Matt Nolan

More on macro controls

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From Eric Crampton:

Because he personally has lost faith in modern portfolio theory, he wants to force all of us to invest locally. Yeah, things have been rough for the last few years. But the proposal here seems pretty worrying.

It is a great post – adding to the things I said here, so definitely give the whole thing a read.

When the environment changes, for some reason people want “control” – they want to feel like they can change what is going on for the better.  Although this is a noble goal, without trying to understand the underlying rationale and trade-offs associated with any choices, we are more than likely going to hurt people.

Fundamentally, I am willing to go out on the limb and say that, in this case, Bernard has no implicit model of the economy to base his policy prescriptions on – and so such prescriptions are both internally inconsistent and dangerous.  If he provides us with a model, and an actual description of why, I would gladly discuss it – but from the last few weeks of reading through his writing on the issue (I decided to pay more attention following the initial article – especially given that I was receiving a lot of pressure from others to respond) I have not yet ascertained what it is.

Markets fail, institutions fail, governments fail – let’s try to understand why before we arbitrarily play with them.  This is why economists struggle to understand why people fly off the rail like this, we see the point of our discipline as one of understanding and description – predictions are just an outcome from this process not the main goal (see lots of discussion on this issue).

Update:  Surprisingly related posts on Economist’s View and Marginal Revolution (*, and response).

On Economist’s View, the claim is made that “protectionism is instinct, as we struggle with non zero sum games”.  I have heard this before – and this explains why economics, and the actual functioning of the macroeconomy often seems “counter-intuitive”.  Introversion is essential for doing economics – but we have to be willing to question our intuition if it just doesn’t hold!

This is relevant, as I get the impression that many calls for macro-controls are on the basis of this instinct.

On Marginal Revolution there is a link to an article on the adjustment in the yuan.  Brad Delong’s reply also offers relevant points.  Overall, this illustrates that the true “concern” regarding currencies has existed for a while – and stems from currencies being fixed NOT from the fact that many monetary authorities are simultaneously devaluing now.  These issues need to be separated.

Matt Nolan

Race to the bottom actually race to the top

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Note:  The title should be premised with in the current extreme environment – I am not supporting the idea that we can have permanent income gains beyond potential from printing money, that would simply be inflationary.

A bunch of poppycock from Reuters on “currency wars” here.  I’ll let Scott Sumner discuss the fallacy here.

I have no idea where these guys are coming from.  A currency war causes everyone to lose?  Why is that Mr. Reich?  Because it leads to high inflation?  And what causes the high inflation?  Rising AD?  And what is the point of the fiscal stimulus you favor?  Higher AD?

Seriously, when people talk about “currency wars” do they recognise what the mechanism is that is used to lower the value of currency – well it is printing dollars.  If we truly do have “insufficient aggregate demand” this is what we want monetary authorities to be doing.  Far from being a “war” it is really co-operation …

Note:  The “imbalance view” stems from the relative exchange rates changing and prices being sticky – so that countries can sneakingly change their real exchange rate to favour exports or some such.  This structural issue is interesting – but criticising what seems to be a bunch of central banks loosening policy on these grounds misses the point.

Furthermore, lets not forget the impossible trinity here (*,*,*) – if we try to control the exchange rate we either lose control of the inflation rate, or we have to arbitrarily restrict capital flows (which is also costly – as by restricting capital flows the cost of capital will rise).  If we want to forget about the crisis and argue for a medium term strategic (arbitrary) fixed exchange rate target this is a separate issue to any near term “currency wars”.

Update:  Paul Krugman paints out the structural issue here.  Now note that the US and Europe could devalue, and they force China to devalue – so they all print more money and stimulate aggregate demand.  Ergo, we have a recovery.

The issue here is that the recovery is “unbalanced” because of the artificial shift in the relative prices faced by exporters/importers.  This issue existed before the economic crisis – and this is a trade issue.  However, the threats regarding this are as high as they have always been – I can’t remember a time that the US wasn’t trying to get China to shift its currency.

I would also note that if China is willing to lend its export income for a tiny (maybe even negative) rate of return to the countries buying its exports then it isn’t clear that they aren’t just f’ing themselves over to be honest …

Matt Nolan

A step too far: The case against pursuing direct capital/trade/currency controls

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To start off with I have to admit I like Bernard Hickey.  I like the fact he has got out there, written about New Zealand economic issues, and pushed to add an open debate type platform to the discussion regarding the New Zealand economy.  As a result, I may have not been critical enough when I read his posts in the past – as I did not see this coming.  In truth, the calls for exchange rate, trade, and capital controls is a massive step too far in what could well be the wrong direction.  Let me talk about the points Hickey has raised:

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Matt Nolan

When illegitimate is legitimate

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Over at Not PC a number of economic and social concepts are termed “illegitimate” namely:

  1. Externalities,
  2. Opportunity cost,
  3. Free-rider problems,
  4. Stake-holder theory.

However, these are some of the most important – and legitimate – concepts that should be looked at when forming policy.  I don’t like to use the word should lightly – but in this case these are central legitimate concepts.  Ignoring them would simply lead to bad policy.

So, to illustrate this, let me briefly discuss each concept:

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Matt Nolan

Oct 1 GST increase: Transfer from the old to the young

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There has been a large number of people, specifically Gen X and Gen Y people, saying that baby boomers are selfish and have eaten up all the resources for themselves.

The case has been that baby boomers took free education, then when they got jobs they cut taxes and charged their children for education, then they purchased multiple houses and charged their children rent.  Sure, this is all probably true.

However, today GST has gone up and income tax has fallen.  This implies that younger people, who generally borrow to build up human and physical capital, have experienced a lifetime tax cut.  Meanwhile, older people who have assets and net savings have experienced an increase in their lifetime tax burden.

Yet have we heard any more rubbish about “intergenerational war” and transfers between generations in the lead up to this?  Well no.

Ultimately, the idea of intergenerational transfers has been overplayed.  New generations are benefiting from the established capital stock and technology – in fact if we care about each generation equally we would WANT to transfer resources backwards in time.  I get the feeling that Gen X and Gen Y (my generation) are simply a little bit to argumentative, and would like to pretend that they are being horrendously wronged – this makes sense to me, as I happen to be very argumentative myself 😉

There is a good article on the issue here, by Nigel Pinkerton from Infometrics.

Matt Nolan

Actors back union out of self-interest

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I agree with Peter Jackson that the Aussie film union is a “bully boy”.  And I find the actors supporting a boycott of the Hobbit highly self-interested.

For one, we know that having the unionisation of the workforce will lead to fewer movies, and the exclusion of potential “actors” who would work for lower wages – but can now not get a job.

Given this though you might say, how are the wealthy actors being self-interested?  After all, these minimum conditions have nothing to do with them!  However, this is just not true.

Since we know that unionisation limits the potential pool of actors, and that the acting skill requires “learning by doing“, we can say that this type of unionisation limits competition for actors roles – and so will push up the wage these actors can demand.

How can we say that labour in the NZ film industry is being exploited?  These people are willing to work for the current wage – and there is an industry here willing to hire them.  The fact that some of the workers want to exclude other workers from the industry to drive up their own wages is abhorrent – and I don’t understand why these big name actors believe they are taking the moral high ground when they are simply acting in their own self-interest