Matt Nolan

An embarrassing moment

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This morning while I was reading I remembered a conversation I had with Agnitio in 2004 which, in hindsight, is very embarrassing for me.  It went along the lines of:

Me:  Look at the interest rate on Hanover, its got to be worth putting some money there

Agnitio:  It isn’t that much more than a bank deposit, I’m not sure its worth the risk

Me:  Surely the slightly higher interest rate is a function of only a slight increase in risk

Agnitio:  Not if people don’t understand/are underpricing the risks.

Now, Agnitio was completely right, risks were being underpriced because of asymmetric information.  To make matters worse, people that read the interest rate like I do took it as a signal that the risk was relatively low (although I never did put any money with finance companies, I guess Agnitio must have convinced me 🙂 ) – leading to an “information cascade“.

The current situation has reinforced and extended my belief in the importance of information in the functioning of the market.  I still believe that information asymmetries are the primary factor behind the current crisis.

Matt Nolan

Japan’s hole, the US hole, our hole?

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I just took a peak at an interesting Business Week article from March 2006 called “How Japan fell into the Hole“.

The key message for me was this:

This shift to debt minimization, however, completely disrupts the normal workings of the economy. That’s because the corporate sector no longer borrows the funds saved by the household sector, even at ultra-low interest rates. With no one borrowing, those personal savings — plus the debt companies are repaying — pile up unused in the banks, effectively shrinking aggregate demand by the same amount. Left unattended, this deflationary gap will continue to shrink the economy until almost everyone becomes too poor to save any money.

In order for the disruption to become severe, we need reserves to be built up – money will need to be hid under pillows.  In this case, if the government can get hold these resources and put them to use (or say, if people are only willing to lend to government because of a substantially negative economic outlook) we avoid the paradox of thrift.

Fundamentally, for our demand deficiency to really get kicking, we need one of our prices (interest rates) to get “stuck” at a level which is “too high” leading to excess savings.  We are seeing a similar situation in the US, the question is – will we run into the same thing here in little old NZ?

Matt Nolan

September GDP preview

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So on Christmas eve we get a special present – confirmation that we have so far had a three quarter recession 🙁

The main market in town, iPredict, is spot on with the 95% pick for a negative GDP quarter.

Let us discuss 🙂 :
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Matt Nolan

The temporary redundancy package

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So National got in, and as a result it is their redundancy package that has passed into law (as opposed to the Labour one).

I am still not happy that we are running a redundancy package now and not in normal economic times. Why are people that are made redundant now any more deserving of an additional government handout than people who are made redundant in normal economic times?

Sure we can state that it is “harder” for people to get work during a recession, so it is more likely that the redundant person is genuinely unemployed rather than “lazy” – but I just don’t buy that.

I do not think this policy is solving any market failure, and as a piece of fairness legislation I am not sure if it is all that fair.  Luckily, its not particularly expensive anyway, so there is little chance of a massive government failure, unless … we don’t have mass unemployment, only a structural change in where labour is most highly valued.  In this case, the redundancy payment will prevent the transition between industries, and lead to a longer, more painful, adjustment process for the New Zealand economy.

So do we think that the construction industry needs to be smaller while there are other industries (say exporters) who are now desperate for labour?  Or will the global recession cause genuine involuntary unemployment?

dant03

The proper way to levy taxation

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The full set of briefings to incoming ministers (BIMs) following the recent election are now helpfully available on a single page, and between them cover a host of quite interesting, practical, and in some cases timely economic questions. One quite meaty suggestion that I noticed in Treasury’s BIM related to taxation, but it was given very little space (perhaps they knew that it would be ignored?).

The full passage is quoted below, but the bit of interest is in the final bullet:

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Patrick Nolan

Taxing times

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Below is a link to an updated calculator that allows people to compare how their tax situation would change should they shift to Australia.

Taxing times.

The model also allows people to work out how the tax situation and family income assistance for people in their circumstances have changed this century.

The provision of tax relief in this year’s New Zealand budget has closed part of the tax gap with Australia. Yet while this relief kept pace with recent changes in Australia, the growth in the tax gap over the earlier part of this century largely remains unaddressed.

While incomes remain higher in Australia than in New Zealand, Australia will remain an attractive country for Kiwi workers to relocate to. Given the commitment in Australia to reviewing the tax system (including family income assistance) to attract and retain workers in competitive global labour markets, the competition for workers with Australia is only going to become more important for New Zealand.