Matt Nolan

Quote of the day: On theory and data

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From Eric Crampton:

I tend to be pretty skeptical of results that aren’t grounded in basic price theory or that aren’t confirmed by a lot of different methods, including both Ocular and Ordinary Least Squares.

A single paper merely helps people to update their priors – it doesn’t provide conclusive evidence of a result.  Often when it comes to economic discourse there is too much “faith” put in single results that tend to reinforce whatever the authors prior is.

That is why the economic method in itself is a useful tool – but the process of reaching a conclusion, or justifying why a result holds, is one of debate and discussion.  It is more of an art form than anything else.

Unless you can say why a stated result means very little.  No matter how fancy your data analysis or theoretical model is, unless you can explain it it means nothing.  Luckily, economists out there do go around explaining why – which is why I have much more faith in the analysis of economists than many other disciplines.

Matt Nolan

Labour market is a lagging indicator …

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… at least lets hope so right 😉

Unemployment rate rose to 6.8%, and the employment rate is at its lowest level since June 2003.  Further (relative to seasonal) weakness in part-time employment was the kicker here – which is why total hours worked (the size of the labour input in a sense) still rose.

Relative to many other countries our unemployment rate is still low – but the fact that a rising proportion of people are out of work for a long time is concerning, as these are the people that really struggle (loss of human capital, happiness, etc).

One thing I will say is this:

It has been worse.

Matt Nolan

Savings working group report: Media release, first impression

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I am busy with labour market data (and the EPL transfer window), so you won’t get a good read on the report from me until later tonight, or even tomorrow.

However, I was happy with the media release in the most part.  Especially the discussion of tax bias toward housing (and away from interest bearing investments) and the fact that it was over-investment in the housing stock (paradoxically while we were underbuilding in terms of the number of houses – this bit is just from me, not the release though) was one of the main drivers of debt accumulation.

Mentioning the risks of a “sudden stop” is a good step towards the justification of some type of externality/multiple pareto ranked eqm among outcomes – which could justify subsidisation.  So if they have made that case, with associated evidence, it is a relatively persuasive one.

Matt Nolan

Private sector fails to take on losers …

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Interesting series of quotes on the disaster that was think big.

The years of media coverage have not been kind to the “think big” projects of the early 1980s – speculated to have cost taxpayers about $7 billion.

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“It’s a peculiarity of New Zealand that both our main parties have been interventionist and it was partly because time and again the private sector failed to provide.”

The private sector failed to ‘provide’ by investing in projects that lost $7bn … that is fair enough in my opinion.  The question is, why did the public sector feel like we should have to throw money down the toilet as taxpayers 😉

I’m being a little facetious here of course.  Rather than evaluating the loss, we need to ask if ‘ex-ante’ – given the risks and the information at the time, and given societies preferences/taste for risk, was this a good idea.

And here we have the kicker – the fact the private sector was unwilling to do it, when they would have to face the risks, suggests that it probably wasn’t a good idea to start with.  Even if think big had “succeeded” it was still bad policy.

Nowadays, I like to think that we base policy on evidence and logical argument – lets hope that actually is the case.

Matt Nolan

More on commodity booms

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After today’s discussion on food prices, it was interesting to see a speech out of the Reserve Bank.

The speech was painting risks – so stating things that could occur that were both positive and negative (risks are not just negative things when your current forecasts “balance” risks).  It was good, it raised issues, and it gave me an idea for a post for next week.

But, who the hell picked the wording on this:

New Zealand farmers are still recovering from the last commodity boom

And I suppose employees are still recovering from the large increase in wages during 2007, and oil drillers are still recovering from the record high oil prices in 2008 …

Yes, farmers overborrowed, sure.  But it wasn’t so much the commodity boom that did it – rather the expectation that land values and high commodity prices would make highly leveraged farm buyouts economical … when some were not.

I imagine farmers are really still recovering from the commodity slump during the GFC, weakened access to credit, and a sharp decline in farm values.  The statement “recovery from” is not the first thing that comes to mind when thinking of a period when incomes were high 😀

… You might think picking up on this is pedantic – but seriously, the wording the Bank uses is analysed in detail.  And statements are constantly compared to try and get a feeling for where policy is moving.  Saying that farmers are recovering from a period of high income gives the impression that they expect farmers to expose themselves again if commodity prices stay high – which is a big call.

I can (and constantly do) mis-speak, because I am not important.  The Bank is important – it sets policy – and the train of thought that is betrayed by their language dictates how the market forms expectations of their policy

Matt Nolan

Pricey food and New Zealand: Net and distributional issues

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I have been crawling closer to writing about food prices for a while.  Originally I was going to only write about distributional issues, but now I’m going to write a little more.

A report released by NZIER yesterday afternoon suggested that New Zealand would be worse off, as a whole, if the relative price of commodities stayed high.  In truth, this result seems like an unlikely counterfactual to me in the current situation (even in the long-term) but the difference would likely stem from some of our implicit assumptions regarding the drivers of higher food prices – and as a result the net income effect and the change in domestic capacity.

However, it is not just people within New Zealand that are concerned, both Matt Yglesias, VoxEU, and the Economist are bemoaning high food prices.  To get an idea of the issues lets split ourselves into three sections:  1) short-term impact of current high food prices, 2) distributional impact of these prices in the short term (this is just for NZ, as it is an important point),  3) long-term impact of high food prices – and what it means if the relative price does stay higher.

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