Quote of the day: allocative efficiency and output gaps
It takes a heap of Harberger triangles to fill an Okun gap.
Gossip as a co-ordination device
Everybody complains about the slacker in a workplace who gossips about their colleagues. But what if the gossip is actually a device for sharing information about free-riders? And what if sharing information results in an equilibrium with fewer shirkers?
More than 220 students were asked to describe the last time they talked about someone behind their backs and then fill in a questionnaire about their motives for doing so. It found that gathering or checking information was the most important motive.
A second study involving the same participants asked whether they would gossip about somebody who was shirking their share of work to a colleague or friend who they bumped into. People were more likely to gossip about shirkers to colleagues – who belong to the same group as the shirker and the person spreading the gossip – than to friends.
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When people thought someone was gossiping about a shirker in order to protect their group they viewed the act of gossiping as more social and less immoral than in other situations.
Via The Daily Mail, so make of that what you will!
UK debt and default
There’s been a bit of discussion about the possibility that the UK government’s debt might be downgraded by the ratings agencies.
In response to those suggestions Jonathan Portes claimed that “…unlike countries in the Eurozone, there is no possibility of the UK defaulting, so our fiscal policy is not constrained by markets in the same way; and we should ignore the credit rating agencies, because they’re irrelevant.” He cites the head of the OBR, Robert Chote, as support for that view. Now I don’t deny that there is little chance of the UK defaulting, but I think Portes is only telling half the story. Read more
Fiscal rules need an enforcer
Since the Autumn Statement there has been a lot of discussion about fiscal rules. One of the most substantive comments has come from Simon Wren-Lewis, who is something of an expert on the subject of fiscal rules and fiscal councils. His conclusion is that
…the main problem with the UK government’s fiscal mandate has nothing to do with cyclical adjustment or any of the other things discussed above. It is just inappropriate for the situation we are now in.
There is a lot of good stuff there, so head over and read it, but I’m not convinced by this conclusion. To understand why, let’s go back to the reason for a fiscal rule. The idea is that we need rules to commit the Government to a sustainable debt path because the political incentives don’t necessarily push them in that direction. That means the rules need to constrain the government’s actions in times when it is inconvenient for them to exercise prudence. It is certainly not enough for the rules to be kept only when it is politically convenient.
Wren-Lewis is saying that there will be times when even the best rules must be broken. However, if the Government is given the task of deciding when to break the rules then they may as well be discarded. Rules that bind the Government only when it feels like being bound will never do the job that they were designed for. To be effective, fiscal rules must be resilient to external shocks so that they can force governments to do the prudent thing when it not in their political interests to do so. Anything else compromises the credibility of the rules beyond saving.
That is not to say I disagree with Wren-Lewis that there are circumstances in which you might want to breach the rules, whatever they are. It’s just that you can’t let the Government decide when such circumstances have arisen. This is a strong argument for having an independent body to enforce the fiscal rules, and to decide on circumstances in which they might be legitimately ‘bent’. Rules are usually used in tandem with an independent council who can both enforce the rules and credibly legitimise departures from them. In Sweden, for example, the independent fiscal council recommended that the government run bigger deficits during the financial crisis.
Wren-Lewis may be right that the UK’s current rules are too inflexible to deal with the present situation, but a government can’t expect to break its own rules and retain credibility. Either another mechanism must be found or the fiscal rules become a paper tiger.
Carney endorses NGDP level targeting!
Mark Carney’s speech last night:
For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP.
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…when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.
Huge news for the market monetarists! Here is comment from Sumner and Britmouse.
Why cyclical Kiwisaver would be an awful tool
Via Rates blog I see that, at the conference on government finances over the past couple of days Michael Cullen suggested making compulsory Kiwisaver contributions pro-cyclical (combined with the scheme becoming universal) as a monetary policy tool. I appreciate he wanted the auidence of academics there to think outside the box, but this is actually a pretty poor idea. I am sure these matters were discussed at the conference, but I will lay them down here in any case:
There is little evidence Kiwisaver increases national savings – and when it does, it is because of the “credit constrained”
Remember, just because we have to contribute to one savings vehicle doesn’t mean that households won’t borrow or dissave from other vehicles to compensate. Work by the Savings Working group and Treasury suggested that Kiwisaver had very little impact on savings, and in the long-term it may actually reduce savings due to it being a relatively blunt way to promote savings (inefficient).
Compulsory Kiwisaver would lift savings, in so far as it does, by making some people unable to borrow or dissave in order to meet the level of consumption/investment they desire – as a result, this policy only works to promote savings in so far as it makes people worse off …
It isn’t savings that is the monetary policy issue – it is investment/consumption demand
For kicks, lets pretend that Kiwisaver does push up savings depending on the contribution.
Also targeting domestic savings misses the point on what we are trying to do here. Remember, we use interest rates for monetary policy because they determine the intertemporal “price” that determines when people consume or invest out of current income. A low interest rate now makes it relatively more attractive to consume/invest now – and if resources in the economy are underutilised at current interest rates, we would like this “price” to be lower. The combination of a clear inflation target, and central bank policy that chases down this price, helps us to smooth the ebbs and flows in the economy.
If we were a large closed economy, then we know that pushing up savings would force consumption and investment to fall for a given level of income (as disposable income is lower) – under some conditions this may well do the trick. This is like some sort of paradox of thrift style view, with Kiwisaver actually determining savings (so it needs to bind on the upside AND the downside).
Although this is a stretch, matters are even worse than that! We are a small open economy, households and firms can borrow from overseas if their disposable income temporarily falls.
We use interest rates because we are changing the incentive for NZer’s to invest and consume, using Kiwisaver has nothing to do with actually monetary policy in this sense.
It is not politically independent
This is an obvious one.
It is even blunter than interest rates
I’m adding this, but the first two points were really all I was interested in writing 😉
Tl;dr
Kiwisaver doesn’t necessarily change savings levels, and it is underlying consumption/investment demand that really matter. Given this, “compulsory Kiwisaver with cyclically varying contributions” is too clever by half – and shouldn’t be considered as a stabilisation tool … especially not as part of “monetary policy”.