Matt Nolan

The housing bubble: Why implicit insurance may well be the real driver of Piketty’s concerns

/7 Comments/in , /by

Alex Tabarrok at Marginal Revolution points out that, without the run up in house prices, we do not get Piketty’s trend of rising capital to output ratios in the data.  This is very true, and was one of the key reasons why I wasn’t convinced that Piketty’s explanation of his data was the best available.

Now Piketty expressly discusses capital gains in his book – and he points out that he does not view the current increase in the value of capital as a bubble, instead it is the value of capital returning to its “real” level.  In that way, he views the idea of saying that we have a bubble as both wrong and beside the point.

Say that we accept the implied assumption he works with – that there isn’t (and hasn’t been) a bubble in housing markets.  Given this, it is important at this point to consider the narrative he has for history.  He discusses a period (pre-WWI) where governments offered a high risk free rate of return, where wealth was (in some ways) heavily insured by government, and where (as a result) the value of capital was high and the private risk premium was low [best example of this was his discussion of the UK, where government debt offered a high risk free yield for those who could invest in it].  WWI and WWII – with the combination of war and the change in government policies (towards appropriation and direct regulation) changed this – the private risk premium was now a lot higher, and the value of capital dropped as a result.  Government protection and regulation is BUILT INTO the price of an asset!

In Piketty’s data we are looking at a situation where government policies have changed, and as a result so has the inherent private risk premium associated with assets, pushing up the price of assets.  This description suggests that, if there is a failure, it is due to an “implicit subsidy” by governments to capital owners – it is in essence the same policy failure that those in financial/macroeconomics have been discussing for years now (a quick look on the blog for recent posts gives these 1,2,3,4 – more importantly don’t forget this and suggestions by Cochrane to make the financial system run free and remove this implicit subsidy).

If this is the real cause of the changing capital to output ratios, then it suggests economists have already been investigating the key cause – and that there is no natural tendency for capitalism to head this way.  Even if we don’t deal with the inherent injustice, capital/output ratios shouldn’t intensify.  And furthermore, this would suggest that there is no need for a capital tax to deal with the perceived injustice – instead we just need to remove an implicit subsidy, and it make investigation into financial regulation even higher on the research agenda!

This is an incredibly important issue to investigate with respect to Piketty’s central thesis – his data set is incredible, but there is a lot of work to be done teasing out what it actually means, let alone defining what correct policy is.  Even while I was reading this book, I could not get this alternative hypothesis out of my head – and Tabarrok’s post has just increased my belief that this alternative hypothesis is the correct one.

Matt Nolan

Minimum wage and the “deserving poor”

/1 Comment/in /by

Via Marginal Revolution I see that there is a paper common confirming the intuition that the minimum wage is a wage of targeting a given view of the “deserving poor”.  Essentially, those with a strong taste for leisure are assumed to be the ones that lose their jobs first in the case of a minimum wage (efficient rationing) and as a result the minimum wage gives a way to “target” our income transfers to those we think are most deserving.

I have so far only skimmed the paper, and the Saez 2012 paper that justifies efficient rationing – so take my comments with a grain of salt.  However, I have two issues with this:

  1. The efficient rationing argument does not appear compelling – the wage will be in excess of the market wage for both types of workers, so the efficient rationing argument seems to rely on a situation where lower labour demand is primarily working through the intensive margin and the “high leisure” individuals are either generally unemployed or loosely tied to the labour market to start with.  I need to think on this point more – but it is the crux of the issue.
  2. I generally find the “deserving poor” argument weak.  I don’t like the normative assumption that we should favour people with one set of preferences over another – the general policies I’d favour don’t follow this type of assumption.  Now, society may hold this view, and then society should make policies along this line – that is fine.  But I don’t have to like it 😉

I want to read these papers in more detail and write about this business.  The new minimum wage and optimal tax literature is formalising a lot of topics that we’ve previously used “intuition” on, and that is pretty exciting!  Why – well formalisation helps to make assumptions transparent, which is what we really want to do before going around and trying to figure out policy.  However, it is going to be a while until I get to this, as I get very busy through the middle of the year – and this year is busier than usual!

