Matt Nolan

Hold up: In defence of macroforecasters

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Hold up a second here.  My two favourite bloggers have consecutively posted suggesting that macroforecasters are essentially a waste of space (Offsetting Behaviour and Marginal Revolution).  As a macroforecaster I am inherently biased, but I think that such forecasters can add value.  Let me discuss why.

As I have said in the past, if a forecaster thinks his value comes from the accuracy of predicitons, and sells himself as such, he won’t be adding value.  The economic environment is too uncertain, and our forecasting methods too imperfect, to simply rely on forecasting accuracy per see.  But given that we can’t provide a perfect version of the future – we must offer something else.

As I have also said in the past, we provide a description of what has happened, a service on the sort of things going on, and a point of view regarding the risks around the economic situation.

I have asked a number of clients what they find useful, and what they want from us, and I generally get told that they like to have information condensed and described in a clear, consistent fashion.  Having someone available who is keeping up with the news, and is willing to discuss it at any point has value – and as economists we can also paint risks around the situation, and indicate what “general economic” issues people should keep an eye out for.

The value stems from this service – a service that most private sector macroeconomists are blatantly honest about.  Essentially we would never say “this IS going to happen” we would always say “given this set of information, we see this set of potential outcomes, and have this set of probabilities on them – as new information is released we will tell you what this indicates about the general economic situation”.  We definitely aren’t there to tell people how to run their business – we are just there to provide information regarding the general environment this business activity is taking place within.

Sure the information may disparately be floating around in places, but we tie it together and use the economic method to interpret it in a clear concise fashion.  It is a service, a service people are willing to pay for, and so I would suggest it must have value.

Matt Nolan

Government fail(ure)

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Seriously, why the hell did we ban pseudoephedrine in New Zealand?  Has it had any impact on the “external costs of P”?

I know it has had a serious impact on me during this years flu season – given that all the alternatives suck.  And I know a lot of people who feel the same.

Dumb policy with a very obvious and high cost and pretty much no benefit.  What is this!  How does this rubbish get passed.

Matt Nolan

Marginal rates, interest rates, and NZ monetary policy

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One of the things that I find fascinating at the current time is the enormous gap (see page 9 of link) that has developed between marginal bank funding costs and the official cash rate.

By setting the OCR the RBNZ commits to borrowing an infinite amount off banks for 25bps less, or loaning an infinite amount too banks for 25bp more than the OCR.  Of course, this is now constrained by prudential regulation – but at the margin, the RBNZ sets the opportunity cost of bank borrowing and lending, and so can move around interest rates (which also depend on borrowers risk profile etc).

The increase in the “margin” on top of this has been assumed by many people to be permanent.  The main calls are:

  1. It is the result of higher risk, which is not going to abate soon
  2. It is the result of new prudential regulation

In part these are true.  However, is the assumption that this increased margin will remain forever really the best assumption when looking at how the OCR translates into interest rates?  Furthermore, as the OCR rises, is it fair to expect that the margin will remain unchanged, and marginal costs will keep rising by 25bps?

I’m not so sure – as I’m not convinced the Bank completely controls the marginal cost of funding right now.  Here are a few reasons off the top of my head:

  1. The Bank also focuses on financial regulation – as a result, borrowing from and lending too the Reserve Bank provides a signal of an individual banks quality.  Even though the RBNZ is willing to borrow and lend an infinite amount does not mean that individual banks will work on this basis – and marginal funding may infact come from other sources for new loans.
  2. Individual banks are constrained in setting lending rates on what they have set for deposit rates.  As deposit rates have been pushed up due to prudential regulation this has set a “floor” on lending rates – even when the marginal rate is lower, implying that the reaction to a rising OCR will be muted.
  3. International interest rates, even for moderately long maturities, are low.  This will, in turn, have an impact both on demand for funds from banks and the cost of funding from banks.  Note that, even with the new prudential regulation longer-term foreign lending can still often be used – and so could help to determine the marginal price for longer term lending.
  4. The new prudential regulations (will) mean that a bank has to fund 75% of a loan (currently 65%) from outside the RBNZ right.  So if they loan a new $1, the marginal cost of that dollar will be 3/4 set by the underlying market and 1/4 set by the OCR – at least this is my impression of how banks have to respond.

