairly stable and reliable indicator – hence it is bull to say that this data is telling us that unemployment only didn’t rise further because people are leaving the labour market.  If it was fine for you guys to dismiss the lift in the PR in December (when anyone could have said unemployment only went up because participation rose) you should dismiss the fall now – you can’t cut it both ways.
  2. Stop using inverted comma’s when the data doesn’t suit your story.  The fact is that this unemployment rate was a hell of a lot better than any of us economists were expecting.  We should accept that, and try to understand it – instead of belting it with a stick until it fits our specific stories.
  3. Also, 5% is an only – there is no need for inverted commas.  5% is about New Zealand’s neutral rate – the level of unemployment we expect over the medium term.  After 15 months of recession I would expect unemployment to be higher than that – as a result this is a significant positive for the country.
Matt Nolan

What is the exchange rate telling us

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There is an interesting article on the Rates Blog that I have been meaning to mention by Rodney Dickens.

Although I don’t agree with him that the RBNZ is being silly – I do think he makes a good point when looking at the exchange rate.

the forex market [may have] pushed the exchange rate up because it has correctly assessed that NZ growth prospects have improved

When I read this on the 5th I agreed with it – and if anything this point of view is becoming more obviously right as a bunch of good data has come out.

However, I would take a step back and try to understand what is going on here. I don’t think that the growth outlook is the sole factor – we also have “risk taking behaviour” (as our currency is a form of investment) and commodity prices (as our currency helps to share any gains from a terms of trade lift.

Now ANZ reports that commodity prices rose in both March and April – so this is some of the reason. However, in $NZ terms they fell – implying to me that there has been more to it. With the DOW rising from 6,500 to 8,500 (among other indicators) we can tell that there is some risk loving behaviour coming back – making a high yielding currency like the $NZ attractive. If we strip these out we might find that the market expects marginally higher growth – but I’m not convinced that this view is particularly different to the RBNZ’s March forecasts 😉

Matt Nolan

Australian unemployment also surprises …

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So unemployment in Australia fell from 5.7% in March to 5.4% in April.  Following our better than expected March quarter this is all very interesting.

Very interesting …

Matt Nolan

Mar 09 Unemployment: 5%

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This figure is far stronger than the market expected (5.3%) – and well stronger than I was thinking (I was personally seeing scope for 5.5% given how quickly the UR rose in 1990/91).

I know unemployment is a lagging variable – but just reaching the “neutral rate” after 15 months of recession is a strong sign for the NZ economy. I don’t know how we can even get to 7% unemployment in a situation like this (unless the recession is still going strong in 2011 😉 )

This is a very strong result – make no mistake.

Also careful trying to say that employment or the participation rate were rubbish – they are still both up on a year ago 😉