Matt Nolan

Against the 10 reasons for Fitch downgrading NZ

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Bernard Hickey posted on the 10 reasons why Fitch should downgrade New Zealand’s credit rating, it is an interesting post that you should run off and read before looking at this 🙂

Now that you have read that I am, for the sake of argument, going to counter each of these points. I cannot provide a “slamdunk” against anything, but I can raise the other side of the argument so that we can really think about the issues that little bit more.

Note that in many ways I agree with Bernard Hickey about our current situation being slightly precarious. However, I feel that going through these factors on the other side is a useful exercise for understand exactly what we need to look at.

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Matt Nolan

Don’t start targeting asset prices, target inflation

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ANZ has suggested that we need to broaden the RBNZ target to include asset prices.  No.

Everyone seems to be mixing up the RBNZ’s monetary policy goals and its financial stability goals.  Now, inside of the financial stability targets a good look at asset prices and a dose of prudential regulation COULD be useful.

In terms of monetary policy this does not matter.

The goal of monetary policy is to shift around the interest rate and the supply of money such that “inflation” is constant.  Inflation is the growth in prices that has nothing to do with changes in productivity or changes in relative prices.

Is the CPI imperfect as a measure here, yes.  But it is better than an arbitrary measure that mixes up the price of goods and services in the economy with the price of assets (discussed here).

If I had to target something, I would target expected future growth in the adjusted labour cost index.  But that is a story for another day 🙂 [in fact this isn’t an issue I have covered in the inflation debate yet, I’ll have to have a sit down and think 😛 ]

Matt Nolan

RBNZ on “sustainable” growth

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So on the 14th of July Alan Bollard said the follow in a speech to the Hawke’s Bay Chamber of Commerce:

Sustainable recovery, with rebalancing in demand and the economy’s productive base, is mostly a microeconomic matter. This means households, firms, banks and investors making the right decisions about where to allocate land, labour, capital and funding.

I agree, any issues with the sustainability of growth (read the composition of growth relative to the fundamentals of the economy) depends on the incentives provided to the individual agents in the economy.  If there are issues with the incentives we should ask, “where is the market/government failure here”.

Then on the 30th of July the OCR Review had this in it:

The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks

A higher dollar will lead to lower GDP growth yes.  A higher dollar change the relative price of importing vs producing, leading to more importing yes.  A higher dollar promotes consumption and debt, yes.

BUT, the higher dollar may be the result of rising prices for our goods, or a stronger growth outlook, in which case complaining about it makes no sense.

Furthermore, even if it doesn’t seem justifiable we should recognise that it is a symptom of the imbalances, not the fundamental cause.  If our dollar is “too high” we need to ask what fundamental incentives are out of whack – what policy errors have been made, what institutions are causing problems.

For the RBNZ the dollar is about monetary conditions – if they think monetary conditions are too tight, cut the interest rate to promote consumption now.  Cutting the interest rate because of concerns about the sustainability of future growth makes no sense.  The sustainability issue is not a monetary policy issue.

Matt Nolan

No tax cuts?

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So Bill English has said there is now no room for tax cuts, specificially:

New Zealand had to get out of the tax-cut “mode” it had been in for the past five years, he said, because of the new economic conditions, which see budget deficit forecasts of up $12 billion for the next 10 years.

So since not cutting taxes in the face of inflation is actually “increasing real taxes” Bill English is saying we need to get rid of the Budget deficit by gradually increasing taxes.

There is another way – cut real spending. If New Zealanders are in “tax-cut mode” because they think real spending is too high, and would rather have a government that is a smaller share of GDP, then we should cut taxes and actually do something about spending.

Mr English is attempting to soften the ground for what could be some radical ideas emerging in the next few months from the comprehensive tax review being undertaken by leading tax experts.

I am glad to see that they are looking at ways to improve the tax system. But this is only part of what needs to be looked at. I know that we are being told they are cutting spending, but I’m not sure if there is much more scope for cutting morning teas to public servants.

We need to look at the hard issues (namely: Working for families, interest free student loans, our high level of infrastructure spending) and then we need to ask, is this what we should be spending societies effort and production on?

Note:  To be fair I have a lot of respect for the fact that Bill English admitted the limits on tax cuts and spending.  That sort of transparency is an important part of good government, so it is awesome to see.

Matt Nolan

Private costs are not policy relevant

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Repeat after me:

Private costs are not policy relevant

Private costs are not policy relevant

Private costs are not policy relevant

Now when the Law Commision says (on pg 169) (ht Offsetting behaviour):

These are controversial issues and the Law Commission is in no position as
yet to arbitrate in this debate which has become highly charged.

What they really mean is that, they would like to pretend private costs are policy relevant. However, since they don’t want to be criticised for it they will pretend they aren’t making that value judgment.

How do I know they are making a value judgment – well they come up with policy recommendations like “increasing the tax on alcohol”. Making a recommendation involves making a value judgment, regular readers will remember this.

Law Commission, you have come out on a specific side by giving a policy recommendation. Pretending you are being objective when you aren’t (which reminds me of this quote the Hand picked up) is not cool.

Update:  Anti-Dismal covers as well.

The Hand

NZIER on emissions targets

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So NZIER thinks it doesn’t matter whether we reduce local emissions or just pay off third-world countries to reduce them for us. Apparently the only important issue is whether we satisfy our responsibilities that we’ve committed to. The money quote is:

It allows emissions reductions to take place in the country where it is cheapest to do so. The climate doesn’t care where the emissions reductions occur, so nor should we.

Economists just love to assume the world’s a perfect place but, so often, reality bites them on the ass. Yeah, I’d like to THINK that when I bought a credit from Somalia they were implementing a project to reduce their forecast emissions. In reality they probably spent the cash on guns and powerboats like your Tracker Targa boat, and forged the certificate of additionality. The fact is that a lot of credits available on the international market either have dubious additionality value, or cheaply reduce GHG emissions by destroying the environment in other ways. When you buy on the international market instead of reducing your emissions domestically that’s the sort of thing you’re buying into. If you don’t believe me then ask the gospel 😉

Ultimately, the environment doesn’t care if NZ satisfies its international obligations, it only cares how damaged it gets. When you buy on the international market you just have to accept that you’re not doing it to help the planet, you’re doing it to meet the letter of the law. If that’s the way you want to play international diplomacy then fine, but don’t pretend it’s because you’re a greenie at heart!