Tweeting the curse of distance

Via Owen Williams on Twitter came this gem:

This is true, shipping is a pretty big deal.  However, Aaron Schiff pointed out another common cost of being in NZ:

This is of course the curse of distance – both from the “production” of goods and from large centres of “consumption” (where the fixed cost of transporting can be spread over more customers).  The OECD has discussed this cost before, and NZ’s Productivity Commission also mentions it when discussing why productivity in New Zealand is relatively low.

Nice to see Amazon giving us some concrete examples we can use to discuss the phenomenon though – well nice until you want to buy anything ;)

Some broad lessons from the GFC

I had to do a brief chat about the Global Financial Crisis, “mistakes” that were made, and the role of the international financial architecture, for a organisation I’m not naming with people I’m not naming.  It was Chatham House rules, but nothing particularly rough was said – so I’m more not naming anything as I like to let people’s minds run wild!  Anyway, here are the notes I wrote for myself in preparation – make of them what you will.

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Dynamic comparative advantage: Costs and benefits, the case of Cuba

Political and economic systems are often fraught with emotional comparisons.  Few create more of an uproar than Cuba – with those on the far left seeing it as an ideal to aspire to, while libertarians view it as a fundamentally broken and immoral state.  However, no matter how we feel it is always useful to ask what the trade-offs are, and what “theories” these ideas are indicative of.  This is what Mieke Welvaert did on her recent post about Cuba trading doctors (Infometrics link here).

Cuba provides an interesting case study in how government policies can help individuals coordinate in their choice of job and educational attainment.  However, it also shows some of the costs of trying to generate a “dynamic comparative advantage”: the misallocation of human capital as people are pushed into specific areas, the restrictions to freedom required to solve the time inconsistency issue between government and the service providers, and ultimately the risk of being exposed to an industry ‘picked’ by a government.

In truth is does appear that one of the key issues, when looking at how the system works, is the freedom of choice of the individuals involved – understandably, people’s beliefs and judgement around this in ethical terms should drive their view on what is appropriate.




Small New Zealand: It’s advantages and the growing importance of trade

Matt Nolan discussed the benefits of trade for a small open economy on Rates Blog (Infometrics copy here), and some of the specific factors for New Zealand.  Namely, the fact that New Zealand’s comparative advantage is in a homogenous product, where New Zealand as a whole only provides a tiny amount of the world’s supply.  In this context, if demand or supply changes in our of New Zealand’s target markets it is relatively easy for dairy or meat producers to slip the products somewhere else for a slightly lower process (relative to if New Zealand sold very specific goods within a global supply chain).

New Zealand’s small size and exporters reliance on homogenous goods actually makes the country relatively resilient to global economic shocks – an important point to keep in mind when demanding that the government interfere to “restructure” or “rebalance” the economy.

However, he does touch on the idea of terms of trade shocks, and the justification for insurance.

Then Matt wrote up a guest Top-ten at ten last week.  In this, he focused on trade during the Great Depression and now – before swinging to a couple of posts by Aaron Schiff and Eric Crampton discussing the importance of competition to domestic industries.  That can in turn be expanded by thinking about services and the changing nature of scarcity.  At the end of it all he concluded:

We are moving into a world where trade in services is becoming more important, more valuable, and where it is removing the burden of distance from New Zealand firms.  The fact the world is changing, and that New Zealand firms and households have to be prepared to change with it, is an important point to keep in mind – both in terms of what we can expect, and what policies government should be putting in place.

Perspective is great – income

Via Tim Harford on Twitter, I see the “global rich list” site has been updated.  Take a look!

It is this sort of recognition that makes economists get so wound up about global income inequality rather than income inequality within a country.  This is why it came up in the second part of my “careful with occupy” plea in NZ back in 2011 – because I guess that is the sort of way we’ve been trained to view these equity issues.  When economists talk about equality of opportunity (which is a value judgment – so we are wandering out of our strict specialty here) we are viewing all people as equal, irrespective of the country – and this is why development economics is such a massively popular field, and I can fully understand and appreciate that.

Let us take someone working every week of the year, 40 hours a week, on the current minimum wage ($13.75 per hour).  Assume they have no kids and the such, so we are just talking about an individual.  That gives us gross income of $28,600pa.  Now go here, and we get tax of $3,710pa.  Take off the ACC levies, that is $486.20.  Add on the independent earner tax credit, so $520pa.  Ignore any other payments.  This gives us net income of $24,923.80pa.

This result would put you in the top 6.53% of the income distribution over the world.  You would be among the 6.53% of worlds richest people, if you work in NZ on the minimum wage full time.

This in term does ignore two things:

  1. The fact that goods prices tend to be higher in wealthier countries – so this factor will be exaggerating how wealthy the NZer is (as we actually care about goods and services)!
  2. It also ignores that the tax that is paid is used to fund health care, education, etc etc.  These are “goods and services” that are provided which people is much poorer countries do not have access to.  As a result, this factor will be making you look less relatively wealthy than you actually are!

Perspective, it’s interesting.

The excel error in Rogoff-Reinhart

I see the Rogoff-Reinhart figures regarding the correlation between GDP growth and the size of the debt stock are currently under attack – due largely to an unfortunate excel error discovered reported by Mike Konczal.  Here are the list of posts about it at the moment:

All very nice.  Depending on the message people were trying to sell they either said the result was meaningless, or central, so I don’t think this makes any actual difference.  Honestly, without clear causal drivers there just were not good evidence based claims for actual policy adjustments – a lot of people were actually just saying we need to do X based on their preconceptions.  And they found this correlation either something that supports that (somehow) or something they need to rule out.

Over the last few years I have seen authors, at different times, use R-R as central to their argument on one thing, and then dismiss it for arguments regarding other issues (I’m not going to name names).  For example, you can’t use this result to say we need more savings policy because the stock of debt is to high, then complain that the study is flawed when you want more government borrowing … just focus on the actual core elements of your frikken argument instead!

My problem with the result isn’t the excel errors, or anything R-R appear to have said – it is the way it has been used as an inconsistent marketing tool by people for selling their own unrelated ideological policies.  I’m just hoping that this shuts that up.

As a side note, here are my feelings on twitter:

People who think the R&R result caused austerity overestimate the impact evidence has on government policy.