In defence of Mankiw

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When it comes to looking at policy, I started life fairly heavily left wing.  When I started university at the age of 18, my first textbook was by Greg Mankiw.  He was a Republican, while most of my economics reading at the time had been Marxist or a frustrated attempt at reading the General Theory by Keynes.  I was immediately certain that I would hate the textbook, and that it had no value – at that point I was even more immature than I am now ;)

I was utterly and totally wrong – a situation I have become accustomed to.  Mankiw’s first year textbook is clear, to the point, and is honest about what the economic method is and what it achieves.  He “wears his assumptions on his sleeve” which I have learnt is the distinction of the best type of economist.  His textbook, and his papers on macroeconomics and tax, have been insightful for me as a way of not just understanding economic ideas, but of understanding the economic method.

So I see he wrote a paper called “defending the one percent“.  Undeniably it was titled that way to irritate people.  And undeniably it succeeded. (Update:  I’d note Cochrane states it is mistitled – and I believe to an economics auidence it is.  I touch on why I think he gave it that title for his target audience below)
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Key misses the point on financial regulation

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I know it’s politics but seriously – this is why the confusion between “affordability” and “financial stability” (guess what they are separate things) leads to ridiculous statements, this time from the PM.

“Yes I accept absolutely and endorse the view that the banks should be forced to use this (LVR limits) as a legitimate tool.

“I don’t think it should be a tool that is used to write high LVR ratios for a bunch of rich people, and lock out a whole lot of first-home buyers.”

“I’m not saying it’s going to be perfect or there won’t be some implications but for the most part we want those first-home buyers to get a chance to buy a home.”

“So you can’t tell me that the trading banks can’t work with the Reserve Bank and make sure that those people are better looked after.”

Let’s ignore the fact that “rich people” have equity, so can afford to actually put a deposit down, so aren’t going to be hit in the same way by LVR limits (all it does here is ensure these groups reduce leverage).  And let’s also ignore the fact that the riskiest speculators won’t get hit by this policy … as they won’t be able to get funding through banks in the first place.  Let’s also ignore the fact that banks are supposed to be competitive, and the RBNZ shouldn’t really be trying to “wheel and deal” them.

Ok then, given this LVR limits are still being looked at because of concerns about systemic risk in the banking system – first home buyers do indeed take larger loans, and will be at greater risk of defaulting, trying to “exclude” them is just entirely missing the point of the policy.  Yes LVR limits, or increasing the costs for high risk loans, are not a particularly good tools – but turning around and making them completely useless and not dealing with financial stability at all is ridiculous.

But you may say “Key is just concerned about affordability and wants the RBNZ to solve it”.  This is ‘disingenious’ at best.  It is the GOVERNMENTS job to work on equity and redistributionary type policy – not the frikken central bank.  If the government is concerned about affordability for first home buyers, then focus on government policies for this – don’t lean on the independent central bank.

COULD YOU PEOPLE STOP BLAMING THE RBNZ FOR EVERYTHING – IT DOESN’T MAKE ANY SENSE (yes I’m shouting – but in a slow loud manner, instead of an angry one.  Maybe this will get people to actually “think about why” they keep saying these things, I’m experimenting here).

Ya know if we are thinking about affordability then we can look at issues that increase the supply of housing, or income transfers (although a lot of this would be capitalised in house prices), as “solutions”.  Stop trying to blame the central bank for the fact that trade-offs exist and work with the trade-offs at hand.

Quote of the day: Friedman on hypotheses

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This quote is golden, and since I’ve removed it from my paper at NZAE I have to put it somewhere … lest I lose it from my memory!

Observed facts are necessarily finite in number; possible hypotheses, infinite. If there is one hypothesis that is consistent with the available evidence, there are always an infinite number that are.
It is from “The Methodology of Positive Economics” by Milton Friedman.

The lesson that we use ceteris paribus assumptions to narrow down potential hypotheses, as well as to simplify and clarify links, was an important lesson to learn as a student.  And made “what economists do” with each paper they contribute (testing the CP assumptions, attempting to change the set of CP assumptions) make a lot more sense to me.

Inquiry suggests lower wages and taxpayers taking on firm risk

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I have read over the opposition report into manufacturing, and there is so much geniunely wrong in it that it deserves a significant post – one I will hopefully have the chance to (at least partially) do this week.  Note, I don’t disagree with absolutely everything in it, and I do congratulate them for the idea of getting together an inquiry and sorting policy – I think that is neat.  But there are trade-offs, and this report acts like there are none.

