The Congressional Budget Office reported recently on its comparison of a cap-and-trade program to a carbon tax program. The one-line conclusion is that carbon taxes are cheaper and simpler, but caps give more certainty. Continue Reading →
Torres and inflation expectations
I am a Liverpool supporter (the football club), I’m proud to admit it 
. While I was reading an interview with Fernando Torres today, I ran into this gem of a line when discussing Benitez’s rotation policy:
“It is normal to rest. We players never want to, but if the manager says so, you have to. If everybody accepts that is the way forward, the atmosphere doesn’t suffer.”
This reminds me of inflation expectations. If the Reserve Bank (the manager) says that it is commited to making inflation zero (for arguments sake), then individual agents accept that the Bank will do whatever it takes to achieve that target (hiking interest rates), and inflation expectations shift to zero. If this is the case, there is no need for a costly adjustment to the new equilibrium (atmosphere), as inflation expectations drive the true rate of inflation.
Ok, the two arguments are a bit different, but I still think that Torres would make a great economist 
The economist’s economic growth bias
Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither rauparaha or myself defined what ‘growth’ we were talking about. Like all economists, we took ‘Growth’ to be synonymous with growth in gross domestic product.
Could this possibly imply that economists such as rauparaha and myself have an inherent bias when discussing normative statements about welfare that points us towards pro economic growth policies – even when there is a hefty trade off in other social values. Do economists focus too strongly on technical and allocative efficiency without taking social efficiency and equity into account?
Continue Reading →
The birth rate vs the growth rate
Stats NZ reports a marked increase in the NZ birth rate. There are three ways to view this: first, you could use it as Quest does to suggest that maths and equations are stupid and we should just trust the politicians’ instincts. Unfortunately for Quest, there is no statistical evidence for that position 
The Standard claims that an increasing fertility rate is a signal of the good economic times brought about by the Labour government. This connection seems a bit results driven to me. Particularly so when the correlation between per-capita GDP and fertility is strongly negative worldwide. It may be the case that Labour’s policies have encouraged people to have children, but that’s hardly the same as signalling a rosy future for the NZ economy.
Finally, one might ask what economic theory has to say on the issue. While the theory on growth economics has a patchy empirical record, it does have an explanation for the negative correlation between fertility and GDP per capita. Essentially, higher fertility rates mean that the resources of the economy have to be spread across more people. Those people do create value but, since productivity has decreasing marginal returns, they don’t create as much extra capital as they consume. Thus, higher birth rates lead to an increase in GDP, but a lower GDP per capita in the long run. So perhaps the increased birth rate doesn’t bode so well for NZ after all.
Growth forecasts and government
I was just reading a post on forecasts for US economic growth at Econbrowser. In it the author says: “However, even back in December, the White House forecast was slightly more optimistic than the private sector consensus”. This ‘overconfidence’ in the economy seems to have been a common theme in US public sector forecasts over recent years.
Compare this to Treasury forecasts of the New Zealand economy, which have been consistently below the private sector consensus – that is the reason why tax revenues have consistently surprised on the upside in New Zealand.
Here we have two government authorities, one which constantly overstates economic growth and one which understates economic growth. Why do you think we have this difference?
Update: My brief thoughts are below the flap:
Chicken and egg economics
After my recent post, which dealt with issues of equity, I have been invited to consider how appropriate it is to bring normative issues in to a discussion of economics. I was referred to a paper which discusses the distinction between economics as a science and political economy:
For Robbins, the science of economics and the entire field of economics were quite different… He saw [the] pure science of economics as only a small sub branch of economics — a branch, which in his view, had nothing to do with policy. He saw another branch of what economists do — political economy, as the branch primarily concerned with applied policy, not with science. Here, he wanted value judgments to have free reign, and to be allowed into the analysis.
I like the distinction, but I feel that the normative judgments should inform our science, not just the other way around. Continue Reading →