The compassion of unions towards the minimum waged

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Source: page 451 and page 828 of the 3rd edition (1972) of University Economics by Armen Alchian and William Allen; the first part of the quotation is Question #30 at the end of Chapter 22. via Bonus Quotation of the Day… – Cafe Hayek

Great Escape passed by @WorldBank’s preoccupation with RCT (randomised controlled trials) as next big thing in development policy

Could civilisation have been the result of a plan?

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Milton Friedman is said to have mesmerised several countries with a flying visit!?

Milton Friedman visited Australia in 1975. He spoke with government officials and appeared on the  TV show  Monday Conference. Apparently, that was enough for him to take over Australian monetary policy setting for the foreseeable future.

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When working at the next desk to the monetary policy section in the late 1980s, I heard not a word of Friedman’s Svengali influence:

  • The market determined interest rates, not the reserve bank was the mantra for several years. Joan Robinson would be proud that her 1975 visit was still holding the reins.
  • Monetary policy was targeting the current account. Read Edwards’ bio of Keating and his extracts from very Keynesian treasury briefings to Keating signed by David Morgan that reminded me of macro101.

See Ed Nelson’s (2005) Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand who used contemporary news reports from 1970 to the early 1990s to uncover what was and was not ruling monetary policy. For example:

“As late as 1990, the governor of the Reserve Bank rejected central-bank inflation targeting as infeasible in Australia, and cited the need for other tools such as wages policy (AFR, October 18, 1990).”

Bernie Fraser was still sufficiently deprogrammed in 1993 to say that “…I am rather wary of inflation targets.” Easy to then announce one in the same speech when inflation was already 2-3%.

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When as a commentator on a Treasury seminar paper in 1986, Peter Boxhall – fresh from the US and 1970s Chicago educated – suggested using monetary policy to reduce the inflation rate quickly to zero, David Morgan and Chris Higgins almost fell off their chairs. They had never heard of such radical ideas.

In their breathless protestations, neither were sufficiently in-tune with their Keynesian educations to remember the role of sticky wages or even the need for the monetary growth reductions to be gradual and, more importantly, credible as per Milton Freidman and as per Tom Sargent’s End of 4 big and two moderate inflations papers.

I was far too junior to point to this gap in their analytical memories about the role of sticky wages, and I was having far too much fun watching the intellectual cream of the Treasury senior management in full flight. At a much later meeting, another high flying deputy secretary was mystified as to why 18% mortgage rates were not reining in the current account in 1989.

Friedman’s Svengali influence did not extend to brainwashing in the monetarist creed that the lags on monetary policy were long and variable. The 1988 or 1989 budget papers put the lag on monetary policy at 1 year, which is short and rapier, if you ask me.

#Corporatewelfare since 2008 @JordNZ @MatthewHootonNZ @GrantRobertson1 @stevenljoyce

My latest corporate welfare report is out at the Taxpayers Union website. The company tax could be 6 percentage points lower but for this generosity of politicians picking winners.

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Source: New Zealand Budget Papers, various years.

It is not as bad as you think under the last Labour  government budget. $700 million of  those hand-outs to business was seed capital for agricultural research institute. That institute to be run out of the investment income on that $700 million one-off injection which the incoming National Party-led government cancelled.

Another $675 million in that last Labour budget was to KiwiRail and OnTrack. Other than that, the Labour Party ran a pretty tight ship on business subsidies. There are no particular record of picking winners. Labour did buy a real loser in KiwiRail. You heard it here first.

Milton Friedman on Neo-Liberalism and the welfare state

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Source: “Neo-Liberalism and its Prospects” by Milton Friedman (1951).

@AndrewLittleMP all but admits rents to go up after Healthy Homes Bill?

Opposition Leader Andrew Little accepts that mandating insulation and heat pumps into rental properties will increase their value. But he denies that this will affect rents!

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Source: Healthy Homes Bill won’t up rents Little | Politics | Newshub.

An upgrade increases the value of a rental property if the improvements that increase its rental value. You cannot have the increase in the value of the asset without the increase in rent.

I will contract out the rest of my answer to David Friedman’s superb book Laws Order:

For an application of economics to a different part of the law, consider the nonwaivable warranty of habitability, a legal doctrine under which some courts hold that apartments must meet court-defined standards with regard to features such as heating, hot water, sometimes even air conditioning, whether or not such terms are provided in the lease—indeed, even if the lease specifically denies that it includes them.

The immediate effect is that certain tenants get services that their landlords might not otherwise have provided. Some landlords are worse off as a result; some tenants are better off. It seems as though supporting or opposing the rule should depend mainly on whose side you are on.

