Matt Nolan

Two-handed economist: The accidental compliment

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As someone with the job title “economist”, a large number of my friends only contact me when they want advice on buying currency or whether to fix their mortgage or buy as asset.  After providing my thoughts about why things might happen, and what the risks are, I often get the comment “damned two handed economist, not willing to take a position”.

People think they are insulting me.  However, if that is the actual attitude of my friends in this case I’d gladly point out that they are being utter morons.  Instead, I take this as a compliment.

If I was going to “take a position”, why would I rattle it off to someone, instead of actually taking on the risk of doing so myself – if I genuinely thought that buying and selling currency offered me a good risk adjusted rate of return at this point in my life, then I’d do that, rather than just suggesting it to people.

When giving advice, I simply want people to be aware of the risk involved in the choices they are making – and the fact that there are reasons why asset prices may move one way or the other (and a good number of unforecastable, or unforeseeable, things that may pop up).  To give this advice, I need to to be two-handed.  It is my job, as a good friend, to help inform not to tell my mates what to do.

It would be the height of arrogance to pretend that, with my training as an economist, I could instantly turn around and fill the role of a professional risk manager for a certain asset class, or the CEO of a firm for a certain product.  Instead, I pull together news, ideas, and a good dollop of statistical analysis to provide information for people that will make decisions – filling a role in the production process, not trying to control it.

So economists, stop being so defensive about being called “two-handed” and stop feeling as if you have to take a specific “position” to have worth.  The world is complicated, and your advice (if based on intense questioning and analysis combined with clear communication) is valuable in the way it helps people make choices.  Embrace the fact you’re born with two hands and make sure you use both of them!

Matt Nolan

New Zealand’s bubble

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I know, I know, I’m very late to the party – while I was busily writing about factor shares and income inequality the big news in New Zealand was this discussion of how our housing market is a “bubble”!

A bunch of points have already been made about why the US to NZ comparison isn’t fair, our shortage of housing being key among them.  Shamubeel also did an excellent post last week noting how the framework for thinking about the issues wasn’t really there – and what was missing from each of the points raised.

However, there were a few things that didn’t get play that should have over the last couple of weeks.  As a result, and after conversations with a bunch of wonderful people who were interested in the issue, I thought I would do a blog post noting these points.  Here is what I said in the conversation:

Remember, New Zealand banks have already been stress tested on 30% house price declines – and found to still be solvent.

It would be fair to discuss risk if the conclusion was only a fall in house prices by itself.  But picking a gigantic recession for a small open economy, with a fragile global financial market, is virtually meaningless for planning purposes without a catalyst/narrative.  It sounds more like marketing than a real forecast.

We would need a situation with massive household bankruptcies for the NZ banking sector to struggle (loans aren’t nonrecourse).  To me that suggests our banks have strong power over consumers, and there are more important regulatory failings than banging on about bubbles.

Also, our external debt is mostly in NZD nowadays, with maturity of over 90 days.  Crisis happens, dollar drops, foreign investors have taken on that risk.  I find it surprising – but good for NZ.

The key points raised here:

  1. Unlike the US, NZ loans are not non-recourse.  People are still stuck with their mortgage if house prices fall.
  2. NZ banks have been stress tested on a large house price decline, and the banking system was still holding together.  We need to think about specific shocks to think about risk – the real fear is a massive drop in export prices, which leads to greater defaults in both agricultural and housing loans.
  3. Banks have changed their external funding significantly in recent years – with the maturity a lot longer and currency risk being shifted further towards overseas investors.  If a crisis strikes, this implies that the liquidity issues will be less severe, and the value of our gross debt will also drop (due to a lower currency) – a fortuitous situation!  These figures are all available on the RBNZ’s website if you want to check them out!

We aren’t like the US prior to their housing market imploding – we have our own sets of risks and concerns we need to think about.

