June 29, 2009
The owner of Montana Wines and New Zealand’s largest wine company, Pernod Ricard, is set to cull its contracts with wine growers in the Gisborne region.
This action is in response to falling demand for chardonnay and sparkling pinot noir wine, both domestically and internationally. Chardonnay exports reportedly fell 12-14% last year alone. The culprit? Chardonnay’s fairer sister, sauvignon blanc. Apparently we are seeing a significant supply-side ‘correction’, as producers respond to a structural demand shock – consumers’ changing tastes and preferences. Indeed, last year sauvignon blanc overtook chardonnay as New Zealand’s most consumed white wine.
Try as they might, Pernod Ricard have not been able to sway the mighty consumer to stick with the product they have contracted for, despite “new product development, innovative packaging, capital investment and changes in wine style”.
I know at least one TVHE author that might be a little disappointed seeing his favourite varietal taking such a pounding. As for me, well I’ll stick with my reds thanks.
Originally posted here.
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June 29, 2009
Late last week the Government announced that they were running a public consultation on the emissions target for 2020.
The Government already have a long term goal of reducing carbon emissions to 50% of 1990 levels by 2050. Long term goals tend to work quite well for Governments as it gives the public the idea that they are proactively doing something but realistically they will never be held to account if and when they don’t meet the target, as they don’t align all that well with the three year election cycle. But I digress.
This consultation process is part of setting the ‘interim’ goal for the year 2020. Environment Minister Nick Smith has quite correctly identified that setting this target requires a trade-off between our economy, our international reputation and, obviously, the environment.
Ultimately this 2020 goal will be presented in international climate change conferences at the end of the year, including the post-Kyoto Copenhagen Conference. I’m sure we will all be waiting with bated breath to see what the outcome of this Conference will be.
Of far more interest are recent ‘cap and trade’ developments around the world. Obama *just* got his bill passed by the House of Representatives while in Australia the proposed Carbon Pollution Reduction Scheme (CPRS) is very much struggling to gain legs.
New Zealand’s version of cap and trade, which will aim to reduce emissions to the 2020 (and subsequently 2050) goal looks set to be determined sometime later this year, although early indications are that it will be somewhat like the Aussie model. To blatantly oversimplify things, the Aussie model is a more politically palatable version of cap and trade, with lots of pressure-group exemptions and handouts to favoured sectors, as compared with the version NZ originally had planned for under the previous Government, which was more of an economically pure ‘you pollute, you pay’ model.
The final design of New Zealand’s scheme will be very interesting indeed…
Originally posted here.
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June 28, 2009
I have a question on loss aversion, as I am confused. I keep seeing loss aversion defined like this:
our tendency to feel sadder about losing, say, $1,000 than feeling happy about gaining that same amount
But this sounds like diminishing marginal utility to me. I mean, the $1,000 dollars I’m losing provides me with a greater level of satisfaction than an addition $1,000 would provide me with.
My feeling was that loss aversion was a situation where my satisfaction would be lower in a situation where I lost $10,000 and ended up with $40,000 than it would be in a situation where I gained $10,000 and ended up with $40,000 – even though in both situations my endowment was the same.
I thought loss aversion was about an additional payoff relevant factor (namely that the direction of the change in my outcomes is also payoff relevant, as well as the strict outcomes) not an arbitrary way of framing diminishing marginal utility.
If someone could explain where I am making a mistake it would be much appreciated 
Originally posted here.
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June 25, 2009
Strict neo-classical economists need to realise that there ARE systematic deviations from tightly defined rationality and as economists we should try to understand these deviations (although preferably deviations can still be incorporated into a more general version of our framework).
Behavioural economists should realise that these deviations are far less common than they believe, and even if they do exist they aren’t necessarily policy relevant.
Example for both sides, the conjunction fallacy.
Originally posted here.
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June 24, 2009
So when consumer confidence rose in December because of falling fuel prices there were people saying it was because of the National government. When net migration started to turn at the start of 2009 there were mummers of it being because of the National government. Now that it is clear that departures have collapsed Immigration minister Jonathan Coleman has decided to show us just how deluded politicians can be by stating:
“Under the Labour government, with its high taxes and disincentives to getting ahead, thousands of our brightest and most talented people chose to seek their fortunes overseas,” Dr Coleman said.
“Now, these people are choosing to either stay in New Zealand or return home to build a better, brighter and more prosperous future under the National government.”
You have to be frikken kidding me. For one, the National government is still running the same set of policies as Labour. And more importantly as the article points out:
Dr Coleman did not say whether the international recession had anything to do with the situation.
