Apr 17 2012

The economics of love

My latest piece in the Dom post was about the “economics of love” – where I compared a relationship to a firm, and worked out some basic conclusions.

Now, the article in the Dom was focused on relationships, specifically marriages.  However, there are times where the optimal formation for a relationship is more akin to a set of “independent contractors negotiating and renegotiating each time they want to work together to provide a product”.

So what factors are likely to be behind this?

  1. Option value:  Available and interesting individuals appear in your life, of a varying quality, according to some probability distribution.  If you commit to a relationship, it is very difficult/costly to take up a “better” person if you run into them.  By saying as an individual contractor, you are able to take advantage of these opportunities.
  2. Diminishing marginal utility:  Often, the more you consume something, the less additional value you gain from it.  Setting up your relationship profile such that you enter temporary contracts with a number of different individuals may provide higher overall satisfaction than committing to only one permanent contract.
  3. Diversifying risk: Focusing on one relationship involves taking on all the idiosyncratic risk associated with that individual – if you set up an appropriate portfolio of relationships, you may be able to remove this risk while still achieving the same expected return.

So the optimal solution to the formation of your relationship is a complicated issue – there are the benefits of a strict relationship mentioned in the article, and benefits for non-strict relationship status as mentioned here.  I have only covered some of the very basics, in comments feel free to add some more ;)

Permanent link to this article: http://www.tvhe.co.nz/2012/04/17/the-economics-of-love/

Apr 12 2012

Law vs economics: preventive detention

From Andrew Geddis:

National plan to legislate to permit the ongoing “civil detention” of offenders deemed at high risk of future sexual or violent offending even after their jail sentence [is] complete. Civil detention[,] now apparently called “Public Protection Orders”… would thus be a retrospective restriction applied to some prisoners on top of the original sentence that they received for their crimes, based purely on the prediction that they inevitably will commit further offences when and if released.

the proposed Public Protection Orders differ from preventive detention in that they are imposed not because of a crime already committed, but rather purely because of predictions of a crime to come.

That’s a difference that has been held important by the European Court of Human Rights (see here), as well as the United Nations Human Rights Commission (see here and here). Both of these bodies have said it is OK for a country to sentence someone to an indefinate period of detention for something they have done (combined with a justified fear of what this shows they may do when released). However, altering a person’s prison sentence once this has been imposed purely because of fears the person may do bad things in the future is a no-no from a human rights perspective.

As I understand it (not being a lawyer) there will now be two ways to spend an indefinite period of time in jail: either you committed a crime, posed a risk to the community at the time of sentencing and still pose a risk to the community, or you committed a crime and pose a risk to the community at the time of release. Apparently the latter is more problematic for lawyers because the ‘indefinite’ bit happens after sentencing. From the perspective of an economist I find that a bit perplexing.

First of all, let’s suppose that we think putting people who pose a risk to the community in jail indefinitely is a good thing. Presumably the motivation for doing it is to protect the community from harm; any other motivation seems hard to justify. So, at what point following the conviction for a crime would we be concerned about harm to the community? Certainly not when the person is incarcerated, and probably not when they’re in custody awaiting sentencing. Surely the time at which we might be concerned is when we have to make a decision about releasing them. Does it matter when, between conviction and potential release, they were adjudged to be a risk to the community? Well, certainly not from the perspective of the potential victims. So why would there be some fundamental difference between preventive detention and an equivalent test incorporated in a Public Protection Order (PPO)? To go a bit further, if it’s a good idea to keep people who are a risk to the community in jail, surely we want the option to keep them there up until they are released. Anything else risks being unable to react appropriately if the convict develops risky behaviours while in jail.

Now I can understand that people might be concerned about abuse of power and the unethical use of PPOs, but there seem to be similar problems with preventive detention. The best one can argue is that the PPO gives more time for the justice system to abuse its power, but I can’t see why judicial checks on that would be any less effective than judicial discretion over preventive detention.

I’d very much welcome any lawyers to clear it up for me, because I may very well be entirely confused here!

Permanent link to this article: http://www.tvhe.co.nz/2012/04/12/law-vs-economics-preventive-detention/

Apr 12 2012

Is housing affordability the issue?

The productivity commission has released its final report on “housing affordability”.  Now there are a number of important points in the report, and there are undeniable issues in the New Zealand housing market which have caused a “misallocation” of resources.

However, the justification for their being a housing affordability issue in the report is not fully covered off – something that is surprising given that this is the issue that appears in the title of the report.

Read the rest of this entry »

Permanent link to this article: http://www.tvhe.co.nz/2012/04/12/is-housing-affordability-the-issue/

Apr 05 2012

More NZ economics blogs

Given recent hectic times I’ve neglected to mention a couple of new New Zealand economics blogs.

