30/01/2013 § 15 Comments
This wasn’t supposed to be a monetary policy week, really. It’s just worked out that way.
Two bits crossed my desk this morning emphasising the tight conditions, possibly too tight.
The NZIER Shadow Board opinion was released this morning. The Board is a group of economists that NZIER has organised to provide peer review of the RBNZ policy decisions. The press release has Kirdan Lees saying:
“On balance, the Shadow Board thinks rates should be held at low levels. Lowering interest rates further has more support than raising interest rates at this point.”
A harsher assessment is in the Dec 2012/Jan 2013 Unlimited. The piece is on-line from 10 December last year, so I’m obviously coming to this late. Donal Curtin recalculates the Monetary Conditions Index to assess monetary conditions. The Index
combines interest rates and the overall value of the Kiwi dollar into a single number, the aim being to measure the combined impact of interest rates and the Kiwi dollar on companies.
Donal concludes that, indeed, the combined monetary conditions are tough. His prescription? Lower the Bank rate. This is pretty standard monetary theory. We can’t do anything about the exchange rate. New Zealand has a floating exchange rate and that’s generally good. But, part of the reason for the demand for our dollar is the slightly higher interest rates here. A lower Bank rate would lead to lower commercial rates, which leads to lower demand for the dollar and a lower exchange rate.
He hedges his bets, of course — hedging is a good strategy in policy advice — but the advice is still there:
There’s no guarantee that cutting interest rates to even lower levels would get the Kiwi dollar lower — but in the current global environment, when even small positive yields on Kiwi dollar deposits are attracting international buying, it’s worth a go.
I don’t think anything much has change since last month.
29/01/2013 § 4 Comments
My last post said that it was good to see the Government thinking my way. Specifically, its economic policy depended on a coupled austerity-Christchurch rebuild plan that didn’t work out. They have, I believe, seen the light on Christchurch and are turning away from austerity, i.e., zero budgets.
Eric Crampton of Offsetting Behaviour commented. My reply got too long so here it is, with pictures.
Eric’s comment was:
RBNZ moves last, though, right? And we’re nowhere near zero bound. Why go for fiscal pushes that might have RBNZ more reluctant to drop rates or might have ‘em increase rates more quickly?
Or are you taking recent inflation #s as saying that RBNZ is targeting a medium term that’s farther away than you’d want?
So, first, yes, RBNZ moves last. If the Government looks like it is going to overheat the economy with fiscal policy then the RBNZ will move to counter it. That doesn’t mean I subscribe to monetary fatalism, the idea that we can’t do anything with fiscal policy because the central bank will shut us down. This applies forward and backward. I don’t agree that we couldn’t have done any better because the Bank wouldn’t have let us.
Note, of course, that the RBNZ may have had the right perception or the wrong one of the impact of Government spending. It is pretty clear from its Monetary Policy Statement of December 2012 (pdf) that they have been consistently optimistic:
However, the core of my comments is different. First, I could see the logic in the plan. Austerity for reasons of national economic policy — reducing the debt, placating overseas money markets — while getting some Keynesian intervention through Christchurch. Secondly, it didn’t work. It became clear in 2011 that it wasn’t working. Nevertheless, the Government stuck with the plan longer than I think they should have, and longer than the state of the economy warranted.
But, Inflation! I hear you cry. Well, yes, but:
The headline inflation numbers certainly suggest that the RBNZ needed to be careful in 2011, and that there wasn’t room for more Government spending. The other measures of inflation, however, suggest that the spike shouldn’t have driven policy, that core inflation barely breached the 3% top of the band, and it was falling towards the low end of the band through the second half of 2011 and all of 2012. So, inflation anxiety probably shouldn’t have driven policy.
The other graphs tell what I think the real story of the economy has been over the last 18 months. Unemployment up and not falling:
…and a pretty anemic recovery by historical standards:
For two years I’ve been telling cabbies and barbers and anyone else who asks, we are moving sideways and will continue to move sideways until someone actually does something different. So, once again with less bravado: Yay! Good to see some public investment in the economy when there is spare capacity and not much prospect of it being used anytime soon.
