jamesz

Why is torture such a dirty word?

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I’ve been intrigued by the recent posts at Overcoming Bias on the topic of torture. The proposal is that torture could replace imprisonment for many offences. While my initial response was repugnance at the idea, that may reveal my biased perspective of imprisonment.

As James Miller points out

…both prison and torture impose costs on criminals. Why is one type of cost crueler than the other? If a convicted criminal is indifferent between …torture or being imprisoned …then why would it be excessively cruel to torture but not to imprison?

In New Zealand we distinguish between preventive detention for those who pose a risk to society, and imprisonment as punishment for a crime. Could it be that torture is a cheaper and equally effective way to achieve the goals of our justice system in the latter case? It certainly achieves the goals of punishment and retribution for the crime. The sticking point for me is that torture does not aid in rehabilitation of a convict. However, I’m not persuaded that the current justice system does much of this anyway. It seems to me that people are more likely to find it hard to lead an ‘honest’ life after a long period of imprisonment than after a brief bout of torture. This is particularly so when the money saved in running prisons could be spent on genuine rehabilitation programs.

Is this a case where economists are as guilty as anyone of shying away from an efficient solution because of the moral biases involved? Or is there a real reason why torture is shunned by our society while, simultaneously, calls for harsher prison sentences grow ever stronger?

Matt Nolan

The Teachers union should sit in on some 5th form economics classes

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So teachers want a pay rise.  This isn’t really surprising given the inflationary pressure in the economy.  Now I don’t know too much about teachers pay, but I did find it interesting that the teachers union is saying that teachers wages should increase by 7.5%, and that this would reduce the average size of the classroom.

We know why teachers are saying this, they want parents and students to support them, so they have to make it sound like it is in their interest.  However, this isn’t the way I understand the situation.  If teachers pay is increased, and the government does not completely fund it, then less teachers will be hired.  With less teachers and the same number of students, schools will ended up with more students per class.

One possible counter-argument is that we have a skill shortage for secondary school teachers, and as a result by increasing wages we can get more teachers into jobs.  This presumes that schools have the resources to hire more teachers, at a higher wage, which would imply that we have a shortage of secondary school teachers.  But we don’t.  We are on the border of having a shortage of teachers, schools can find the number of teachers they need, but it does take time (average fill rate for secondary teaching jobs is 70%).

As I doubt the government will be stump up all the cash for a 7.5% jump in teachers wages (there are other groups they have to bribe first and foremost), schools will be stuck trying to come up with more money to pay teachers.  Fewer teachers will be hired and class sizes will rise.

Matt Nolan

Property finance Ltd goes bust

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So that makes it six finance companies in 15 months. What does this mean for the NZ credit market?

NZ banks should not be significantly effected. Banks are in relatively good shape, and all the recent trouble in secondary, non-bank financial institutes, is likely to increase demand for low yielding, low risk bank products.

However, non-bank financial institutions are going to have one hell of a time trying to find funds in the current tight credit market. The failure of so many finance companies is likely to make thing more difficult for them, by increasing investors level of risk aversion. Without a steady stream of deposits, some efficient and well managed finance companies are going to be flushed down the toilet. That is what happened to Property Finance.

My concern is that this may make it difficult for firms to borrow money. NZ currently has a tight labour market, and NZ firms are making low margins. In this sort of situation, firms are unwilling to remove staff, and as a result need to borrow to stay afloat. Now, something will have to give, either the flow in the credit market will improve, unemployment will creep up, or firms will be run into the ground. Only time will tell I guess.

Update: A couple of finance companies say they are feeling good. They expect regulation to occur, but how should we regulate the non-bank financial sector?

Update II:  So Five star consumer finance has gone under.  Guess it wasn’t really five star 😉 .  Look I’m an economist with no sense of humor I just had to say it.  But it didn’t deserve a new post, as the company was small and not that exciting.  It might scare people, but I suspect it was just dead wood.

Matt Nolan

More immigration?

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So, our labour market is looking extremely tight. According to the department of labour all nine of the main occupation classes are currently suffering from labour shortages, and these shortages are likely to continue into the medium term. So the country needs more workers, and it takes time to breed them, so why don’t we get them in from overseas?

The government seems concerned about letting people into the country as it might cause inflation. But if we are actually suffering from a chronic labour shortage, a few extra pairs of hands will surely help suppress inflationary pressures.

As long as the individuals we bring in are more productive than the average New Zealander everyone is better off. Whats the problem?

Matt Nolan

Outgrowing Inflation II

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Rod Oram has had another crack at explaining why he thinks higher output will lead to lower inflation. His argument is, that higher output can help us reduce housing, labour, and business capacity constraints which are dogging the economy.

The first point seems to be his main one, that there are too few houses and so building more houses will reduce house prices . He has a point here, but not a strict point about inflation. House prices rising doesn’t mean inflation, it means that there has been an increase in the price of houses relative to other goods. However, house prices increases can drive inflation by making people feel wealthy, and thereby increasing their rate of general consumption. As a result, all that matters is the rate of growth (return) in house prices, which is driven by short-run demand factors (as supply takes time to adjust).

Now, growth won’t help increase house construction enough to drive house prices down, the constraints holding up house prices are structural. Councils refusing infill, the difficulty of getting consents to build property, these are the reasons that house construction activity has been sub-par. As a result, its not a matter of keeping interest rates low, it is more a matter of regulatory constraints.

His second point is that we need to increase labour skill training and capital to increase output. Yes that would increase output, however it is not current growth that drives investment, it is the expectation of future growth. As a result, the current goal of monetary policy of stabilising prices is the best way of driving efficient long-run investment (by reducing uncertainty).

The third point is that businesses need to innovate. Again this is a business decision, government policy is not trying to stifle innovation and so this doesn’t do anything to defend the idea that keeping interest rates down will reduce inflation.

Ultimately, I think in this second article he switched tack slightly, and discussed situations where we could grow, rather than attacking monetary policy as he did in the first article, which we wrote about. However, I don’t believe that he has shown that all things constant higher growth leads to lower unemployment, all he has done is changed some of the parameters (making people more productive etc).

Matt Nolan

The week in numbers

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  1. Tourist arrivals were strong, up 3.6% on July last year.
  2. Net migration for the year to July was weak at 8,966.
  3. The merchandise trade balance continued to deteriorate, with a deficit of $6.3bn for the year to July.