Matt Nolan

The Depression and Now: Why we should be concerned?

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As a footnote to todays post on the Depression I feel it is important to add this from Dr Doom, Nouriel Roubini (ht Greg Mankiw).  He puts down four reasons why deflation is now the concern:

  1. (1) a slack in goods markets,
  2. (2) a re-coupling of the rest of the world with the U.S. recession,
  3. (3) a slack in labor markets, and
  4. (4) a sharp fall in commodity prices following such U.S. and global contraction, which would reduce inflationary forces and lead to deflationary forces in the global economy

I think that the only key one is the third one – the goods market is too flexible, the second is merely a means for the other reasons, and the change in commodity prices is a relative price movement again.

Ultimately, if the price in the labour market it too inflexible (wages) we will see a knock down in employment sure – but deflation?  Deflation stems from a reduction in the quantity of money – central banks are going to keep printing all they can to keep price levels up, a factor that will reduce real wages and then in turn reduce the scope for increases in unemployment.

I don’t see deflation occurring when fiscal and monetary policy is determined to stop it.

Will Taylor

LEANZ Seminar in Wellington: The New Zealand – China Free Trade Agreement

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The Law and Economics Association of New Zealand (LEANZ) is hosting an interesting seminar in Wellingotn next Monday on the free trade deal with China. It is being presented by some people in MFAT who were involved the behind the scenes economic and legal analysis of the deal. I (Agnitio) went to this seminar in Auckland and enjoyed it.

Seminar and RSPV details below

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Matt Nolan

Random statement of the day

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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.
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Matt Nolan

Brain drain: Why looking at only emigration doesn’t make sense

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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.

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

More evidence of asymmetric information?

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Over at Market Movers, Felix Salmon discusses “Lehman’s Lies“.

In the wake of the collapse, it was clear that if Lehman couldn’t be trusted, then it would be silly to trust any other troubled financial institution, either — AIG, WaMu, Wachovia, Fortis, Hypo Real Estate, you name it.

This breakdown in “trust” destroyed the delicate equilibrium we were in, and has sent us spinning towards a worse set of outcomes.

Fundamentally, this has happened because “trust” (the fact that we would be playing a “infinitely” repeated game, which then rewards people for collusive behaviour) had allowed us to bypass the asymmetric information problem inherent in the market. With that trust gone, no-one will lend or purchases assets, as they think that only the worst deals are available on the market.

In this light, the behaviour of Lehman appears to be a major factor behind the crisis we now find ourselves in – damned investment banks 😛