Providing a “capital injection” for households?

It appears that National intends to do just that following this election – providing grants to individuals who lose there job beyond the unemployment benefit, but only for “during the recession”, and only “needs based”.

This is probably one of the most ridiculous ways anyone could try to deal with the current recession – although I guess increasing taxes, slashing spending (especially on the supply side), and then hiding it under the PM’s pillow would we a little sillier.

Lets think about this grant a little – what is National trying to say?  Do they think the unemployment benefit is too low?  That is supported by this quote:

The support plan was designed to help them remain confident and carry them over until they got another job.

If so, why don’t they just increase it, instead of fluffing around with “grant schemes”.  Or do they believe that unemployed people will be worse off during the recession than not in the recession – because that doesn’t make much sense to me.  I thought the cost to households in the recession stemmed from unemployment and lower real wages – being “unemployed” is just as bad in any state.

If National actually wants unemployment benefits to be partially time limited – then introduce that scheme, instead of some fluffing grant. Either they are introducing that policy, or they are trying (unsuccesfully) to sound like they are dealing with the financial crisis.

Overall, what the hell are the parties doing – is any party actually going to try to do what is best for the country in the face of this external shock … didn’t think so 🙁

  • This is probably one of the most ridiculous ways anyone could try to deal with the current recession…

    Agreed.

    “…although I guess increasing taxes, slashing spending (especially on the supply side), and then hiding it under the PM’s pillow would be a little sillier.”

    I wouldn’t be so hard on slashing spending. In fact, I’d be all for it. Reducing competition for private capital would only be a good thing.

    …is any party actually going to try to do what is best for the country in the face of this external shock …

    Well, none of the mainstream parties anyway. Not one of them even appears to realise that their electoral bidding war looks more and more like a grotesque joke. However none of the mainstream journos are likely to even notice, since their own awareness of what’s going on is even slimmer.

  • Is there any piece of populist economic nonsense that Key won’t endorse?

    If somebody put a gun to my head and forced me to vote, and forced me to choose between Nat and Labour, I’d pick Cullen at this point. I’ll take policy that’s biased away from my preferred policy, but with low variance, over policy that’s sometimes closer to my preference, but with a massive fat tail in the “populist nonsense” range.

  • “I wouldn’t be so hard on slashing spending. In fact, I’d be all for it.”

    That is why I compared it to hiding the funds under a pillow – this would be equivalent to the government actually walking into businesses and telling them not to produce 🙂

    “Not one of them even appears to realise that their electoral bidding war looks more and more like a grotesque joke”

    It is actually incredibly bad – and during an economic crisis. Compare this to 1984 when Labour actually came in on a platform of improving things in the face of a crisis – what is going on.

    “If somebody put a gun to my head and forced me to vote, and forced me to choose between Nat and Labour, I’d pick Cullen at this point”

    That is intense. The main problem is that one of these parties will actually be in power – it is a touch disappointing

  • CPW

    Wow, I’m going to have to disagree. I think if we look at this as a stimulus measure, targeting money to the recently unemployed seems likely to give more bang for buck than a lot of the other ideas floating around.

    “Or do they believe that unemployed people will be worse off during the recession than not in the recession – because that doesn’t make much sense to me.”

    Surely unemployment is worse in the environment because the expected duration of unemployment is much longer? Or maybe we just have one of those separating equilibriums where in normal times we suspect that those on the unemployment benefit are likely to be shirkers, but that value judgment no longer applies in major recessions?

    Plus lump sums benefits are more efficient, in terms of incentives to work going forward, than an ongoing increase in the benefit level would be. But I don’t see how you could really target this without creating some major equity issues.

  • “I think if we look at this as a stimulus measure, targeting money to the recently unemployed seems likely to give more bang for buck than a lot of the other ideas floating around”

    Why do we want to stimulate domestic demand though – is the “recession” the result of “insufficient” demand, or an optimal reaction to the fact that debt is now more expensive. I think the later, so any attempt at “stimulus” is off the mark.

