Matt Nolan

Read Brian Fallow

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Off you go.

In the end it comes down to supply and demand. The Reserve Bank can only influence the demand side of the economy – and that with difficulty and a considerable lag. It can’t do anything about the supply side.

But Governments can.

Rather than insisting that it take employment into account when making interest rate decisions – as though it didn’t already – it would be more helpful for politicians to focus on policies that would, for instance, create a better match between the skills employers need and those job seekers have to offer.

Very good.

Matt Nolan

Papers to read

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Via Marginal Revolution

On a banking glut.  On excessive financing.  Both arguing against the “excessive savings” view of the crisis – which is currently my prior.

Will be reading these (rereading in the case of the second one) in order to avoid listening to more crap about the NZ election … seriously, I didn’t realise how much politicians lie during an election till I became an economist, and I’m still uncomfortable with it.

FYI:  I agree with the description of macroprudential policy, but I remain nervous about the “time series” policies – which are really just non-interest rate cyclical tools.  We need a significant burden of proof before these instruments can be used – although I suspect at present monetary authorities are aware of this.

Matt Nolan

Too little economics caused the crisis/inequality

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There seems to be a suggestion that economic principles, and the worlds focus on them, is one main reasons why inequality has risen in a way that many are uncomfortable with.  Furthermore, it is common to hear that the economic principles taught to bankers were at fault for their being a financial crisis.

To me, this illustrates that people do not know what the “economic principles” are – and if they did it would become self-evident that it ignorance of these principles that drives poor policy by government and financial institutions.

Just look at the principals that come under this category.  It merely states that people face trade-offs, and make choices given the incentives they face.  How can these sorts of terms be at fault for causing the crisis, or leading society down a path where they were willing to accept higher inequality?

Dig even further into the most subjective elements of economics – welfare economics.  This is the stuff most economists steer away from – because they are too worried about looking like they will have a firm opinion, instead of just being descriptive (at least that is my excuse).

Look at the welfare theorems – they state that, under a given set of conditions with some initial endowments, people will trade and prices will adjust to give us so that no-one can be better off without making someone else worse off.  And on top of that, the government can transfer some of the initial endowment and voluntary trade will lead us down a road where the same condition holds (pareto optimality).

Many will then criticise economists for coming up with a model that takes on unrealistic assumption – but instead think of it this way, with this result what can we ask:

  • If we can transfer resources and allow the allocation to change, which transfer gives the outcome that society values the most?
  • Under what conditions do transfers have real effects?
  • In what cases does our result break down – and in what ways does reality represent this?

Given these questions, economists set about to try and frame issues for policy makers.  With an entire frikken set of transparent assumptions, and discussions around the potential trade-offs, they aim to provide a mixed platter for society to pick from.

And what happens instead?  People prefer to run around, pretend there are no trade-offs, lie about the impact of policy, and then when they face the costs of their actions they just blame other people.  And that is why I say that if people in society accepted scarcity, and understood the basic principles of economics, we would have better policy – and a good argument for more redistrubtion if that (for the cost of some income) was what society wished.

If the teachers have failed, it isn’t because they aren’t being critical enough of the economics establishment – it is because they haven’t been able to make children understand the basic tenant of economics, which is that scarcity exists, and that economics is the study of how to describe scarcity and the allocation of scarce resources in society.

Of course, given that this is stated in the first lecture of all economics courses, I prefer the explanation that the students that walked out of Mankiw’s course were just spoiled brats trying to do something that would make them look cool – after all, I have no doubt that was the incentive they faced.

Matt Nolan

Should the US really keep blaming the exchange rate with China?

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Bemoaning the Chinese exchange rate when talking about the structure of the US exchange rate is looking increasingly unreasonable.  I don’t think either country should be messing around with trade policy and intervention, and I think they are both doing irresponsible things.  But if we are just going to look at the exchange rate lets actually look at it (thanks FRED).

Take into account that inflation has been stronger in China than it has in the US, and you get a story where the real exchange rate is probably lower than it was in 1994!

China is buying up US bonds at an incredibly low rate of return, as long as US isn’t “pissing the money in the wind” I can only see this sort of action hurting China – not the United States.  If the US is going to criticise China for creating and now maintaining “imbalances” I would like a slightly more sophisticated argument than “look at the exchange rate”.

How about “look at the artificially low rates of return in the past due to excessive artificial savings” – you make that argument, and it becomes obvious that fighting against China loosening global monetary conditions during a period where the world is suffering from tight money (even with amazingly low interest rates – as the equilibrium real interest rate has dropped markedly) and the  developed economy’s central banks wont doesn’t really make sense …

Matt Nolan

Facing the bloggers

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I will be doing a free presentation to the blogsphere in Auckland on December 2, followed by a Wellington presentation on December 10.

You guys have been good to me, challenging my preconceptions and helping me to develop my ideas understand (ideas was a stupid term – I never come up with anything original, I just aim to try to understand the world around me given the knowledge that already exists 😉 ).

I want to give something back by giving you guys a rundown on what has been going on in the economy, and some of the issues we should be keeping an eye on over the next three years.  Given that it is after the election I’m calling it a “post-election economic update for bloggers”.

I will pop up more details closer to the time – I just wanted to give you guys a heads up that this is happening, and that you are all more than welcome.

For those that cannot make it, I will pop up the slides on the site after the Wellington presentation.

Matt Nolan

A minimum income can replace a minimum wage

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That is the suggestion here from Gareth Morgan.

I agree of course, I have said the same thing here before – both when raising what my policy platform would be and discussing the minimum wage more recently.

It is fine to disagree with this and say “only people who are part of the labour market are part of society” – but in that case lets make that transparent and build our policy platforms from there.  I don’t agree that platform (hence why I would push for a minimum income) – but the current state where we don’t face issues of income adequacy OR fairness simply leads to inconsistent and unfair policy.