Will Taylor

Raising Rivals Costs: Bar Edition

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Just read a great post By Dom over at the liquor ladder. Sounds like the Hospitality Association wants to restrict liquor licensing to certain parts of Wellington (Courtney Place and Cuba St).

But the Council, who seem to think the scenes in Courtenay Place late on Fridays and Saturdays represent “vibrancy”, and the Hospitality Association, led by individuals who, I believe, own businesses in Courtenay Place, are planning a regime that will penalise anyone trying to establish a business anywhere else – businesses that might give discerning consumers an alternative to the chaos on Courtenay Place. It may not be what the Council intended, but it’s what’s called an unintended consequence. It’s what happens when you draw lines on a map and create differences between the two sides.
Of course not all the results will penalise businesses outside the strip. If you’re a Courtenay Place property owner learning that your tenants have privileges with respect to liquor licensing, you’re going to put their rent up. I look forward to hearing the Hospitality Association complaining about sky-rocketing rents in the street in about a year’s time.

Now they may be doing this for good reasons. But to put an economics slant on what Dom says, this sounds a lot like what economists call “Raising Rivals Costs” (RRC). i.e., people who already have bars in Courtney/Cuba want to limit the ability of people to operate bars in other ares, thus hindering competition from other ares of the city.

While it may raise the rent of existing tenants, from memory (I live in Auckland now….) the bars on Courtney place at least are all quite big so may be able absorb the higher fixed costs. So in a way this could be seen as shutting out competition by smaller fringe operators (i.e. most craft beer bars) who won’t have the scale to pay high rents. I for one will not be happy to see a reduction in pub innovation!

Matt Nolan

Bubbles: Remember to ask about the mechanism

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I see that Bernard Hickey is suggesting we have the RBNZ pop the “housing bubble”.  And to do it the Bank should either ignore inflation targeting and hike rates, or do some magic with macroprudential tools!

The ideal RBNZ governor?

Assume a bubble, so lets start with one!  I have a list of problems with this type of article even given that 😉 :
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The Hand

Lowell Manning responds on M3 and housing

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Hola all.   Lowell Manning was nice enough to write up a response, to Matt’s response, to his piece on M3 and the housing market on Rates Blog.  I am publishing it here.

Matt hasn’t read it yet – that would be cheating.  He’ll read it when it is on the internet.

I have no doubt Matt will respond to this saying why he fundamentally disagrees or agrees with points – from the bits he has spotted he already wants to respond.  But he will have to wait until July as he has too many urgent deadlines and planned posts between now and then 🙂

Feel free to discuss in the comments.

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Matt Nolan

NZ Inc: Good marketing, bad for society

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Indeed, as Brennan McDonald states here (Update: and with more discussion here):

The phrase NZ Inc is so nauseating. Please stop using it. New Zealand is a collection of individuals, firms, government agencies, councils, charities, families, iwi and a whole lot of other fluid groups that change their composition and goals frequently.

Update:  Paul Walker also discusses here.

This comes back to this post I popped up about something Mai Chen wrote.

The lack of discussion of trade-offs, or comparisons of counterfactuals, is a perplexing feature of this sort of writing [eg NZ Inc] for an economist – and makes the statement mentioned above absolutely useless for policy analysis.

The phrase “NZ Inc” is marketing for businesses who can benefit from the government taking on risk for them.  Given that the government is linked to the taxpayer, it is the taxpayer taking on risk for them.

Now, all political parties have fallen for this trap, and I’ve spent far too many long hours arguing the point with them.  They will say “isn’t being aspirational a good in itself” and I say yes.  Then they say “shouldn’t we make aspirational policy” and I say, no that is stupid.

Sometimes I’ll be told we need “measurable goals”.  And by sometimes I mean someone tells me that at least once a week.  There is only “one goal” for “society” – meeting the social contract and maximising the “social good”.  Can you measure that, can any of us measure that?

We have elections, and we have plenty of clear measures of other types of outcomes, but the only way we can figure if we are “meeting that” is to honestly describe trade-offs between things and then have society vote (even though this is not perfect, given Arrow’s Impossibility Theorem).

This NZ Inc and measurable goals business INVOLVES presuming what we want.  Which just means it is vested interest groups passing off what is in their interest as in the “national good”.

Discussing, measuring, and debating trade-offs is hard!  But if we actually care about people in society we would actually do this.  And we would use a relatively broad principle for understanding it – such as the long-term benefit of the consumer, rather than the maximisation of some random indicator (like GDP, or export volumes) which just happens to coincide with the interests of the individual selling it to us 😉

Note:  People think I’m being pedantic with all this.  I am not, and if you think this point is a “pedantic point about policy” then I would suggest reading a bit more about normative economics – and how crazy complicated the “real world” actually is in terms of the trade-offs we face.  People that are trying to simplify it to sell their own policy aren’t always doing it out of the goodness of their heart … and even when they are, their experience blinds them to the impact these policies have on others.  True story.

 

Matt Nolan

Sumner on Borio

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A quote via Scott Sumner:

But debt doesn’t make workers want to work less, it makes them want to consume less.  There is a difference.  We need economists to look through these framing effects, and see that the standard model that demand shocks cause high unemployment worked fine; it’s our policymakers who failed us.

