Film incentives are trade protectionism

If we follow Australia down the road of trade protectionism for movies, then we all lose out.  What do I mean?

Well the incentives for trade protectionism is a prisoner’s dilemma.

As Peter Jackson says, if Australia starts subsidising movies we need to do the same or we will miss out on productions – as a result our best response to their protectionism is more protectionism.  Furthermore, if we start subsidising and Australia doesn’t then we get a relatively larger share of the movie industry – assume that this occurs to the point where the tax revenue from the movies exceeds the cost of the subsidies.  In this case our best response is to ALWAYS subsidise.

However, there are two issues.  Firstly it is in Australia’s interest to subsidise (it is also their “dominant strategy”).  And secondly, the decision to subsidise pays off because it hurts Australia.  In the end both countries end up subsidising movies, and both sets of taxpayers end up worse off than in the case when neither country subsidises.

This is the issue, not only with the subsidies on movies, but on all trade protectionism.  That is why we need international co-operation to avoid this type of beggar thy neighbour behaviour.

NZ/Aussie Optimum currency area

There is a little bit of talk about a ANZAC currency I see.  Lets be honest here, this effectively implies that New Zealand would be adopting the Aussie dollar. I remember arguing about this with my brother a while back, he was pro I was against.  Nowadays, I’m not sure – I’d like to see a few studies on it first.

Now there are costs and benefits from such a currency union.  Pages 633-634 in “Foundations of international macroeconomics” by Obstfeld and Rogoff covers these off as follows:

Benefits

  1. Lower transaction costs.  As Aussie is our main trading partner this is a biggie.
  2. Removes exchange rate risk for trade between nations, both in terms of relative prices and account reporting.
  3. Prevents damage from exchange rate verring from fundamental level.
  4. Makes trade protectionism more difficult.
  5. Added I would also add that, in this case, having the Aussie dollar will reduce the risk premium we have to pay for credit

Costs

  1. Can’t use monetary policy to compensate for region specific shocks – dairy price crashes and we can’t use a lower interest rate to help buffer the fall.  This is the primary concern.
  2. Can’t use inflation to lower public debt – our monetary policy is now determined by Aussie.  However, we don’t do this so it doesn’t matter.
  3. As fiscal policy is independent it can cause issues with splitting “seigniorage revenue“.  With a low inflation target this is not a biggie at all.
  4. Speculative attacks prior to the union.

What an inflation targeting central bank would say

The RBA just left rates unchanged and they said:

Inflation is gradually moderating, given the earlier decline in energy and commodity prices, and the effects of weaker demand on prices and labour costs. Given the current prospects for demand and output, this moderation should continue over the year ahead. The higher exchange rate over recent months will assist this moderation, at the margin.

So the higher exchange rate is helping them moderate inflation.

Now our Reserve Bank keeps saying that they are worried that the exchange rate will hurt growth.  For this to fit inside our monetary policy story they must be concerned that, if they don’t cut the interest rate, inflation will fall below the target band.  So why don’t they just say that?

When did NZ’s right become communist?

I am very confused at the moment. I keep hearing the NZ right talk about “catching up to Australia” and increasing New Zealand’s labour productivity (eg here and here).

But doesn’t this presume that the government has the ability to do these things? This confuses me as I thought that the basis of the NZ right was that the government doesn’t have the ability to significantly improve economic outcomes.

For example, Don Brash, the ACT party, and Roger Kerr, believe that the government can increase real GDP growth in New Zealand sufficiently for us to catch Aussie. According to them this involves growing adding 31% more output in this period (15 years) as well as any growth that Aussie achieves. Is it me or is this insane.

I also hear people say “China has been growing in excess of 10%pa” why can’t we. Well this is because they are starting at a low base, and are catching up in technology to developed economies – we don’t have this “low hanging fruit” to pick up on.

Long-term growth is based on technology, resource allocation, and to some degree the structure of institutions in the economy. I severely doubt that the government can turn around and improve any of these things to the degree required to “catch Australia”. Hell, Australia is closer to its markets, has a larger set of currently important natural resources, and gets “economies of scale” due to its higher population. No government policies can magically fill this gap.

Update:  Paul Walker shares similar sentiments, and a bit more discussion, here.

Australian unemployment also surprises …

So unemployment in Australia fell from 5.7% in March to 5.4% in April.  Following our better than expected March quarter this is all very interesting.

Very interesting …

People have decided to stop going to Aussie – go the collapsing labour market

Fewer people are departing to Aussie this February than in Feb 08 (down 22%). The economics tea leaves never leave me wanting – maybe I need to incorporate them into my forecasting routine.

This is a drastic slowdown – and is consistent with the sharp increase in unemployment over in Aussie. Now I’m just waiting for someone to say:

1) Aussie departures near record high or,

2) John Key stems tide to Aussie.

Both will give me a little giggle 🙂

UpdateGo here, read the comments 😀