Subconscious nationalism

I hate nationalism, I agree with the idea of valuing your nation above other nations, it just seems like an arbitrary way of dividing people. However, I just had what I think was a nationalistic experience. I was reading this article about how a Trans-Tasman publisher had its first-half profits driven down by a poor performance in NZ. As I was reading I felt embarrassed, I could hear myself thinking “I’m sure New Zealand is as good a market as Australia (if not better 🙂 ), they just must not be trying to sell their product properly”. However, after hearing myself think that statement, a statement that made practically no economic sense, I realised I was just being defensive. I was being defensive about the performance of the New Zealand publishing market.

We are all boundedly rational, and so we all need to follow rules of thumb in order to make quick decisions, or quickly analyse things. As people we can’t comprehend a world made up of individuals, we have to put people into groups in order to interact with society, this is one of our rules of thumb. However, it is important to realise how ridiculous I sound standing up for the New Zealand publishing market in my head, as that is how ridiculous we all sound when we argue things on a nationalistic basis.

People want higher incomes

I was reading an interesting article by Roger Kerr. Now there were a lot of good points here which I plan to discuss at some point, however I’m not going to right now. One thing that did catch my eye was a poll he used as evidence that our incomes are too low. According to this poll 96% of New Zealander’s want higher incomes.

Now this poll is stupid, deep down 100% of people want higher incomes. All the poll is tell me is that 96% of people are honest about wanting more money, while 4% of people want to make themselves feel good by pretending to not value material things. It reminds me of when I was a student working at the Warehouse and hippies would come in complaining about capitalism and social inequality while happily buying goods that would have ‘exploited’ foreign labour.

Housing equity schemes

Another stunning article from someone I work with (I swear I’m not biased 😉 ), this one is about housing equity schemes.  Now it seems the government is keen to introduce a housing equity scheme, having put money in the Budget for it.

Now, the article covers most of the problems with a shared equity scheme, so all you have to do is read it and tell me if you agree 😉 .

One thing I am going to say is that I think most of government/bank money put into the scheme, when the housing market is this tight, will go to the person selling the house.

In the case when the loan is avaliable to all but not income tested, everyone would be able to take out the loan to buy the house, but as their reservation value of the house hasn’t changed (and thats what they are willing to pay + the loan) the price will just go up.  This is because the effective price is no different, and as agents are rational and know that the price of property will remain elevated, the rate of return on property won’t change the investment incentive either.

In the case when it is income tested, people on low incomes will be able to drive up the price of lower quality housing, much to the dismay of people on the margin who are unable to get the loans. Most people apply for a no credit check loan, and are able to get the loan that way. Here the full surplus may not go to the seller (as they face competition with other property types, and the whole demand curve is not getting subsidised), but some negative distributional effects will eventuate.  In this case we are likely to find that those on low-moderate incomes (not low) are forced out of the housing market, does the government think that these people are worth less than the very poor?

The week in numbers

  • According to the HLFS, unemployment was down to 3.6%, even with the participation rate at 68.8%.
  • Wage growth remained elevated at4.6% for the June year.
  • House sale fell a seasonally adjusted 10% in the July quarter.  This was the lowest seasonally adjusted number of sales since December 2001.

Sorry that this was so late, the Wellington Phoenix was playing and I had to go 😉

Who needs government anyway?

We talk about government intervention all the time, but there are those who believe that governments themselves are unnecessary in modern economies. Peter Leeson says

Anarchy, like all political-economic organizations, is riddled with problems. It is not clear that these problems are any
more numerous or severe than those that plague governments, however. …Where the state does not provide law, order, or the
institutions required to produce these things, private institutions emerge to perform these roles instead.

It may be that many small, everyday transactions, such as those cited by Leeson, would still happen smoothly without government involvement. However, as Rodrik points
, these sort of things don’t scale well. They tend to rely on repeated transactions between individual agents to maintain co-operation. Once people have to interact on a one-shot basis, as happens in most large economies, this co-operation breaks down without enforcement. If you don’t expect to transact again then there is no incentive to invest in a reputation as an honest trader.

There is also the problem of maintaining a functioning financial system in a large economy. This is very difficult to do without some
regulation, as the online life simulation Second Life is finding out.

Should we be pleased to have a tight labour market?

Over at no right turn, they seem to believe that economists sour reaction to the low unemployment figure is ridiculous. After all, a low unemployment rate implies that people have jobs, and a secure income, which is of course valuable to society.

They seem to believe that if we accept a little more inflation we can keep this low level of unemployment, and society will be better off. However, in this doesn’t hold. As an economist would say, in the long-run there is no trade-off between inflation and unemployment. If we accept higher inflation now, then in the future unemployment will rise to its natural rate, and we will be stuck with a higher rate of inflation.  The unemployment level is a problem now because it is lower than the NAIRU implying that the upward pressure on wages is too strong, and as a result the price level will increase.

Now government policy should be focused on decreasing the natural rate of unemployment. If the government can help improve the function of the market, they can make sure that in the long-run, unemployment will be lower. One of the things the government can do to make sure the market functions better, is keep price growth low, so that firms and buyers are more certain of the price level, and savers (whose money gets invested into firms) have more incentive to say (and so there is more investment). So who knows, maybe there is a long-run relationship between inflation and unemployment, lower inflation leading to less unemployment!