Is doing nothing better than doing a little?

Apparently National has decided to allow coal and gas-fired power plants, in a reversal of the previous government’s decision. They have almost simultaneously discarded the obligation on fuel companies to provide biofuel.

In a way, Gerry Brownlee is right that “the ETS put a price on pollution, providing adequate incentives for power companies to invest in renewable generation.” The regulations did distort the incentives of producers to invest in green technology as Matt has previously written about. Removing the distortions and implementing a carbon market is probably the best way to ensure we reduce our emissions at a minimal cost. So why aren’t I happy about the government’s decision? Read more

Credit card companies are smart

The Economist reports that credit card companies are a whole lot smarter than I gave them credit for:

Since minimum payments on credit-card statements are usually small amounts, Mr Stewart wondered whether seeing an actual amount might make people pay less than they would otherwise have done. That is exactly what he found.
Click here to find out more!

Mr Stewart presented 413 people with mock credit-card bills of £435.76 (about $650) that were identical—except that only half mentioned a minimum payment of £5.42. Participants were asked how much they would pay.

Among those inclined to pay the bill in full, the presence of the minimum payment hardly made any difference. However, those who wanted to pay just part of it handed over 43% less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.

Read more

National loves strategic assets too!

I read with great surprise this morning that the new National government has blocked the sale of the Taharoa iron sands to CKI (who now own the Wellington electricity network too).

Matt was equally surprised, he sent me an email with the subject as “WTF” and the body simply containing the link:)

What the hell is going on? It’s already owned by Australians and pretty much all of the iron ore it produces is exported.  I’m not sure that selling sand falls within the bounds of something that we consider strategic? Maybe that’s just me though

As you probably worked out from my previous rants I disagreed with the decision to block AIAL (here and here) and found it inconsistent with the decision to allow the sale of vector’s electricity network (here). I can’t really work out a consistent pattern for when asset sales will be blocked so I can only imagine what foreign investors are thinking…

If we won’t let people buy our sand from the Aussies what will we let them buy?

Rant over.

An embarrassing moment

This morning while I was reading I remembered a conversation I had with Agnitio in 2004 which, in hindsight, is very embarrassing for me.  It went along the lines of:

Me:  Look at the interest rate on Hanover, its got to be worth putting some money there

Agnitio:  It isn’t that much more than a bank deposit, I’m not sure its worth the risk

Me:  Surely the slightly higher interest rate is a function of only a slight increase in risk

Agnitio:  Not if people don’t understand/are underpricing the risks.

Now, Agnitio was completely right, risks were being underpriced because of asymmetric information.  To make matters worse, people that read the interest rate like I do took it as a signal that the risk was relatively low (although I never did put any money with finance companies, I guess Agnitio must have convinced me :) ) – leading to an “information cascade“.

The current situation has reinforced and extended my belief in the importance of information in the functioning of the market.  I still believe that information asymmetries are the primary factor behind the current crisis.

Economic neutrality

Robin Hanson says,

Sure we give lip service to fairness, and we may sincerely believe that we care about it, but that mostly expresses itself as sincere outrage when our side is treated unfairly.
. . .
While in practice economics is full of folks promoting various sides, one of the reasons I am proud to be an economist is that we have a good standard neutral analysis criteria, economic welfare, for judging policies

Welfare economics used to be known as normative economics because it uses value judgments to tell us what we should do. Is it accurate to describe any methodology based on value judgments as ‘neutral’? I don’t know a lot about the subject, but would those who do not subscribe to some form of utilitarianism find the economic framework ‘neutral’? Matt talks a lot about making our assumptions apparent and I fear that trying to paint ourselves as neutral obscures the nature of the framework within which we operate.

Japan’s hole, the US hole, our hole?

I just took a peak at an interesting Business Week article from March 2006 called “How Japan fell into the Hole“.

The key message for me was this:

This shift to debt minimization, however, completely disrupts the normal workings of the economy. That’s because the corporate sector no longer borrows the funds saved by the household sector, even at ultra-low interest rates. With no one borrowing, those personal savings — plus the debt companies are repaying — pile up unused in the banks, effectively shrinking aggregate demand by the same amount. Left unattended, this deflationary gap will continue to shrink the economy until almost everyone becomes too poor to save any money.

In order for the disruption to become severe, we need reserves to be built up – money will need to be hid under pillows.  In this case, if the government can get hold these resources and put them to use (or say, if people are only willing to lend to government because of a substantially negative economic outlook) we avoid the paradox of thrift.

Fundamentally, for our demand deficiency to really get kicking, we need one of our prices (interest rates) to get “stuck” at a level which is “too high” leading to excess savings.  We are seeing a similar situation in the US, the question is – will we run into the same thing here in little old NZ?