Matt Nolan

From a negative OCR to negative interest rates …

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Earlier we discussed a negative OCR as a way to push us towards the “zero bound” on interest rates.

But Greg Mankiw has brought up an interesting point – what happens if we want negative interest rates?

Mankiw admits that we could have a lottery scheme where some currency gets knocked out of circulation randomly – making the return on currency negative. However, he comes up with an interesting point if we just wanted to lower interest rates through a negative OCR.

If reserves earned a negative return at the margin, banks would have more incentive to lend (which is the motivation for these proposals). But more lending might not be the outcome. Banks could instead discourage deposits by, for example, passing the reserve fee on to depositors. Deposits would then earn a negative return, which would give households an incentive to hold currency rather than bank deposits

If the return goes negative for banks they may just pass it on to households who will “horde currency”.

However, I have to ask – will household’s just hold currency as savings? Read more

Matt Nolan

A good question for civil servants

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From the excellent Overcoming bias blog (ht Offsetting Behaviour):

This is a great test case for paternalists; if you feel that your superior minds justify ruling the lives of others, would do you accept having your life ruled by future folk with greatly enhanced minds?

To all those civil servants who tell me we should introduce regulation X because the average person is stupid and it is for their own good – think how you would feel if the shoe was on the other foot.

Also stop being arrogant arseholes who think they are smarter than everyone else – actually try talking to these people you are judging and you might be surprised with their abilities …

Matt Nolan

UK continues to dig a bigger economic hole

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In a sign of the times, the government in the United Kingdom is talking about increasing the top tax rate from 40% to 50% to fund part of their burgeoning budget deficit. A few points about this they may have forgotten:

  1. High income earners are likely to be more responsive to an increase in tax rates (at the margin) – as a result, by increasing tax rates at the top, we are pushing our most talented workers out of the labour force,
  2. The deadweight loss of taxation increases at a faster than linear rate – implying that for each 1% of tax we add we get a greater level of lost surplus than for the previous 1%.
  3. Highly skilled labour is more mobile – as a result, a lift in tax rates for the highly skilled will lead to them moving overseas. When the UK does this it is a good thing for countries like Aussie and NZ – but not for the UK.
  4. Highly skilled labour is able to “move income about” more easily. For example, if the corporate tax rate remains well below 50%, highly skilled individuals may find ways to set up companies and shift part of their income into the corporate tax bracket (Note this relies on being able to include a lot of spending as a business expense methinks). When this occurs corporate tax take will rise, but the increase in income tax revenue will be much weaker than expected.
  5. An income tax is also a “tax on business” – the relative split depends on the “incidence of tax”. As a result, a lift in the top tax bracket implies that there will be more pressure on firms that hire skilled labour – not really the best move when these industries are already credit constrained …
  6. By increasing the tax on income we will drive down the incentive to invest.
  7. Skilled and unskilled workers are complements – by reducing the incentive to hire skilled workers, you also reduce the incentive to hire unskilled workers. As a result this will drive down demand for unskilled workers, lowering wages and increasing unemployment.

Thank goodness economic policy in New Zealand makes more sense 😉

The Times joins in the fun.  And the Guardian illustrates that it doesn’t understand point 7 (among other points).

Matt Nolan

Caricature of the libertarian, economist, statist divide

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In my mind there is a simple distinction between the broad brush strokes of libertarianism, the underpinning beliefs of economics, and statism as statements for the scope of government. It goes like this:

Libertarian:

  • Market prices are a good allocation mechanism – therefore market prices make sense.
  • Initial endowment of resources is fair – therefore no need to redistribute initial endowments.

Economist:

  • Market prices are a good allocation mechanism – therefore market prices make sense,
  • Initial endowment of resources is unfair – need a democratic state to define what is fair and redistribute endowments.

Statism:

  • Market prices are a poor allocation mechanism – therefore market prices are not necessarily any good and pragmatic government shifts to prices make sense,
  • Initial endowment of resources is unfair – need a democratic state to define what is fair and redistribute endowments.
Matt Nolan

Beer goggles and “demand”

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A recent study suggested that the idea of beer goggles did not exist. The study stated that men who had been drinking actually rated women lower than men who had not been drinking – the author went from this empirical “fact” to a claim that the idea of beer goggles is false.

Now even if the empirical fact is indeed true, I would be a little more careful before claiming that such a commonly accepted social belief is wrong.

The essence of “beer goggles” (lets stick with the male version) is that men are more willing to sleep with a given woman after drinking beer.

Now, even if men find women less attractive when drunk than they do when they are sober – it does not mean that they are necessarily less willing to sleep with them. Fundamentally, we have to ask how beer influences “how low” a man is willing to go in terms of attractiveness when drunk (we are of course assuming that the supply curve is unchanged 😛 ).

If beer makes men willing to sleep with a significantly lower “attractiveness level” of woman – than it is possible that even if he finds her less attractive he is more likely to sleep with her.

This is still an interesting finding – as it tells us that we don’t find people more attractive when drunk. And in order to have the “beer goggle” phenomenon beer must simply make us more willing to sleep with less attractive people.

Note: The article dodges this issue by defining “beer goggles” as finding people more attractive on an objective scale. But I don’t think that this definition catches the true nature of beer goggles – which is simply slang for saying that you slept with someone when drunk that you wouldn’t have sober …

Matt Nolan

Interest free loan lollyscramble part II

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Not content with the interest free student loan scheme the government has decided it might be time to add an interest free home loan scheme (ht Rates Blog).

Now, this is essentially a transfer from everyone (taxpayers) to first home buyers and the people they are selling to.  In such a situation I have to ask why?  It certainly doesn’t seem fair to take money from people and give it to first home buyers and the section of the property market they are involved in … (disclaimer:  I would be able to get the loan as I would be a first home buyer – just like I have an interest free student loan.  This doesn’t stop me as an economist saying that they are bad policies)

The government says it is to “encourage building” – if this is the case, then why this scheme?  Why not a direct subsidy to home builders.

Furthermore, why do we want to encourage building – why aren’t we doing enough building.  The answer I believe is that in the current environment residential builders are credit constrained – so why doesn’ the government just offer them loans (at a MARKET rate of interest).

Bad policy idea …