Is New Zealand heading for a recession?

Well of course it is, a recession is a typical part of a business cycle and we need one to help our economy achieve some balance.

Now that I have provided my conclusion, let me meat it out a little bit.  By recession I am thinking that NZ is going to have a growth recession (at least two quarters of close to zero growth (seasonally adjusted)).  A number of other economists (namely NZIER and ANZ economists) believe we are going to have a full blown recession.

Many people out in the community are scared of a recession, they think that it means the economy will fall in on itself and that the unemployment rate will fly into double figures.  However, if that was the case we would be predicting a depression not a recession.  Many of the doomsayers out their use the term recession thinking that it implies negative annual economic growth and double digit inflation, however that would be a depression.

The reason for economists confidence is the strong position of NZ’s terms of trade, which implies we can buy more goods than ever (well post mid-70’s anyway) with the bundle of commodities we make in NZ.  The reason we still expect a recession is that our economy is highly unbalanced, with strong asset price (namely house price) growth, high levels of consumer debt (which in turn feeds into a huge balance of payments deficit), hefty pipeline inflationary pressures, and poor productivity growth.

A year or so of poor economic growth will not see unemployment fly upwards (it is extremely likely that it will not cross 5%), but it will help the economy catch its breath.

One important question does appear to be unanswered though, are the current imbalances the result of a long business cycle, or are there structural deficiencies in the New Zealand economy?  This is the question we should be concerned about, not whether New Zealand is going to have a little old recession.

Note:  You might wonder why I did not mention the finance companies in my discussion.  Well they were imbalanced, and now a whole lot of the unstable ones have gone done.  There might be a short term panic by people, but hopefully in the long run this will just make people take account of risk.

Is medicine a money pit?

Robin Hanson suggests on CATO Unbound that much of the health care spending governments do is a waste of money. Citing the RAND study on healthcare he says:

The experiment’s random assignments allowed it to clearly determine causality. Being assigned a low price for medicine caused patients to consume about 30% (or $300) more in per-person annual medical spending… For the five general health measures, [they] could detect no significant positive effect of free care for persons who differed by income … and by initial health status.

Despite this and other studies, governments still devote huge proportions of their budget to health care. Hanson points out that, despite the apparently negligible returns to greater medical care, there are “apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution [and] climate.”

If this evidence is to be believed, leading a healthy lifestyle is far more beneficial to one’s health than free health care. In light of this, is the government’s emphasis on providing low cost health care a good idea? Low cost health care results in far greater consumption of medical services, but does not appear to appreciably increase aggregate health. It seems an expensive strategy for a government to pursue and one that may provide perverse incentives to live unhealthily. If health care is seen as a substitute for a healthy lifestyle then cheaper health care may lead to people living less healthily than they otherwise would if they had to pay for their own health care. The moral hazard problem engendered by these incentives could further raise the costs to the government of health care, yet without appreciably improving health care outcomes. Does this mean that a new approach to health care funding, focussed on encouraging healthy living, is required?

The sad reality of public life

I have often wondered why there is such a strong reaction to news of politicians’ mistakes. Just recently, Damien O’Connor made the error of allowing a suspended employee to play in the Parliamentary rugby team. The only concern here is the possible appearance of improper influence, as the employee is personally known to Mr O’Connor. I could understand the Prime Minister rebuking him for under-estimating the media reaction to his conduct; however, the PM has not gone to any lengths to disabuse the press of the notion that his position as minister is under threat. It seems common for ministers to be demoted when the cloud of potential impropriety hangs over their heads, and for their alleged misconduct to blight their careers for some time.

I have long been baffled by this seeming over-reaction to the ‘misconduct’ of political figures. Then I read this article on peoples’ recollection of accusations and exonerations. Shankar Vedantam writes:

The conventional response to myths and urban legends is to counter bad information with accurate information. But the new psychological studies show that denials and clarifications, for all their intuitive appeal, can paradoxically contribute to the resiliency of popular myths.

So it may in fact be rational to dismiss people from their positions as public figures if damaging allegations are made against them, regardless of the truth of those accusations. The damage done to their reputation could be irreparable since any later finding of innocence will probably be forgotten by a large number of people. Sadly, the spectre of a scandal could be enough to get you relegated from your ministerial chair to a back-room policy position. The cognitive biases of the electorate make it the rational choice for the PM to fire you.

Is nuclear power generation the way for New Zealand?

Over the weekend, Australian Prime Minister John Howard said that countries who supported reducing GHG emissions must support nuclear energy. Of course the one does not presuppose the other (non-sequitur), and New Zealand politicians came back saying that it was not for New Zealand. In reaction, I note a number of ‘straw-polls’ on websites such as Stuff and NZHerald, where more than half of self-selecting participants said that they wanted nuclear power in New Zealand.

