Matt Nolan

AMI and moral hazard

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So when a disaster hits, the government is willing to bail out domestic insurance companies to “provide certainty for claimants”.  Ok.

As a result, insurance firms will discount these large scale low probability events – and take on more risk when providing loans.  Their willingness to take on more risk than is socially optimal will be paid for by tax payers.

I wonder how big this effect is – and I wonder why it hasn’t been raised in conjunction with these movements.  If we are determined to provide a backstop for a number of New Zealand industries we will probably need higher taxes – this is something that the government should probably articulate to people if it wants to be transparent – then if society is willing to socialise losses they can …

Matt Nolan

Quote of the day: An excellent conclusion on trade

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This is a point we all need to remember.

Even when the benefits outweigh the costs, the tabulation of gains and losses by groups highlights the facts that international trade has distributional consequences. That realization should not induce policymakers to hinder trade via protectionist measures. Rather it reminds us that transfers from gainers to losers is a prerequisite for trade to be Pareto improving.

You always see economists arguing.  But you would be hard pressed to find an economist who objected to this concept – they may argue about magnitudes, but there is a broad agreement with regards to this idea.

Matt Nolan

Quake levy and timing

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Kiwiblog states that he disagrees with the Herald on a tax levy being introduced now.  I think his points on it slowing the economic recovery are valid – increasing taxes to pay for investment when the government can borrow the money at a lower rate of interest AND many consumers are actually locked out of credit markets AND incomes are well below what the economy can achieve is bad policy for economists of all political stripes (ceteris paribus).

But lets say that we currently have spending and taxes balanced over their lifetime IGNORING one-off events.  As a result, we want to pay off one off events with a temporary levy.  Ok, I’ve assumed that.  Now assume that we want two other characteristics of the levy:

  • The current generation wants to pay for the rebuild – even though it is their capital stock that got smashed.  As a result, it must be a relatively short-term levy.
  • We are concerned about the economic recovery, and would prefer to not delay it if possible.

Ok, so I’ve made a bunch of huge assumptions that point to us, at some point, HAVING to have a temporary earthquake levy.

However, even with these big assumptions there is no reason to put in such a levy right now.  We should say “we will introduce the levy on consumption goods from December 2013 till blah which is the period when we think the economy is back at its “potential” level”.  Advantages are:

  1. The impact on economic activity is indeterminate instead of negative.  Future wealth for this generation is lower, however the relative price of consumption now is lower.  As a result, the net impact on spending could go either way – when we have insufficient aggregate demand having an indeterminate impact is better than having a negative impact.
  2. This is a relatively short time horizon, so the current generation is paying for it.
  3. We make the levy money.

So if we have to have a levy, why don’t we do it when the economy is on an even keel – rather than during a point in time when we are in a historically potent recession.  Unless the people claiming that we need a levy don’t actually think the recession is particularly large … in which case a lot of other things that have been said about NZ’s economic performance by these people would be inconsistent 😉

Update:  Eric Crampton covers the issue more widely here.

jamesz

Beauty and brains

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It is well known that beautiful people earn more, which goes some way to explaining Matt Nolan’s success in his stage career. What is apparently more difficult to understand is why they earn more. A paper tries to split out two effects: productivity and discrimination. For instance,

…lecturers who are viewed as better looking receive higher instructional ratings by their students. Then, ceteris paribus, these higher ratings translate into higher salaries, because US university administrators pay attention also to teaching quality in setting salaries. However, the question remains on whether students are simply discriminating against ugly professors by reacting to an irrelevant characteristic, or if they do really learn less from them.

The researchers find that the additional wages of lecturers are due to productivity gains rather than discrimination but what confuses me is the difference between the two! The wording implies that productivity gains are independent of discrimination when, really, it is just a different form. Read more

Matt Nolan

Looking at the wrong place on inequality

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Via Bernard Hickey’s Twitter feed I saw the following from the IMF:

But this globalisation had a dark side — a large and growing chasm between rich and poor. While trade globalisation is associated with lower inequality, financial globalisation — the big story of recent years — increased it.

Even ignoring other important policy elements, does it make sense to say we should be restricting elements of globalisation in order to “reduce inequality”.  So here, I’m ignoring the efficiency costs, I’m ignoring the fact that any arbitrary restrictions will have an arbitrary welfare cost on individuals – but I’m still not convinced.

Why?  The problem is too little globalisation, not too much.  We need to open the borders – after all nations are just large labour unions, they benefit their members to the detriment to the REAL poor people in the world – those that live in the third world.

But instead of focusing on opening up borders, and helping those that are genuinely poor, the IMF is more interested in complaining about the fact that financial deregulation has made it easier for those who are willing to save to save – and for those who are impatient to get themselves into debt.

Putting on my normative hat, I have close to no sympathy for those who couldn’t find a way to save in the first world relative to the sympathy I feel for those who are born into abject poverty.

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.