Shamubeel Eaqub

LVR restrictions: exempting new construction

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The RBNZ today exempted new home builds from high loan to value restrictions.

The reason for putting the policy in place is financial stability. That is to reduce the accumulation of high-risk debt in the banking system. By this test, and this should be the reasonable test, this is bad policy.

By this exemption the RBNZ is saying that it is less risky to borrow to build a new house than to buy an existing house. I disagree that new house prices move less than existing house prices. So, the RBNZ is now exercising a policy of exclusion – against those high LVR borrowers who want to buy existing homes.

The justification that we need to build more houses, surely is retorted with, is this the right policy to address that problem? It also raises the question of why was this not a consideration before the LVR policy was implemented? What did the RBNZ actually know about how high LVR loans were being used, by whom and where?

By increasing highly leveraged credit flow to new builds will not solve issues to slow land release and planning restrictions.

By seemingly bending to industry and political pressure, the RBNZ has tarnished its shield of independence. I am fearful of ongoing lobbying and political interference it invites heading into the 2014 election.

Matt Nolan

QOTD: Delong on targets and the ‘great stagnation’

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Golden passage from Brad Delong.  For once I’m going to put up a quote and not add my thoughts – as they’d just get in the way:

The focus on real GDP growth and its possible–or likely–slowing is a setup to panic us into making policy decisions we really do not want to make. The “great stagnation” literature as it is currently constituted seems to me at least to guide our attention in the wrong direction–and to quite possibly stampede us into making policy decisions we really would not want to make if we thought more deeply and calmly. The chain of logic is that measures to reduce inequality have a cost in terms of reducing the growth rate of the economy–that the bucket of redistribution is, in the terms of Arthur Okun’s Equality and Efficiency: The Big Tradeoff, a leaky bucket–and that when growth is slower we can no longer afford to engage in redistribution. This seems to me to be the wrong way to conceptualize it: the evidence that the bucket is leaky is weak–or, rather, there are many buckets, some very leaky, some not leaky at all, some anti-leaky–and in any event whether we should tradeoff potential growth for other objectives is not something the depends on how fast growth is. Policies that make sense if underlying GDP per worker growth is 3% probably still make sense if underlying GDP per worker growth is 1%. Policies that don’t make sense if underlying GDP per worker growth is 1% probably still don’t make sense if underlying GDP per worker growth is 3%.

But my aim here is simply to lay down a marker as far as point is concerned: to enjoin you not to get stampeded into going someplace you really do not want to go.

 

Matt Nolan

Religion and institutions

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I see the Pope made some comments about capitalism and social justice, and a bunch of economists were unhappy with this (Mankiw, Sumner) – or were unhappy with the way economists viewed the Pope’s comments.  Note:  This piece is a good discussion.

My view is easily summarized.  Meh.  I grew up in a Catholic family, going to church every week and doing all the classes – and if there was anything I learnt from reading all the “social justice literature” it was that Catholicism as an institution likes to frame things as battles between “right” and “wrong” rather than actually trying to understand the subtle undertones of what is actually happening.  The Pope seems like a nice guy, who is well intentioned, but he relies on “common sense” views of rising injustice – rather than looking at the facts.  While this makes Catholics feel good about themselves, it is a lazy way to talk about justice and fairness – which implies that there is some truth to what he says (we should talk about these matters) but it also propagates dangerous falsehoods.

Note:  If anyone is wondering, I’m not being bitter here.  Growing up my church was filled with good people who were incredibly supportive, who gave me good life advice, and who were always kind – I have nothing but good feelings about any of this.  But the general attitude that exists in society as a whole, that there are obvious good and evil things, is dangerously naive.

Yes, many Catholics have different value judgments than wider society – with far more redistribution desired (I will of course admit to being in this direction on a personal level).  And this is cool!  But I just don’t see this as a reason to employ empty rhetoric to persuade others to introduce policies that favour your value judgments, which is what they are doing.

Of course, this brings us to the actual subject of this post – religion is an institution, an institution that fills a certain role within society and the lives of an individual.  When we think about ideas of ‘social capital’, religion offers us a lens on the type of community/social institutions we are talking about when thinking about this issue.  This is a common idea, and with the use of a little game theory we can even state that Jesus was an early applied economist.