If anyone knows the literature, and would like to do a guest post, I would really like it – compensation would involve a beer and a discussion about economics in a Wellington bar 😉

Matt Nolan

Power prices: A rolling list of links

/4 Comments/in /by

It appears the people very much care about power prices, and that the organisation of the electricity industry is something people are discussing.  It is an interesting issue, but large chunks of it are outside my area of knowledge (even moreso than what I usually write about!).  Furthermore, unless we get a guest blogger in to write on the issue (email if you are keen) our current blogging line up isn’t going to cover this.

But we shouldn’t ignore it.  Here are some links I’ve spotted post EA Report – feel free to mention other links about the issue in the comments, and I’ll throw them up here.  [Our discussions pre-report can be found here, here, and here.  Also, neat post from 2009 I don’t feel I have anything to add to these at this point].

A set of three articles on Stuff with people arguing details about the Electricity Authority Report (here, here, and here)

Business NZ.

Fabians.

Gareth Morgan.

Wolak.

Note:  John Small has comments and links on earlier discussion here.

Matt Nolan

Discussion Tuesday

/9 Comments/in /by

Via CPW we have this gem of a discussion point.  Once again, remember that these are points for discussion – I am not saying I agree or disagree with them.

Would economics, and economists, enjoy a better reputation and be more influential if they jettisoned most of macro-economics as being pseudoscience (as measured by its predictive power)

Matt Nolan

Housing shortage: When is a shortage not a shortage

/10 Comments/in /by

It is received wisdom that Auckland has had a housing “shortage” for a prolonged period of time due to insufficient supply.  However, on the face of it this is a bit strange as:

  1. Residential investment:  Yes building rates have been low during the past 7 years, but the value of residential investment in the prior 7 years was very high.  The “volume” was lower, but what does that mean (we’ll come back to it).
  2. Growth in rents have been low.  Low low low.

In this way many people have, justifiably, questioned the idea of a shortage.

However, there is one potential explanation that could match both these facts and still give us a “shortage” that can help to drive the high price for housing – a fundamental imbalance in the supply of “types” of housing.

Read more

Matt Nolan

Immigration and monetary policy: Let’s be a bit careful

/5 Comments/in , /by

Note:  I realise I have been writing about Labour’s policies and not other parties – I have been very busy, and only write about things when I get a chance.  If you want me to write about any specific party policy, email me, and I will try to have a go 🙂

Labour is talking about varying migrant visa approvals in a counter-cyclical fashion, as a way of helping out the RBNZ with monetary policy.  This bears some relations with stated thinking fro some members of the RBNZ [Update: Michael Reddell, the author of the paper, justifiably pointed out in the comments that the Labour type policy is not related to his work – and that my statement was unclear.  He is completely correct – his work and a counter-cyclical visa instrument are about different things, an important point to keep in mind!].  Now this isn’t about the level of migrants coming in – only the timing – so this isn’t a way of us shutting our borders.  I would like to keep the two issues separate in this instance, so we can think about the specific policy more clearly.

Furthermore, the focus here is very much on short term variation with regards to monetary policy – not a long term view of high interest rates and the real exchange rate.  This issue is much more contentious IMO, and deserves separate discussion.

Much younger (but far less charming) me, at the start of the blog, noted how inward migration boosts “demand” and “supply” in a monetary policy sense, so we need to consider our arguments carefully!  So the idea is that, when migrants first appear they have to set up in NZ and may not get integrated into the workforce straight away.  As a result, the first thing they do is “increase demand”.  The demand for housing, for building housing, for buying other non-tradable services pushes up the interest rate (although we also have to ask how they are getting the income to provide this demand – is it that they are bringing a capital inflow with them and this is the driver?).

As a result, lowering visa quotas when the economy is running hot and lifting visa quotas when the economy is cold could help to limit variability in interest rates right?  Well, not so fast:

Read more