Matt Nolan

More points on long-term unemployment

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A while ago I touched on the issue of long-term unemployment, and youth unemployment, from the persistent recession in NZ.

This isn’t an issue we can yell at the RBNZ to fix, so what exactly could we do if we think this situation is leading to specific costs?  Costs that we fear the market will not deal with, given firms unwillingness to look at long-term unemployed, and concerns about skill-mismatch.

Well Via Noah Smith we spotted this by Kevin Hassett, with five policy suggestions at the end.

  1. Government hiring of long-term unemployed (Note:  A “working for the dole” scheme would fit into this – it is also unclear how much of the “signalling this gets rid of”)
  2. Policies to deal with geographical mismatch (Note:  It isn’t clear whether this is really the case for long-term unemployment in NZ – but separating the Auckland (bad), Canterbury (tight) and rest of the nation (meh) labour markets is useful).
  3. Privatised training (Note:  This is interesting in the NZ context, as we already have wide scope for people to “choose training”.  The key question is whether people have good information on the returns to skills)
  4. Work subsidies
  5. Work share programs

This isn’t to agree with any of these – just to point out that we need to ask where issues in the labour market have appeared that are due to the persistence of the slowdown, and how government policy actions can improve outcomes given this.  The long-term unemployed are the people in society that have experienced significant bad luck due to this unfortunate event, there is a rationale to help people out given this – or even better, to help form institutions (such as WINZ) who are set up to automatically provide assistance given the perceived drivers of long-term unemployment.

Note:  Paul Walker has also discussed these points here and here.

Matt Nolan

A frank (non-technical) discussion on current NZ macropolicy

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Note:  I think of macropolicy as policy that is focused on inflation, interest rates, unemployment, and GDP.  Of course, the causes of shifts in these often have micro-consequences … something I sort of suggest as we go through 😉

As we’ve come into 2013 with the unemployment rate elevated and the dollar rising strongly I have seen two things occur:

  1. An increasing, almost dogmatic, preaching from those talking about the high dollar destroying the economy.
  2. A rising disparity between economists and business expectations for economic activity (which have rebounded) and the news.

The last time I saw the second point occur was early 2010 – just before April 2010 when events in Greece took a turn for the worse.  In this way, I can understand the reluctance of news agencies to accept the large number of improving signs about the New Zealand economy – if something goes wrong overseas it will all be unwound.

I can understand the first point as well – manufacturers are finding their profitability low, and they are trying to blame “something”.  A price seems like a good thing to yell at.  Furthermore, it fits into the view that something should have been done, which would lower unemployment – looser monetary policy would have given us higher inflation (which is below the band), likely lowered unemployment, and would have “made the dollar weaker”.  An argument can be made that over the last eighteen months, monetary authorities accidentally left the OCR at slightly too high a level.

But, this is my most generous view of this side.  I find myself concerned that policy issues are being “mixed” by exchange rate zealots who want to make it a free lunch.  For example, if the central bank had lowered the OCR to get the exchange rate down, house prices would now be higher.  If they had done this and the UNCERTAINTY in Europe hadn’t led to more expensive credit (if we hadn’t seen bank funding costs look ugly for parts of last year), then they would have overstimulated the economy – they would have been forecasting failure given what the information they had … it is hardly their fault that things turned on them.

And if the RBNZ had cut the OCR, would the issue of the persistently overvalued dollar (current-account deficit that is higher than we think is justifiable) go away – no, it would actually make no difference to this as in the medium term interest rates and the real exchange rate would go back to where it would have been.  If this is the “exchange rate issue” you care about, stop talking a bunch of bullshiz about the OCR and interest rates, and try to figure out what the real causes are.

You see, it turns out that we are being hit by a lot of large external shocks (both positive and negative), and this creates a bunch of uncertainty about what to do.  In that environment, we have unfortunately ended up in a situation where unemployment is higher than it would be if the economy was “functioning nicely” – so we need to ask why this is the case and what policy solutions may help.  I think I read something about the principles of that.

A blunt tool, but blunt for a reason

The “interest rate” is a blunt tool.  Hell I struggle with the idea that the “tool” is even the OCR – in truth the RBNZ’s monetary policy measure is its flexible inflation target, and all that implies.

But what is inflation, or an interest rate.  It is an incredibly aggregated piece of information that discusses a general tendency over the economy as a whole.  A firm cares more about the interest rate THEY face on their credit, and the price of their costs and their product – not some bull like this.  In truth, we aren’t a centrally planned economy and we live in a world in flux that is filled with uncertainty – in that environment lightly changing the OCR is no way to deal with specific market or government failures we may think exist.

Exchange rate zealots need to stop being lazy with their analysis, ask what the failure is, and figure out what the cause is.  For example, house prices are “too high” – lets ask what is going on in the housing market and building industry.