Ultimately, any factor that ensures that the “marginal $ borrowed or lent” is not coming from the RBNZ could also provide an explanation for why this “margin” has grown.  If this factor is the result of the OCR being historically low, then we can expect the OCR to have LESS punch as it rises.

This is fascinating – and I’m surprised that we haven’t seen more work come out about it.  By the end of next year, it will be very interesting to see how rates have responded to a rising OCR.  I am currently not convinced that the working assumption a perfect feed through is Bayesian rational 😉

Matt Nolan

If we think there is an implicit social dividend from land …

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… why don’t we just have a land tax, instead of trying to restrict voluntary trade of land between individuals.

My impression has always been that one of the fundamental reasons for tax was to proxy for a social return on a nations capital – such as land.  By doing this we get the advantage of actual property rights on land, even though in essence we hold a belief that society as a whole owns that land.

Now my impression of this debate is that NZ society DOES believe it implicitly owns the land.  If we had a land tax that proxied the “rental income” for society, it wouldn’t matter who owned the property right to use the land and this whole debate about foreign ownership could be chucked out the window.

Another point in favour of land tax is it?

Update:  Danylmc at Dim Post discusses the same article.  I’m not sure I would interpret history the same way as him – was there really much of a cost from the running down of our grossly inefficient railway system?  However, lets not argue about this point here – as it is peripheral to both posts.  There are two primary points that need to be raised beyond my land tax call above.

Firstly, if the problem is that the government sold the asset too cheaply, then we should raise that as the issue.

Secondly the arbitrary idea of a “strategic asset” might crop up – if we want to think along these lines, lets actually do some thinking.  We should ask “is it a public good”, “are there competition issues” and/or “are there externalities from the assets use”.  If these things hold, then we can ask what is the best way to define ownership.

Yes there are cases where the government should own assets – but they should be determined by analysis instead of arbitrary catch phrases like “strategic asset”.  Obviously there are too many management consultants floating around government at the moment given the amount that term is floating about.

Matt Nolan

Don’t stop limiting our competitors ability to compete say rivals

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That is what the title to this article is suggesting right?

My impression is that Telecoms rivals want two things to continue happening:

  1. Telecom to be ineligible for broadband subsidies that they are getting from government,
  2. Telecom to be regulated in a way that:  Reduces Telecom’s ability to increase downstream costs.  Likely increases Telecom’s marginal costs in retail markets.

As a result, is this really surprising?  By increasing the relative marginal costs of a competitor, you can improve your own profitability in the end.  I wouldn’t really trust Telecom’s competitors as an objective analyst of how telecommunication policy should take place in NZ 😉

Matt Nolan

But what is the problem?

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Over at the Dim Post it is suggested that New Zealand is somehow failing when company owners sell their assets to non-New Zealanders.

However, there is no issue with selling companies in of itself.

The “problem” might be that, as a whole, New Zealand residents appear to own a significant amount relative to their income and wealth.

If we do believe this is the case, then we have to ask why. Just saying “look we are selling stuff”, “look NZ owes some stuff” doesn’t tell us why this is the case, whether this is a problem, and if it is a problem what we can do about it.

If we think that there is some systematic risk from this behaviour, or that New Zealand residents do not recognise the risk associated with this level of risk, then we should be looking for policies that will improve said decision making – not arbitrarily looking at policies that will “force” saving or the voluntary sale of goods, services, or assets.

Is this point of view unreasonable? If we accept this point of view, we also have to accept that other New Zealanders might want to consume now, or may want to avoid the risk associated with “high return” ventures.  Given this, it is both unreasonable and harmful to social welfare to try and force New Zealanders to save to effectively subsidise the risk of business owners – which is what compulsory savings will be.