Matt Nolan

Questions on NZ stimulus

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Bill English says it is now time for New Zealand to begin pulling back from its stimulus measures.  The RBNZ also says that they won’t lift rates because they expect fiscal stimulus to be withdrawn.

However, I have a question.  Other then the cycle way (which will still be constructed) and permanent tax cuts (which won’t go away) what stimulus did we actually take on?

If this is the only stimulus we did, and we are not withdrawing it, then isn’t the statement that we will withdraw unnecessary stimulus absolutely meaningless.

So, what DISCRETIONARY spending did the government add solely because of the recession?  [automatic stabilisers do not count – as the economic cycle deals with them itself]

Matt Nolan

When the title and article don’t meet

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Today in the Herald I saw a title “housing fall on the way”.  I expected that this would lead me to a report where someone was discussing why they thought the property market would weaken – an argument I would have been interested in reading.

Instead I noticed they were discussing this article by Westpac.  In the article Westpac says that low construction and interest rates will see house price growth move into double-digits by the middle of 2010.  This isn’t a house price fall.

In fact, the Herald article doesn’t really paint a picture of weakness – outside of a comment that a change in the tax treatment in property would influence house prices.  So where the hell did that title come from.

Let this be a lesson to all of us.  Don’t judge an article based on its title, as the person writing the title is often completely different than the person writing the article.  And obviously sometimes they write the title without actually reading the article 😉

Matt Nolan

Kitten demand exceeds supply

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So says this newspaper story.

Does this suggest to anyone else that the price of kittens needs to increase?  Why?

  1. By setting the equilibrium price we ensure that only those with the highest willingness to pay for a kitten receive a kitten.
  2. By increasing the price  to its equilibrium level we ensure that we have the right relative price signal in terms of the allocation of SPCA animals.  As a result, this ensures that relatively more “less desirable” animals find homes – and that the relative allocation of animals is efficient.
Matt Nolan

Falling wage rates: Should we be concerned?

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According to the Employers and Manufacturers Association’s 22% of job types are being done for a lower wage in 2009 then they were in 2008.  Furthermore, according to recent labour market data 1% of actual employees have received a pay cut in the past year.

At first this seems like a bad thing.  Falling wages mean falling labour income.  If other prices are unchanged such movement implies that people will be falling below the poverty line.  Furthermore, it implies greater levels of government spending – as income rebates are negatively related to income.

However, the pain the economy is experiencing is because of the recent recession, and the large shock to activity New Zealand (and the rest of the world) has experienced.  One of the reasons why we often urgently run to government stimulus during a recession is because wages and prices do not adjust to a change in the economic situation.

Specificially, nominal wages are said to be sticky.  If the nominal wage is stuck and we have a recesssion (which reduces the demand for labour) then we end up with a “surplus of labour” – or unemployment.  The less sticky wages are, the less unemployment the economy faces.

As a result, the fact that wage rates have been able to move downwards is a good thing – it suggests that the economy has been able to adjust and keep more people in work (and as a result, keep activity rolling at a higher level) then would have been the case if wage rates hadn’t been adjustable.

jamesz

Taking unilateral action

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When it comes to climate change the biggest argument against unilateral action is the lack of any tangible benefit. What can a single country really do to mitigate climate change? However, an article by Akira Yakita suggests that there are welfare benefits to action outside of the benefits to the climate.

His central argument is that preferences are not stationary and can be influenced by publicly expressed attitudes. So, if the government subsidises green technologies as part of its climate change policy, then people’s preferences shift towards green products. Because the subsidy increases the production of green products, which are now preferred, total welfare might increase. Obviously the final welfare outcome depends on the coefficients on each effect, but Yakita shows that an increase in welfare is possible.

While that’s all well and good in theory it’d be nice to have some evidence of the effect. After all, it could get awfully close to saying that anything the government does is good because people will grow to love it. Yakita’s evidence for the effect comes from two industries. First, he points to the explosion of interest in hybrid cars, where sales growth has been huge despite the 50% price premium they command. Sales of hybrids in Japan have grown by 19%pa from ’98 to ’06, while the overall growth in car sales is ~1%pa.

Secondly he points to sales of organic food. While there may be dispute over whether organic foods are actually environmentally friendly, there is no doubt about how they are generally perceived. He reports that the organic food market has grown 15%pa over the last decade as the environmental movement has taken hold.

Those two pieces of evidence together do suggest that preference shifts have taken place. However, it’s a bit of a jump from there to suggesting that government action can instigate a preference shift. I’m willing to believe that preference shifts could make it worthwhile for the government to promote green activities to boost welfare, but I’d suggest the causation has to run from preference shift to government action rather than the other way around. Nonetheless it’s a novel way to look at the benefits of unilateral action on climate change.

jamesz

Differential funding for uni departments

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Peter Mandelson wants to revamp British universities to make them more inclusive and have them focus more on job-relevant courses. Proponents of liberal arts schools are predictably outraged. I agree with them that they shouldn’t be discriminated against. A fair system would make people pay for the benefit they receive from their education, and have the government subsidise to the value of any positive externalities from education.

To draw an analogy to university staff pay, the quality of university staff depends in part upon the difference between their university salary and their outside options. As Daniel Hamermesh puts it:

If a university went ahead and paid equally, lowering economists’ pay and raising French professors’ pay, it would have a great French staff and a dreadful bunch of economists.

Of course, Hamermesh is talking from the perspective of a US academic. In the US they pay different salaries for different disciplines. In NZ we do pay all university staff equally and the research bears out the truth of Hamermesh’s conjecture. So paying people with different market values equally is essentially a subsidy on those with low market value.

To come back to the issue of students’ fees, subsidising all students equally is a subsidy on students whose degrees have only private value. Surely, in order to be fair to all departments and all students, the subsidy on education should pay for only the social benefit. The entire private benefit to the student should be paid for by the student. At the very least the subsidy should be proportionate to the social benefit and differ across disciplines.

So who would be the winners and who would be the losers? Speculate away!