When the international recession IS the reason. Foreign labour markets have collapsed, why would New Zealanders leave the safety and comfort of family here when there are no jobs for them overseas. It is blatantly obvious that the ability to get and security of work overseas is a more important factor for individuals than which set of politicians is sitting around in the Beehive.
Now, I guess it makes sense for a politician, the actual immigration minister no doubt, to pretend that they have had an impact. However, they have not. In fact I find this sort of talk embarrassing, as it trivializes the ways that I believe government can help society and mis-informs people as to the primary role of government.
Update: Seems that some of the comments at Kiwiblog also take Dr Coleman’s message to heart. I realise David Farrar didn’t say it, he knows better than that, but I also don’t see him correcting Dr Coleman’s assertion in the same way he would have corrected it when Labour was in power …
Originally posted here.
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June 23, 2009
From a blog that it looking at each day in 1930 we have this beaut of a quote (ht Paul Krugman, and initially Scott Sumner):
Leading economists and market observers are looking for clues on how long the current trade depression will continue. Since 1873 there have been thirteen periods of business depression. Ten of these had an average length of 15 months. The remaining three were much longer, but there were exceptional circumstances in each case that it is clear don’t apply here. Credit is easy, inventories are not high, and the banking system was never sounder. Therefore the current depression should not last longer than 15 months. Since it began in July of 1929 in improvement is to be expected at the start of the fourth quarter.
So during the Great Depression people were saying it was more moderate than previous significant downturns. Interesting 
Originally posted here.
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June 23, 2009
Apologises for my long delay from the blog – I am afraid that it will continue for the next couple of weeks. I am on an economics adventure, trying to fight the beast of recession with sketchy logic and econometrics 
However, I had to say something about this recent Westpac article on bank funding (ht Rates Blog).
At the end Westpac says that it, and other banks, have been pricing at average cost instead of marginal cost – so they have been pricing based on the cost of credit to them, not the cost of sourcing additional credit to make loans.
Now, according to Westpac the average cost is higher than the marginal cost, and all banks have seemingly agreed to do this even though since the marginal cost of credit is below the current “price” an individual bank could “defect” and make some money. Is it me, or has Westpac blatantly admitted to collusion here?
Westpac has said that it, and other banks, have implicitly agreed to set interest rates at a higher level than marginal cost – which I presume must be closer to the collusive price than marginal cost as otherwise it wouldn’t stick.
Now I didn’t think the banks were colluding, but if Westpac is willing to go ahead and admit it then …
[Note: to be fair I think long run marginal cost, which banks would actually need to set fixed rate loans based on, will be higher than marginal cost - and this would explain much of the difference. However, this isn’t what Westpac said. Also, I’ve ignored market power and the prevalence of fixed costs - again if they wanted to make these arguments go ahead, but do they really want to say that they used market power to keep prices above the marginal cost of credit ]
Originally posted here.
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June 18, 2009
Public servants are always frantic at this time of the year. I hear you collectively asking why? It’s nearing 30 June, the end of the government’s financial year. As such the various departments/ministries/commissions are very *busy*, throwing money around like they were the leader of the free world.
The perverse incentives on government officials to make sure they spend all of their allocated budget in the financial year, while nothing new, always amuses me. They are strongly incentivised to make sure that the kitty is empty come June 30, otherwise they risk having money taken away from them in the following year. You have to ask about the importance of the projects that are only taking place in order to empty the coffers.
As a result of these incentives it’s a very lucrative time to be consulting, even if the gravy train is about as efficient as KiwiRail.
Originally posted here.
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June 14, 2009
Greg Mankiw isn’t impressed by Obama’s comments on health spending. Obama thinks that increasing health spending without limit is a bad thing. Mankiw points to a QJE article that suggests increasing health spending is optimal:
As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.
What I find interesting is the choice of assumptions in this article. The authors assume diminishing returns to consumption spending, but constant returns to extra years of life. Obviously this means that, as consumption utility becomes saturated, more will be spent on health care as incomes rise. The assumptions drive the outcome in a way that the authors are very clear about. But is there really a constant return to extra years of life?
I wouldn’t have thought that a year of life at age 85 is equal in utility to a year at age 25. But then I have no experience so I’m just guessing. Health spending probably increases the marginal utility of an extra year, but is the MU really age invariant? I’d be interested to know what people think about this one since I have nothing but prejudice to go on 
Originally posted here.
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June 14, 2009
Dilbert is on the money again. This time on the subject of CEOs working without pay as a show of penance.
Originally posted here.
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Pay later.
