Spending on government employees

An interesting new blog on stuff tells us why interest rates had to rise. Now I agree that people in the public service are being paid too much (as I don’t work there 😉 ). However, I’m not sure that public sector core wages are the main reason for inflationary pressure (although they do play some part in the wage bargain in the private sector as well). I think that it is a broader issue, with wasteful government spending in health and education the major drivers of our inflationary mess, along with low rates of productivity growth (in both the private and public sectors).

Ultimately, much of the current inflation problem comes from government failure. There is a role for government in society, but I’m not sure that the Labour government recognises the appropriate boundaries associated with that role.

You don’t mess with the Guv’nor

Bollard has shown who wears the pants. In raising the OCR today, he has shown his disregard for Dr Cullen’s mischievous feints at invoking his powers to override the price stability objective. He has also shown the market that he’s willing to back up his tough talk on the housing market – now on its “third wind”- even if this means ratcheting up interest rates even further as the Kiwi dollar reaches record highs.

Ultimately these actions will help bring the currency down. The Kiwi is underpinned by interest rate expectations, and only by raising rates today could he claim – credibly – that inflation is coming under control, meaning further hikes were unnecessary. So far the market appears to have believed him.

Perhaps this was unnecessarily hard on the housing market. The higher rates will bite hard as fixed rate mortgages continue to roll off over coming months. But then again, why not? A few months ago, a sharp correction in the housing market would have spelt disaster for the economy, with only government spending staving off risk of recession. But now a dairy commodity boom is underway, providing a massive boost to the incomes of farmers and wider economy. This means Bollard can afford to be more aggressive with domestic demand, coming down harder on the housing market. Showing that he is, indeed, still the Guv’nor.

A Strict Application of “Kiwi Made” Actually Hurts Our Exporters

While I am all for supporting the domestic economy, I think that a strict interpretation of the requirements for a good to be labelled “Made in New Zealand” actually harms our exporters. People get upset when they find out that something that is “Made in New Zealand” is manufactured using inputs purchased from another country. Any attempt to put pressure on exporting firms to use entirely NZ inputs is detrimental given that we are a small open economy with a very volatile exchange rate. The argument I’m making has absolutely nothing to do with price or quality but instead centres on a corporate finance concept known as “Natural Hedging”. Put simply if you have a company that sells its output in a foreign currency, purchasing your inputs in that currency naturally hedges movements in the exchange rate.  A good example of this is Navman who appear to be doing fine because they purchase a lot of their inputs in US$

While I accept that a good should still in essence be New Zealand made, I  believe that when the firm is an exporter, they should outsource as much of their inputs as possible.

One hike too far

So the RBNZ lifted rates. However, they said this is the end, no more hikes this year.

I’m can understand why Bollard wanted to lift now, Cullen threatened his manhood and Bollard had to show he had some balls. I still think this lift is unnecessary, house sales are easing and firm profit margins have recovered, easing inflationary pressure over the next few months. Furthermore, even in the June quarter when retail sales were red hot, core inflation showed signs of easing.

Bollard has said no more rate rises will happen, however I think he’s taken one more than he needed to. Remember, the OCR hits inflation with a lag, it takes 12 months for effective mortgage rates to peak, and some say the full effect of tightening can take 18 months to come into effect. 2008 looks like it will be a difficult year.

People in the UK don’t want to pay more fuel tax

And I’m not bloody surprised either.  They already pay a very significant fuel tax, one that I feel covers the externalities associated with their fuel consumption.  When you have an externality, the government should tax to the point where the marginal cost of consumption is equal to the social marginal cost of consumption, taxing anymore than that is government failure.

However, in New Zealand we should pay more fuel tax, and I know one guy that agrees with me

What do you think?  (bonus points for picking up the obvious economic inconsistencies in the above article, as it will give me the opportunity to say what I really think)

Why the Exchange Rate Makes Me Smile

So the exchange rate has reached record highs much to the despair of the government, reserve bank and local exporters. There is one sector of the economy that is poised to benefit from this though…. ME

Given all the noise coming from the government about the exchange rate being overvalued and the fact that the reserve bank intervened when the dollar was still below $0.80, I’m thinking it’s a fairly safe bet that over the medium-long term the dollar will come back down. With that in mind, now is fantastic time to buy overseas shares and reap the gains as you ride the dollar back down.

It’ll also be a nice self fulfilling prophecy if will all start sending money overseas, we believe the kiwi dollar is going to fall so we dump it which causes it fall. Think about it, you could actually be helping our exporters by investing in foreign companies, I’ve never felt so good about not investing in the local economy!