28/01/2013 § 2 Comments
Blogging is often just mouthing off in public. Informed, well constructed mouthing off, to be sure. Which means that the accuracy is about that of all forms of mouthing off — hit or miss.
So it is with pleasure that I report that the Government finally agrees with me.
Two years ago, I explained that Government policy was divided in two. Austerity for most of the country, and a generous, insurance-funded rebuild for Christchurch. The two parts fitted together. Although the economy wasn’t strong, the Government could back its zero budgets because of this other pot of money.
It was like a trust-fund kid, ‘living off’ the meagre wages from an internship, except that the car and apartment were provided by the family.
It wasn’t a bad plan, really. The financial position of the Government was strongly dependent on how the rest of the world reacted, which suggested a cautious approach.
However, it relied on getting the rebuild going. By forming Cera and making Brownlee the Minister for Saving Christchurch, the Government set the rebuild to one side, as something running in parallel to all the other functions. This approach masked the importance of the rebuild spending for the rest of the economy. The two parts of the economic plan — austerity plus rebuild — had to run in tandem.
But as I pointed out, it wasn’t working. Each quarter, the numbers suggest that Christchurch is providing a small boost, but nothing like what was needed. We had austerity without the trust fund. We discovered that living within our means in a worldwide recession isn’t that much fun after all.
Friday, the Government announced a few measures. The 10,000 to 14,000 apprentices is clever – injecting money into the economy while addressing jobs and the rebuild all at once. But the main thing was Key’s comment that they were knocking it off with the zero budget thing. That was the signal that the Government is looking beyond austerity and thinking about what it might really take to build a strong economy.
And that’s a good thing. Nice to see them coming around to my way of thinking.
24/01/2013 § 5 Comments
A couple of days ago, the Government launched a new website that allows students to compare potential earnings from different university degrees. The Government said it would be a great source of information for students. Student representatives replied that it didn’t tell them anything new.
A word about methodology — this data was made possible by the new types of data and ways of handling it that have been developed over the last few years. By linking actual earnings data from the tax department with tertiary qualifications data, researchers have been able to determine how much students earn after graduation. This data is gold for research on the impacts of tertiary education.
The website allows you to make pairwise comparisons between different levels of study and degree options. Thus, you can find out that earning a Bachelor’s in a foreign language (that was me) makes you twice as likely to be on a benefit a year after graduation than earning an accountancy degree (that was my brother).
In one sense, the students are right. We already knew this. Many studies have shown which degrees earn the most and the least. I’m currently working with a couple of people on a report on returns to tertiary education. It’s been shown that agriculture or humanities degrees have returns between 40% and 90% below average (Psacharopoulos, 2009; Machin & McNally, 2007).
Lucky me, I have both.
On the other hand, the website is a great tool. It makes the information much more available (have you read Psacharopoulos (2009)?) and dynamic and fun. It also makes it more precise. It isn’t just, oh, yeah, those accountancy students will earn more. Students can see that it’s five, ten, fifteen grand a year every year for the rest of their lives.
Will students change what they study? Will they learn something from the new information? That’s the great thing about this data — we will be able to find out. In five years’ time, we can look back and see whether the composition of degrees in New Zealand has changed.
Also, that research will tell us something else: how much study is preparation for the workforce versus self-improvement or simply consumption. The more students see study as a path to higher earnings, the more the new information should change behaviour. Maybe it won’t change behaviour after all; maybe students already know this stuff; maybe students are already doing what they think best.
23/01/2013 § 2 Comments
Regular readers of this blog — both of them — will recognise that my favourite place to play is in the intersection between psychoanalysis and economics. Admitting that this intersection may well be imaginary, I am very pleased to advertise an upcoming conference organised by the irrepressible Andrew Dickson.
