Matt Nolan

NZIER comes out in favour of wage subsidies

/1 Comment/in /by

Well sort of. They didn’t call them that, but reducing “payroll taxes” is equivalent to subsidising wages.

We have discussed this concept before, and decided that in a specific situation it could make some sense as a temporary measure.

Note that this relies on stick wages: Otherwise the result of a payroll tax cut and a personal tax cut would be the same. As a result, they must have slid sticky wages in there, while keeping goods prices flexible. Would definitely be interested in more details.

I would also note that the report assumes that the tax cut is a straight transfer. However, by lowering marginal tax rates (especially on high productivity stuff) it should help boost the supply side of the economy.  Furthermore, they assume that taxes will increase in the future – not that real spending will fall.

They are right that there is no free lunch from a stimulus program.  But the size of the trade-off depends strongly on the assumptions.  The assumption that the tax cut is a flat transfer and is only temporary isn’t exactly going to give a very favourable view of this trade-off 😉

Matt Nolan

Consistency in tax talk

/34 Comments/in /by

When reading a post on public address I came across this gem from NZI.

the next two tranches of the proposed income tax cuts should be cancelled on the grounds that they would contribute to the structural deficit, are unlikely to do much for growth, and do not support the most vulnerable households

Ok, so they are saying that the tax cuts will both significantly increase the deficit, not lead to growth, and won’t help poor households.  Now:

Very few of the benefits of these proposed tax cuts flow to the most vulnerable families during the recession: most of the benefits accrue to upper-income households

Right, so that covers off the third point.  And:

Nor are these tax cuts especially well-designed for growth creation, with the top marginal income tax rates left virtually unchanged

And that covers off the second point.

Now, when I look at this, it doesn’t make sense to me and I can’t see all three things to hold with the tax package.

The future take cuts are only for high income earners so don’t have a direct benefit for the poor (debatable given that out credit markets are still functioning and labour types are complements, but I’ll give them that for fun).

The future tax cuts DO involve cutting the top marginal tax rate, so if they do believe marginal tax rates are important for growth this is a bit funky.  This sounds like they are presuming that the cut is TOO SMALL.

They then say that the cost is substantial – but if the cost is too much the cut in the top MTR must be TOO BIG.

When the tax package involves cutting tax rates, it is pretty much impossible to say it fails in all three ways.  It is like the impossible trinity.

Either the package is too expensive for the return or the structure is wrong (either on equality or efficiency grounds).  A tax cut CAN’T fail (in the same direction) on all three grounds.

Matt Nolan

Inverted commas don’t look good on economists …

/14 Comments/in /by

I don’t like to do this, but I’m getting a bit sick of bank commentary following the HLFS release.  This is specifically from ANZ’s weekly report this morning:

While employment tumbled 1.1 percent in Q1, the unemployment rate “only” rose to 5.0
percent as a number of workers leaving the labour force limited its rise

Three things:

  1. The participation rate fell after SPIKING LAST QUARTER.  It is still up on a year earlier.  The employment and PR series are notoriously volatile while unemployment is a fairly stable and reliable indicator – hence it is bull to say that this data is telling us that unemployment only didn’t rise further because people are leaving the labour market.  If it was fine for you guys to dismiss the lift in the PR in December (when anyone could have said unemployment only went up because participation rose) you should dismiss the fall now – you can’t cut it both ways.
  2. Stop using inverted comma’s when the data doesn’t suit your story.  The fact is that this unemployment rate was a hell of a lot better than any of us economists were expecting.  We should accept that, and try to understand it – instead of belting it with a stick until it fits our specific stories.
  3. Also, 5% is an only – there is no need for inverted commas.  5% is about New Zealand’s neutral rate – the level of unemployment we expect over the medium term.  After 15 months of recession I would expect unemployment to be higher than that – as a result this is a significant positive for the country.
Matt Nolan

What is the exchange rate telling us

/7 Comments/in , /by

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 😉

Matt Nolan

Mar 09 Unemployment: 5%

/2 Comments/in /by

This figure is far stronger than the market expected (5.3%) – and well stronger than I was thinking (I was personally seeing scope for 5.5% given how quickly the UR rose in 1990/91).

I know unemployment is a lagging variable – but just reaching the “neutral rate” after 15 months of recession is a strong sign for the NZ economy. I don’t know how we can even get to 7% unemployment in a situation like this (unless the recession is still going strong in 2011 😉 )

This is a very strong result – make no mistake.

Also careful trying to say that employment or the participation rate were rubbish – they are still both up on a year ago 😉

Matt Nolan

How dare they compete!

/15 Comments/in , , /by

Another article on alcohol retailing provides this “beautiful” quote (FYI this follows on from a previous post):

The end of loss-leading was welcomed by Glengarry product manager Liz Wheaden, who said the practice had the potential to lower customer expectations at the same time as it “destroys” brands.

Loss-leading made customers come to expect to be able to buy a product cheap, Ms Wheaden said.

While her company had never used loss-leading, the practice had forced Glengarry to offer more variety and improved customer service to compete.

How dare supermarkets push other retailers to cut prices, increase choice, and improve service. Have they no shame!!