Matt Nolan

The Open Bank Resolution

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Today we have a panel discussion going on at NZAE 2013 on the Open Bank Resolution policy.

I am on the panel as the third speaker – the goal is that I’ll summarise the arguments of the previous two speakers:  Ian Woolford (RBNZ) will be speaking about why the OBR is a good move, while David Tripe (Massey University) will be listing his concerns.

The slides of my presentation can be found here.  I wasn’t sure what the other speakers would cover, so I have 14 slides for a 15 minute presentation – during the actual presentation I will skip sections that aren’t necessary.  As they say, better safe than sorry.

I do not have the knowledge of the other two speakers, and look forward to learning a bit from them.  The purpose of my presentation is to “get us towards questions” by outlining a general view of how to view the OBR policy, and by asking a few questions.  If you are not at NZAE, feel free to thrown some questions in the comments and I’ll tell you if I learnt the answer at the conference 🙂

My notes Notes for OBR presentation

Matt Nolan

RBNZ puts its macroprudential tools into perspective: The case of the prior housing cycle

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I see that Chris Hunt at the RBNZ has discussed how the current suite of macro-prudential tools may have been utilised during the prior housing cycle.  Interesting stuff, and giving it some historic context helps to give us all some perspective on how and why the tools may be used.

I’ve seen Gareth Vaughan and Brennan McDonald throw down interesting posts on the issue following the release.

All very good.  The only thing I have to add given my cursory glance at everything is this.  Don’t read too much into the results the RBNZ has thrown down – they are saying these policy may well have had some impact on the financial cycle, but many of the other complaints out there about the lack of competitiveness of exporters, a perisistently high dollar/interest rates, and our general propensity to borrow heavily to invest in the non-tradable sector are not magically “dealt with” in this situation.    Understanding these issues involves a different set of arguments.

These issues require analysis, and if required solutions, based on an understanding of those issues.  Not an overtly mechanistic and complicated form of fine tuning.  What the RBNZ has done here is appropriately talk about a specific issue – and that is great.  But let’s keep it in context 😉

Note:

This was interesting:

In hindsight monetary policy – the only policy lever available at the time to address cyclical economic pressure – was too slow in responding to resource and associated inflation pressure

Now this isn’t policy failure – at the time people were not truly forecasting activity and inflationary pressures to be as strong as they were.  If anything it illustrates the limits associated with forward looking policy – and shows that it is a touch unreasonable to expect ex-post “perfect” policy ex-ante 😉

I find the mentioning of multiple levers with regards to inflationary pressures, and the financial cycle being popped in later in the paragraph, to be a slightly contentious area.  But not to worry.

Matt Nolan

Inequality in NZ: A book to read

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I see via Groping to Bethlehem that there is a new book out on inequality in New Zealand.  I have purchased it, I have not read it yet, I will go it a go next week.

Has anyone read it yet?  If so, feel free to give me a run down in the comments.  I refuse to judge it either way until I’ve read it – so don’t expect to get much of an opinion out of me 🙂 … ok I’ll say one thing, I hope there is lots of tasty tasty data.

Also note, my blogging is going to be of this excessively low quality this week.  Busy with NZAE, and generally being lazy.

Matt Nolan

Series on tax: Part 5 – A primer on consumption tax

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Yet more on tax – this is part 5. Here are the blog posts on part 1, part 2, part 2b, part 3, and part 4.

The promised “Part 4b” is still in the pipeline – it’ll appear at some point.

This time we discussed consumption taxes, and the fact that we may not like the idea of taxing consumption differently based on when it occurs.

