jamesz

Auckland council merger

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Paul Walker and Eric Crampton are both concerned about the proposal to merge Auckland’s city councils to create a ‘supercity’. They fear that the loss of competition for residents among councils will decrease the quality of service and increase the rates. My initial thoughts were:

  1. How much of a problem is this? In any given city over 90% of residents report having the nation’s best quality of life. Given that, is there really much that a council can do to entice people away from where they are?
  2. What’s the marginal impact of rates on people’s decision about where to live? I imagine that it is one of the least important factors in deciding what area of a city to live in.
  3. Can the difference in rates be large enough to overcome the transaction cost of moving house?

Upon reading some of the links they provided I’m more persuaded that there could be an issue. Read more

Matt Nolan

Easter and retail sales

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Paymark has reported some interesting results for electronic card sales over March.

In their news story they say the food and liquor are doing well relative to March last year, travel looks soft, and if we adjust for the funky timing of Easter (last year it was in March, this year it is back to its normal April) sales are down a bit.

Now, I remember last March – and I remember Stats NZ said that it wasn’t going to adjust for Easter because, when it comes to retail sales, it isn’t clear what the impact is.

Using my poor memory and a touch of logic, I recall the timing of Easter boosting the sales of specialty foods and tourist related activities – as people were coming around to hang out with family and celebrate Easter in a different month then usual.  In net terms this lead to a movement of these types of sales from April to March.  The place where retail sales did struggle was motor vehicles and the such – however, these aren’t the sort of purchases that turn up in the electronic card numbers.

As a result, today’s figures maybe don’t show such a weak story – maybe tourist spending isn’t quite as bad as they are saying, and maybe food spending is very robust.  I wouldn’t be surprised if liquor spending is strong – as it can be relatively counter-cyclical.  However, it isn’t clear that they should be revising the figures down on the basis of Easter …

Matt Nolan

Housing market: The Barefoot result

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So Barefoot and Thompson have seen a sharp increase in houes sales in March (although the increase on last March is exagerrated – given that Easter was in March last year).

I managed to get quoted in the article on it – and I sounded a little more positive than I expected.  So lets discuss if people agree with these statements:

Sales were ridiculously low, it was unsustainable in itself.

Auckland was struggling a good year or so before the rest of the country.  I’m confident Auckland’s going to be the first place moving. There’s just not enough properties in Auckland in the first place.

Got at it – once someone else has started I might get in on criticising the statements myself 😉 .  There are some other things I said that weren’t in there that might put these in context – but adding that would destroy the fun 🙂

Matt Nolan

Note on commodity prices/exchange rate

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The ANZ  New Zealand commodity price index, in world prices, rose 1% over March – or so I’ve been told.  In New Zealand dollars the index fell – as the exchange rate rose.  This lead to the following quote:

At a time when the domestic economy is still very weak, a higher NZ dollar is likely to delay any support the export sector is able to provide

I think it is essential to keep in mind what a higher exchange rate means here.  If the exchange rate rose on the back of rising commodities prices (which was part of the story – although definitely not all, hence the fall in $NZ prices) then it is perfectly natural.  The increase in returns associated with the higher commodity prices is merely being spread across the economy – rather than directly into exporters pockets.

Now, I feel that the concern comes from the fact that we currently want to avoid declines in production – because the labour market is fragile.  A lower exchange rate makes imports more expensive and exports more competitive – leading to more production than before.

However, if this is the case then we should be clear that the issue is that we are worried about production and employment declining into some sort of “vicious cycle” – rather than just saying lower exchange rates are good.

So remember, a higher exchange rate on the back of higher commodity prices “shares the good fortune” of increasing prices across the economy – this isn’t necessarily a bad thing.

Matt Nolan

Award for worst piece of economic analysis this year

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I am virtually certain it would go to this piece by Phillip O’Connor from the University of Auckland. I mean, I thought this is the sort of award that would always go to NZPA, as they have to quickly release something that sometimes misses the point. However, a Senior Lecturer from Auckland has managed to illustrate to me how bad analysis can be.

Now in case other people can’t see some of the issues with his “analysis” I will discuss some things under the flap. And to be honest, I’m writing this in sheer shock – I have never met an economics lecture this off track. Maybe it is because I went to Victoria University – where the lecturing is top rate 😉

Read more

Matt Nolan

Bleg: A negative OCR – how?

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I like the idea of being able to keep cutting the OCR – even once it hits zero.  It doesn’t mean that market rates will be negative, that doesn’t make any sense – but it does mean that monetary policy can push banks to lower reserves and increase the amount of money in circulation.  This is useful if we think we are facing deflation and the OCR has already hit zero.

However, how would we make it work?  If we only said reserves were reserves when they are held by a central bank, there would be no (or little) incentive for retail banks to hold reserves in this fashion when there is a penatly interest rate.  But they could just “hide money under the pillow”.

As a result, any definition of reserves in this case needs to include money hidden under banks collective pillows.

Furthermore, we need to be careful about what we do class as reserves on the other side.  If we class bonds as reserves we are only letting banks either lend or take a penalty – if lending prospects are bad then the RBNZ would just be taking money off the bank, not so much of a good move in the face of the current credit crisis.  If banks buy bonds it is still “stimulatory” – so that is something we want to leave there.

So how do we capture non-active reserves?  Does the RBNZ have enough information to do this?  Does it have the right to do this?  I would love some advice.