Matt Nolan

Why I’m in a bad mood

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Agnitio asked me what has been going on recently, as I was complaining its a mess.  I emailed him my summary, so I thought I’d also put them down here:

The ECB announced that its going to accept some things as collateral – but dump others.  Leaving markets confused about what the hell was going on, and what it means for sovereign debt purchases.

The US followed this up by saying that they would buy a smaller amount of long-term debt than forecast, sell short-term debt, and flatten the yield curve.  They say it will be stimulatory because NK models say so – however, a flat yield curve is a bit dodgy, given that it’s formed by expectations of either weak growth or weak inflation in the future.  In essence NK models say “get the long-run real interest rate down as much as possible” which you do by increasing inflation expectations, not nominal rates – so markets collapsed after that.

US government decided to get involved by refusing to extend the debt limit AGAIN, if they can’t make up by Sep 30 the US will default.

Then the European commission decided that it was a good time to say they were going to introduce a financial transactions tax – just when financial markets are panicking – and for good measure they said they hadn’t figured out what level it would be at, or what would be taxed yet, just to add to uncertainty.

While all this is happening Italy and Greece have continued to say they’ll get their fiscal situation in order – but they keep delaying introducing actual policies.  Given Greece is effectively insolvent, the dithering by them, other European governments, and the ECB, makes it unclear who holds the liability the entire European financial system is at a stand still.  Given the exposure of Australian banks to this, we have seen funding costs rise considerably (luckily no-one in NZ is actually borrowing anything).

With Europe having fluffed around while the crisis has been in full swing over the past 2 months, purchases from China have pulled back, seeing activity there slow as well.  A slowdown in China will have the impact of lowering our export prices.

Party.

This mix of awesome factors has seen the cost of insuring against default in Australian banks increase to within a whisker of their Lehman Brother peaks.  It has seen uncertainty measures push at new highs.

Unlike the Lehman Brother’s collapse there is no reason for these indicators to be high solely based on the financial fundamentals – the debt burden, and who holds what, is known.  However, while policy makers were trying to improve outcomes during the crisis in 2008, they seem more interested in trying to cause a crisis this time around.

Matt Nolan

Stumbling to another crisis?

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Operation Twist hasn’t gone down particularly well has it.  It could be that the policy was smaller than expected, it could be that growing political angst has made the idea of further Fed stimulus seem more unlikely, but either way a drop in asset prices and falling inflation expectations isn’t what we want to see following a Fed announcement – especially in the middle of a financial crisis.

I think that the general idea would work, akin to this.  However, for some reason the actual announcement has disappointed markets.

In terms of NZ, our dollar has dropped reasonably sharply following the announcement.  I’m hoping this is because the dollar is seen as an “asset price” and people are just moving out of it because they are less willing to take on risk – given lower than expected accommodation of monetary policy by the Fed. {Update:  In terms of the dollar it seems that comments by Dr Bollard last night also had an impact}

Worst case, the drop in the dollar is a signal of lower export prices.

New Zealand policy makers have done a damned good job the last few years, but its hard for them to do much in the face of incompetence around the world – given that we are a small open economy.

Matt Nolan

Why we need an impartial organisation to cost all the parties policy platforms

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FFS, just when it sounded like the Greens were going to come up with sensible policy prescriptions we get this absolute piece of rubbish.

If this is how we base policy why don’t people just make plans as follows:

  1. I will talk with people in important tones during very serious meetings,
  2. I will offer to give them money arbitrarily
  3. …
  4. Therefore:  I will create jobs, income, sustainability, and cute kittens.

Seriously, in what world does a massive building initiative make sense when we are going to be struggling to rebuild Christchurch during the next decade given capacity.

In what world does giving money to green entrepreneurs (I would call many of these people marketers) provide “65,000 additional jobs”. [Pro-tip:  1% of the global market is HUGE – remember that we are less than 0.1% of the global population – so saying “just”, especially given foreign subsidies and scale, is ridiculous].

In what world do these policies not crowd out other industries – guess what, skilled workers are already in work, you will be just driving up their wages with your arbitrary industrial policy.

Tbh, this rings of policy made by people who just want to win an election, and have very serious meetings with policy analysts and people who make glossy leaflets.  It shows no reality, and no willingness to think about trade-offs.