I am not against nuclear power in New Zealand if a robust economic case can be supported for its use, relative to other generation sources. This case would, of course, have to internalise the probability of a nuclear disaster multiplied by the expected costs of such a disaster, and also the real difficulties of disposing of nuclear waste. On 26 April 1986 in Chernobyl there was a nuclear power plant explosion, that is one thing that I worry would happen here. But is Chernobyl safe now? From research I read that they got rid of the topsoil and put new soil down, except they were not able to do that around the trees. So if you stay on the paths it has very little radiation. On the other hand, the emissions of alternatives (such as coal thermal generation) would need to be internalised as a negative for them in comparison to nuclear.

I support analysis that works to such a framework as being a crude but generally good way to rank alternative generation sources, taking into account all of the many pros and cons of each. Unfortunately, most New Zealanders seem to think that because the only raw materials used in generating power from nuclear is a plant and a bit of Uranium, it must be cheap in comparison to a wind farm or photovoltaic (solar) generation, let alone coal or other thermal generation sources – which in New Zealand just is not true. This was best exemplified by a column by Michael Laws in yesterdays Sunday Star Times. Besides describing George W Bush as a very smart man, it suggested that nuclear was more cost effective than wind power and geothermal power (among others), and that an oil price of $2million a barrel was needed to justify the costs of marine energy (plain wrong) and that solar is not an opportunity for future generation (actually, solar is currently non-viable, but not anywhere near as what Mr Laws suggests. In 10-15 years it will probably be a goer).

Let us get some perspective here. With current nuclear technology, the cost of nuclear generation is around twice the current cost of generation in NZ. Wind is actually much more efficient than nuclear, does not emit, generate nuclear waste, or risk catastrophe. There is some visual impairment. But the cost of this is much less than that of storing nuclear waste, or the risks of nuclear disaster. Indeed, marine would at the very least appear to be roughly as economic as nuclear for NZ (and in terms of scale is much more economic), without counting the risk of catastrophe and the costs and risks of nuclear waste disposal.

I am not against nuclear power for NZ per se, but the debate needs to be grounded in economic facts. New generation nuclear technology, probably emerging in 10-15 years may be more suitable for New Zealand than current technology. We should keep an open mind when this comes, but also not just jump on it as an easy fix and a solution to all of our problems – there are a lot of things to think about and internalise when comparing different generation options, and this should be done with care. Knee jerk opinions such as Mr Laws’, based on nothing but perception, do not represent good economic analysis.

Is economics vulgar?

The people at no right turn are unhappy with our discussion on torture as an alternative to imprisonment. That’s fine; however the last sentence of their post interested me:

“As for “moral biases”, economics would do well to remove the beam from its own eye, and recognise that it is in fact a rather vulgur monetarist implementation of utilitarianism and hence loaded with moral preconceptions (some quite questionable), rather than the morally-neutral, unbiased science they like to paint it as.” (emphasis added)

I am especially interested in the fact that Idiot/Savant said economics was “loaded with moral preconceptions”. The view of economics as money hungry right wing sociopaths is fairly common, and as a result there must be some reason why people think of economists in this way.

Before covering this, I want to say what I think economics is. Economics is the study of choice. Now there is a descriptive side to this (what is the situation) and a prescriptive side (what choice must be made). The descriptive side is positive, ‘fact’ based, while the prescriptive side is normative, so value laden. A good economist should separate out the descriptive and prescriptive parts of their argument. Ultimately, all economists should agree with the descriptive side of an economist’s statement, but they can disagree about the prescriptive side, as value judgements are different between people. Note: You cannot usually make a choice without value judgements, and even inside economics there is great debate about what constitutes an objective fact. The point is that a good economist will separate these factors out..

There are economists out there who bastardise this process, and will act as if their value judgements are objective facts. This is the case where we get “loaded moral preconceptions” from economists.

What I think irritates people is that people think economists apply values to things. However, if an economist gives something a certain monetary value, this is a value judgement, and can be attacked on that basis. An economist will first try to figure things out without resorting to value judgement, eg if an action makes everyone better off, then that action is objectively better than doing nothing. The ultimate goal at this stage is to model the situation without attaching value to any components.

Once this process is done the economist may want to make a prescriptive statement, this involves implementing some value judgements. While some people say it does make sense to attach values to things, we have to realise that when economists give a monetary value to something it is just as a means ordering the possible choices available (Note that this order is determined by some value judgement). You might say that a value cannot be attached to murder, but you simply have to look at an appropriate set of choices. Eg would you rather be murdered or have your fingers cut off.

James’s post was very good in this regard. He put down the appropriate considerations, and asked whether the way society views them is appropriate, he did not apply any value judgements. He was asking us to reveal our own value judgements to do with the punishment of criminals, to see what choice we would make.

Note:  I do want to have a free and frank discussion about economics applied to social issues, but can we please use a different issue than child abuse and rape.  We can cover the same emotive issues without delving into issues like this directly.

Fortnight in numbers

I’ve been lazy, here are some numbers:

  1. Work put in place slipped 0.5% in the June quarter.
  2. Non-residential consents rose 3.9%pa in the three months to July
  3. July residential consents slipped 1.3% from June (SA), on the back of a fall off in apartment consent numbers
  4. July credit card transactions were down 0.2% from June (SA)
  5. House prices rose 13.3%pa in August