Archive for October 2008
Random statement of the day
Posted on: October 24, 2008
This from the Minneapolis Fed:
Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of nonfinancial businesses to borrow from households is highly questionable
There are two ways I can read this quote, one that I agree with and one that I dispute. The first way is that “this isn’t the end of the world” – I agree with this, and I still think that people too closely linked to the financial markets are expecting worse outcomes for the global economy than will actually occur.
However, I think the Minneapolis Fed’s paper overplays it a little and suggests that there is no credit rationing element – only a risk-price element.
Read the rest of this entry »
According to their recent official cash rate decision they might:
The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices (emphasis added) and the recent loosening of fiscal policy
Now I have no problem with this view – hell we have discussed the ambiguous nature of oil prices on inflation before (here, here, and here). However, our conclusion was that the net impact would be zero – not the negative relationship the Bank is implying here.
This is consistent with the RBNZ’s strong focus on the “demand” side of the economy ahead of any “supply” side effects – and indicates that any sharp increase in retail sales (given recent declines in oil prices) could put the Bank back into pausing mode.
I think this is actually a fairly substantial point – it tells us that as well as watching the labour market numbers, we need to watch retail numbers in order to get a handle on future movements by the Bank.
Over at Econlog Arnold Kling takes to task virtually all mainstream Macroeconomists for there “description” of the current economic crisis. This combined with my reading last night on reductionism in economics (I think it was Robert Frank Kevin Hoover – although I have now forgotten as it was an essay in a larger book) currently has me on the back foot – even though I’m a strong methodological (and even an ontological) individualist there are obviously issues with the current application of reductionism in economics.
However, let met put down some of the key bits from the Kling.
Thanks goodness – they have changed the deposit insurance scheme such that the premium depends on risk!!!!
We have discussed that here (*, *, *, *).
Also they have capped the amount you can insure at $1m – very good.
The one concern left is the wholesale market. With no wholesale insurance available the wholesale market for funds is threatening to dry up. With many other countries doing it we have a problem – because of other nations choice to insurance wholesalers domestic credit for banks could dry up.
However, I would like to point out that there is unlikely to be a “bank run” on wholesalers, and as a result if they were willing to pay market rates for private insurance I’m sure they could get it – as a result in of itself government wholesale insurance is not a good idea. As a result, the only reason for doing it would stem from this “international prisoner’s dilemma” – something the Bank must not see as a sufficient threat.
So the OCR is now down to 6.5%. This was in line with market expectations given recent credit market turmoil.
According to the statement “ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today’s decision” – consistent with the view of the market
Although I was unimpressed by this statement:
With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to
3 percent around the middle of 2009
Given that a drop in CPI growth as a result in a fall of tradables does NOT imply that the Reserve Bank is achieving its mandate, they partially made up for it with this:
However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high
Non-tradables is a problem – we have had a recession and they haven’t declined. The Bank does need to ensure that non-tradable inflation goes below 3% before it can be confident about heading into easing territory.
Often in New Zealand we bemoan the fact that so much of our “skilled labour” is heading overseas.
This concern is fine – however, looking at this factor by itself does not tell us anything about the change in our skill base domestically.
In a paper by Satish Chand and Michael Clemens it is claimed that skilled migration out of Fiji has been caused by the same factor behind the increase in the stock of skilled labour in Fiji (ht Market Movers) – namely an increase in the return on skills overseas.
This makes sense, an increase in demand for skilled labour overseas increases the return for skilled labour overseas – with an open labour market skilled labour will then bugger off. This in turn will reduce the supply of skilled labour, increasing the wage and increasing the incentive for people to train in these specific skills – increasing the long-run supply of this labour type.
I find the perceived result that the skilled capital stock INCREASES (which is what they find) a touch implausible, as if domestic demand for those skills does not change and a higher return on labour exists overseas (holding the wage rate up) surely the equilibrium level of employment for that skill is lower. Still I do not know what mechanism they use to explain this – as I have not gone through most of the paper. Once I have I’ll correct myself in the comments 😛
Still it is a valid point that we have to look at why people are leaving before making judgments – instead of merely stating that people leaving is a bad thing.
To put my personal value judgments out initially, I generally DO NOT think that government (through fiscal policy) can be blamed for inflation. However, among many people, and even many economists there is a feeling that government is to blame in some way. Personally, I completely blame monetary policy for the failure to control inflation – and although I think they are behaving in an appropriate way in the current crisis – I think that policy was too weak in the past, which has made things more difficult now.
However, the view that it is “the government fault” is not completely without merit. Iprent at the Standard asked me to link to a discussion of how this COULD happen, and as a result I will write a post and link to it here 🙂
A while ago (after the Pre-EFU) Brian Fallow discussed the upcoming “twin deficits” New Zealand is likely to face.
Fundamentally, the private sector in New Zealand has been borrowing a lot from overseas while the public sector has been saving. His fear is that, once the public sector starts borrowing again our debt levels will rise and we’ll be in big trouble.
However, there is a nifty little thing called Ricardian Equivalence which we can call on to state why this may not be such a problem. In the case of Ricardian Equivalence, when households see the government borrowing, they know that the government will have to increase taxes in the future (as they assume that government spending will itself grow at some rate). As a result, private people save a bit more in order to cover there future tax liability. In this case, it is the national level of debt that is the concern – not the idea of “twin deficits”.