When the policy is out fully, I’ll do a write up on it without the angst – but right now I’m pissed.  To think I was considering voting for them – god I wish we had a real choice this election …

Update:  Kiwiblog and No Right Turn discuss.

Matt Nolan

Youth minimum wage and youth outcomes

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One question I’ve been receiving a lot during presentations is “what is the cause of the really high youth unemployment rate”.  I have been answering with two things:

  1. The youth minimum wage was significantly increased, making young people more expensive (but also making more young people want to participate in the labour market)
  2. A recession disproportionately hits the young, as they have less human capital and can be seen as a more “risky investment” then other labour types.

I usually go on to say that I can’t say which factor is bigger – I would need someone to do empirical work.

Luckily for me, the work has now been done.  The Department of Labour commissioned a report by Dean Hyslop and Steven Stillman which went through these issues.  Now these guys are top draw, so I’m pretty comfortable just stealing their results 😉

Read more

Matt Nolan

Targeting non-tradable inflation: Some points

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Bernard Hickey has stated that the RBNZ needs to target non-tradable inflation.  Fair enough, I’ve heard the argument for that before.

However, he says we should do it because of the “structural flaw” in our economy and to “help exporters”.  Ok, but remember that the RBNZ controls monetary policy – not all the structural policies in the economy.  So what happens when they target “non-tradable inflation”

  • The RBNZ lowers non-tradable inflation by increasing interest rates further … likely leading to an even higher currency.

In this context, the stated aim of targeting non-tradable inflation doesn’t met the goal.

Now Bernard Hickey likely believes that there are structural reasons why non-tradable prices are growing more quickly than relative-tradable prices.  And he would right.  The reasons are:

  • The Baumol effect, where services become relatively more expensive as we become more wealthy
  • A related issue that tradable goods experience larger increases in productivity than non-tradable goods (as they tend to be more capital intensive, and face more competition)
  • Competition issues due to our scale
  • Issues of the size of government
  • The combined impact of our rising terms of trade and productivity improvements in developing economies (which has held down imported cost pressures – ex fuel).

In this context the only two “policy relevant” issues that have changed the “structure” of our economy are competition issues and the size of government – both things that fiscal authorities and competition authorities should look at … not the RBNZ.  All the other changes were responses to fundamental changes in our economy.

Protip:  Our manufacturing sector is shrinking because it is relatively less efficient than the rest of the world – we are “relatively better” at making other things (comparative advantage).  NZ has done amazingly well from this – with our real incomes holding up, and our employment ratios still elevated, even WHILE the world has experienced the largest economic shock since the Great Depression.

tl;dr  Targeting non-tradable inflation won’t give the “structural changes” that are desired here – and “structural” issues are due to competition and fiscal policy, not inflation targeting.  Changing around the inflation target will actually lead to the opposite outcome than the one that is being targeted.

Matt Nolan

NZ fact of the day

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So, US real median incomes in 2010 were down 6.4% from their 2007 level, and down 7.1% from their 2001 level.  That is a pretty danged poor result, the situation over there has been pretty messy over the last decade.  The median income figures are biased by the fact that the cost of goods purchased by low income households have in many cases fallen (think cheap washing machines, and the $2 shop) while higher end products haven’t experienced the same sort of price declines.  Yet even with this excuse, it does appear that middle-class America has seen a tough time.

Now this is from census data – and NZ hasn’t done a census for a while so I can’t really tell how we’ve done in the same accurate way.

But what I can do is go to the HES (Household Economic Survey) provided by the good people at Stats NZ.  By taking the median households pre-tax income figure, and adjusting it for NZ’s CPI (excluding the recent change in GST – as that was met by a corresponding change in income tax) I get the following regarding the year to June 2010 [note, I’m a moron and used the June 2011 CPI, hence the adjustment – this is fixed below]:

  1. Household real income is up 2.3% 4.4% from the June 2007 year.
  2. Household real income is up 19.1% 21.6% from the June 2001 year.

Also note that the median figure for the  US is $49,455 (in 2010 US dollars).  In the June 2010 year the US/NZ dollar exchange rate averaged 0.70c … and as a result our median income was $44,429.  This is significantly closer than I would have expected, given underlying production in the US.

If we expect the dollar to be at $0.80 during the June 2012 year (not a huge assumption given where the dollar has been), and we assume that real median incomes stay unchanged during this two year period the median NZ household income level would actually be higher than the median US household income level – that is complete madness.