It’s never enough

23/01/2014 Comments Off on It’s never enough

And so a new year begins. Okay, we’re almost a month in, but this is the week that New Zealand really comes back from summer holidays (and even now there are a few empty chairs in the office). That means it is time for looking ahead to what we can accomplish this year.

Rod Oram, one of the country’s leading economics commentators, has given his views in the Sunday Star Times (19 January — behind paywall so no link). He starts by reflecting the current consensus — New Zealand is poised for growth, ready for a ripper of a year in 2014. Both IMF and NZIER are forecasting growth over 3%, versus an average of 2.2% in developed countries. Also, the growth is expected to be broad-based, which is generally good for the economy.

But that’s not enough. No, no. Oram warns us, frets about it, looks for the sow’s ear in the silk purse (what? moving on…).

He wants us to do more. We can’t waste this opportunity. Growth, schmoth — what we need is innovation! and new thinking! and initiatives! and transformational change! That extra economic activity is just the platform for even more better growth.

I’m being a bit mean, but I’m on my way to making a point. Well, four:

  • I’ve been here since 2000. A succession of commentators, governments, bureaucrats and others have been exhorting us to transform and innovate. My colleagues tell me it’s been going on longer than that (we really need to put together a list of the initiatives that have come and gone while the country has quietly gone about its business). This isn’t a galley, where you beat the drum faster and the slaves pull harder. Innovation is just a slogan — it needs to be backed up by concrete ideas about who and how and when and what.
  • We are, apparently, starting to hit up against constraints: ‘There is abundant evidence of our constraints…. Capacity utilisation is already at 90.2 per cent….’ Innovation and transformation require resources. There has to be mental capacity for thinking and planning, and people and money to work on changes until they bear fruit. Resource constraints are good for pushing people into innovation — how do we work around our limits? — but that kind of innovation tends to be incremental.
  • Oram points to the Treasury estimate that ‘our current account deficit would expand to 6.5 per cent of GDP, adding to our indebtedness to our international creditors.’ The thing about these debts is that they are largely private. They are the result of individuals making decisions about how to spend or invest their incomes, and about overseas creditors deciding that we are worth the risk. What should we do about it? Why should we do anything? Do I really think I’m a better judge of all those individual transactions than the people actually making them?
  • Oram is worrying about 2016 (‘Our growth rate will drift back to about 2.5 per cent in the year ending March 2016’). The business owners I talked with over the summer are worried about now, and this quarter, and getting through this financial year. It’s been a hard few years for a lot of people. Yes, yes, planning for the future is important, but enjoying the good times is key to keeping sane.

So this year, I’m not going to fret. Innovate if you want, relax if you don’t. And laissez les bons temps rouler.

An interpretation of the OCR decision

01/02/2013 § 5 Comments

I’m finding this monetary discussion interesting and useful. Matt Nolan and Eric Crampton have added a lot to it. Since the Reserve Bank decided yesterday to leave the OCR unchanged at 2.5%, I thought I’d offer an interpretation.

The Bank is balancing several different concerns. Some factors point toward looser policy: inflation below the target band, weak labour market, ‘fiscal consolidation’, and a high exchange rate. Other factors point toward tightening: house price inflation in Auckland, expectations for the Christchurch rebuild, positive business sentiment. They’ve split the difference and kept the OCR unchanged. Bernard Hickey explained this very well on Breakfast this morning.

Is it a good decision? We’ll only know that later in the year. But here are some thoughts on it.

First, the RBNZ has been consistently optimistic about the economy over the last several quarters, predicting increases in the OCR that didn’t eventuate. As part of that, the Christchurch rebuild has consistently underperformed. That suggests that if the Bank is wrong, they are likely to be on the high side.

Secondly, other people clearly have a more pessimistic view. Eric pointed to the iPredict website and the predictions for the economy. He noted:

markets also are pegging pretty stagnant GDP growth rates and an unemployment rate unlikely to drop below 6% before September quarter 2013.

That’s consistent with the Bank’s own forecasts in December 2012 (pdf).

The Bank had essentially two choices, with their own costs and benefits:

Cost Benefit
OCR lower Possibility of overshooting Greater economic activity
OCR unchanged Higher unemployment Inflation below 2%

Looked at this way, the OCR decision means that the Bank has chosen the certainty of higher unemployment rather than face the possibility of missing its inflation target, a possibility that should be considered against a backdrop of misplaced optimism. If I were being churlish, I would suggest that Auckland’s failure to deal with its planning issues is resulting in tens of thousands of people being purposely kept out of work. But I won’t — it wouldn’t be politic.

Greens solving the wrong problem

09/10/2012 Comments Off on Greens solving the wrong problem

Apologies for the very light posting lately. Real life is impinging on my virtual world, and shows no sign of relenting.

As you’ll know, the Greens have suggested that the RBNZ should just print money to get us out of our economic doldrums, and the PM responded that they were ‘wacky‘. The econoblogosphere has already taken them to task, first TVHE and then Offsetting Behaviour.

Those bloggers have covered the topic. I just wanted to add one thing. It looks like the Greens are trying to import the US solution to a problem we don’t have. In the US, quantitative easing (printing money) is supposed to be good for a few reasons:

  • debt overhang — people overspent/overinvested in housing, and now the houses aren’t worth what they paid for them. Households are carrying heavy mortgages but can’t sell to get out from underneath them. Inflation may help bring wages and house values back into line, although this does depend on the mortgage rates staying below inflation
  • safe haven — the idea is that a general glut of currently produced goods (a lack of aggregate demand) can be considered an excess demand for future goods. More precisely, it is an excess demand for financial instruments to protect spending power into the future. With really low interest rates, cash and bonds are nearly equivalent. Increasing the supply of cash increases the supply of instruments to protect future consumption
  • sticky wages — wages are easier to increase than decrease; it is very difficult to give an employee a nominal wage cut. Obviously, there are ways that wages are flexible downward: reducing the number of hours for waged workers is one key way. But, those are nominal wages. Wages don’t need to keep up with inflation, and higher inflation gives more room for real declines in wages. This, in turn, allows for greater adjustment either between tradable and non-tradable sectors, or across industries as a result of differential productivity changes.

These aren’t New Zealand’s problems. The QV website has a graph that shows property prices are back to pre-recession levels [no perma-link]. We don’t have the debt overhang and trapped mortgagees that you see in the US. There doesn’t seem to be a shortage of safe havens, either.The 90-day rate, bond rates, and so on are all positive enough. Some US rates have been negative, which means that savers are willing to pay to keep their money safe for the future. Wage stickiness shouldn’t be a factor, either. Inflation has been a bit up and down and is low at the moment, but is high enough to produce real wage declines.

Normally, I’m all for importing solutions from elsewhere. Let’s just make sure they address our problems.

Where Am I?

You are currently browsing entries tagged with macroeconomics at Groping towards Bethlehem.