jamesz

Carbon taxes again…

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It looks like Matt’s not the only brilliant economist campaigning for Pigovian taxation of carbon emissions. Now Greg Mankiw’s weighed in on the side of taxation. To those who claim a carbon tax is regressive because poor people are forced to live in the suburbs and drive more than the wealthy, Mankiw says

Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged.

In addition, the Economist points out that

…it’s possible that a carbon tax might sharply reduce carbon output without any fall in oil consumption, so long as consumers of other fuels affected by the tax reduce their use of such pollutants and their consequent emissions,

although this seems like a bit of a long shot.
In NZ, the government has preferred a cap-and-trade system to carbon taxes. Mankiw mentions that this is equivalent to a carbon tax only if the permits are auctioned off. If they are allocated for free based on previous emissions, as I believe the case will be in NZ (please correct me here if I’m completely mistaken), then “…the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.” In other words, a cap-and-trade with grandfathered permits IS regressive and it’s expensive to redress the burden on the poor.

jamesz

Insiders vs outsiders

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Government departments are constantly criticised for their lavish spending on outside consultants. Why, the newspapers ask, couldn’t they rely on the inside talent that taxpayers are already forking out for. This paper, mentioned by Eliezer Yudkowsky may give some clue. It turns out that people are not only incredibly bad at predicting how long it will take them to complete a task, they also get worse at predicting it as they know more about it.

A person who knows the ins and outs of a project will estimate the completion time of the project by taking in to account all of the things that they know need to be done for that particular project. In doing so they tend to disregard all of the unforseen stuff-ups that could happen along the way. An outsider will tend to estimate completion time by looking at how long similar projects have atken in the past. It turns out that the latter approach is not only far more accurate, but also estimates completion times far, far longer than ever predicted by insiders.

Could it be that, in some cases, ministries are actually saving us money by getting an outside perspective on a project? Quite conceivably, the money spent hiring the consultant improves project planning to the point that less money will be wasted on false expectations of the project’s success. We should also disregard the protestations of the ministry insiders that the hiring of the consultant was a waste of money because the consultants know very little about the project. It is precisely because they are not involved in the micro-management of the project that they can provide a realistic estimate of the project’s expected success and completion time. Of course, advocating more government spending on consultants is hardly an election winning strategy.

Matt Nolan

OCR stays at 8.25%

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The RBNZ left the OCR at 8.25%, a move that was completely expected.

They also released a monetary policy statement this month, which is what the markets were keeping an eye out for. The executive summary was pretty neutral, mentioning both global credit market uncertainty and the need to keep rates high to combat inflation. As a result, this gave little information to the market on whether the Bank was thinking about easing in March, June or September.

However, I think that the current MPS points towards loosening in the OCR late in 2008. For one, there forecast 90 day bill rate track remains high, only easing slightly into 2009. Furthermore, they forecast economic growth to March 2008 of 2.9%, significantly above other analysts forecasts. Also, they expect inflation expectations to stay near the top of the target band up until at least 2009 (falling to a low of 2.7%!).

I’m not sure how to interpret this. Does this mean that the Bank is prepared to tighten again as they are pricing in strong inflationary pressures? Or does it mean that the Bank is estimating a high track for GDP growth, so that when growth comes in lower (as it invariably will, given the lack of TOT movement in June), the Bank has a consistent reason to cut rates.

Matt Nolan

Is New Zealand heading for a recession?

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Well of course it is, a recession is a typical part of a business cycle and we need one to help our economy achieve some balance.

Now that I have provided my conclusion, let me meat it out a little bit.  By recession I am thinking that NZ is going to have a growth recession (at least two quarters of close to zero growth (seasonally adjusted)).  A number of other economists (namely NZIER and ANZ economists) believe we are going to have a full blown recession.

Many people out in the community are scared of a recession, they think that it means the economy will fall in on itself and that the unemployment rate will fly into double figures.  However, if that was the case we would be predicting a depression not a recession.  Many of the doomsayers out their use the term recession thinking that it implies negative annual economic growth and double digit inflation, however that would be a depression.

The reason for economists confidence is the strong position of NZ’s terms of trade, which implies we can buy more goods than ever (well post mid-70’s anyway) with the bundle of commodities we make in NZ.  The reason we still expect a recession is that our economy is highly unbalanced, with strong asset price (namely house price) growth, high levels of consumer debt (which in turn feeds into a huge balance of payments deficit), hefty pipeline inflationary pressures, and poor productivity growth.

A year or so of poor economic growth will not see unemployment fly upwards (it is extremely likely that it will not cross 5%), but it will help the economy catch its breath.

One important question does appear to be unanswered though, are the current imbalances the result of a long business cycle, or are there structural deficiencies in the New Zealand economy?  This is the question we should be concerned about, not whether New Zealand is going to have a little old recession.

Note:  You might wonder why I did not mention the finance companies in my discussion.  Well they were imbalanced, and now a whole lot of the unstable ones have gone done.  There might be a short term panic by people, but hopefully in the long run this will just make people take account of risk.

jamesz

Is medicine a money pit?

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Robin Hanson suggests on CATO Unbound that much of the health care spending governments do is a waste of money. Citing the RAND study on healthcare he says:

The experiment’s random assignments allowed it to clearly determine causality. Being assigned a low price for medicine caused patients to consume about 30% (or $300) more in per-person annual medical spending… For the five general health measures, [they] could detect no significant positive effect of free care for persons who differed by income … and by initial health status.

Despite this and other studies, governments still devote huge proportions of their budget to health care. Hanson points out that, despite the apparently negligible returns to greater medical care, there are “apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution [and] climate.”

If this evidence is to be believed, leading a healthy lifestyle is far more beneficial to one’s health than free health care. In light of this, is the government’s emphasis on providing low cost health care a good idea? Low cost health care results in far greater consumption of medical services, but does not appear to appreciably increase aggregate health. It seems an expensive strategy for a government to pursue and one that may provide perverse incentives to live unhealthily. If health care is seen as a substitute for a healthy lifestyle then cheaper health care may lead to people living less healthily than they otherwise would if they had to pay for their own health care. The moral hazard problem engendered by these incentives could further raise the costs to the government of health care, yet without appreciably improving health care outcomes. Does this mean that a new approach to health care funding, focussed on encouraging healthy living, is required?

jamesz

The sad reality of public life

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I have often wondered why there is such a strong reaction to news of politicians’ mistakes. Just recently, Damien O’Connor made the error of allowing a suspended employee to play in the Parliamentary rugby team. The only concern here is the possible appearance of improper influence, as the employee is personally known to Mr O’Connor. I could understand the Prime Minister rebuking him for under-estimating the media reaction to his conduct; however, the PM has not gone to any lengths to disabuse the press of the notion that his position as minister is under threat. It seems common for ministers to be demoted when the cloud of potential impropriety hangs over their heads, and for their alleged misconduct to blight their careers for some time.

I have long been baffled by this seeming over-reaction to the ‘misconduct’ of political figures. Then I read this article on peoples’ recollection of accusations and exonerations. Shankar Vedantam writes:

The conventional response to myths and urban legends is to counter bad information with accurate information. But the new psychological studies show that denials and clarifications, for all their intuitive appeal, can paradoxically contribute to the resiliency of popular myths.

So it may in fact be rational to dismiss people from their positions as public figures if damaging allegations are made against them, regardless of the truth of those accusations. The damage done to their reputation could be irreparable since any later finding of innocence will probably be forgotten by a large number of people. Sadly, the spectre of a scandal could be enough to get you relegated from your ministerial chair to a back-room policy position. The cognitive biases of the electorate make it the rational choice for the PM to fire you.