Matt Nolan

Descriptively, Hickey and Labour are both right on LVR’s

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I’m not commenting of course, but both LVR restrictions will limit lending to SME’s and on house building.  As is stated by:

This was known before the LVR restrictions were put in place, hence why it is seen as an indirect tool.  Mortgages are used as a cheaper finance option for small firms, this is one of the most widely known “secrets” around (sorry that article is only available to Infometrics clients it seems) – the regulations were put in place knowing that it would credit constrain these groups.  Whether this is appropriate or not … well that would be commenting.  If you want to in comments go for it 😉

Note:  The link isn’t available, sorry – I thought our articles from March 2013 were freely available now, but seems not!  The article is on LVR’s and risk-weighting adjustment (before it was clear which tool the Bank was going to use), but in the LVR section the quote I wanted is:

Furthermore, it is important to ask who will be getting credit constrained by the introduction of LVRs.  Who are the sorts of people that load up on mortgage debt?

It is our view that the credit constraints will be most binding for the following groups.

  • Young borrowers who haven’t built up sufficient equity
  • Small business holders who rely on mortgages to fund investment in their business
  • The construction industry, by making it more difficult for people to use their property as equity when looking at infill or the construction of a new house

As a result, the introduction of a maximum loan-to-value ratio will lead to collateral damage for small firms and some private investment in the residential building industry.

Matt Nolan

That’s it, I’m done: RBNZ takes the path of discretion

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A paper from the latest RBNZ bulletin.

It has always been clear that the aim should be to increase the resilience of the system to adverse shocks, but is it possible to be more ambitious? The traditional prudential approach has had a strong focus on shock-absorbing capacity; for example, increasing capital requirements so that banks are better able to absorb loan losses. This approach largely takes movements in credit and asset price cycles as a given, and aims to provide an adequate safety net should systemic risks be realised. A more ambitious approach is to try to reduce the amplitude of the financial cycle – in a sense lopping off the extremes of the cycle. Swing low but not too low; swing high but not too high. The potential benefits of this approach are obvious but it is also much more demanding, as it requires the authorities to answer some difficult questions.

Hmmm.  This seems to be saying that simply ensuring the resilience of the financial system is not enough, the central bank should be trying to exert direct, and discretionary, control over what financial markets do and where investment heads.  Fine tuning at its finest.  It does appear that policymakers here have been strongly influenced by Borio.

That’s me, I’m done with writing about macroprudential policy in New Zealand.  If you want to know why, read below the flap 😉

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Will Taylor

Economics themed beer: Hopportunity cost IPA

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Here at TVHE our two favorite things are beer and economics. Some of our most insightful discussions of economics often occur over a beer or two…I might even go as far as saying the beer consumption of TVHE authors should be subsidised given the large, un-priced public benefits that occur when we drink. But that’s a whole post in and of itself…

The reason for this post is that an NZ Brewery is releasing an economics themed beer! If you read this blog and don’t find that exciting I am confused….The beer is called Hopportunity Cost IPA (as brewer/economist myself, I’m gutted I didn’t think of the name first!!) and the brewery is Behemoth Brewing Company. Behemoth is the brand of lawyer-turned-brewer Andrew Childs, who is “famous” for a winning “Wellington in a Pint” with coffee flavoured beer named after the mayor of Wellington, the Celia Wade-Brown Ale (dom post write up here). I’ve had a sneak peak of the beer and it is delicious!

The launch parties in Auckland/Wellington/ChCh are coming up soon, so you should get along and support economics themed beers! Plus it will widen the pool of people who get the economics puns on the posters that will be at the venues:)

  • Auckland = This Friday @ O’Carrols on Vulcan Lane (FB event page)
  • Wellington = Wedsneday 2 October @ Malthouse (FB event page)
  • Christchurch = Thursday 10 October @ The Twisted Hop (FB event page)

And last but not least, the amazing economics themed tap badge/logo:

Hopportunity cost IPA

 

Matt Nolan

The importance of asking why on productivity

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A neat article (on Prod Blog here), and corresponding paper, by the Productivity Commission on New Zealand’s productivity performance over the past couple of decades.  This is a descriptive paper, which runs along side the recent productivity symposium, and the upcoming set of papers which will turn up in the Productivity Commissions ‘Productivity Hub‘.

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Infometrics

Tourism’s changing face

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While it is widely known that the destination and composition of merchandise exports have been changing over recent years, less attention has been given to the drastic changes in the tourism industry (a major form of service export).  Benje Patterson discusses that here (with a link to the Infometrics article here).

With these trends in mind, it is not surprising that many tourist operators in regional New Zealand are doing it tough.  The five years since the beginning of the Global Financial Crisis (GFC) have been extremely trying for tourist operators in regional New Zealand who cater towards longer-staying self-guided tourists from Europe and North America.  However, once European and North American economies return to more normal health, there is no reason that arrivals from these parts of the world won’t recover to their pre-GFC level.  This recovery will take some time, but at least those operators who have weathered the storm are leaner and more efficient than they were before the downturn and will be well poised to capture any pick-up.

On the other hand, tourism businesses fortunate enough to be exposed to the lift in arrivals from Australia and China have been enjoying permanent structural improvement.  Cut-price air travel across the Tasman, as well as a growing number of New Zealand citizens residing in Australia coming home to visit family, are helping to boost arrivals from Australia.  At the same time, inbound tourism from China has soared, as the rapid expansion of the Chinese middle class has increased demand for overseas travel to places like New Zealand.

 

Matt Nolan

Confusing social responsibility

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I see Brian Rudman suggesting that we make a government remuneration board for workers on low wages.  Some concerns:

  1. This isn’t “society giving people a fair go” – this is one set of people being told to increase the amount they pay for a factor of production, it is put down as their responsibility and it is a cost they respond to.  Does this sound heartless to you?  If so I apologise but I find it heartless that people confuse income adequacy and the value of an individual by what they do for “production” – it is the way we convolute the two that upsets me 😉
  2. You increase this cost, you reduce firms incentive to give people a go and/or they increase prices to consumers.  Before someone says hikes in the minimum wage don’t reduce employment let us note a few things:  It has been shown that the low relative minimum wages in the US, when increased, don’t lead to immediate layoffs.  However, the higher the minimum wage, the more likely layoffs are.  Recent evidence shows that even at this lower level, net job creation does fall over time.  Furthermore, in the long run this leads firms to subsidise away from labour – this is part of the argument for “productivity improvements” and “capital intensity” that people use to justify the “efficiency” impact of the minimum wage … we get the efficiency impact if firms actually cut hiring.  Note:  So may say, excellent, we want substitution!  But do not forget to think in a GE, and open economy, sense – how do we fund this investment in capital, what do the relative margins tell us about the loss in consumption now relative to a potential gain in consumption in the future.  This arguments rely on sets of interactions and spillovers between firms that I find a stretch …
  3. A renumeration board you say.  There are two ways I could see this going:  It is a small board that just sets the minimum wage for everyone, and so is a simple waste of money.  It is an incredibly expensive large board … in which case it sets differential wages and finds ways to extract rents.

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