Thursday, November 29, 2012

Appalling theft…..

This (courtesy of Cafe Hayek) is from page 92 of the 3rd edition (2009) of Douglas Irwin’s indispensable volume Free Trade Under Fire (link added):

Pareto‘s idea that the benefits of trade protection are highly concentrated, while the costs are highly diffused, has been a central point of departure for explaining the existence and persistence of import restrictions.

The U.S. sugar program, once again, illustrates this imbalance in costs and benefits.  Import restrictions have kept domestic sugar prices at roughly twice the world price.  The General Accounting Office estimated that domestic sugar producers reaped about $1 billion in 1998 as are result of this policy.  However, 42 percent of the total benefits to sugarcane and sugar beet growers went to just one percent of all producers; indeed, just seventeen sugarcane farms collected over half of all the cane growers’ benefits.  Clearly, the owners of these few farms have a powerful incentive to maintain the import restrictions.  Although the sugar policy imposes far larger costs on consumers of sweeteners ($1.9 billion [in 1998] according to the GAO) than are distributed to growers, consumers are far more numerous, and these costs are spread widely among them.

Sunday, November 25, 2012

Fixing Housing Policy with Education Policy

Apparently crazy house prices in Auckland (Herald 25th November) may result as much from education policy as from housing policy. 

Teacher unions are afraid of school league tables and performance pay. Meanwhile parents are using cheque books and housing prices to rank them anyway.

The housing market is the league table.

Home buyers and parent home buyers evidently do not believe all schools perform equally well across Auckland;

Home buyers and parent home buyers evidently do not believe learning and teaching involves identical teacher performance.

  • Currently they are prepared to pay any where between $250,000 and $500,000 above market value to get their children into schools they believe are high performers.

The converse is important.

  • Currently they are prepared to pay any where between $250,000 and $500,000 above market value to keep their children away from schools they believe are low performers.

Non parents selling out of the leafy suburbs are able to use their new found capital gains to bid up house prices all over Auckland.

The Ministry helpfully provides property value fences called zones to reinforce the effect. Meanwhile providers of education rock along merrily while house prices soar and reformers puzzle about land availability and construction prices.

Rip those zones out, install some serious performance evaluation measures such as those everyone else faces and the southerly  impact on house prices would likely be serious – right across the board.

Scary thing is – people paying huge educational premia in housing very likely believe they will recover their premia when they sell after the kids are educated – which tells you how big a threat they believe educational reform is.

Being too timid is costing us dearly.

Thursday, November 8, 2012

A little Milton seems apposite right now…

“The fantasy that the democratic act of centralizing and concentrating decision-making authority and responsibility in the state ensures that decisions are made better and more wisely and more ‘scientifically’ and in ways likely to promote greater human flourishing is the most absurd and dangerous – yet widespread – fantasy that afflicts modern humanity.  It is a fantasy to which academics cling with special and remarkably steadfast faith.”

Tuesday, November 6, 2012

Logic that’s tough to argue with….

Rakon plans to cut up to 60 jobs in New Zealand as part of plans to shift production to China.

The electronics company says some its crystal manufacturing output, which is used in mobile phones, can be made cheaper in its Chengdu plant.

Rakon's shares slumped to a low of 38 cents in August. Investors have been unhappy since the company reported its second annual loss in three years in May.

Managing director Brent Robinson said 60 of the 430 jobs at Rakon will go by early next year, but research and product development will remain here.

He said the move will help Rakon take advantage of a global growth in demand for smart wireless devices, and save $10 million per year, with 70% of that happening by April next year.

The company's shares rose 10%, or 4 cents, to 45 cents each on Tuesday.

Copyright © 2012, Radio New Zealand

Sunday, November 4, 2012

Nominal GDP Targeting–the simple description

By  Brendan Greeley on November 01, 2012

Scott Sumner finally got a cell phone last year. Almost everything else in his Newton (Mass.) apartment would be familiar to a time traveler from the Great Depression, right down to the steel barber’s chair and brass cash register. His new Mac confuses him. “I like old things,” he says. Sumner, who stands with the rounded shoulders of an academic economist, teaches at Bentley University in nearby Waltham. And by sheer force of will, he’s changing the way governments respond to economic crises.

On Sept. 13 the Federal Reserve’s rate-setting committee announced a third program of quantitative easing, which it vowed to continue until it saw substantial gains in the labor market. This open-ended commitment was a shift for the Fed, which in earlier rounds of quantitative easing had simply targeted a certain amount of bonds to buy.

The Fed’s decision under Chairman Ben Bernanke to alter course has roots in ideas about setting targets for a specific percentage growth in nominal gross domestic product. Sumner has quietly promoted this approach to central banking for nearly three decades, especially over the last four years on his blog The Money Illusion. Sumner concedes that he’s “someone who doesn’t really know people at the top levels of the profession.” But after influential economics bloggers, such as Tyler Cowen, picked up Sumner’s ideas, officials from Sweden’s central bank and the British government got in touch with him. At a press conference in November 2011, Bernanke had to field questions about Sumner’s theories. “Sumner deserves most of the credit here,” says Cowen. “He turned the idea into an intellectual movement—and through his blogging only. A pretty amazing feat.”

Sumner, who holds a Ph.D. from the University of Chicago, made a suggestion in the late 1980s to the New York Federal Reserve. He proposed that the Fed set a target for nominal GDP—real growth in GDP plus the rate of inflation. He felt that this would induce the correct level of business investment better than targeting either inflation or growth in real GDP by themselves. The response at the New York Fed, says Sumner, was, “Thanks, but no thanks.” He returned to Waltham and grew bored with monetary policy. “There was a sense that [central banks] had figured it out,” he says.

He revisited the subject in 2008. In his view, the Fed initially responded too timidly to the crisis out of fear of provoking inflation. He also wondered why Bernanke was forgetting his own work as an academic, when he studied the Japanese stagnation of the 1990s. Bernanke in 2000 wanted the Bank of Japan to adopt “lead targeting”—publicly stating an inflation target of 3 percent to 4 percent for a number of years as a way of inspiring confidence.

Sumner decided to start a blog that argued for his old idea of targeting nominal GDP, which in a crisis means expanding the money supply until you reach your target. It also means swallowing any fears of inflation. Sumner is well known in his department as a technophobe, and he triggered expressions of surprise and amusement when he informed his colleagues that he was starting a blog. He was also aware of his own obscurity. “I had a fairly low opinion of my ability to change the debate,” says Sumner. Later, though, he saw signs that he was breaking through. One example: When Christina Romer, head of the President’s Council of Economic Advisers, returned to academia at Berkeley in 2010, she added his blog to her class reading list.

The announcement by the Fed’s rate-setting committee in mid-September doesn’t contain any mention of targeting nominal GDP. But its open-ended nature and clear goals—pump up the money supply until hiring rises strongly—resembles Sumner’s nominal GDP model, which would have a central bank do all in its power to achieve an agreed-upon nominal rate of growth. Sumner thinks the Fed should shed its fear of the “zero bound,” the point past which a central bank can no longer lower interest rates. The zero bound is a psychological barrier, he says. It prevents policymakers from taking more aggressive steps to respond to financial crises—aggressive steps like targeting nominal GDP.

The bottom line: Targeting nominal GDP is gaining in popularity among economists, who see it as a new way to encourage business investment.

Greeley is a staff writer for Bloomberg Businessweek.