In the longer run, the effect is quite different. Every lease now automatically includes a quality guarantee. This makes rentals more attractive to tenants and more costly to landlords. The supply curve, the demand curve, and the price, the rent on an apartment, all shift up. The question, from the standpoint of a tenant, is not whether the features mandated by the court are worth anything but whether they are worth what they will cost.

The answer may well be no. If those features were worth more to the tenants than they cost landlords to provide, landlords should already be including them in their leases—and charging for them. If they cost the landlord more than they are worth to the tenant, then requiring them and letting rents adjust accordingly is likely to make both landlord and tenant worse off. It is particularly likely to make poorer tenants worse off, since they are the ones least likely to value the additional features at more than their cost.

A cynical observer might conclude that the real function of the doctrine is to squeeze poor people out of jurisdictions that adopt it by making it illegal, in those jurisdictions, to provide housing of the quality they can afford to rent.

If my analysis of the effect of this legal doctrine seems implausible, consider the analogous case of a law requiring that all cars be equipped with sunroofs and CD changers. Some customers—those who would have purchased those features anyway—are unaffected. Others find that they are getting features worth less to them than they cost and paying for them in the increased price of the car.

Does invested $1 in retrofitting saves $6 in health expenditure? @PhilTwyford @PeterDunneMP @AndrewLittleMP

Various bold claims have been made about the payoff from investing more in retrofitting insulation into housing. The government recently spent $600 million on such retrofitting of insulation.

There is a private member’s bill before Parliament to introduce minimum standards for rental properties with regard to insulation and other matters. Little is by the Leader of the Opposition Andrew Little said for the consequences for rents of this additional expense to landlords.

Ian Harrison of Tail Risk Economics initially estimated that the $600 million invested in retrofitting of insulation will save barely half of that:

After correcting for this major error and taking a more realistic view of the benefit estimates in other studies, the net benefits of $630 million disappear.

The $600 million insulation investment will probably generate benefits of closer to $170 million, for an economic loss of $430 million.

After meeting with Ian, I read through the rather dull background documents behind a cost benefit analysis relied upon by the government to spend the $600 million dollars.

The most interesting part of the cost benefit analysis is most of the benefits come from fewer cardiovascular related hospitalisation of the elderly and not from respiratory diseases among children.

I found the error was far more fundamental than a incorrect transfer of a calculation between tables discussed in the first publication by Harrison. I had to read the background documents several times to understand what had been done wrong.

The cost benefit analysis for the Warm Up New Zealand Heat Smart Programme assumes that the number of elderly occupants of the newly insulated house increases by one each year and after 5 years, one of these dies but is replaced by a new elderly occupant.

We have modelled the probability of a vulnerable person avoiding mortality as a result of the intervention. The probability of this is (112.7/1000)*0.27= 0.03 (3%). We treat avoidance of mortality by treatment in each year as independent events.

The multi-year benefit calculated above would accrue based on the life years gained as a result of deaths avoided in year one.

However, we would expect these benefits to accrue in year two for different vulnerable individuals (aged 65 and over with a cardiovascular related hospitalisation in previous 18 months), and for different individuals again in every subsequent year that the treatment continues to have an effect, i.e. an on-going stream of benefits of $1,050.74 per year. This assumes a constant proportion of people aged 65+ who have recently been hospitalised with circulatory problems….( p.38).

In the first year of the new insulation, the first occupant benefits and the net present value is included in the benefit cost analysis calculation – the erroneous benefit cost analysis calculations which its authors still defend.

In the 2nd year, another elderly person moves into that same house and the same calculation is done for them. In the following year, yet another elderly person moves into the same house and the net present value calculation is repeated.

By the end of 5 years, there are 5 occupants in this house all benefiting from the same insulation investment. In the 6th year, the first elderly occupant dies to be replaced by a new elderly occupant who then gains from the insulation upgrade.

There was double counting of the number of people who benefited from the insulation as Iain Harrison explains

The analysis assumed that there was not one, but five occupants who had been hospitalised with a cardiovascular illness in the previous 18 months in each of the relevant insulated houses. There should have been only one such occupant.

The retrofitting of insulation was estimated to cost $600 million. Iain Harrison estimated the benefits to be $300 million, not $1.2 billion. That is a benefit cost ratio of 0.5.

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Source: Iain Harrison, The mortality reduction benefits of insulation: the error identified.

@jacindaardern @NZLabour’s Healthy Homes Bill will raise rents to poor tenants and students

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Source:  David Friedman, Chapter 1: What Does Economics Have to Do with Law?

Long-term costs of cutting emissions grow hazy

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