There is a huge difference.  Economists say GDP = C + I + G + X – M – but in macro you can’t just take these individual factors and talk about their impact on GDP, they are all massively endogenous.  In other words, this decomposition can be misleading – and gets filled with “fallacy of composition” issues when people try to use it for policy!

“GDP” is produced by factors of production, it is output using labour and other factors.  People are worried about high unemployment, and underutilised resources, this is exactly what Sumner is talking about when discussing active monetary policy of “demand management”.

The obsession with including “finance” into the cycle has to be viewed carefully.  In so far as it improves forecasts, and thereby improves the ability to “target a path” for demand, and improves our understanding of “what could or will happen” it is very very useful.  But it doesn’t actually change the fundamental relationship that monetary authorities should be focused on when setting monetary conditions!

Now this is where I get concerned with Borio’s stuff.  There is a lot of very good work in there (I agree with a lot of the discussion of the financial industry – and using financial indicators to “add information” about the output gap), but he is obsessed with selling his work “output gap that is adjusted for finance” or a “finance neutral output gap”.  This framing doesn’t make any sense to me – and in my reading of his papers he has never provided a full methodological reason why the output gap measure should be sold in this way.  He attempts it post-hoc justifications of why finance impacts on deviations from potential bullet two of this Vox Eu article – but this is still an uncompelling base.  When it comes to monetary policy the actual counterfactual we are interested in is in terms of unemployment and inflation – other factors matter (in terms of monetary policy) only INSOFAR as they influence these!

Macroprudential policy yadda yadda yadda are structural policies about “real economy” issues – monetary policy is set GIVEN these.  But having monetary authorities focus on this instead of actual monetary conditions is missing the wood for the trees.  Financial market information is useful to help inform us of where we are, and where we are going, BUT can we actually focus on the first order issue of the purpose of “active monetary policy” which are medium-long term inflation outcomes and short term unemployment variation (read the short-term as the outlook for 18-24 months out, I realise this term can be vague otherwise!).  If the financial market information helps the central bank set policy to deliver this (which it will) use the hell out of it – but don’t then lose sight of your actual purpose and start trying to value companies and assets for the market at large.  If you want to do that monetary institutions, give up your contract with government and get a job as a financial adviser 😉

When I read this sort of stuff all I see is monetary theorists saying “ahhh, NGDP growth was weaker than authorities were committed to delivering, here are some excuses”.  But as soon as they give up the role they were given by government (deal with inflation and short term fluctuations in the UR) they leave themselves increasingly open to arbitrary demands and politicisation.

After ignoring prudential standards and arbitrarily trying to deal with it with monetary policy, we stumbled into the Great Depression.  Pressure post Great Depression and war, in time led to the hyperinflation and stagflation through the 1970/80s, which led to a recognition that policy needed to narrow.  Which led to completely ignoring macroprudential rules (which is not good either) which then led to the 2008/09 crisis. Which led to …

Matt Nolan

The employment decline exists – let’s just be careful interpreting it

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Over at Whale Oil I spotted this piece by the NBR which discusses the claims of “40,000 job losses in manufacturing” – a claim I think I’ve heard from the Greens in the past, I’ll include a link if someone gives me one 🙂 .  [Update:  Link here, along with a pointer that it is from QES for 2008 to now.  Adjusting for seasonal variation this specific claim does look a little exaggerated in terms of filled jobs (but I still don’t think it is necessarily a misleading claim in this context) – I’m also not sure why we’d ignore the 2005-08 period given this is when the real exchange rate issues really kicked into gear.]

The figures quoted by Whale Oil suggest that the drop was only half that over the past 17 quarters.  However, the people who have been claiming that employment in the manufacturing sector is down by around 40k over time are not wrong.

For that, let’s jump on the Statistics New Zealand site and look at the HLFS (Household labour force survey).  Below I have a graph of annual average employment from 2004 onwards:

Between it’s peak in March 2005 and now, average annual employment is indeed down by 44,125 people.

Now this measure isn’t perfect – but it is better than the QES.  The HLFS measures “employment”, the QES measured the number of jobs (people can have multiple jobs) and it excludes self-employment and some areas such as agriculture.  Self-employment is pretty important in a industry filled with small firms like NZ manufacturing, so we have to keep that in mind! [Note: For some context, the level of annual QES jobs are currently 77% of the level of annual HLFS employment in manufacturing – even though there are multiple jobs for some employees.  Normally this ratio is closer to 80%, but it does indicate that some true underlying jobs/employment may be missed by the QES 🙂 ]

Of course, we need to think about “why” employment is shifting out of manufacturing and what that means before we can say anything about it – there is no fixed “lump” of jobs, and the structure of the economy does change.  Eric Crampton notes that in this tweet, pointing to this post on the manufacturing industry.

But in of itself, the number is not bogus – it is straight from the HLFS! it could have come straight from the HLFS 😉

Update:  In terms of the NBR pieces conclusion – it is true there has been a secular decline over a long period of time.  Understanding why in this case is important – and exciting.  Global manufacturing employment is falling, could we be about to experience the “manufacturing revolution” version of the “agricultural revolution”?  I hope so, and I hope that if this is the case then unlike the agricultural revolution society/government helps people with the transition 🙂

Update again:  I’ve noticed people from all the sides blaming government X or Y – a structural trend in the industry, a downturn in global manufacturing, and seizing up of credit conditions to the point where we haven’t been building, are not factors I would blame on any politicians.  And I’m notoriously harsh on politicians.