Matt Nolan

Question on the power price spikes

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So some businesses are complaining that the spot price of electricity occasionally spikes when there is a shortage (and that these spikes are inconsistent).  They want government intervention.

My question is, if these spikes are such a concern – why don’t the businesses set up fixed price contracts with electricity retailers in the same way household do.  Also, the retailers are complaining about the wholesale price spike – but couldn’t they also set up contracts on a fixed rate?  Ultimately, knowing that the price can spike heavily in the face of a shortage of power, these businesses are CHOOSING to buy at the spot price (I guess it must be cheaper) – if that is what they choose to do then they should really face the risk of it.

Now if there was something anti-competitive about the setting of wholesale energy prices sure, go ahead and complain.  But if they spike because there is a significant shortage – and this price is just representing the underlying opportunity cost associated with providing that power – then having the spike occur is a GOOD thing.

This is because the price is saying “hey, at the current time there is a severe shortage of power, and unless you can create oodles of value from it you should think about stopping power usage for a short period of time”.  When it is placed in that context the spike seems reasonable, and all the complaining about it seems weird – so what is going on?

FYI:  Good comments from Rauparaha.

Matt Nolan

Central Banks: Second best policy and operational separation

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Following a major crisis, such as the one we’ve just experienced, it is easy to get into a situation where the goal of policy is to “avoid another crisis”.  However, this is not a trap that our fine readers fall into – so we don’t need to worry about it here 😉 .

This isn’t to say that we shouldn’t take things from a crisis – far from it.  A crisis gives us information about the behaviour of the macroeconomy, about the feed-back loops that may exist that we may not previously pay attention to, and about the process people use for forming beliefs.  But we still need to say why these things occur – and hopefully make our given hypothesis testable – before we can decide to do anything.

So well prior to the crisis there was a string of micro-prudential policies introduced.  In truth, the retail banks have been grappling with the introduction of many of these policies during the crisis – and the Reserve Bank has stated that part of the reason the OCR is so low is because these policies have, in of themselves, tightened credit conditions.

Now all this is fine, when it comes to cyclical policy the impact of both micro and macro-prudential regulation has been widely discussed.  However, what bugs me is the lack of heavy discussion and analysis is the lack of significant discussion around the structural impact of said policy.

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Matt Nolan

Why I’m not holistic

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A lot of New Zealand policy discussion and debate is holisitc – we say we want a set of outcomes, these outcomes are desirable, these are the outcomes we need to achieve.  In essence, they are saying there are a set of states “we” could be in as a society and we should strive to be in the “one” they are talking about.

Note:  There are elements of holism that are ESSENTIAL, but I see them as part of reductionist philosophy as well.  For example, the idea that the state of the world influences payoffs beyond the actions of individuals is fair.  Also the idea that we can’t compute everything is acceptable.  My argument is against the idea that we start with a “target” (top down) rather than starting with “guiding principles” (bottom up) when designing policy.

What is an example, lets say “sustainability”.  The idea of being sustainable, of having sustainability, sounds nice – it is an overaching state that some people want us to have.  If they are forced to define sustainability they will say it has a whole bunch of characteristics – however, why these characteristics are good is never touched – just the fact that it takes us to this “state” of the world that they normatively believe is desirable.

However, I’ve never, not even as a child, found such descriptions convincing.  One of these states must be reducable to the sum of its parts, there must be a set of causes that lead to that state – either that or it is an impossible pipe dream.

This is part of the reason I found economics so attractive when I was young – just think of the production possibility frontier.

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