jamesz

UK fiscal rules and the Autumn Statement

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The big news out of George Osborne’s Autumn Statement last week was the abandonment of his fiscal rules. But the real story for economists was in the OBR’s forecasts. There were two rules:

  1. The cyclically adjusted budget deficit must be eliminated within five years (a rolling window); and,
  2. Debt must be falling as a percentage of nominal GDP by 2015-16.

What’s notable about both of these rules is that they are about a future balance, so whether they have been met is presently a matter of judgement for the official forecaster. That forecaster is the Office of Budget Responsibility, an independent body that is incredibly transparent about its models, methods, and judgment. In this Autumn Statement its forecasts predicted that the Chancellor will breach his debt target. He is forecast to meet the deficit target, but only by a small margin.

Before getting worked up about Osborne failing to meet his target let’s remember that meeting fiscal targets is not inherently noble. It is a means to and end, and that end is long-term fiscal sustainability. It is ensuring that the country’s debt is manageable in the long run. So the real question is whether Osborne’s targets have much relation to that objective. Read more

Matt Nolan

New Zealand’s middle class

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Here I go, banging on about how the issue of “middle class squeeze” isn’t the same in NZ as it may well be in the US.

I’ve talked on this before of course, what can I say I’m a man of limited imagination 😉

Matt Nolan

Another example of why we need a full story

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I was sitting around working the other day, and at that point in time it involved downloading and playing with PPP (purchasing power parity) data in order to compare a bunch of GDP and consumption figures for work.  All very exciting.

At that moment I looked around the internet a bit, and noticed people complaining that we needed to be more like Australia as they were richer, and that our exchange rate was too high.  Having these points put together illustrated to me how policy prescriptions can often be based on reactive thinking, without truely asking “why” this is the case.

Why did I think this?  Well, Australia’s exchange rate has been “over-valued” relative to the New Zealand exchange rate in PPP terms for a long, long, time (the last time it was close was about 1995).  In fact, if we were to go solely off PPP terms for the NZ/Aus exchange rate the New Zealand dollar should be worth more than the Australian dollar – true story.  And yet, Australia is one of the wealthiest countries in the world (on a per capita basis).

This is why, when discussing what is going on in New Zealand I prefer to focus on a clear narrative that is based on a mixture of what we see in data (the persistent current account deficit, low savings) and a consistent theory that bases these stylized facts.  Just saying that our manufacturers are uncompetitive and trying to mess around with the nominal exchange rate misses a lot of the macro story here – it misses the idea that the returns to manufacturing may be falling (due to easing scarcity), it misses that we may not have the scale for such things, it misses that we may have a comparative advantage in other place (see the trend of our rising terms of trade), it misses the fact that returns to manufacturing have been hit by a global recession, and it refuses to acknowledge possible policy settings in the country that have created the underlying and persistent low level of savings relative to investment.

There is no silver bullet, instead if we are going to implement policy we should first ask “given trade-offs that exist, where does current policy differ from policy that may be seen as socially desirable”.  To ask this, we need a clear conception of what society values and what the trade-offs are.  Chasing silver bullet policy that will “save the NZ economy” is simply a way for the loadest interest groups in society to steal resources from everyone else.

People may complain about economists here, why haven’t they been saying anything!  Well, they have – well before I was wearing my economics diapers New Zealand economists were complaining about the persistent current account deficit, the lack of savings, and NZ’s uncomfortable investment balance.  These issues are worth more discussion – and I’ll consider doing that once my sore throat has cleared up and Christmas is over 😉

jamesz

Ethics of doping

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Peter Singer on doping in sport:

At the elite level, the difference between being a champion and an also-ran is so miniscule, and yet matters so much, that athletes are pressured to do whatever they can to gain the slightest edge over their competitors. It is reasonable to suspect that gold medals now go not to those who are drug-free, but to those who most successfully refine their drug use for maximum enhancement without detection.
…
Julian Savulescu proposes that instead of trying to detect whether an athlete has taken drugs, we should focus on measurable indications of whether an athlete is risking his or her health. So, if an athlete has a dangerously high level of red blood cells as a result of taking erythropoietin (EPO), he or she should not be allowed to compete. The issue is the red blood cell count, not the means used to elevate it.
…
To those who say that this will give drug users an unfair advantage, Savulescu replies that now, without drugs, those with the best genes have an unfair advantage… Setting a maximum level of red blood cells actually levels the playing field by reducing the impact of the genetic lottery. Effort then becomes more important than having the right genes.