There is Fair play and forward passes (via Anti-Dismal), where an economics lecturer from Massey discusses sports and New Zealand economics.

There is also Welly Gnome, where a Vic University undergrad takes it upon himself to get into economics blogging.

I of course encourage everyone studying, teaching, and practicing economics in New Zealand to start blogging – see it as a way for us to communicate ideas.  In the end it might not be for everyone, but I think its an important way of getting discourse regarding the New Zealand economy (which is at times lacking).

Some people might be worried that there would be too much “noise” – so that whatever is good won’t get through.  Given how few economics blogs currently exist in New Zealand I would say that, even if  the worst case scenario where the noise of a million screaming economists drowns out any useful information is what would happen, we are a long long way away from that now …

Permanent link to this article: http://www.tvhe.co.nz/2012/04/05/more-nz-economics-blogs/

Apr 05 2012

Hot cross buns … a lesson on pricing

Over on his blog, Bill Bennett has been discussing hot cross bun inflation over the last couple of hundred years – saying that it has averaged about 1.1%pa.

With the consumption of hot cross buns about to spike, I thought I would copy and paste my comments on hot cross bun pricing over here:

One thing I’d note though is that the increase in the price level more generally only really got kicking off during the last 50 or so years. As a result, if hot cross buns had just been generally following inflation overall, the 1.1%pa figure could be a bit misleading.

Another point when looking at hot cross buns – we need to ask what the price of these buns has done relative to all other goods and services. Over the past 200 and a bit years we have seen the relative price of inputs fall for hot cross buns, but we have also seen incomes rise – and given that hot cross buns are a “normal good” it is ambiguous whether hot cross bun inflation has exceeded inflation in goods and in prices.

A final point, a hot cross bun in 1798 would have tasted and felt different than a current hot cross bun – any changes in the quality of said bun should be taken into account.

These are all points to keep in mind when looking at changes in the price of any good or service.

Permanent link to this article: http://www.tvhe.co.nz/2012/04/05/hot-cross-buns-mmmm/

Apr 04 2012

On GST and regressivity

James did an excellent post discussing tax issues recently.  After this, he obtained a copy of the book, and dug out the three ways that Rob Salmond had noted GST was regressive.  It is good to see Rob put some thought into it and found measurable reasons why regressivity exists – but I also need to point out where I disagree.

In essence, of the three reasons for regressivity I believe that only one is regressive (and by less than we may expect), that one is neutral, and that one of the reasons actually makes GST a progressive tax.

The reasons Rob outlines are:

  • Some savings are spent on acquiring multiple properties, which do not attract GST
  • Some savings are spent outside of New Zealand, which also do not attract GST
  • Some people do not spend all their savings before they die. That is, they are lifetime net savers.

Importantly, all of these forms of GST-exempt dispersal of savings are more likely among wealthy people than among poor people.

My response (with a bunch of arbitrary notes thrown in) was:

  1. The construction of a house attracts GST, so it is just the rental and “owner occupied rental” that doesn’t.  As rich households tend to spend a lower proportion of their income on rent this is progressive.  Remember in turn that this “rental” price is also related to the replacement cost of the house … part of the reason for not including rent in GST is the impression that we would be double taxing it!
  • [Note on this first point - I wrote it with regards solely to the ownership of a house, not multiple properties - as that is how I read the initial question.  Even so, it isn't clear that implied rental expenditure as a % of income rises by decline - I will have to investigate. [Huzzah, investigation done, the share of expenditure on housing of total expenditure falls as the income decile rises.]]
  1. Having GST rather than income tax leads to a one off increase in the price level, which lowers the value of the New Zealand dollar.  This pushes up the cost of goods and services overseas in the near term – given convergence towards the PPP level.  Overall, I still think this will be a regressive element though.
  • [Note:  Looking at the HES data, spending overseas as a % of total spending is surprisingly constant among income declines ... making it seem like a pretty neutral impact at present.]
  1. Although more wealthy people will leave proportionally larger bequests, bequests only have value in so far as the next generation buys goods and services – as a result, they will be taxed, and this is neutral.

I would also note that, even if all of these elements were “regressive” we would need to look at representative baskets by income groups to get an idea of how much of an impact that would make – and given that GST exists, this will be exaggerated by the fact that people are choosing volumes to consumer based on the “lower relative price” of anything where the GST burden does not fall.

Comments and discussion welcome – tax is a huge issue, with fascinating equity and efficiency considerations running through it.

Permanent link to this article: http://www.tvhe.co.nz/2012/04/04/on-gst-and-regressivity/

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