A defence of the calculation of the living wage

Over at The Standard I noticed this defence of the recent living wage calculations from the two critiques that had popped up (which I linked to here).  The key points seem to be:

  1. The living wage concept was being defined in a different way by critics – making the attacks a wee bit of a straw man.
  2. The living wage concept is not being sold as a policy, or as mandatory.  It is about articulating certain fairness principles with regards to need.
  3. A discussion of the costings, countering many of the specific claims.

That is cool, thinking about poverty requires discussions about many of these issues, and I think that this defence was clear and completely legitimate.

In this context, I agree with the authors.  However, there are a few points I would raise – points that I think are especially important when judging Treasury’s analysis, and points I touched on when initially blogging about this.

  1. The Treasury work was largely pointing out that, if the living wage was to bind, the number of people who fall into this “specific group” is quite small (especially relative to the full number of people who earn below the living wage).  As a result, any policy relevance is a bit murky.
  2. Although the authors say the policy is not mandatory, or a call to government, it is being used widely as a call to government to “do stuff”.  It is fine to say something such as “we are trying to ethically motivate firms”, but many people do not take the concept that way.  In this way, Treasury’s response was almost preemptive.
  3. We can have a reasonable debate about relative poverty.  In this way, having Brian and the living wage authors argue about these things is choice – as it makes the value judgments involved in discussing “need” more transparent!
  4. For me I get a bit confused about why we talk about need and poverty in terms of a wage, rather than in terms of minimum income.  If we are interested in poverty and opportunity, it makes more sense to articulate these in terms of bundles of goods and income – and think through that – rather than stating that those who are employed should reach that standard, while those that are not shouldn’t.  This is where I probably disagree with both NZ’s left and right – but not to worry!

The Reserve Bank of Air New Zealand

With Bitcoins and Argentinian hyperinflation in the news, it seems like an apt time to discuss what currency actually is.  In a novel way Benje Patterson discusses this with regards to Air New Zealand’s airponts program – and given this he tries to figure out how exactly this program should be valued (Infometrics link)!

Airpoints Dollars conform to the standard definition of a currency – they are a medium of exchange for goods and services, they can be used to store value through time, and they are a quotable unit of account.  Air New Zealand operates a fixed exchange rate policy for its currency, where one Airpoints Dollar can be redeemed for one New Zealand dollar worth of flights.

Furthermore, in addition to being a currency, the Airpoints Dollar loyalty scheme also adds to Air New Zealand’s bottom line.  Air New Zealand is the sole institution with the ultimate authority to issue the Airpoints Dollar currency and back-of-the-envelope calculations show that the value of the airline’s loyalty scheme could be around $400 million.

 

 

Policy and heterogeneity: A point

Via Geoff Simmons came this interesting post about new health policy in New Zealand.  This isn’t my area of expertise, but I found the post really insightful – I’d definitely recommend it as a read.

However, a small part of the post did spark my imagination, and will lead me to write on a loosely related, but important issue.

In the post, when talking about potential issues with the new scheme, the author says:

We hear echoes of the Bolger-led Government adoption of social capital in the late 1990s. Remember that? It placed social problems and their solution-generation with ‘communities’. There is a worthy role for this type of policy in a wider package, but it can also be used as a distancing policy to shield a government and the state from its responsibilities (e.g. on welfare benefits), deflecting the blame and responsibility for solutions to the level of communities.

This is a fair point, words like “community” and “opportunity” are often used by politicians on the right to avoid action.  However, politicians on the left are just as eager to push inappropriate policy at a national level by dismissing these claims.  In truth, the relative importance of “community”/”opportunity” as opposed to nationwide determination of policy depends on our assumption about how different people are – to whip out some jargon, we need an idea about how heterogeneous individuals are with regards to the issue we are looking at.

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In defence of the RBNZ’s upcoming hike

Although I no longer have the time to keep up with the literature on financial stability policy (and so am not commenting on it – this is due to my switch to detail income data analysis), I still spend a bunch of time looking at the national economy and monetary policy.

I see that a section of my work place thinks we need the RBNZ to be more hawkish than it is.  There are also many people who think lifting soon is madness.  I am not personally not in either camp – I actually think the Bank has got this right now!  The Bank’s decision to lift soon and get rates back to neutral does make sense given what they are facing, and that they are doing it the right way.

[As a disclaimer, I was more hawkish than the Bank during the crisis (I was wrong) – although my forecasts of economic variables were surprisingly accurate then, that was because their actions were more appropriate, not because I had any foresight … another indication of why forecast performance isn’t always the best judgment variable ;) .  From late-2011 until the end of 2012 I was more dovish than the Bank was.  Now, I find their discussion consistent with my own narrative and models – including the discussion of the risk.  So it is hardly surprising I’m so willing to defend them :) ]

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Should we hit inflation hard and fast?

With a hawkish statement from the Reserve Bank of New Zealand yesterday it is a good time to ask – do we need a preemptive strike against inflation, David Grimmond thinks so (Infometrics link).

This reasoning brings us to the need for the Bank to make an early strike at growing inflation pressures.  Given weak New Zealand and world demand conditions, inflation outcomes have remained below 2%pa for more than two years.  But there are a number of reasons to be concerned that inflation pressures could quickly mount this year.  To begin with, the low inflation outcomes of recent years have been largely a world inflation outcome, with declines in tradable prices offsetting non-tradable inflation that has persistently been above 2%pa.  With the period of deflation for tradable goods coming to an end, the headline inflation rate could begin climbing very quickly in 2014.

With inflation expectations also on the rise, it would suggest that a prudent Reserve Bank would seriously consider increasing interest rates sooner rather than later – perhaps less in need of reducing current demand pressures, but rather to strongly signal its continued resolve for maintaining price stability, and pre-empting a build-up of inflation inertia.

Do you agree that, given the rebuild and rising economic momentum the Bank needs to act confidently to maintain its credibility?  Or with pricing pressures, and expectations of price pressures, still relatively low would this be jumping the boat in an overzealous attempt to maintain credibility?