This discussion of the value of genes vs effort, and the morality of using drugs to level the genetic field, seems to have parallels with social redistribution. We begin unequal because of genetic differences. Through a system of taxes, subsidies, and other transfers, we redistribute the fruits of effort, genetic talent, and opportunity.

What is interesting is that most people think it is fair to redistribute some of the fruits of talent to the least lucky in society. That is why we have progressive systems of taxation, for instance. But, in the sporting arena, pure talent and opportunity is glorified and there are few serious movements to redistribute the lottery. That’s not to say there isn’t some action, but the call for more equal outcomes in sporting contests clearly not as strong as in economic contests.

jamesz

Precommitment without external help

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In an interesting post Bill Kaye-Blake discusses how we might overcome internalities through autonomous precommitment. As we’ve discussed previously, commitment mechanisms tend to involve external contracts: agreements with friends, or monetary contracts are common. But might we be able to commit our future self without external mechanisms?

I wonder if selecting identities is a way that people overcome the problem of time-inconsistent preferences.

By deciding ‘I am a vegetarian’ (or ‘I am a non-smoker’ or ‘I am a saver’), you construct the immediate consumption problem differently. The impact of the burger or cigarette isn’t on your heart or lungs but on your identity. The marginal impact on your physical health may be nearly zero, but the impact on your identity is binary. You are no longer that which you have decided to be.

Selecting an identity allows you to make a portfolio of decisions all at once. You commit to the identity. Then, to preserve the identity you have to do the behaviour in the future and in the now. Identity becomes a strategy for pre-commitment.

Eric points to this paper by Sunstein and Ullman-Margalit, which says much the same thing

Matt Nolan

Financial regulation: Efficiency vs stability trade-off

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Over at Rates Blog the trilogy of articles I’ve put up about the GFC has been completed with this one.  The first two artices are here and here, and the blog post I did on them are here and here.  Infometrics will be popping up some more articles on Tuesday’s, but they won’t be on the GFC anymore 😉

So in the first two I mentioned uncertainty about the lender of last resort function as a catalyst for the crisis, and a reason why it persisted.  However, this isn’t a costless function – it is true that introducing financial regulation to induce “stability” will impact on the efficiency of the financial markets.

We like to pretend this is not the case.  We like to pretend that the government has the knowledge and ability to figure out what the “externality” is and what “credit ratios” are appropriate – and so faced with a crisis we tend to focus solely on stability.

However, this is not the case.  In fact, the crisis occurred in part due to our determination to make the banking sector around the world more competitive – leading to the development of the shadow banking sector to avoid regulation.  In such a case, we can only get “appropriate” regulation when we in turn accept lower competitiveness in the banking sector.  And given the “supernormal profits” banks get in this case, they are ripe for second best style regulation through the central bank.

In truth, we either throw out the central bank and have competition over the medium of account through banks directly (allowing them to work together in the face of bank runs), or we have a central bank who directly regulates the whole businesses – it was our attempt to get the best of both worlds that helped us wander into the situation we found ourselves in.

Now none of this is news for central banks – they have been trying to length maturities for bank liabilities and clarify and improve regulation in the banking sector for some time.  The crisis was a reminder of the unintended consequences of regulation – firms (in this case banks) can innovate to avoid regulation as well, and that can be costly.  This must be taken into account, and the full cost involved should be accepted, when it comes to setting up policy – rather than throwing around piecemeal rushed ideas and concepts.