Matt Nolan

Labour and monetary policy

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Labour has put a bunch of thought into its discussion on monetary policy – and there is certainly nothing wrong with discussing the issues and putting out a policy document, in fact there is a lot right with that.  Furthermore, over their entire document they recognise this is a multi-faceted issue we need to be careful with, I appreciate that a lot.

However, there are still a few glaring issues with the way they discuss monetary policy:

  1. They keep mixing “monetary” policy with longer-term “fiscal” policy.  It is not the RBNZ’s role to determine longer-term fiscal policy – this is undemocratic.
  2. On that note – the “external balance” is not an RBNZ target, and nothing they are suggesting actually helps that.  This is a general issue with medium-long term savings-investment imbalances, and we need to neatly define what the welfare relevant “problem” is before we go swinging around policy and reducing the ability to “judge” the Bank by giving it piles of targets.
  3. They don’t seem to appreciate how much monetary policy HAS changed during the last 25 years as institutions try to adapt to the changing world around us – their view that policy structures are no different than they were in 1989 is totally wrong.
  4. The variable Kiwisaver idea, controlled by the RBNZ, is horrible.  It comes from a good place IMO – they are looking for counter-cyclical tools that are used by an independent body.  But as I’ve explained, this is a particularly bad one, and will hurt the defacto independence of the RBNZ.  In addition, this “tool” won’t help the “external balance” – as the average savings rate should be unchanged.

Labour’s focus appears to be on exporters and manufacturers, as given there discussions with people they believe there is an issue there.  However, monetary policy, and the monetary policy choices of the Reserve Bank, are not the cause of this inherent S-I imbalance which forces NZ interest rates to be on average high.  Investigating why this is, and trying to understand it and base policy on issues in that, is the way forward.  This is why we’ve had a savings working group, a tax working group, and a productivity symposium – as all these structural issues, and the trade-offs they represent, are related.

These whys matter intensely for deciding policy – wasting time trying to mess around with one of the institutions that is working (in terms of keeping inflation in the band, and moderating the drop in output/employment, during the largest external shock since the Great Depression) to look like we are facing the issue is not doing this.

Matt Nolan

Discussion Tuesday

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This one is from the magical world of Twitter:

Once again, remember that these are points for discussion – I am not saying I agree or disagree with them.

Matt Nolan

Quote of the Day: Kolm on inequality

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One of the forefathers of modern income inequality analysis, Serge-Christophe Kolm, started one of his most famous papers (REPEC) in the following way:

Many people consider the reduction of economic inequalites as a basic aim of society. Such ideas are, however, largely nonoperational, sterile, and even meaningless, as long as what is called inequality is not stated with precision. This is so because, as well appear below, different measures of inequality give widely different, and even opposite, results. Such policy which diminishes some apparently reasonable measure increases other ones.

This is no small point.  While it is nice for us to bang on about “reducing inequalities”, it is nothing more than empty platitudes if we aren’t willing to discuss the trade-offs associated with individual policies.

Also, let’s not forget this quote:

Few concepts are as meaninglessly used as that of inequality.

But this is not because he thinks analysing issues of social justice don’t matter – in fact it is the complete opposite!  He believes that multi-dimensional ethical issues deserve careful and specific analysis, rather than being thrown into one broad, and close to meaningless, term.

Like exchange rates, productivity, GDP, and inflation, inequality is a broad macro(social/economic) term that can be used as a touch stone to go on to think about other real issues.  But it should not be allowed to become more important than these issues, and an understanding of the trade-offs that do exist when we go to make policy choices.

Matt Nolan

Other reviews of Capital

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Having looked into our own review of Capital, and discussed some of the common misconceptions of the book, now is the time to allow a bit more perspective.  Here are a bunch of other reviews of Capital in the 21st Century that I have hunted down.  There is no way I’m saying I agree with all the reviews here – as if I did, my opinions would constantly contradict!  Instead, I just want as broad a range of views here as possible.

There is no particular order, but it appears that the more critical ones are ‘on average’ at the top.  This is because they turned up later, and I tended to add things near the top of the list as I was too lazy to scroll down 🙂

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