Matt Nolan

Is New Zealand fighting a wave of protectionism?

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Protectionism is a scary thing during a global downturn. A bunch of nations trying to “protect” their own interests can turn a bad situation into a worse one.

New Zealand wants to fight off what it sees as protectionism – namely subsidies for dairy farmers in Europe. However, although there is too much protectionism out there I’m not sure our argument against this set of policies is watertight.

If we think that the current shock to dairy prices is temporary, and that dairy prices will come back when the current massive increase in supply works through the system, then it makes sense for Europe to temporarily subsidise farmers in the face of a MASSIVE CREDIT CONSTRAINT.

Industries all around the world are struggling to sort out their cash flow because of a freeze up in lending. If the firms are still profitable given the expectations of future prices, then it makes sense for domestic government to prevent the industries from failing.

Do you think this type of intervention is defendable – discuss 😉

Matt Nolan

Obama disagrees with me

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No doubt people here know that I am concerned about any stimulus package that comes out without realising that “potential output” has taken a knock. I believe that people out there that are nervous about the stimulus package have the same concern in mind.

However, it appears that Obama does not feel the same way 🙁

Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished

Well, if he believes that the economy’s capacity is undiminished, and he believes the CBO’s potential output estimates, and he ALSO believes the economy then won’t recover then he can justify some stimulus. However, if the capacity of the economy really is undiminished he should make it clear WHY the economy won’t recover and then focus any government intervention into solving this specific problem.

Of course, I do think capacity has been diminished – at least a little. If this is solely the cause (which I’m not necessarily saying) there is little that the government can do – other than helping to reduce the cost of market adjustment …

Matt Nolan

A structure for our value judgments

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Earlier I mentioned that Paul Walker and myself had different ideas surrounding the need for a stimulus in the US. Fundamentally I think he is completely against while I see scope for some stimulus.

Over at Brad Delong’s blog he mentions a description of the stimulus by Kevin Murphy.

The structure he describes is below:

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Matt Nolan

Market panic: Should we trust it?

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Mark Perry at Carpe Diem has an excellent post comparing the 1991/92 recession to the current recession in terms of “media reporting”.

As he illustrates in his post, the constant comparisons to the Great Depression also occurred during this time – even though for the US it was a relatively mild recession.

Although I am a little more pessimistic about the current outlook for economic growth than Mark Perry is, I agree with his point, and think that it is especially relevant to today – there is often an incentive for people to exaggerate the severity of a crisis (to sell papers, or extract surplus from government).  As a result, instead of just buying the hype, economic commentators should try to keep in mind what is fundamentally going on – whatever you think that is 😉

In terms of New Zealand we should also remember that 1991/92 was a terrible recession – unemployment reach 12% and average income (according to the GNDI) fell 10%.  Even a repeat of this type of recession is a cause of concern for us here in little old NZ.

Matt Nolan

Arnold Kling on the economics profession

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Arnold Kling from Econlog has an excellent post on the debates between economists. One of the best quote for me was:

There are economists making the case against the stimulus in ways that I find unpersuasive (Eugene Fama, for example). But the economists making the case for the stimulus are not doing a very good job, either.

There is no definitive answer. Those that are selling stimulus as the ONLY possibility are merely using a different set of value judgments than those selling the market as perfectly self-correcting. Ultimately, as Arnold says:

My advice to Will Wilkinson would be to distrust one-handed economists when it comes to macro

Economic models are incredibly useful for framing a situation like the one we are in now. However, don’t let the ideology of certain economists be more persuasive just because it is from economists.

I would add that by far the most balanced economic discussion on the crisis has come from Econlog and Marginal Revolution. And the reason that there description has seemed so balance is because they are TRANSPARENT with their value judgments – massively different to many of the other US economists on the blogsphere.

Matt Nolan

Institutions fail: What about it?

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Over at Anti-Dismal, Paul Walker has replied to a comment I posted with a couple of posts. Now I thought I should repay the favour by writing something up 🙂

Update: Paul replies here.  I agree with absolutely everything he says, but ultimately I think our views on what constitutes “optimal” action still differ as a result of different value judgments.

You should definitely go read the posts, they are very good posts which cover the idea of government failure, and the limits to market failure through asymmetric information. I completely agree with all the objective parts of his posts. However, I still believe my response to “Now there may be something wrong with the price system, but there is a lot more wrong with the government system”:

That’s really your key value judgment isn’t it. I’m not sure I agree. I am not a fan of “multipliers” – but in the face of a large, sustained, market failure I find it hard to conclude that there is no role for government.

Here’s why:

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