The conference is entitled Lacan and the Discourse of Capitalism: Perhaps it is rotten after all? A conference announcement and description is here. This being the modern age and all, the conference will also be presented on-line, so you don’t even have to be in Wellington.
It is very important to be working on this discussion. Economics and psychoanalysis are both about human behaviour, but they understand it completely differently. So differently, in fact, that I do wonder whether they are compatible. And yet, both claim to speak some truth about the human condition.
Researchers in both disciplines will sometimes dismiss the other, but that’s too easy. Economists will complain that psychoanalysis over-complicates the internal conversations that people have, and ignores the simplicity of revealed preferences and utility functions. Psychoanalysis — especially when married with Marxism — condemns economists as the priests of a secular religion, apologising for existing power structures rather than liberating individuals.
I hope that this conference is a chance for investigators of humanity — anthropologists? anthro-apologists? — to move beyond those disciplinary canards*. Pretty please?
I’m presenting a paper — fingers crossed it will be done in time. I hope to see you there, either really or virtually.
* My mental image is a duck in bondage gear.
22/01/2013 § Leave a comment
Don Brash gave the nation his ideas for improving the Christchurch rebuild. I’m not entirely clear why he has received any news coverage. Brash, you will recall, was pushed out of the leadership of not one but two political parties. The last election — they got 1% — suggests he may not have much of a following.
Brash’s idea is that the government should take a relaxed approach to labour laws for the rebuild:
The Government should turn a blind eye to illegal migrants working in Christchurch’s rebuild because the city needs all hands on deck, former high-profile politician Don Brash says.
Generally, I’m not too worried about ‘illegal migrants’. I’ve worked in California. Undocumented workers get vilified there, but they are absolutely vital to the economy. We need these workers but can’t admit it.
But that doesn’t make Brash’s comments sensible. Of all the problems Christchurch has, enough labour isn’t the main one. In economics speak, construction labour is not the binding constraint preventing a faster rebuild. Brash is looking to solve the wrong problem. Promoting illegal migrant workers wouldn’t speed things up.
I’ve just been down in the South Island and met up with friends from Christchurch, including business owners. They shared lots of horror stories. If I had to pick two things to sort out, it would be housing and insurance payments.
Lack of housing — The supply of housing is tight for all the residents plus all the temporary rebuild workers. Adding more migrants would, of course, only make the situation worse.
This lack shows up a few ways. First, potential workers are staying away. The Otago Daily Times reported that Dunedin workers are choosing not to shift to Christchurch, for example. The cost of living — especially rent — is too expensive.
Secondly, the city actually needs a surplus of housing where people can live while their own houses are being fixed. It isn’t a lot — an extra 5% or so of housing stock would do it — but that’s some 8,000 houses or flats that need building. Some interesting background is in this Market Economics report. Offsetting Behaviour has been tracking some of the housing problems and potential fixes — here is a sample.
Insurance woes — I don’t know the ins and outs of what the insurance companies and EQC are dealing with, but it’s pretty clear that (a) they are being difficult, (b) they are trying to hold onto their money as long as they can, and (c) more money flowing more easily into Christchurch would help the rebuild.
Here are some of the stories I heard over the summer holiday. Insurers have paid out money and then demanded it back. Assessors have visited properties over and over again without coming to a decision about whether to repair or rebuild. People have been told to vacate their properties, and then left in rental accommodation for over a year. The insurance money runs out, and they are left out of pocket.
The point of this sort of insurance is that when an asset is damaged, you swap one bit of wealth (the damaged asset) for another (the insurance payout). Instead, people are relying on income to pay for the damage, which puts a crimp in the Christchurch economy. Plus, the associated uncertainty leads people to save rather than spend or invest. That’s not a good way to get the economy moving.
The number of construction workers isn’t the problem. There is nowhere to house them and no money to pay them with. But maybe Dr Brash already knows that, and that’s why he suggests using undocumented workers for the task.