I avoided talking about commodity taxation and then talking about the result where we don’t want to tax intermediate inputs.  I also avoided going too far into the debate around the Atkinson-Stiglitz paper (Saez here has a great piece(REPEC)).  I feel that when just describing the idea of income, poll, and consumption taxes adding these additional issues would add more confusion and less understanding.  I could have added a bit more at the point where I was talking about Ramsey taxation – especially the point that if people with different ability have different preferences we can use variable consumption taxation as a form of redistribution.  The idea of a progressive consumption tax is interesting.  However, the goal in this article was to make consumption tax relatable to forms of income tax – hopefully that got through 😛

I’m saving a lot of these addition factors for when we introduce the talk on progressivity and the equity-efficiency trade-off for the next article.  Urg.  Let us see if I can manage it in one article!

I have avoided using the term “marginal tax rate”.  I don’t know how I’ve done this.  I suspect it will make an appearence in the next article 😉

 

Matt Nolan

The dangers of “financial stability”

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In an otherwise clear, insightful, and useful speech regarding the use of macroprudential tools – and why – the Reserve Bank states the following

While the Reserve Bank’s mandate is to promote financial stability, not social equity, there are clear implications here for housing affordability. As house prices and debt levels trend increasingly upwards, so too housing becomes less affordable, particularly for first home buyers. While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term. Such measures should also reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly indebted home owners.

And from the summary:

“While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term,” Mr Spencer said.

Sigh.  Is it necessary to go down this road, does it have anything to do with RBNZ policy?  Do people even know what they mean by “affordability”?  If our concern was due to a bubble, does mentioning affordability confuse or help with understanding Bank policy?  Does their comment make any sense (note, I don’t think it really does)?

Why bother defending the Bank from politicians who act like the RBNZ is responsible for everything (here, here) if the Bank is keen to make arbitrary ill-defined statments that seem to imply just that?

Is financial stability not actually about financial stability – but a catch phrase used to justify moral judgments regarding “rebalancing” and “deleveraging“.  This is one of the dangers of focusing on financial stability in such an ill defined way, and one of the reasons why Scott Sumner has pointed out why care must be taken (extra comment here).

This speech was otherwise a good set of clear statments that discussed RBNZ policy.  Why try to pretend it does other things?  It is statements like this one about affordability that makes people believe the central bank can dance upon the head of a pin and make happinesses and manufactured products rain down from the sky.

Matt Nolan

Government, tax, democracy: Careful now

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I note Gareth Morgan is discussing the idea of an independent tax authority.  On paper I don’t disagree, I’ve seen similar sentiments pop up in 2009 and 2011 😉

As mentioned in the 2011 piece though, the idea of what is “democratic” is important.  Recently we touched on this by discussing the appropriate scope for independent monetary policy.

I think the idea of an independent tax authority makes sense for the following:

  • setting a “tax level” given a structure for the tax system that is set by a democratically elected government.  The goal of adjusting the tax level is solely to ensure that the “medium term balance budget” condition is meet … or in other words that the stock of debt to GDP is held at a given target level in the medium-term set by a PTA.

This is fine, this is an operational issue, and implies that if political parties promise to “spend up large” the independent authority will note that this implies the tax burden will have to be higher.  It is transparent, consistent, and neat 🙂

Gareth Morgan is taking things a step too far in my opinion.  He is saying that the authority should set the structure of the tax system itself, rather than leaving it to politicians.  To me, this is an example of a technocrat taking matters too far – it is not up to some tax authority to determine the “optimal level of redistribution”, it is up to society as a whole to push towards this through democratic engagment.  Yes this process is slow and imprecise, but it is preferable to relying on the value judgments of technocrats.

This is not a small distinction.  The idea of having tax levels set to make sure that operational policy is consistent, and parties can’t “lie” is good.  The idea of having the structure of tax policy being set by unelected technocrats who “know best” is not – no matter how many economists belive otherwise 😉

I love economists to the point where I host “sexiest economist” competitions on my blog – but even given this, I don’t believe that a dictatorship of economists is preferable to the democratic ramblings of society as a whole.  And this distinction needs to be made.

Note:  I would even point out that the “technocrats” disagree with each other on issues of tax, adding layers of value judgments makes this even worse – in that sort of environment having technocrats set the structure is even more tenuous.