Matt Nolan

Video: On the unemployment leap

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Agnitio sent me a couple of links to an interview I did on unemployment last night (here and here).

It is consistent with what I wrote yesterday, even if it doesn’t seem that way.  Furthermore, I don’t believe the government was too “inactive” in this case – we aren’t a centrally planned economy, blaming the government appears pretty arbitrary.

Relative to my expectations (which albeit were low) the government actually performed quite well in terms of the recession – by not really doing anything excessive, but still trying to make sure that any painful transitions are smoothed over (by not removing, and augmenting, automatic stabilisers).

Matt Nolan

The Dec 09 UR: Terrible, but not

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What the hell does my title mean.

Well, let me be straight up – the headline number is a lot worse than expected … especially by me personally.

However, the more general “underutilisation” measure (the number unemployed + the number of people who want more hours all as a proportion of the labour market) was in-line with what I felt were my overly optimistic expectations!

What does this suggest – well it sort of suggests that the people that were laid off during the December quarter were the people who wanted more hours in September, sort of (as we are excluding normal seasonal factors as well).

My opinion here?  The fall in hours worked points to a weak December, especially in conjunction with other partial indicators (QSBO, money supply, inflation expectations).

But so what, the past sucked.  Forward looking expectations are strong, our trading partners are genuinely recovering, and we have an intelligent Reserve Bank that understands how to balance inflation expectations and prevent arbitrary pain in the economy.  When we see hours worked pick up it is game on – that is the one to watch.

Economic activity will remain below trend for some time, unemployment will stay higher than we would like for some time.  But surprising even the shock of a much higher UR number is enough to suggest that the outlook is significantly worse than it was.  Why is this surprising?  If you had told me that UR=7.3% yesterday without telling me about underutilisation I would have been in a mild state of shock.  However, putting these numbers in context has eased my mind.

Update:  Other commentary at Rates Blog, Kiwiblog, Gonzo, the Standard, and No-Right Turn.

The unemployment issue is a lot more complicated then it is being made out to be methinks – it looks like NZ is undergoing a structural shift as well as a standard “recession”, blaming the government doesn’t make sense in this type of case.  For an example, look at manufacturing employment …

Matt Nolan

Strategy spaces and monetary policy

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Over at Worthwhile Canadian Initiative, Nick Rowe suggests that central banks should find something else to discuss instead of interest rates.  The analogy provided is that of oligopoly competition: namely how the Cournot-Nash and Bertrand games have exceedingly different outcomes, even though the only superficial difference is that one game involves choosing output and the other game involves choosing price.

However, in the same way I don’t believe the difference in these games is just the product of “framing”, I am not sure if the call to arms against using interest rates as a focal point is necessarily that compelling.

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Matt Nolan

NZ inflation expectations end of 2009

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Yesterday gave us the Labour cost index.  This index provides my favourite (albeit partial) measure of inflation expectations, the adjusted private sector labour cost index.  Anyway, what is it doing?

In conjunction with the negative annual growth in the money stock during the close of 2009 (note our caution) it looks like inflation isn’t a clear and immediate concern …

Matt Nolan

RBA, what the …

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Ok ok ok, so trimmed mean consumer price inflation is running at 3.2% (ht Institutional Economist), house prices rose by 12% on a year earlier (around 18% annualized), my favourite measure of inflation expectations – the labour cost index – rose by 3.5% on a year earlier.  So given the RBA expects trend real growth (3%), the premium on credit has fallen to about 50bps, and the cash rate is only 3.75% a rate increase is in the bag right!!

No – they left rates unchanged.  The statement seems to indicate that an increase is coming next time, why they didn’t now I have no idea 😛

As far as I can tell this is why:

Concerns regarding some sovereigns have increased

If you are worried about the world RBA just say so, we’re friends and transparency is a great thing in a friendship.

Furthermore, you have an inflation problem.  As a concerned party I would love to intervene on your behalf but I can’t.  You are going to have to get rates up and get this inflation down.

In New Zealand inflation is contained and the Bank does have some time to think.  In Australia they need to keep moving.

Update:  My impression is that a decline in the money stock could also engender caution – broad money declined by 0.8% (sa) in the December quarter, the fastest rate of decline since July 2002.  They may feel that this is an indicator of weakness in Dec quarterly activity rather than a run down in reserves on the back of rising interest rates.

Matt Nolan

Zero tax threshold: No thanks

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I don’t like the idea of a “zero tax” threshold at the bottom of the tax system.  I see it was suggested today by Mark Keating, so I thought I should explain why I feel this way (ht Kiwiblog).  I’ll put down three reasons, in reality the third reason is by far the most important:

  1. I don’t believe the cost of “churn” is very substantial – implying that any benefit from setting a zero tax will be negligible compared to taking the tax and sending it back.
  2. The effort required to set a zero tax and enforce payment of tax when moving out of the bracket requires effort as well – as a result I don’t think it is self-evident that setting a new bracket would reduce administration costs (it might even increase them).
  3. If we set a zero tax bracket this also acts as a tax cut for EVERYONE earning more than that amount.  This has to be paid for by INCREASING other tax rates (substantially as well, since the loss of the bottom bracket will cost more than an equivalent cut anywhere else).  As a result, effective marginal tax rates will be higher than if we taxed and paid benefits (for the same average tax rate in other words).  This reduces labour supply incentives for higher income earners.  As these earners tend to be more responsive to tax there would be a SIGNIFICANT efficiency cost.

Yes, the zero tax rate at the bottom will increase labour supply incentives for those on very low incomes.  But this will only lead to efficiency gains if we believe it will get the more elastic secondary earners into the labour market.  If we are doing it to promote equity it doesn’t make sense – as those that are actually poor are likely to provide very inelastic labour supply.  Overall, it is likely that the negative impact of higher EMTR’s on middle and high income earners will outweigh any positive impact through a increase in, our already enormous, part time labour force.

The purpose of the zero tax bracket is to make sure that people get a minimum living standard.  The better way to do this is to ensure that society pays everyone a living wage at whatever level it believes is fair.  Leave redistribution to the welfare system (where our social value judgments are transparent), tax needs to be applied on the basis of efficiency in order to be effective.