Matt Nolan

NZ inflation expectations end of 2009

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Yesterday gave us the Labour cost index.  This index provides my favourite (albeit partial) measure of inflation expectations, the adjusted private sector labour cost index.  Anyway, what is it doing?

In conjunction with the negative annual growth in the money stock during the close of 2009 (note our caution) it looks like inflation isn’t a clear and immediate concern …

Matt Nolan

RBA, what the …

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Ok ok ok, so trimmed mean consumer price inflation is running at 3.2% (ht Institutional Economist), house prices rose by 12% on a year earlier (around 18% annualized), my favourite measure of inflation expectations – the labour cost index – rose by 3.5% on a year earlier.  So given the RBA expects trend real growth (3%), the premium on credit has fallen to about 50bps, and the cash rate is only 3.75% a rate increase is in the bag right!!

No – they left rates unchanged.  The statement seems to indicate that an increase is coming next time, why they didn’t now I have no idea 😛

As far as I can tell this is why:

Concerns regarding some sovereigns have increased

If you are worried about the world RBA just say so, we’re friends and transparency is a great thing in a friendship.

Furthermore, you have an inflation problem.  As a concerned party I would love to intervene on your behalf but I can’t.  You are going to have to get rates up and get this inflation down.

In New Zealand inflation is contained and the Bank does have some time to think.  In Australia they need to keep moving.

Update:  My impression is that a decline in the money stock could also engender caution – broad money declined by 0.8% (sa) in the December quarter, the fastest rate of decline since July 2002.  They may feel that this is an indicator of weakness in Dec quarterly activity rather than a run down in reserves on the back of rising interest rates.

Matt Nolan

Zero tax threshold: No thanks

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I don’t like the idea of a “zero tax” threshold at the bottom of the tax system.  I see it was suggested today by Mark Keating, so I thought I should explain why I feel this way (ht Kiwiblog).  I’ll put down three reasons, in reality the third reason is by far the most important:

  1. I don’t believe the cost of “churn” is very substantial – implying that any benefit from setting a zero tax will be negligible compared to taking the tax and sending it back.
  2. The effort required to set a zero tax and enforce payment of tax when moving out of the bracket requires effort as well – as a result I don’t think it is self-evident that setting a new bracket would reduce administration costs (it might even increase them).
  3. If we set a zero tax bracket this also acts as a tax cut for EVERYONE earning more than that amount.  This has to be paid for by INCREASING other tax rates (substantially as well, since the loss of the bottom bracket will cost more than an equivalent cut anywhere else).  As a result, effective marginal tax rates will be higher than if we taxed and paid benefits (for the same average tax rate in other words).  This reduces labour supply incentives for higher income earners.  As these earners tend to be more responsive to tax there would be a SIGNIFICANT efficiency cost.

Yes, the zero tax rate at the bottom will increase labour supply incentives for those on very low incomes.  But this will only lead to efficiency gains if we believe it will get the more elastic secondary earners into the labour market.  If we are doing it to promote equity it doesn’t make sense – as those that are actually poor are likely to provide very inelastic labour supply.  Overall, it is likely that the negative impact of higher EMTR’s on middle and high income earners will outweigh any positive impact through a increase in, our already enormous, part time labour force.

The purpose of the zero tax bracket is to make sure that people get a minimum living standard.  The better way to do this is to ensure that society pays everyone a living wage at whatever level it believes is fair.  Leave redistribution to the welfare system (where our social value judgments are transparent), tax needs to be applied on the basis of efficiency in order to be effective.

Matt Nolan

Review: Mass Effect 2

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Taking a brief break from discussing economics I thought I should mention a new Xbox game called Mass Effect 2 (reviews).

Why am I mentioning this.  Two reasons:  I don’t have time to put any thought into a post as I am extremely busy (which rules out most economics 😉 ), and it is the best game I’ve every played.  It is like a good movie, with entertaining action and a strong story.  I figure this is a blog, so I can really write about anything anyway as long as I’m not breaking the law 😉

Experiences during the game are strongly based on what you did in the prior game – quite a breakthrough for games.

I haven’t wanted to replay a game this much since Knights of the Old Republic 2, and I haven’t appreciated the story and the tie in of characters this much in a game since Ultima 7.  As a result, I’ve immediately lent my copy of the game to a friend so I can’t play it anymore and can get some work done.

My one qualm is that Bioware seems to find a way of making the sex scenes in their games more and more uncomfortable with each game they release.  I don’t know what it is, it just feels like other emotions/interactions in the game are treated with such depth (and awesome amounts of moral ambiguity), whereas the “love/sex” chains feel more contrived.

Note:  I seriously recommend playing through Mass Effect 1 and then importing your save game for Mass Effect 2, it just adds that little bit to the experience.

Matt Nolan

Tyranny of the majority

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Any policy to ban smoking, on the basis of this, would count as “tyranny of the majority” in my opinion.

This reminds me of my favourite rule of thumb for policy:

Any regulation should be based on the idea of avoiding coercion either from the private or the public sector

On the flip side, any regulation that increases coercion (as banning tobacco seems to) is likely to be bad policy.

Matt Nolan

Dovish Jan for the Bank

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Reserve Bank statement is out for January.  They seem more negative on the world and feel inflation is more “comfortably” in the band.

If we want to know when they are going to move rates we have to keep an eye on:

  1. Monetary aggregates (for household debt accumulation),
  2. Labour market,
  3. Global growth.

Rates Blog also comments here.  Personally I’m more positive on both the world and near term New Zealand economic activity – and if the data shows this I would expect the Bank to move more quickly.

And also, what the hell – the 90 day bill rate is around 2.8%, inflation is around 2%, we are talking a real rate of 0.8% with expected real growth of say 2.5%.  We are in very very stimulatory territory here.