Matt Nolan

Tackling the core

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NZIER raises an important point regarding New Zealand – the core costs of government look set to increase substantially in the next 15 years.

Now I don’t want to overplay the increase in health costs and superannuation – those will occur, but at the same time a smaller proportion of people in the youth category will lead to relatively smaller costs for education and health care for the young.

However, in net-terms the dependency ratio will increase, and the average “cost” of each dependent will rise.  As a society we will undoubtedly want to look after the most vulnerable among us – but if we are truly serious about that we need to keep in mind what we can afford.

In reality, if society is serious about looking after dependents in the future there is a significant liability in the future – and this is a liability we need to fund now.  Although some may say we should do this by increasing taxes, lets not forget that our current rate of government spending as a % of national income is fairly high.  As a result, we may have to cut back on some of our “golden cows” such as the age of eligilibity for super, the degree of funding for health care, our comprehensive ACC system, and our willingness to give families income through Working for Families.

If the US can get downgraded for not facing up to these challenges, NZ can too – it is best for everyone that we face them now, and try to decide where society as a whole is willing to make cuts to fund these future costs.

So I have to ask, given that economists have been walking around trying to get this issue on the agenda for over the past decade how can we actually inform the voting public of how much of a big issue this actually is?

Update:  Bill Kaye-Blake from NZIER adds the following important point on Twitter:

Another thing to think about is the difference between the size of liabilities – because we are all aging – and who pays

So the size of the liability is increasing, but we also need to remember that the pool of people who will be paying for this liability is shrinking (or at least growing at a much smaller rate).  There are a growing number of “dependents” that society needs to cover for each taxpayer – which is why we really need to fund some of this now.

Matt Nolan

What to watch for during the sovereign debt crisis

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Note:  Europe is where the real crisis is now – hence why this is the focus of the post, not the US.

While Europe tries to figure out how it can use the ECB as a lender of last resort, the current credit issues are likely to have some impact on the New Zealand economy.  In order to understand how, and what to look out for, we can use the same framework we did following the failure of Lehman Brothers.

This crisis is not on that level in its current incarnation – but the fact that it is borne of issues in the financial market does give us an idea of what we should look at, namely:

  1. What’s happening to our commodity prices?
  2. What’s going on with bank funding costs and access to credit?
  3. In what ways will uncertainty about the outlook lead to a delay in investment/durable good spending.

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Matt Nolan

Metaphor for today

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Protecting your economy from vulnerabilities is like protecting you computer.  The more you reduce how vulnerable your computer is, the worse your computer’s performance is.

In the same way, the more we introduce policies to try and reduce New Zealand’s vulnerability to shocks, the more we lower the average performance of the New Zealand economy in the future.

This is a trade-off, and we need to make sure we have a clear idea of what the trade-off is, and that society is willing to accept the costs associated with it, before we introduce any policies to reduce “vulnerabilities”.

Matt Nolan

The case of New Zealand: Inflation targeting, relative prices, monetary policy and industrial policy

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According to this piece on Rates Blog, in a recent presentation Dr Geoff Bertram discussed the inflation targeting framework, and the idea of the NZ$ being overvalued.

Back in the day I had him as a lecturer, he is an extremely smart man and he brings up a number of important points.  However, I have to disagree with his view regarding inflation targeting and relative prices in the economy.  There are two main themes where I feel our views differ, fundamentally these are:

  1. The driver of the change in the relative price of non-tradable and tradable goods
  2. The relevance of industrial policy in relation to monetary policy.

Let me flesh these out.

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Matt Nolan

Media uses wrong data to reach wrong conclusion … again

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“Wages not keeping up with inflation” that is the headline we get here.  While I’m sure that will get a lot of people wound up and complaining about something, its a load of cr*p.

Actually looking through the numbers, we see that gross wage growth is roughly inline with the growth in consumer prices excluding GST.  Why do this?  Well the increase in GST was met with a corresponding cut in income taxes, so that NET wage growth is that much larger than gross wage growth.

But lets ignore this, and lets focus on what they said:

That took annual wage inflation to 1.9 per cent … well-short of the 5.3 per cent annual pace of inflation.

Looks like a big difference.  And that is what you can do when you cherry-pick and compare incomparable data series to fit the story you want to write.  Let me explain step-by-step.

The 1.9% figure comes from the Labour Cost Index – this is a quality adjusted index that captures growth in wages that are unrelated to the type of job or changes in productivity.  This doesn’t tell us anything about income gains for people – in fact, I use this as a measure of inflation expectations not wage growth.

If we want wage growth we should probably look at … wage growth figures right.  So, average hourly earning according to the Quarterly Employment Survey were up 3.1% from a year earlier.  Taking into account hours have risen, total wage income (excluding sole traders and agriculture) was up 4.7% from a year earlier.

Given that the changes in tax cancel each other out we have to ignore the increase in GST when talking about the cost of living (or include the tax cut in the wage growth figure above).  As a result, labour income growth has well beaten increases in the cost of living.

Furthermore, again inflation is a whole different concept – however, I’m not going to ping them too hard for using that term here.  What I will ping them about is the fact that:

  1. They didn’t understand (or wanted to misrepresent) the data and used the wrong series
  2. They didn’t understand (or wanted to misrepresent) the data and inappropriately included/excluded tax changes

Overall, both of these “adjustments” were to make the data fit their narrative – which is a load of bullsh*t.

How about writers either learn what the data is before writing this sort of thing – or talk to someone (either at Statistics NZ or an economist) who knows.  Then they wouldn’t write factually false pieces like this.

Matt Nolan

Historical revisionism on July OCR

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So because the dollar has eased back following the OCR people have decided that the statement was dovish (ahh the Herald did this too).

Fact, no it wasn’t – it was a more hawkish than expected statement.  Probabilities of rate increases did rise following the statement.

Remember something here, the link between the exchange rate and the OCR IS NOT as clear as people act like it is.  Money doesn’t “flow in” to take advantage of “higher interest rates” when the RBNZ increases the OCR – as so much depends on the “demand” for said overseas loans.  Please god, lets remember that someone in NZ actually has to borrow the overseas money for a loan to be made – its doesn’t just wash up on our shores in a bottle and start aggressively lifting our currency through black magic.  Oft times the currency does get pushed up (especially pre-core funding ratio), but in of itself it will not always happen.

Hell, explaining daily movements in the currency is a mugs game (explaining movements in the currency generally is bad enough).  However, the fact that people put it down to a dovish OCR statement illustrates to me that people are putting TOO MUCH weight on how the RBNZ effects economic variables that aren’t inflation – something which concerns me greatly.