The unemployment rate is too high, while vacancy numbers have climbed – interesting do we have an issue of “skill-matching” … seems we do!  Given that, the policy solutions involve trying to lower the cost of matching, and more work with unemployed people and investment in skills … not a 25bp cut in the official cash rate.

A sidenote on the exchange rate – remember it captures relative growth

Have people noticed how much growth has been outperforming since about October last year, or how much bank funding costs have dropped, or how much easier it is to access credit.

When these factors were the other way around, they really slowed economic activity in NZ – isn’t it likely that we may see strong growth off this now?  The growth outlook for much of the world is not as flash, and tbh I’m working under the impression that Australia is now hitting its wall, and as a result I don’t think this is “it”.  But the exchange rate is indeed a “price”, and it appears to have given us an indication that we are finally experiencing a (likely rebuild led) recovery.

Treating the issue as “low exchange rate good, high exchange rate bad” involves not thinking about what the exchange rate is.  Originally I thought this was because people hadn’t had the chance to look at the issues, but with the RBNZ/Treasury running a conference on this, and with my little article on “what is an exchange rate” available, I find this attitude perplexing.

QE and exchange rates though!!!!

Yes, QE is driving up the dollar, as every economist in the universe has said since the start.  There are two ways to think about this:

  1. Implied relative interest rate channel
  2. Specific currency purchases

The first channel is cool, that is relative monetary policy.  As long as everyone involved is setting an “inflation target” and sticking to it then this is just a product of all the countries “closing their output gap” – and it is a good thing for all.  Not a currency war.

If countries start trying to mess around with relative prices, by directly buying up currency or bonds in NZ, then the issue is more difficult.  We receive a “capital gain” but the exchange rate gets knocked around as a symptom of relative prices for asset classes and the such being out of whack.  This is generally a pain in the ass – and is an argument for greater co-ordination in monetary policy.  Furthermore, it isn’t actually clear whether it is a net positive or negative for NZ – we are making a capital gain out of our assets after all – what is clear is that it involves a transfer, and we might not think that is fair to some in society (although one of the beneficiaries are consumers so …).

The QE question is one that needs investigation, but on the balance of probabilities having these countries do this is better for NZ then having them experience a full scale depression

Also one note I think gets missed – if they hadn’t done QE, inflation would have been lower, and so the world price of the goods and services we export would have been lower.  For something that is vulnerable to “overcapacity” like manufacturing this would have been very acute – and as a result without QE it isn’t even clear manufacturers would see their return be that much higher!

jamesz

The UK’s political divide

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The Economist this week explores the political divide between the North and South of the UK: the North belongs to Labour and the South to the Tories. Unfortunately, they are unable to pinpoint the reason for the divisions, saying that “even controlling for factors such as education level, housing tenure, benefit receipts, local unemployment rates and age, the political divide remains in evidence.” That is not particularly surprising since voting doesn’t tend to follow economic divisions, for whatever reason.

An interesting theory of political divisions is provided by Jonathan Haidt’s descriptive theory of morality. He suggests that there are six foundations for our emotional response to situations and ideas: caring, fairness, liberty, loyalty, authority, and sanctity. His empirical research shows that left and right-wing people systematically differ in the weight they place on each of those foundations. For example, left-wing people are far more responsive to ideas that trigger their caring response, while right-wing people are more likely to worry about proportionality. Crucially, he claims that almost all of our responses to ideas are determined by an initial emotional response that we then rationalise. He uses his theory to explain the divisions between Republicans and Democrats in the US, but it could equally be applied in the UK.

For example, Haidt claims that most conservatives will have an emotional response triggered by the sanctity foundation, while liberals will not. The recent debate over gay marriage in the UK shows precisely that division. While liberals pointed to the importance of the liberty to marry freely, conservatives talked about the ‘sanctity of marriage’ and were morally disgusted by the idea that homosexuals could marry. Those differing emotional reactions drew the battle lines for the ensuing debate and were post-hoc rationalised in various ways by both sides.

Perhaps economists who view ideological and political divisions through a materialist lens are thinking far too narrowly. Rather than pointing to industrial policies and wealth redistribution as vote-winning tactics they should look to the emotional responses that the parties’ rhetoric evokes.

Matt Nolan

For next time someone attacks macro based on the “money multiplier”

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Via the Wonkmonk twitter, this paper from the Fed.

The effect of reserve balances in simple macroeconomic models often comes through the money multiplier, affecting the money supply and the amount of bank lending in the economy. Most models currently used for macroeconomic policy analysis, however, either exclude money or model money demand as entirely endogenous, thus precluding any causal role for reserves and money.

This makes more sense if you are willing to think of economic models not as “general models” by as models of individual tendencies – identifying specific causal mechanisms.  In this way, policy making requires “multiple models”, and trying to say something like “you entirely rely on money multipliers” really doesn’t make sense.