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Matt Nolan

‘Fake food’ and ’empty calories’: An assault on value?

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On Thursday I was in the supermarket after a long day of reading – with a long night of reading ahead.   Next to me was a deal, dark chocolate Tim Tam’s, two packets for $5.  They are great with coffee and so I reached to grab them – however, then the barrage of health related stories I’ve seen at the moment came into my head.

These are empty calories, fake food, there is no nutritional value, they are not good for me.  I could do with losing a couple of kgs, and my weak willpower ensures that future me will find it just that little harder to get to the size I want to be!

Then I thought, blah blah blah.  Information is great, but looking solely at the cost of “empty calories” without thinking of the subjective benefit I get is as dumb as Boris Johnson presuming that maximising the GDPs is all we want.  Yes there is a time inconsistency issue, but as I am aware of it, and surprisingly active at trying to deal with it, I am pretty comfortable that I can make my own choices …

In my view economists, and other forms of social informers, have a role to provide information and help describe trade-offs for the public.  But lets not get on people’s back because they enjoy action that has a corresponding cost to themselves.  Analysts that go too far in telling other people how to act have moved past acting in the public interest, and are starting to act more in terms of ego or an inflated sense of confidence about their own understanding [to be clear this comment is NOT pointed at anyone, it is a hypothetical – accusing anyone in NZ of this would be strawmaning them].

In this case I purchased the Tim Tams and had a few with a coffee.  I spent the rest of the afternoon reading about economics and many utils were gained.  I have no doubt that other people, with different preferences, would not have gained the utils in this case – but that is completely irrelevant, these are my preferences, which are revealed by my action.  Not your preferences.

 

 

Matt Nolan

The equity-efficiency trade-off and simplifying assumptions

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Given my admission that I am now going to talk more about inequality, it is important for me to show a bit more analytical respect to the concept of the ‘equity-efficiency trade-off’.  This is a term that is often used in economics, and that we often use here, but which on the blog I have only explicitly dug into once before – back in 2008.

The reason I often prefer not digging myself into the equity-efficiency trade-off concept too much is that I fear I won’t dig myself out, and if I do I doubt much would come from it.  It is an overarching concept that exists in economics, one that we have to be sure we consider whenever we ask a specific question.  However, without reference to a question there isn’t terribly much to say.

When it comes to the equity-efficiency trade-off associated with policy and social organisation, it is clear that we cannot clearly separate individual concepts associated with fairness – ideas of inequality and poverty will be inextricably linked, one of the key reasons why I dislike to push by the Spirit Level to solely place focus on inequality.

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Matt Nolan

NZ inequality statistics: Some of the research

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Donal over at Economics New Zealand posted up some OECD figures that indicate that the Gini coefficient over the OECD was the same in 2010 as it was in the mid-1990s, and that it is actually lower in New Zealand.

As I have noted earlier, I am going to start writing about inequality on the blog.  So I have been spending a little bit of time reading about it!

Given this, I’ve realised we can take this analysis a step further.  Bryan Perry from MSD discussed the Gini coefficient, and other indicators, in his introduction for the inequality conference in July.  I wasn’t there – but I know the document is here, and I know Figure D.17 (third page of the pdf) has a graph of the Gini coefficient through time, and a trend line through it.

A couple of things should stand out when we look at this:

  1. The Gini coefficient has more been “flat” rather than “falling” since the mid-1990s if we look at the trend – the drop the OECD recorded looks like it may have been from comparing direct points, which are volatile
  2. When people complain about the large increase in the Gini coefficient they are not talking about the mid-1990s to today – they are talking about the reform period.  This figure shows that there was a very sharp increase in the Gini coefficient between about 1987 and 1992.

So unlike other countries, the complaints are NOT about a creeping increase in inequality through time – but about the level shift in inequality that New Zealand experienced following the reforms.  Ultimately, there is a view by these groups that the “equity-efficiency trade-off” New Zealand decided to make at that point wasn’t the right or just one.

Now I am not sure how we are even supposed to evaluate that claim without thinking about why, and how, inequality has changed.  To give some flavour for this, I’ll comment on a few of the New Zealand specific research papers we have had about this change – if you know any other similar work, flick me a line in the comments 😉

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