Matt Nolan

When not to stimulate

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Sorry for linking to the Standard twice in one day, however they have written about a couple of things I wish to touch on recently. In a recent post Irish Bill states that:

One of the things I like about being left wing is how often the best moral decision is also the best economic decision.

Take economic stimulus for example.

Now, on the first point I would state that the best policy decision and the “morally right” decision always match when you are a utilitarian like me. Getting the two to separate in anyway involves making some pretty specific assumptions and what a “economic decision” is and what a “moral decision” is.

Still this isn’t the point I was interested in discussing – I was interested in Irish Bill’s belief that a stimulus package is good policy in the New Zealand environment. In a credit driven slowdown like the one we are facing a stimulus is not the way to fix things as we are not suffering from a “demand deficiency” – or at least not the type that cannot be solved with monetary policy.

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Matt Nolan

Do we want “productivity growth”?

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CPW has requested that we cover the Standard’s coverage of the National-Act coalition agreement, specifically this section:

National/Act agree to close the ‘income gap’ between Australia and NZ by 2025, requiring ‘3% productivity growth per year’. Which is just economic techno-babble. What ‘income gap’ are they talking about? GDP per capita or wages or what? And how would a faster rate of productivity growth close this gap? Anyone who knows what productivity is (the amount of wealth produced in a unit of work) knows that merely increasing productivity doesn’t necessarily boost GDP or wages. GDP = productivity x work done. So, GDP not only depends on productivity it also depends on how many people are in work. And boosting productivity doesn’t lead automatically to higher wages – wages are determined by supply and demand in the labour market, nothing to do with productivity. In fact, productivity grows faster when employment drops because it’s the low quality workers that lose their jobs first and lower quality capital that sits idle first, but wages don’t go up because there is more slack in the labour market.

After reading it we felt that a non-biased explanation of the “economic techno-babble” was in order.

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Matt Nolan

Frogs concern about the Baltic Dry Index

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Over at Frog Blog, Frog discusses the current economic crisis and the magnificent fall in the Baltic Dry index. The sentence that summarised this feeling for me was:

Another part of me says that any indicator that drops 93% in less than six months is reflecting a serious ailment in the global economy

Now Frog is right to be concerned – he is right that this movement indicates a slowdown in global trade, and that any slowdown in global trade will impact on New Zealand by knocking down commodity prices. However, I would like to put the movement in perspective – as a figure such as a “93% drop” may give people the impression that we are in a more dire situation than we actually are.

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Matt Nolan

RBNZ Financial Stability Report

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This semi-annual report by the RBNZ will take on disproportionate importance given recent events.

It came out yesturday, so what happened?  Is our financial system doing alright?  What do they think are the primary risks?  What do they say about the deposit insurance scheme!?

Matt Nolan

September quarter retail volumes: The curse of the deflator?

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So the September quarter retail figures are out.

I love the quarterly figures because they give us volume and price data as well as the monthly value data.

So how much did retail sales fall by – only a little bit hopefully. Now pull out all those automotive subtypes – how much did core volumes fall by – this is the key figure for me. If they fell by more than, say, 0.6% in the quarter (seasonally adjusted) then I would be concerned.

How about the “deflator” (retail price increases). People in the retail industry say that they are slashing prices to get people in the door – the consumer price index indicated that they weren’t actually doing this. So which is it?

Now we can use the value number for something useful – compare it to growth in hours worked X average hours in the QES (on the third). If the QES number grew by more then it indicates that we may be seeing a sizable increase in savings – some may view this as “demand deficiency” and other may view this as “a required adjustment”. Ultimately, where I sit depends on how big the adjustment is 🙂

So, discuss 😀

Matt Nolan

The paradox of thrift and demand deficiency

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The paradox of thrift is one of the key lessons taught to macroeconomics students during their first undergraduate year.

Fundamentally it states that if everyone in society decides to save more right now, then it reduces consumption, with reduces economic activity and thereby incomes – and as a result it may actually decrease aggregate savings, and it will definitely reduce economic activity.

It is still widely applied, with recent Nobel prize winner Paul Krugman appealing to it in order to explain why the US needs to jump on in and get consumers spending again.

Of course this does not mean the theory is necessarily right. The paradox of thrift does not have a supply side – as long as prices and quantities can adjust to an economic shock this paradox, and the suggestion of government intervention in the face of it, does not hold water. For government intervention to be a possible solution we need a MARKET FAILURE, a market failure that causes a special macro-economic situation called “demand deficiency”. (Note: This is effectively the difference between Say and Keynes).

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