The Hand

Health Legislation: a carbon emitter?

/2 Comments/in , , /by

As speculated by some over the weekend, and confirmed today by the Economist, Copenhagen currently appears to be nothing more than a venue for which policy makers will agree to consider a future agreement on Carbon Emissions.

Undoubtedly there exist links between the U.S.’ relaxed approach to the summit and the Obama administrations efforts to pass universal healthcare; for the latter to pass the support of those contributing to the former is required. This is nothing new. What is interesting to note, however, is that such an attitude to favor health over emissions has been indirectly present within the U.S. for some time.

Earlier this year Boston became the second city (following San Francisco) to pass legislation banning the sale of cigarettes in ‘drug’ stores.  Within this legislation there exists a further directive restricting the sale of cigarettes on college campuses. This is where things become interesting. Consider a representative smoker. The impact upon this agent from said legislation results in further effort (i.e.; distance traveled) to obtain cigarettes. As such, the ‘carbon footprint’ of each cigarette has increased within the city of Boston; not too mention the shadow price of the cigarettes themselves.

The question is now posed; are carbon emissions an indirect consequence of health legislation?

Matt Nolan

Cunliffe on Labour’s shift in monetary focus

/17 Comments/in , /by

David Cunliffe has done a guest post on the Rates Blog looking at Labour’s change in monetary policy … policy. [We have discussed this here, here, and here already].

As far as I can tell (tell me if I’m wrong), the content of the post boils down to this paragraph:

More importantly, acting alone it has not achieved inflation control alongside reasonable stability of exchange rates and money supply. Combined with an imbalanced tax structure, high real interest rates helped suck in hot money that drove the housing bubble.

Now, I don’t know why he’s mentioning the money supply unless he’s going back to inflation – so lets ignore that.  Exchange rate stability is not important – if the dollar is moving because commodity prices are moving (which they have been) then it helps to stabilise movements in the value of export prices.  This is a good thing.

So we are left with the housing bubble.  I commented on the post with this:

Imbalanced tax structure – yes.

High interest rates – no.

An imbalanced tax structure with a lower OCR would have lead to a larger housing bubble. We are a small open economy, the supply of credit is infinite – the housing bubble stems from credit demand, which is declining in the OCR.

This is something people forget.  We are a small open economy.  The supply of credit at the world interest rate is infinite, no matter what our OCR is.  As a result, everything falls back to our “demand curve”.  Demand for housing credit is falling in the domestic interest rate – therefore, if our RBNZ increased the opportunity cost of bank lending by lowering the OCR it would lead to less borrowing to fund housing relative to otherwise.

We cannot blame monetary policy for the housing bubble (unless we feel they should have increased interest rate more).  I remember BERL making the same claim a while back, I was a bit unhappy with it then and I still am now.

Matt Nolan

Translating Labour’s goals for monetary policy

/13 Comments/in , /by

Labour has stated four goals for their special monetary policy.  Let me discuss what these mean in turn. [Note we already have two posts on this issue today].

Labour goals were:

  1. a stable and competitive exchange rate;
  2. reduced interest rates for businesses and home owners;
  3. continued priorities of price stability and low inflation;
  4. to guard against expectations of price rises.

So, with goal 1 they want to reduce the flexibility of NZ$ prices, which will lead to higher unemployment and a worse allocation of resources.  Furthermore, they want to keep the dollar low which implies subsidising exporters to the cost of households in the short-term.

With 2 they want to punish savers.

And with 3 and 4 they want to contradict themselves – as by limiting price flexibility and holding the exchange rate and interest rates down they WILL drive an increase in inflation expectations, dump price stability, and remove any chance of a low inflation environment.

Matt Nolan

Discussing inflation targeting and our exchange rate concerns

/3 Comments/in , , /by

In a recent speech (ht Rates Blog) Goff committed to destroying monetary policy independence and damaging the New Zealand economy if he gets into power.  That is all well and good.  However, I think part of the reason this issue has occurred is because of a lack of understand around the necessity of monetary policy independence and inflation targeting, and how all these other factors (like the exchange rate) are determined.  Lets discuss them a little bit here:

Read more

Matt Nolan

Goff announces end to RBNZ independence if Labour gets back in

/5 Comments/in , /by

Either showing a complete misunderstanding about how monetary policy works, or showing that political power is more important than the welfare of New Zealander’s Phil Goff has stated that:

Today I am announcing the end of the consensus around the policy targets and tools of the Reserve Bank

Ignore him when he says that he is still interested in “monetary policy independence”.  Forcing the RBNZ to target near term growth and the exchange rate destroys the purpose of Bank independence in the first place.  Ignore him when he says he “wants to put money in peoples pockets” – as by cutting interest rates he is just transferring money from borrowers to savers.

Monetary policy should target stable inflation expectations, that is all.  All this crap from both the government and the opposition blaming the RBNZ for whatever is going on with the exchange rate is ignorant.  If our exchange rate is “too high” then as Treasury says the government could lower it by cutting the structural level of government spending, or by adjusting the tax system.

Furthermore, we have to ask, what do we mean when we say “the dollar is too high”?  The ultimate goal of policy is to maximise welfare (net happines) in society, not to “accumulate wealth” or “move the value of the dollar”.  If we ask ourselves “why” we think the dollar is too high then we realise that the problem isn’t monetary policy, but a host of other structural factors.

God we have discussed this stuff constantly (here, here, here, and here).  Phil Goff, I thought you were a pretty cool guy, but to be honest this makes me sick.

Disclaimer:  I am personally insulted by this blatent attack on monetary policy independence, and have written the post as such.  The opinions put down are not representative of anyone else I am involved with.

Others on it:  Kiwiblog, Rates Blog, Not PC, the Standard.

Matt Nolan

Go the All Whites

/8 Comments/in , /by

New Zealand’s football (soccer if you are from the US) team is playing in their final World Cup qualifier tonight.  If they beat Bahrain they reach the World Cup finals for the first time since 1982.

Most of the members of TVHE will be going to the game tonight, and all of them will be watching in some form.  So we are thinking that everyone else should really cheer the All Whites on as well 😉

Go the All Whites!