Scott Fullwiler from New Economic Perspectives (ht Economists View) describes some issues he has with the “negative interest rate” idea being put forward by Willem Buiter , Greg Mankiw , and Scott Sumner
Now I have previously put my foot forward and said I agree with this idea (here and here) and I still feel the same, let me describe why with reference to Dr Fullwiler’s post.
It appears that economists at Infometrics believe New Zealand is not hurting enough from the global recession – that we aren’t noticing the true underlying risk of our debt position.
Well at least that is what the title says. Reading the article indicates to me that the commentary is not on the current crisis at all – but about how we grow when we come out of it. Infometrics seems to be of the opinion that once the crisis is over, fundamental imbalances in the domestic and global economies will drive us back to high current account deficits and a worse net debt position.
Once this happens, a global economy that has recently been stung by risk loving behaviour will punish us – forcing us to take on an adjustment that we didn’t complete during the current crisis.
Now I buy that reasoning. But my only question (which isn’t covered in the newspaper article) is, what are the structural factors in the New Zealand/global economy causing this imbalance. Is it our artificially high exchange rate (against fixed Asian currencies), is it artificially low interest rates, is it no capital gains tax, is it poor financial education, is it an inherent bias towards housing as an investment vehicle, is it poor investment decisions by firms, is it uncertainty surrounding policy?
Without an answer to this question, how are we supposed to know what New Zealand is supposed “to learn” 😛 .
Recently Peter Cresswell from Not PC asked me if I understood the difference between production and consumption. I know that consumption is what we value and I know that production is what we do in order to achieve consumption. As a result, I see production as a means to an end – the costly process we take on in order to get what we want.
This brought to my mind some of the issues we need to discuss when looking at Gross Domestic Product. GDP is a measure of the production in society over a given period of time. Real GDP gives us a “volume” measure of production, which tells us the quantity of stuff we make in the arbitary prices of some point in time.
Since we value consumption not production we need to remember:
We all overuse GDP. It is a useful stat, but it is important to keep in mind what it is actually saying, and what society actually wants, before leaping to policy conclusions.
In the housing example this still leads me to believe that house building has a purpose. Are there enormous issues in the housing market – yes. Have many households overexposed themselves to housing as a retirement nestegg – yes. Has NZ inc “over-invested” in housing by borrowing from overseas – at the moment the data suggests not.
I completely agree with many criticisms out there about the NZ housing market, but saying that the countries terrible debt position is the result of a “housing obsession” seems off the mark – as we don’t appear to have overbuilt.
In reality the data seems to indicate that NZ inc has borrowed to fund a whole bunch of business investment that has turned sour – plant and machinery investment has been through the roof and we haven’t done much with it. Unfortunate, but C’est la vie.
There is an interesting article on the Rates Blog that I have been meaning to mention by Rodney Dickens.
Although I don’t agree with him that the RBNZ is being silly – I do think he makes a good point when looking at the exchange rate.
the forex market [may have] pushed the exchange rate up because it has correctly assessed that NZ growth prospects have improved
When I read this on the 5th I agreed with it – and if anything this point of view is becoming more obviously right as a bunch of good data has come out.
However, I would take a step back and try to understand what is going on here. I don’t think that the growth outlook is the sole factor – we also have “risk taking behaviour” (as our currency is a form of investment) and commodity prices (as our currency helps to share any gains from a terms of trade lift.
Now ANZ reports that commodity prices rose in both March and April – so this is some of the reason. However, in $NZ terms they fell – implying to me that there has been more to it. With the DOW rising from 6,500 to 8,500 (among other indicators) we can tell that there is some risk loving behaviour coming back – making a high yielding currency like the $NZ attractive. If we strip these out we might find that the market expects marginally higher growth – but I’m not convinced that this view is particularly different to the RBNZ’s March forecasts 😉
In a recent column by Paul Krugman, he bemoans the fact that wages appear to be falling (ht Economist’s View). His primary justification for this comes from the following section:
Over at the Big Picture blog there has been talk about how bad GDP would have been if we take away the positive contribution of imports.
Fundamentally, imports fell and this “increased GDP”. As a result, some people there have been looking at GDP excluding imports.
Now, this doesn’t actually make sense as a measure to look at. Why? Well when we measure GDP we are interested in “domestic production”. When we measure consumption, investment, and government spending we get some domestically made stuff and some foreign made stuff. We take out imports to remove the foreign made stuff that appears in consumption, investment, and government spending – leaving us with only domestic production.
If we don’t include imports we are effectively “double counting” (in this case double subtracting) and so a figure without imports doesn’t tell us much about domestic production – it effectively gives us some measure of world production associated with activity in the US.
Now, if we are interested in a hypothetical where imports had been unchanged and consumption and the such remained the same then inventories would have risen – as the goods and services don’t just disappear after they turn up at the port. As a result we would have got the same GDP figure that we received the other day (a 6.1% annualised contraction).