Matt Nolan

The importance of incentives

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This story is a great example of how institutions can shape incentives, in order to change outcomes.

The women of Barbacoas, Colombia have ended a three-month, 19-day “crossed legs” strike of sexual abstinence aimed at getting a road to their isolated town paved, after officials pledged to invest in the project.

The money quote is:

“The men’s first reaction was laughter, because they found the way we were protesting very curious,” Silva said.

Then reality set in, and work on the road finally began last week as the government had promised.

Now, my question is – is this optimal or not?

On one side, the women were signaling the high value they place on the project through their actions – and are in one sense trading sex for a road.

On the other hand, the women are in a position of power – and are changing the bargaining position so that they can extract more surplus from this trade.

Truly, there is economics everywhere

Matt Nolan

Moral hazard: The case to increase regulation

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This piece from Vox Eu provides a good run down of one of the issues of that exists when we have a central bank as a lender of last resort – moral hazard.

The prospect of receiving liquidity support may distort banks’ risk-taking incentives to a much larger extent than has been acknowledged up to now. In particular, in addition to stimulating excessive maturity transformation, the prospect of receiving liquidity support provides banks with an incentive to increase their leverage, diversify their asset portfolio, lower their lending standards, and to do so in a procyclical manner.

As long as we need a lender of last resort to prevent against bank runs – we also need to lean against the moral hazard implicit in any of this sort of support.

The question I have is, how do we then try to make banks price in the full social risk of their actions, when they are protected in the “worst case scenario”.  In essence this suggests there is some “externality” and so we will want to have some type of “externality tax” for these banks.

However, this is an issue we need to look into, I see the argument as follows:

  1. We require a lender of last resort function for central banks, to prevent bank runs on solvent banks facing liquidity issues.
  2. However, this function creates a moral hazard problem – because some of the downside risk is socialised
  3. Given that, how can we solve the moral hazard issue?

This is one of those cases where the initial issue (bank runs) is serious enough that it seems worth dealing with the unintended consequences directly – instead of dumping the policy of a “lender of last resort” completely 😉

Matt Nolan

A message to tomorrow’s protesters

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Update:  The protest that I’m arguing against in the first half of the post isn’t till the 5th of November (thanks Seamus!).  However, my main critique in the second half applies to both protests insofar as the first protest is focused on inequality again.

Personally I AGREE with a some of the issues being put down for the first protest – and would potentially head along if it wasn’t that the bullshit inequality line is being sold so hard (including in the picture for the site).  Sigh

I see that a number of people have decided that, on Saturday, they are going to camp outside the Reserve Bank of New Zealand in Wellington to protest.  After seeing a similar protest on Wall Street these protesters have stated that they are the “99%” (a statement that implies that they aren’t part of the 1% that is assumed to own most of the capital) – and they are protesting for “change”.

I understand why people feel worn down, I understand the power and importance of non-violent protest, but I have to say something that will likely upset the protesters and many of my closest friends:

This protest and its message are wrong, and by doing it you both ignoring the real issues in the world and acting in a selfish way – and for that reason I think less of every single one of you.

That’s a pretty damned cutting statement – so let me discuss why I believe this.

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Matt Nolan

Protectionism: What the ….

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The US is pushing to start introducing duties on Chinese goods to make a “level playing field” given the currency “misalignment.

Hold up a second.  China maintains a “low” exchange rate by “saving” too much – and using that savings to do things like by US currency and bonds right.  Any subsidy on Chinese exports is “implicit”.

If  this is indeed the case, introducing duties is not the way to go about things – and by ignoring the central issue it will at best lead to an uncomfortable situation and poorer US consumers, and at worst will lead to a full scale trade war and a severe economic crisis.

If you think that having China save excessively creates risks to your own economy (as that sort of subsidy actually sounds pretty welfare enhancing in a direct sense – so we need to think about risks), then deal with it directly – eg by taxing capital flows from that specific country.  Don’t start rubbish protectionism.

Matt Nolan

When times are tough, mess around

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That is the Greek attitude it seems.

They need to default, leave the Euro zone so that they can have their own currency (and the huge corresponding real wage cut).  Surely it is obvious that the politicians, and the people, don’t have the will to actually sort out their problems.

I want to know what the protesters want.  How do the tax collectors think that not collecting tax is going to help Greece pay its bills?  With the level of corruption and tax evasion in Greece prior to the crisis, it appears that their “social contract” was never really adhered too.

I will give them one point though – they may think the distribution of the burden is “not fair”.  However, not collecting tax on current policies (not the new austerity ones) appears to be an overstep – and a signal that people are just generally unwilling to pay their bills.  Pro-tip:  If you elect a government who is going to spend lots of money, its your money they’re spending – you will have to pay for it at some point.  Contrary to popular belief government doesn’t pull goods and services out of thin air.

Matt Nolan

Greek fact of the day

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Via my boss:

If Greece had a dollar for each time they were blamed for the global financial crisis, they’d be able to pay their bills

I think this is worth keeping in mind.  Although, if they could pay their bills there wouldn’t be a crisis.  Then they wouldn’t be blamed for it.  Then they wouldn’t be able to pay their bills.  So I’m not sure we really have a stable equilibrium here.

Note: Another work colleague notes that if they were blamed enough to pay down the stock of debt, then we have a stable outcome.  My presumption was that we were saying they received enough to just pay back interest, not principal.  As a result, the total flow of funds from people willing to give Greece a dollar is very important here.

Now markets are hellishly volatile at the moment.  I think that this is due to the world waiting on an announcement from Europe which will tell us exactly who is going to lose out from the ultimate Greek default.  However, it probably also has something to do with Dan Carter getting injured – damn.