Shamubeel Eaqub

Blogging vs sensationalism – Economic Bubble?

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Social media frenzy over the news-quiet Easter weekend. Blooger at Forbes.com says NZ economy is headed for a bubble! Hat tip to Jessie Colombo for creating a media storm.

While there are reasonable and often cited risks in his analysis, the substance is lacking. You will find any number of economists, including in the RBNZ and Treasury, highlighting the risks from high Auckland house prices, high household debt and concentration risk in exports (from our increasing exposure to emerging markets, China in particular).

Here are his 12 reasons and why I think there is reason not to panic:

1)     Property prices have doubled since 2004

In Auckland and Canterbury. They have fallen elsewhere.

2)     New Zealand has the world’s third most overvalued property market

Yes. Auckland is.

3)     New Zealand’s mortgage bubble grew by 165% since 2002.

Bit selective. Household debt to income has actually been going sideways, if a little down, in recent years. Although not paid down the rapid accumulation in the 2000s.

4)     Nearly half of mortgages have floating interest rates.

Actually 73% by value. But you can fix if you want to. Which borrowers have done in the past. This is not to say that rising interest rates wont bite, but they will be spread over a long period of time.

5)     Mortgages account for 60% of banks’ loan portfolios.

I haven’t verified this number, but presumably this is bad if this will lead to high defaults. New Zealand does not have the legal structure to allow borrowers to walk away from their debts. Also, even during the recession of 2008 and the early 1990s mortgage default rates in NZ were relatively small.

6)     Finance, not agriculture, is New Zealand’s largest industry.

Like any advanced economy services are a big part of the economy. This is not surprising. Although he misstates the data. The top 10 industries as per GDP are:

  • Information Media and Telecommunications    7%
  • Professional, Scientific and Technical Services                   7%
  • Owner-Occupied Property Operation (National Accounts Only)                  7%
  • Rental, Hiring and Real Estate Services                  6%
  • Wholesale Trade              5%
  • Construction      5%
  • Health Care and Social Assistance           5%
  • Retail Trade        5%
  • Transport, Postal and Warehousing       5%
  • Financial and Insurance Services              5%

Agriculture details are:

Production approach

  • Ag 3.2%
  • Fishing 0.6%
  • Forestry and logging 1.1%
  • Food manufacturing 4.6%
  • Wood & paper product manufacturing 4.6%
  • Total 11.1%

Export approach

Or Ag related exports are 43% of total exports and 14% of expenditure GDP.

Like most advanced economies the services sector is a large share of the economy. Ag, forestry and fishing is around 7% of GDP as at 2010, compared to the OECD average of around 2%. Finance & insurance directly account for around 10%, while the OECD average is around 6%. Most debt in NZ is intermediated by the banking sector (smaller equity market etc). Details available at oecd.stat

7)     New Zealand’s banks are exposed to Australia’s bubble

Not really. Banking regulation in NZ separates our banks from direct exposure. Although our cost of funding may rise if tarnished with a Aussie housing bust. Real economy threats too from a recession in our second biggest trading partner.

8)     Australian and Chinese buyers are inflating the property bubble

Really? I still haven’t seen evidence of this. So cant comment.

9)     New Zealand has a household debt problem

Same as number 4.

10)  Government overseas debt has nearly tripled since 2008

Government net debt to GDP is less than 30% of GDP and denominated in NZD. Whats the issue?

11)  The New Zealand dollar is overvalued

NZD is high relative to history. Export share of GDP is at a historically high level. A fall in the NZD would spur exports and reduce imports.

Here is what to expect when New Zealand’s economic bubble truly pops:

The property bubble will pop.

Sure in Auckland.

Banks will experience losses on their mortgage portfolios.

Like they did in the GFC? More than half of the housing market in NZ crashed in the GFC and bad debts peaked at a very low amount. Don’t buy this argument.

The country’s credit boom will turn into a bust.

We haven’t had this already?

Over-leveraged consumers will default on their debts.

Why? Its not America. You cant walk away from your debts. This did not happen in the GFC.

Stock and bond prices will fall; the New Zealand dollar may weaken.

Good.

Economic growth will go into reverse.

Ok. Thats what happens in a recession.

Unemployment will rise.

Ok. Thats waht happens in a recession.

 

Matt Nolan

Some misconceptions about Capital in the 21st Century

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After reading Piketty’s book, I have run into a good number of comments from people about it.  Some of them appear to be based on some confusion about what the book is saying.  Below I’m going to note down some of the more popular ones, and point out why they are not backed by the central thesis in Capital.  This follows on from yesterday’s review.

This is not a criticism of any of the people making these claims – given the way the book has been discussed, and the nature of the text, I can understand where the confusion has come from.

