Spending on government employees

An interesting new blog on stuff tells us why interest rates had to rise. Now I agree that people in the public service are being paid too much (as I don’t work there 😉 ). However, I’m not sure that public sector core wages are the main reason for inflationary pressure (although they do play some part in the wage bargain in the private sector as well). I think that it is a broader issue, with wasteful government spending in health and education the major drivers of our inflationary mess, along with low rates of productivity growth (in both the private and public sectors).

Ultimately, much of the current inflation problem comes from government failure. There is a role for government in society, but I’m not sure that the Labour government recognises the appropriate boundaries associated with that role.

Fast food and health standards

As I was waiting in line to grab some McDonalds before going to see the latest Harry Potter movie I got to thinking about why the line was so long.  In fact, I got to thinking about why, when there are other perfectly good foods around the food court, was half the place lining up to grab some greasy McDonalds.

I realized the best way to analyze this is to think about my own behaviour.   Now I virtually never go to the McDonalds in the food court (that day I just had a hankering for a Boss burger), I usually go to the Chinese place.  However, when I’m in some foreign land (such as Hamilton), I always go for McDonalds or Subway.

When I go to buy food in a foodcourt in Wellington, I know I will be going back there again soon, so their is an incentive for me to experiment, find out what I like and then stick to that.  Simply put, its a repeated game.  When I arrive at a foodcourt in Hamilton, this is a one-off experience, I have no intention to come back to the city of the future.  So this is a one shot game.

Now, franchises like McDonalds offer a standardized product, I know what I will get.  The rest of the shops could sell anything.  As a result, McDonalds is the less risky option, there is less variance in the quality of McDonalds meals.  So even if the average food court meal is better, as long as i’m risk averse there is scope for me to grab MiccyD’s.  If it is a repeated game, then experimenting gives me information for future periods, as I know that some of the food is better than McD’s food, I’ll try things until I hit something (or a bundle of foods) I like, then I will repeatedly consume it (or repeatedly consume some time varying combination of fast foods based which is dependent on previous consumption).

By virtue of this blog I have to bring this rant back to government.   I think I can do that with health standards.  By setting and enforcing health standards the government cuts out the worst foodcourt places, and as a result lifts the average standard and reduces the variance/risk of eating at other stores.  Now even if McD’s was within the health standards before these regulations, they will be forced to up the quality of their product, or risk losing their one off customers.

So govt. health standards lift the standard of franchises, and reduce the risk of getting killed when you go for a meal.  That sounds like positive government intervention to me.

The Economist writes well

On the economist blog they decide to talk about carbon emissions. Everything they said was simple 1st year economics, I completely agree with them. But they say it so well, and in so few words.

Now they might make the odd mistake (such as inverting the exchange rate and saying we are 72% over-valued against the US$ when it was actually about 9%), but they write so well. I know its not much of a compliment from someone as illiterate as myself, so I was wondering what everyone else thinks.

You don’t mess with the Guv’nor

Bollard has shown who wears the pants. In raising the OCR today, he has shown his disregard for Dr Cullen’s mischievous feints at invoking his powers to override the price stability objective. He has also shown the market that he’s willing to back up his tough talk on the housing market – now on its “third wind”- even if this means ratcheting up interest rates even further as the Kiwi dollar reaches record highs.

Ultimately these actions will help bring the currency down. The Kiwi is underpinned by interest rate expectations, and only by raising rates today could he claim – credibly – that inflation is coming under control, meaning further hikes were unnecessary. So far the market appears to have believed him.

Perhaps this was unnecessarily hard on the housing market. The higher rates will bite hard as fixed rate mortgages continue to roll off over coming months. But then again, why not? A few months ago, a sharp correction in the housing market would have spelt disaster for the economy, with only government spending staving off risk of recession. But now a dairy commodity boom is underway, providing a massive boost to the incomes of farmers and wider economy. This means Bollard can afford to be more aggressive with domestic demand, coming down harder on the housing market. Showing that he is, indeed, still the Guv’nor.

A Strict Application of “Kiwi Made” Actually Hurts Our Exporters

While I am all for supporting the domestic economy, I think that a strict interpretation of the requirements for a good to be labelled “Made in New Zealand” actually harms our exporters. People get upset when they find out that something that is “Made in New Zealand” is manufactured using inputs purchased from another country. Any attempt to put pressure on exporting firms to use entirely NZ inputs is detrimental given that we are a small open economy with a very volatile exchange rate. The argument I’m making has absolutely nothing to do with price or quality but instead centres on a corporate finance concept known as “Natural Hedging”. Put simply if you have a company that sells its output in a foreign currency, purchasing your inputs in that currency naturally hedges movements in the exchange rate.  A good example of this is Navman who appear to be doing fine because they purchase a lot of their inputs in US$

While I accept that a good should still in essence be New Zealand made, I  believe that when the firm is an exporter, they should outsource as much of their inputs as possible.

One hike too far

So the RBNZ lifted rates. However, they said this is the end, no more hikes this year.

I’m can understand why Bollard wanted to lift now, Cullen threatened his manhood and Bollard had to show he had some balls. I still think this lift is unnecessary, house sales are easing and firm profit margins have recovered, easing inflationary pressure over the next few months. Furthermore, even in the June quarter when retail sales were red hot, core inflation showed signs of easing.

Bollard has said no more rate rises will happen, however I think he’s taken one more than he needed to. Remember, the OCR hits inflation with a lag, it takes 12 months for effective mortgage rates to peak, and some say the full effect of tightening can take 18 months to come into effect. 2008 looks like it will be a difficult year.