Matt Nolan

How one could blame government for inflation

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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 🙂

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Matt Nolan

“Twin deficits” and Ricardian equivalence

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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”.

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Matt Nolan

Quality from the Dim Post

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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 😛

Matt Nolan

Tobin taxes?

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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).

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Matt Nolan

Inflation breaks the 5% barrier

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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!

Matt Nolan

Kiwisaver and the current crisis

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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:

  1. It effectively implies a higher tax rate – as money going into Kiwisaver is money that could have been redistributed through the tax system.
  2. 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 😛

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