The visible hand in economics

Archive for the ‘International economics’ Category

So we all know that Iceland is bankrupt – what is the situation like for New Zealand?

A few of the stories I saw when Iceland first went into massive trouble were here, here, and here.  At the time the comparison was so popular that there was a Dom Post article on the risks of New Zealand’s current account.

However, I think by now it is obvious that I am not going to agree :P  Our stock of debt is equal to one years income – I don’t see how this is unsustainable!

So tell me – are we heading towards bankruptcy, are we heading towards a bumpy ride, or are we heading towards more “golden weather” :)

A recent survey stated that New Zealand exports were “resiliant” in the face of a massive global recession.

Now this is something that, at first, might seem unusual. New Zealand relies on exports so much, and if the global economy is collapsing surely we will have no-one left to sell too.

However, it is important to remember the difference between “prices” and “quantities”.

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This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:

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Excellent article by Tyler Cowen in the New York Times. (ht Economists View, Marginal Revolution).

Paul Walker at Anti-Dismal has also covered this issue heavily (here, here, here, here, here, and here).

Fundamentally, for New Zealand, there appears to be no reason for any change to fiscal policy to help deal with the slowdown – something we have discussed here.

Show me the actual “market failure” – then we can figure out how the government can improve outcomes. If there is no market failure, then government action to “stabilise” the economy will simply make matters worse.

Note: This is different to government actions to try and help cushion the impact of a sharp change in fundamental economic conditions. Although a change in the economic situation may change the optimal allocation of resources, a labour market that allows people to upskill and gives them firm institutions to rely on in the bad times will help to reduce the welfare cost associated with the change. This is subtly, but importantly, different from a simple “fiscal expansion”.

It appears that the UK wants to spend their way out of a recession. The US has a plan too, as does New Zealand, Europe, and Australia. Governments all across the world want to spend their way out of a recession – however, there is only three ways they can get the money together.

  1. Increase taxes – knocking out any stimulus anyways,
  2. Borrow,
  3. Print money.

Assume that monetary policy will act to constrain any excessive “money printing” that will be going on this leaves us with borrowing.

If all the governments in the world want to increase their borrowing, this will increase demand for global credit, which will push up interest rates – won’t it? This will lead to an increase in private savings, and will just move around the allocation of resources rather than creating wealth.

There is no free lunch when it comes to “getting out of a recession” – give me the “market failure” we are facing, then we can talk about improving outcomes!

Over at the Standard they discuss one of Lord Keynes’s “real ideas” – namely an international organisation that tries to push savers to spend, by buying the things borrowers save.  When I put it this way the idea sounds ridiculous – which it is.

This unusual view comes from a belief that a trade deficit or surplus is a “imbalance” that needs to be “solved” by a benevolent organisation.  This is of course rubbish, nations, like individuals, should be able to run trade balances or surpluses based on the preferences of the individuals involved.

Now I haven’t heard this idea before, and if Keynes did come up with it I think it has more to do with the elitist world view of the Cambridge school combined with some foggy mercantilist sentiment than with the practical relevance of such a policy.

“Imbalances” that are caused by market failures are the ones we should solve – not arbitrary imbalances that we have assumed exist because we want to regulate.

Ultimately, there has been a disjoint between risk and return in some areas of society, a problem that has been able to occur because of large information asymmetries across the financial market.  Transparency of information and wider education surround risk are the best ways to improve outcomes in the financial market – not arbitrary regulation based on a view that “all countries should run a trade balance”.

Over at Kiwiblog they cover John Key’s speech at the APEC summit. The following passage is quoted, and then David Farrar suggests that economics blogs should discuss it – it seems simple enough so lets give it a go together :)

The question is: faced with this situation again would we do something different to address it? To my mind, this question should lead economies to consider whether monetary policy, fiscal policy, and prudential policy should be more counter-cyclical, and lean against credit growth in an upswing

Now, this by itself tells me very little. Simply put, John Key appears to be saying that “credit market policy” should be counter-cyclical. Now, just 18 months ago people were complaining about interest rates being too high – that is counter-cyclical monetary policy guys, and it helps to tighten domestic credit markets. Our institutions have been relatively prudent (as lenders and households actually do face the risk associated with there decisions, unlike the US :P ).

Of course, there is more to this statement than just that – there are good inferences and a bad inferences to make from the flavour of the speech. Let me sketch them out – then we can discuss them, or whether these inferences are fair :)

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