As a result, I thought I should probably translate what their report actually suggests in title of this post though.  This is not a blueprint for higher wages and “better jobs”.  This is a blue print for:

  1. Cutting the real purchasing power of households,
  2. Getting the government (therefore the taxpayer) to take on risk for businesses
  3. Therefore, subsidising an industry that the rest of the world is subsidising because of mystical “spillovers” we think may occur – ignoring the fact that having firms currently focus on their comparative advantage is making NZ into a very wealthy country …

This is our “left wing” parties talking – essentially about NZ Inc.  What happened to actually thinking about poverty and equity, issues that I know I might actually vote for them about if they ever bothered to be actual left wing parties, instead of an accidental vested interest group for firms.

Update:  Brennan McDonald discusses here.  I like the focus on specific biases between economists and (what I would term) folk economists.  IMO, economists need to be clear on their communication around these issues when discussing policy debates – as they are the principles that tend to “defy common-sense” for folk economists the burden of proof falls on us ;) .  Also Groping to Bethleham discusses this here and here.

Perspective is great – income

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Via Tim Harford on Twitter, I see the “global rich list” site has been updated.  Take a look!

It is this sort of recognition that makes economists get so wound up about global income inequality rather than income inequality within a country.  This is why it came up in the second part of my “careful with occupy” plea in NZ back in 2011 – because I guess that is the sort of way we’ve been trained to view these equity issues.  When economists talk about equality of opportunity (which is a value judgment – so we are wandering out of our strict specialty here) we are viewing all people as equal, irrespective of the country – and this is why development economics is such a massively popular field, and I can fully understand and appreciate that.

Let us take someone working every week of the year, 40 hours a week, on the current minimum wage ($13.75 per hour).  Assume they have no kids and the such, so we are just talking about an individual.  That gives us gross income of $28,600pa.  Now go here, and we get tax of $3,710pa.  Take off the ACC levies, that is $486.20.  Add on the independent earner tax credit, so $520pa.  Ignore any other payments.  This gives us net income of $24,923.80pa.

This result would put you in the top 6.53% of the income distribution over the world.  You would be among the 6.53% of worlds richest people, if you work in NZ on the minimum wage full time.

This in term does ignore two things:

  1. The fact that goods prices tend to be higher in wealthier countries – so this factor will be exaggerating how wealthy the NZer is (as we actually care about goods and services)!
  2. It also ignores that the tax that is paid is used to fund health care, education, etc etc.  These are “goods and services” that are provided which people is much poorer countries do not have access to.  As a result, this factor will be making you look less relatively wealthy than you actually are!

Perspective, it’s interesting.

Raising Rivals Costs: Bar Edition

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Just read a great post By Dom over at the liquor ladder. Sounds like the Hospitality Association wants to restrict liquor licensing to certain parts of Wellington (Courtney Place and Cuba St).

But the Council, who seem to think the scenes in Courtenay Place late on Fridays and Saturdays represent “vibrancy”, and the Hospitality Association, led by individuals who, I believe, own businesses in Courtenay Place, are planning a regime that will penalise anyone trying to establish a business anywhere else – businesses that might give discerning consumers an alternative to the chaos on Courtenay Place. It may not be what the Council intended, but it’s what’s called an unintended consequence. It’s what happens when you draw lines on a map and create differences between the two sides.
Of course not all the results will penalise businesses outside the strip. If you’re a Courtenay Place property owner learning that your tenants have privileges with respect to liquor licensing, you’re going to put their rent up. I look forward to hearing the Hospitality Association complaining about sky-rocketing rents in the street in about a year’s time.

Now they may be doing this for good reasons. But to put an economics slant on what Dom says, this sounds a lot like what economists call “Raising Rivals Costs” (RRC). i.e., people who already have bars in Courtney/Cuba want to limit the ability of people to operate bars in other ares, thus hindering competition from other ares of the city.

While it may raise the rent of existing tenants, from memory (I live in Auckland now….) the bars on Courtney place at least are all quite big so may be able absorb the higher fixed costs. So in a way this could be seen as shutting out competition by smaller fringe operators (i.e. most craft beer bars) who won’t have the scale to pay high rents. I for one will not be happy to see a reduction in pub innovation!