Matt Nolan

How many economists see government

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I have seen economists termed “growth fatalists” for the fact that we don’t believe that there is much government can do to change underlying economic fortunes.  Greg Mankiw posted a quote that summed up the position well:

Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm.

If I’m honest, I think that the belief that government can create growth magically stems from the fact that people want to feel like they have control of things – economic growth is something that impacts upon our daily lives that we have no control over, but if we can tell ourselves we have control it is easier to live our lives.

In the same way our forefathers would worship the sun, or a “god of the harvest” our modern society worships government policies that “will provide economic growth”.

Discuss 😉

Matt Nolan

Translation: Foreign investment

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This time from Frogblog:

Foreign investment is driving up the price of rural land to an extent that it is unaffordable for many would-be New Zealand farmers to own their own farms

Translation:  Foreign investors are willing to pay at a higher level than is appropriate given the rate of return of the land for domestic land owners – so allowing them to buy the land increases wealth.

I agree with this – but not so much with the “tone” Frogblog is giving the issue.

High land prices are driving farmers to make the maximum possible return from their land through ecologically unsustainable farming practices

Translation:  Farmers are dumb and will only maximise their revenue stream when they are struggling.

I don’t really agree with this – there could be a “competition issue” but in my experience farmers aren’t “dumb”.  Furthermore, even if we do believe there are negative externalities from farmers farming practices – shouldn’t we find a way of making them pay for the external cost of their actions.  Banning voluntary trade with people who aren’t “New Zealanders” is insanely, well, xenophobic.

Update: Turns out you can support xenophobia under the guise of democracy – as long as it isn’t actual democracy, but what the party believes society actually wants.  I am glad I have people here to explain this to me …

Matt Nolan

Selling farms, a thought experiment

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I agree with Kiwiblog and Anti-Dismal strongly regarding foreign investment.  Kiwiblog is completely right when he says that restricting foreign investment does the following:

  1. The current owner of the land is unable to sell the land for as much as they otherwise would have got. This means less wealth in NZ.
  2. The foreign owner of the land, as they valued it more highly, may be able to put it to better economic use (as they need higher returns to cover the higher capital) and this can contribute to a more efficient economy.

For someone that doesn’t believe this, and wants to say that “selling our assets means we will send more $$$ overseas” this is not the case – we can illustrate that with a little, massively oversimplified, thought experiment.

Imagine a firm took out a loan to invest in, what they thought was, the best use of the land.  The loan is expected to have an average interest rate of 6%pa, and is borrowed from people with credit overseas.  Over time they find out that the rate of return they get is only 4%pa – so this is a loss of wealth for this person.  Furthermore, if we wanted to talk about the “country” this is a flow of funds overseas.

If we allowed this person to sell the asset, this flow disappears.  The person that purchased it can make their rate of return at 4%, but the 6% being sent overseas is no more.

Ultimately, if we think we are “borrowing too much” from overseas we need to think on the flip side of that – are we spending too much relative to what we earn?  If so, why?  Instead of restricting foreign trade we should be asking how the incentive structure in our economy is working – and then we can see:

  1. Whether there is actually any problem
  2. If there is a problem, the most direct way of improving outcomes.

And if we think, for some reason, that all of society owns the land – then why not introduce a land tax as a form of “rental”?

Matt Nolan

More defence

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Ok, so there were a couple of comments in the previous post that I think I need to discuss in order to explain why macroforecasters have value.

Read more

Matt Nolan

Careful throwing stones: The employment rate

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No Right Turn suggests that John Key is “intellectually shallow” (the Standard makes the same claim) for calling the employment rate the percentage of the working age population employed (ht CPW).  I was surprised with this, as that is also the definition I use.  Furthermore, it is the definition the OECD uses.

NRT’s belief that the employment rate = 1- UR is wrong, and it would be a relatively pointless statistic to release.  However, just because he got it wrong does not lead me to the conclusion that he is “intellectually shallow”.  In fact, I will appreciate his posts with the same amount of interest that I usually do.  I just suspect that he should be a little more careful before throwing around stones attacking other peoples intelligence.

However, there is one place where I disagree with NRT AND John Key – “catching Australia” is a managerial consultants view of policy, and doesn’t make sense on either economic or social policy grounds.  (Comments here, here, and here).

Update:  Anti-Dismal agrees that this goal is weird.

Matt Nolan

Hold up: In defence of macroforecasters

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Hold up a second here.  My two favourite bloggers have consecutively posted suggesting that macroforecasters are essentially a waste of space (Offsetting Behaviour and Marginal Revolution).  As a macroforecaster I am inherently biased, but I think that such forecasters can add value.  Let me discuss why.

As I have said in the past, if a forecaster thinks his value comes from the accuracy of predicitons, and sells himself as such, he won’t be adding value.  The economic environment is too uncertain, and our forecasting methods too imperfect, to simply rely on forecasting accuracy per see.  But given that we can’t provide a perfect version of the future – we must offer something else.

As I have also said in the past, we provide a description of what has happened, a service on the sort of things going on, and a point of view regarding the risks around the economic situation.

I have asked a number of clients what they find useful, and what they want from us, and I generally get told that they like to have information condensed and described in a clear, consistent fashion.  Having someone available who is keeping up with the news, and is willing to discuss it at any point has value – and as economists we can also paint risks around the situation, and indicate what “general economic” issues people should keep an eye out for.

The value stems from this service – a service that most private sector macroeconomists are blatantly honest about.  Essentially we would never say “this IS going to happen” we would always say “given this set of information, we see this set of potential outcomes, and have this set of probabilities on them – as new information is released we will tell you what this indicates about the general economic situation”.  We definitely aren’t there to tell people how to run their business – we are just there to provide information regarding the general environment this business activity is taking place within.

Sure the information may disparately be floating around in places, but we tie it together and use the economic method to interpret it in a clear concise fashion.  It is a service, a service people are willing to pay for, and so I would suggest it must have value.