Matt Nolan

Why we always need a “why”

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I found this write up strange.  We are being told that student that are overseas should pay back their student loan more quickly to “help Canterbury”.  We are told that it is a “win-win” because it gets money into the economy, it lowers the budget deficit, and it means the students don’t need to pay back the interest as quickly.

Typifying this is the quote “It’s in your own interest, but an opportunity to be seen as a hero.”

This is where doing things without a full model/conception in mind is problematic – there is no such thing as a free lunch.

The student isn’t paying back the interest, because they are making sacrifices now to pay back the debt.  The government gets the cash now instead of later, so the cash balance improves but the set of non-cash assets declines – given that the interest exceeds inflation the real value of their asset position is likely to be lower.

What we SHOULD ask is:  Why aren’t the students paying it back now?  Is the policy that was introduced sensible?

Students overseas aren’t paying it all back now because the cost of doing so exceeds the benefit.  If we were to start pushing them to pay it back, we would likely be causing harm on New Zealander’s who have moved overseas – is that something we want to do?

If we don’t think that it is “fair” that students are paying back their debt at the rate they are, and we think the rate of interest is favourable (it definitely is on students who have stayed in the country) then isn’t the solution to increase the interest rate – not to start dancing around and talking about the deficit and Christchurch to guilt people into it.

Now just talking at people doesn’t cost much – there isn’t a policy failure from doing that.  But it doesn’t make it a “win-win” that we are missing out on – if students aren’t paying off their loans, they will have a reason.  Trust me.

Matt Nolan

Understand before you tinker

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I would be lying if I said this didn’t depress me.  Economists, great economists, economists I idolize stating that there are “imbalances” we must solve – and then telling us how to solve them without actually describing what the imbalance is and why it exists.

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Matt Nolan

A wager: Price growth of 15% between Dec 10 and Dec 15

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In the comments of this post, Andrew Coleman and myself decided to place down a little wager on price level growth during the next five years.  The bet goes as follows:

If the CPI grows by more than 15% between its December 2010 level and its December 2015 level (excluding any changes to the GST rate), Matt pays Andrew $100 (in Dec 2010 prices)

If CPI grows by less than 15% during this period, Andrew pays Matt $100 (in Dec 2010 prices).

We put down this bet just to show that we believe our own positions enough to stake money on them.  He believes there is some probability that the Reserve Bank will allow prices to grow at more than 2.8%pa during the next five years, and that this probability is sufficiently high for him to be willing to make this bet.  On the other hand, I do not think this will happen.

Update: Eric Crampton has also joined the bet, sitting on Andrew’s side.  So it is my $200 against $100 from each of them.  Confirmation here – combined with an explanation why.  I use the same explanation if I ever bet against the All Blacks in the work pool.

Matt Nolan

Bubbles, stability, Stiglitz

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As soon as you guys have read the title and saw the article I’m discussing, you are probably expected me to go off about Stiglitz – given that, although he’s a genius, his views tend to be a touch unorthodox and I’m a slave to orthodox economic theory.  But this isn’t the case.  There are a couple of things I disagree with in the article, but I actually felt what he wrote was pretty good – in fact most of it is more orthodox than many may realise.

Now, I disagree with his assertion that:

They failed to predict the crisis; standard models even said bubbles couldn’t exist — markets were efficient.

Of course, the EMH suggests that we can’t predict crisis – and doesn’t say their can’t be bubbles.  Hell, the macro text book I’ve got next to me has a great deal on where bubbles pop up in models.  Personally, I’d go as far as saying that the “popping bubble” was not the main issue at stake during the GFC – it was the break down in trust and reputational capital in the finance sector combined with a slow policy response.  But I digress.

He also states:

The ultimate objective of a central bank is to stabilize the real economy, and financial and price stability both need to be seen as instruments toward this and other ultimate objectives.

This is a little loose.  The objective the central bank is to run a fiat money system without incurring undue variability in the real economy – we want the certainty and efficiency associated with fiat money and price stability, but we want to avoid ADDING to variability in real output.  My only real disagreement here is that I still believe ensuring price stability is the best way to achieve any cyclical goals from monetary policy – when he does not believe this.

But ignore this, he has some great insight, namely:

Perhaps the major failing of some of the earlier models was that, while the attempt to incorporate micro-foundations was laudable, it was important that they be the right micro-foundations.

The discipline needs to build and develop – and recognising that helps us understand that the discipline isn’t in some magical “final state” where it can provide all knowledge.  This isn’t a critique of the discipline – it is an admission that the discipline needs to keep learning and growing.  Furthemore, it shows he still believes in reductionism – which I’m glad to hear.

Nice.

Matt Nolan

Cartoon: Economists socially

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Via the always excellent SMBC.

I would say this is a close approximation to how I operate in town – I just usually forget the notepad 😉

On a more serious note, it is true that people who do economics do tend to be very analytical about social situations – that is the field we work in, that is what we do, and we are a self-selected group that does that.  It reminds me of that facetious paper that did an anthropological analysis of economists – does anyone know where that is so I can link it here?  Update:  Here, thanks Eric Crampton.

goonix

The funniest part about the UK budget 2011

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Since I am the UK correspondent for TVHE I thought I had better contribute something to the blog. Then I stumbled across this gem from today.

One of the centre-pieces of the budget was the reduction in fuel tax (it has had a lot of media coverage). Not only was the fuel tax increase cancelled, fuel tax was in fact decreased by 1p per litre. According to Chancellor Osborne, this move would lead to motoring costs falling for families and businesses.

Given the budget was a fiscally neutral one, in that all additional spending/tax cuts come from spending cuts/tax increases in other areas, how is this cut in fuel tax being funded?

By an increase in taxes on North Sea oil production, from 20% to 32%.

I’ll leave it to the reader to think about what effect this increase in production tax might have at the petrol pump.