Matt Nolan

The US economy is still very mighty

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I was sent a book called “When Giants Fall” – which I am part of the way through.  It is very well written, although I have some issues about the economics type ideas in it.  Once I have finished it I will be sure to pop a review up.

One of the implicit claims in the book and among many people I’ve heard from is that the US is only ahead of everyone else because they are borrowing – once the game of musical chairs between developing nations and the US stops the US will not be the primary superpower, or even a superpower, anymore.

Now I don’t really buy this.  Lets think about the GDP of the US.  Now if the US is borrowing to buy things this wouldn’t increase GDP – as any increase in consumption or investment would be netted out by a similar increase in imports.  US GDP is currently $13.8 trillion pa (US definition of trillion 😉 also all figures are in US$ as of 2007).  The other big boys have:  Japan, $4.3 trillion pa, Germany $3.3 trillion pa, and China $3.3 trillion pa – these three produce less per year COMBINED than the US produces.  World GDP is $54.3 trillion pa – so the US accounts for about a QUARTER of world production.

Sure the US has borrowed a lot, and sure the US economy is in big big trouble at the moment, but lets keep some perspective here – the ability for the US to produce is far beyond anything that any of the rest of the world has.  Could this change over time – sure.  But I wouldn’t say that the US has solely relied on borrowing – it also makes a hell of a lot of stuff.

Matt Nolan

Articles, economic flows, and tax authorities

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The Interest Blog has linked to a couple of old Dominion Post articles from Infometrics economists:

One the provides a metaphor for the slowdown in economic activity.

And one that describes the possibility of centrally determined tax rates. (I have mentioned that one before).

Enjoy …

Matt Nolan

Why prefer spending to savings

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Prime Minister Key appears to believe that it is in the interest of the nation for us all to take our tax cuts and throw them around – either spending them or finding other people to spend them for us.  However, I don’t see why we have to rely on consumption now or giving to charity to do this.

Our credit market is working – if we give money to the bank they will lend it out to someone that will spend it.  The person that spends it will earn income in the future and pay the bank back, and the bank will pay us back.  Where is the issue here?  The focus really shouldn’t be on spending – it should be on production.

Now, if the credit market was broken in NZ there could be a different story.  Hell if unemployment was nose-bleedingly high you could make a case for it – but it is 4.6%.

Bernard Hickey at Interest Blog expresses similar sentiments here.

Matt Nolan

Is qualitative easing a partial default?

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The Fed is going to buy some government bonds.

Now, if they fund this buy printing money – doesn’t this effectively imply that they are shifting the burden of their recession from taxpayers to bond holders? If so, isn’t this equivalent to a partial default on debt.

I don’t think other countries would be allowed to do this.

What am I missing?

Update: CPW points out why I’m wrong – effectively I’m presuming that the Fed won’t stick to a future inflation target anymore, which is not really a fair assumption.  He pointed me to this very good post as Econbrowser, and I also really enjoyed this post on Greg Mankiw’s blog.  I’m nervous about the Fed’s willingness to pull back the QE/lift rates in the future – but this is no different to the usual concern I hold during the whole economic cycle.  The introduction of QE hasn’t actually changed this issue.

Matt Nolan

Why I’m sick of hearing about “productivity”

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There is nothing wrong with productivity, I love productivity. But why does this government have to bang on about it like it is an issue they actually have control over.

Increasing productivity implies that we can make more stuff for the same amount of labour and capital – now this is a completely good thing, we can be wealthier without any more work! However, surely when I put it this way alarm bells must start to ring!!!!

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Matt Nolan

Tarot card reading and Economic forecasting

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So I’ve started reading the moral philosophy and economics book I was discussing, and on the eighth page I found this quote:

The idea that studying ethics could help people do economics or policy analysis may seem far-fetched.  Why not consult tarot cards instead?

Now I do not agree with the first part of the above paragraph – policy analysis requires value judgments to reach conclusions, and understanding ethics helps to inform value judgments.

But my focus is on the second part of the paragraph.  Why the dig at tarot card reading?

My impression that his focus is on the broader form of economics that requires value judgments in order to reach conclusions – however, if this is what he is focused on tarot card reading is virtually equivalent.  Let’s discuss why:

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