Quality from the Dim Post
Posted on: October 21, 2008
- In: Other
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Truly, this guys satire is brilliant. I love the new post so much I have to stick bits of it up here 😛
Investors, economists and prominent businessmen have all praised the new economic plan unveiled by National Party leader John Key this weekend.
Key’s proposed strategy to kickstart the New Zealand economy was announced yesterday in a speech to local party members at the Winter Palace restaurant in Parnell. Key has promised that if elected the government will provide unlimited liquidity to banks and other major businesses in exchange for 100% equity.
…
‘A National government will buy out the mortgage of every property in New Zealand, both business and residential,’ Key said. The news was met with cheers of support from the enthusiastic crowd of National supporters.
…
Business Round Table Director Roger Kerr welcomed National’s new scheme. ‘It’s about time we ditched the tried and failed socialist ideas of the Labour Party and moved on as a country,’ Kerr said.
The last sentence made me laugh – alot 😛
Tobin taxes?
Posted on: October 21, 2008
So the Green’s want a Tobin tax do they (ht Frog Blog and Stephen). Ok, so I’m hoping they aren’t justifying it on externality grounds – this leaves us with the conclusion that they must believe that it is the most efficient means available to make a certain level of government income.
They do seem to follow this point of view when they quote from a Guardian article:
Set at a lower level it would raise considerable sums of money. If a levy of just one basis point (one hundreth of 1%) was placed on all currency deals, governments would find themselves with an additional $70bn a year. At a time when they are chucking vast amounts of taxpayers’ money at the banks, that would be a nice little earner, and might help assuage the concerns that the public are going to pay for the folly of financiers.
I find it interesting that they see the money appearing out of thin air – if $70bn of tax is raised, it must come from some value somewhere. This is the same issue I have with people who like the financial transactions tax (furthermore, the assumption that capital/trade flows would not change when you tax them – even a little bit, is silly, as a result this over-estimates the associated revenue).
Inflation breaks the 5% barrier
Posted on: October 21, 2008
Ok, so our pick of 5%pa inflation by September following the Budget was wrong – its even worse at 5.1%. Largest increase since June 1990!
I blame the re-weighting for the difference 😉
Note it will not stay over 5% for long – underlying “true” inflation (stemming from inflation expectations and its impact on the quantity of money) is closer to 3.5%. Although I would like to point out that non-tradable inflation is horrendous at 4.1%pa – horrendous!
Winston’s plan for Kiwibank
Posted on: October 21, 2008
You may have missed it since it was announced last night and is already off the front page of stuff, but Winston Peters has announced some interesting plans for Kiwibank.
The main points are
- A partial float of Kiwibank where only New Zealanders are allowed to own shares
- Using Kiwibank for all of the government’s business.
The argument underlying these two points is profits leaving the country are bad. This argument is probably one of my pet hates as there is nothing stopping you buying shares in the company that owns the asset to bring the profits back into the country. In addition one has to worry about efficiency when you guarantee Kiwibank a gigantic customer. What incentive does Kiwibank have to be competitive with respect to the government contract if they ahve no chance of losing it?? Presumably if the government thought Kiwibank would give it the best price/quality contract they would already be doing their business through Kiwibank.
I’ll leave Matt to comment on the BERL report he mentions as Macro is mostly gibberish to me. However if Winston Peters agrees with it, that raises some serious red flags for me!
Agnitio
Kiwisaver and the current crisis
Posted on: October 21, 2008
How do we think the introduction of Kiwisaver has influenced the current economic environment?
Well, Kiwisaver will have worked through a number of channels but fundamentally, in the short term, it would have propped up savings (note, when I say savings I am talking about PRIVATE savings, not NATIONAL savings) and thereby reduced CONSUMPTION. Where does it increase savings:
- It effectively implies a higher tax rate – as money going into Kiwisaver is money that could have been redistributed through the tax system.
- By using tax money as a carrot it increases the incentive to save beyond that implied by the market – fundamentally, the government takes your own money and says it will only give it back if you save.
As we are struggling with a crisis of confidence, a short-term decline in consumption is probably not what we needed 😛
Is marriage really the answer?
Posted on: October 20, 2008
Family First has just released a report on the costs of the breakdown of the family unit. I might not have given it a second glance save that it is written by Dr Patrick Nolan, the more qualified sibling of our Dear Leader.
The thrust of the document, as you might expect, is that costs of having fewer intact marriages are very high. The report points to a bunch of private and social costs, such as increased risks of poverty, mental illness and infant mortality, and tries to put a dollar value on them. It ends up suggesting that the fiscal cost of the reduction in the number of marriages is about $1 billion per year.
I don’t have a sociology background or the knowledge to challenge any of the assertions made by the report, and I trust that Dr Nolan has calculated his costs in as objective a fashion as possible. However, it’s what the report doesn’t monetarise that is most concerning. Read the rest of this entry »
- In: Poll
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According to Tony Arthur at BNZ we should be. This is an essential issue for NZ as it determines where our Terms of Trade stays elevated – or whether it falls. In turn it determines our national income, given what we produce.
I agree with many of the factors he states (although he is a bit bullish on them) but I think he ignores factors around the long run elasticity of supply of food. So I thought I’d try a poll (my first one 🙂 ), and do a post based on discussing the dominant view later:
agnitio
cpworthington
dant03
goonix
metrosideros
rauparaha
Robbie Allan
stevedoogue
Matt Nolan
The visible hand in economics 
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