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jamesz

In support of dynamic scoring

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Estimating the impact of tax cuts is a tricky business. You can fairly easily calculate how the revenue from current income and spending will change, but that’s just the beginning. The problem is that people don’t stand still: they change their earning and spending habits in response to your tax changes, which changes the revenues from the taxes. The UK government is pretty good at estimating that but economists have long known that there are a couple more stages before you have a full picture of what’s going on. That’s why HM Treasury has begun to use a dynamic, computable, general-equilibrium (CGE) model to estimate the effect of tax changes.

CGE models bring us closer to reality…

The CGE model accounts for the long-term effect on the economy of changing behaviour. In the case of cuts in the fuel duty it accounts for the growth in production caused by a reduction in transport costs. Increasing production generates more road traffic, which yields more fuel duty revenues and partially offsets the cost of the cut. Using the CGE model to ‘dynamically score’ (as the jargon goes) the cost of the tax cut incorporates effects these effects that are not a part of the traditional approach. Read more

Matt Nolan

Book review: Capital

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Here is my book review of Capital in the Twenty-First Century [Review of Capital].  I have tried to avoid other reviews, so that I can give a perspective based on my own reading of the book – the only bits I’ve noted before now are these discussions, this twitter post, these “reviews”, and this interview.  As a result, I have probably covered a lot of ground that has already been covered, just in a less informed fashion – my apologies!

My review is very long (20 pages).  Although it is still written as a blog post there are no hyperlinks or links to other blog posts, I’ve tried to go directly to literature instead.  Here is a pdf version of the review [Review of Capital].  So if, instead of reading this online, you’d prefer to make yourself a coffee, grab some dark chocolate, lie down on a bearskin rug in front of a roaring fire, and fall asleep to something, then this review should do the trick.

I will put down a cut down (and more accessible) version at some point well in the future – it already exists but is promised to other people.  In this post I will just put the “summary” section, if you want to read the full review you will have to click on the pdf version of the review.  My review is not very accessible, and I’m sorry about that.  However, I didn’t feel that I could discuss Piketty’s argument as “one thing” when it is very multifaceted – I hope this is clear from the summary at the start.  Going through the argument in the way I have, and then discussing assumptions involved individually, helped me to understand what is going on – so I may as well still share it 🙂

Note:  In the review there were two things I directly said, but I’m not sure if my language was clear enough – but as I can’t access the file prior to posting I’ll just stay here.  1) In the example, the higher MPL from higher K drives up w and drives down r, that is why I state w/r is higher – my language isn’t quite clear enough in it.  2) when discussing the average as the minimum wage worker, the point is that in reality individuals/households “move between” income deciles a lot, making this an awful benchmark – again my language may not be clear enough.

If you catch logical mistakes in the review, I’d love to hear from you – the reason I wrote this without reading anything else was to ensure that I gave the book an honest appraisal, on the basis of my actual understanding.  I’m more than happy to learn where my understanding is wrong.  Here is the introduction and summary:

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Matt Nolan

Discussion Tuesday (on Monday)

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Continuing on with value judgements:

Social groups can evolve to changing social structure surprisingly rapidly.  As a result, basing policy on inherent “social values” (such as for housing) is at best an exaggeration, and at worst nonsensical.

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

Note:  The early timing on our discussion Tuesday is to make space for three Piketty Capital related posts this week – the first of which is a book review tomorrow.

Matt Nolan

What do Easter trading laws and bus timetables have in common?

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Today is Good Friday, I have just moved house, and have no food – so I’m trying to work out how to source some.  As a result, you may think I’d be supportive of ACT saying that the Easter trading laws are archaic and need to be overhauled.  But even in my hungry stupor, I realise that there is a potential defence of Easter trading laws – the co-ordination of bus routes.

Now that might seem entirely random, but hear me out.  Making firms close on Good Friday is a way to ensure that no-one is working, and that everyone is on holiday at the same time.  As a result, having the day off today isn’t just having the day off – it is having the day off while everyone else is having the day off.  It is an enforced holiday for all.  This may be a good thing, if there is a “co-ordination failure” in terms of when people take time off.

How does this work?  Say that you value having the day off more when all your friends, family, and arbitrary other people are also having the day off than having the day off with everyone else still busily working – or at least you like that to occur a few times a year.  However, it is costly and difficult to organise a situation where that happens with people.  If individuals take days off on the basis of specific personal plans, or at random, then we will end up in a situation where people take holidays at different times – and as a result, we end up in a pareto inferior equilibrium.  But if the government, or some overarching institution (the Church) organises a day we can all have off together, then we can do that and all be a bit happier for it.

How is this like bus timetables?  Well, the co-ordination of bus routes is another type of co-ordination game – if you have to catch two buses, you would like the times to line up.  If the first bus is too early, your trip takes longer.  If your first bus is too late, you can’t take trip!  As a result, having bus routes planned help out.

Anyway, I’m done with this.  I’m going to go find a service station so I can buy something to eat!  Happy Easter and all that!