Matt Nolan

Energy policy as a new policy issue!

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So we’ve had Labour and the Greens make the cost of energy the first big pillar of their upcoming election campaign.  The energy industry is important in a large number of ways, is something people care about, and is definitely policy relevant – so it is a good pick.  I’d note I don’t talk on “political levels” (my own failure to be sure), but it is a good area to discuss in terms of the policy society desires.

Now I’ll be honest that given this I was heavily disappointed with the analysis done by the Greens and Labour. There have been two good posts discussing the issues – Lance Wiggs and Seamus Hogan.  This isn’t going to be one of those posts.  Instead I’m going to complain about something.

I’ve seen lots of people on twitter bang on about “ideology“, “starting a debate”, etc etc … but the fundamental number they provided of an average household saving $230-$330pa is what MOST of the public cares about.  I respect the dudes and dudettes that have been saying “hey let’s just discuss energy policy”.  But I’ve just spent the last few days listening to a large number of my non-economist friends going on about how they like the idea that Labour is going to give them this money …

And that figure is a load of complete crud.

Ignore the BERL report here.  I have no real criticism of them – they were VERY transparent with their assumptions so I knew from the start that:

  1. They had assumed the energy boost was a given – they were told it by Labour and were just running a scenario,
  2. They had excluded government dividends,
  3. They had assumed persistently deficient demand.

Yes all these assumptions will in turn increase the size of the result – but none of them are actually too relevant to the claim that Labour and Greens are selling the most, that is will improve the money in your pocket.

Instead I get the feeling that Labour seems willing to ignore capital costs (I’d note the Greens do talk about the LRMC).  When looking at the electricity industry, we want to think about long-run marginal costs rather than short-run marginal costs – given that we are talking about an industry with massive fixed costs (huge costs of investment).  Kiwiblog suggests that this important point may have been put by the wayside, the use of the Wolak report gives further fuel to this fire, and finally via the Labour site:

Hydroelectric power makes up almost two-thirds of our electricity, and it costs next to nothing to generate because it uses free water and dams that were paid off years ago.

This is what the site says now – when it first came out it said “free water and dams”.  The change doesn’t matter though – as you still need to invest in new capacity as demand rises and you need to maintain the current capital stock!

Now, there are things that I would like to see work on (given I’m not an industrial economist, I don’t have the research and evidence in my head that other true industrial economists do).

  • Why has the relative price of residential power risen so quickly (relative to commercial and residential),
  • Why has investment in the industry seemed patchy at best?

Given that the electricity industry is probably the second most regulated and researched industry in New Zealand (I’m putting it behind telecommunications – although I may well have them the wrong way around!) the answers are probably out there, and ways to improve current regulation probably exist.  As a result of all this, the Labour-Greens decision to pick only a single report, misuse the figures, ignore the criticisms of those figures, and then publish a policy impact that is effectively a LIE is all the more disgusting – frikken ask some of the myriad of experts out there for some help making policy, hell some of them are Labour supporters and will likely to work at a cut price.

Sidenote:  National doesn’t get off for free here – socialism, communism, really?  In of itself a monopsony buyer is not something you can just rule out due to “ideology”.

Update:  This will teach me for commenting on blogs on a Saturday morning.  I didn’t mean to use the c word (not the really bad one), I’m trying to cut back on my swearing.  I do essentially think that the promised boost to income to people is a lie though – and I mean to use that as a loaded term – so I’ll live.

Matt Nolan

The excel error in Rogoff-Reinhart

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I see the Rogoff-Reinhart figures regarding the correlation between GDP growth and the size of the debt stock are currently under attack – due largely to an unfortunate excel error discovered reported by Mike Konczal.  Here are the list of posts about it at the moment:

All very nice.  Depending on the message people were trying to sell they either said the result was meaningless, or central, so I don’t think this makes any actual difference.  Honestly, without clear causal drivers there just were not good evidence based claims for actual policy adjustments – a lot of people were actually just saying we need to do X based on their preconceptions.  And they found this correlation either something that supports that (somehow) or something they need to rule out.

Over the last few years I have seen authors, at different times, use R-R as central to their argument on one thing, and then dismiss it for arguments regarding other issues (I’m not going to name names).  For example, you can’t use this result to say we need more savings policy because the stock of debt is to high, then complain that the study is flawed when you want more government borrowing … just focus on the actual core elements of your frikken argument instead!

My problem with the result isn’t the excel errors, or anything R-R appear to have said – it is the way it has been used as an inconsistent marketing tool by people for selling their own unrelated ideological policies.  I’m just hoping that this shuts that up.

As a side note, here are my feelings on twitter:

People who think the R&R result caused austerity overestimate the impact evidence has on government policy.