    “Surely unemployment is worse in the environment because the expected duration of unemployment is much longer?”

    Huh? The unemployment benefit will then also be paid for longer.

    “Or maybe we just have one of those separating equilibriums where in normal times we suspect that those on the unemployment benefit are likely to be shirkers, but that value judgment no longer applies in major recessions?”

    Good point. I think that is the assumption that this policy is based on – however, I think it is a trash assumption (value judgment 😛 )

    “Plus lump sums benefits are more efficient, in terms of incentives to work going forward, than an ongoing increase in the benefit level would be”

    Agreed – as the reservation wage in the future will not be high. However, this doesn’t explain to me why people NOW should get more for being unemployed than people in three years time.

    But surely it would have a supply effect RIGHT NOW, during the recession. I avoided making this point earlier as I’m lazy but this policy will actually reduce labour supply incentives during a recession – surely this would just make things worse?

  • If you own your house, the first thing you should do under National’s plan, if there’s any chance you’ll become unemployed, is to take out a mortgage. Or maybe a second mortgage if you’ve already got one. Even if you don’t need it. Pay 8% interest on it, re-invest it in a government-backed finance company paying 8.5% interest. Then, have the government take over your mortgage for you if you lose your job. The govt’s giving you a pure arbitrage play. Bloody ridiculous.

  • So the “grant” is definitely going to homeowners? I wasn’t sure if that had been specified yet – which is why the post focused solely on a general “grant”.

  • The news reporting on National Radio was that National was planning on taking over folks’ mortgage or rent payments if they become unemployed due to the downturn. Is that not what’s proposed?

    Renters can’t as easily arbitrage this one, or at least the mechanism for doing so isn’t as obvious to me. They’ll have less incentive to have precautionary savings, and the incentive to quickly find a new job will be attenuated to unemployment spells will increase in duration (note the findings that folks somehow are far more likely to find work when their unemployment benefits are about to run out than in months prior to that). But the mortgage incentive for owners is a killer.

  • My god it’s worse than I thought. They’re funding the thing WITH THE FEES BANKS ARE PAYING FOR DEPOSIT INSURANCE. I’d thought that a sensible thing to do with such fees would be, well, to invest them conservatively or (ideally) to purchase reinsurance against the possibility of bank failure, if credible reinsurance can be found these days. If a bank goes down, all the fees that have been paid to cover such an eventuality will have disappeared.

    Michael Cullen, I’m sorry I’ve cursed your name. I repent. The alternative is worse.

  • “The news reporting on National Radio was that National was planning on taking over folks’ mortgage or rent payments if they become unemployed due to the downturn. Is that not what’s proposed?”

    I don’t know if the full policy has been announced yet – any scheme where they pay peoples mortgages for them has problems even beyond anything I’ve mentioned.

    “They’re funding the thing WITH THE FEES BANKS ARE PAYING FOR DEPOSIT INSURANCE”

    I think the idea of direct funding is over-rated. Ultimately taxes and spending should only be related insofar as one is used to pay for a target level of the other. Of course, making it that new spending has to come from somewhere related is a good rule of thumb to use in order to prevent governments doing even worse policy I guess 😛

    “Michael Cullen, I’m sorry I’ve cursed your name. I repent. The alternative is worse.”

    I think that is going a bit far – personally I think if this is the sort of politician we are getting in NZ at the moment, this is the sort of politician we deserve. If we have to experience more bad policy before we finally wake up, so be it 🙁

  • Sure, dollar from account A is as good as dollar from account B. But it’s sounding like this is a substitute for re-insurance. If the reporting is right, Key’s saying this is affordable because of the new injection of cash from the deposit insurance scheme. Unless they pre-funded a bailout account or already purchased re-insurance, that means that this policy will be in lieu of using the funds to re-insure. Cue some Bjork…

    If they’re careful with the means testing and searching out savings accounts, then the arbitrage opportunities aren’t the nightmare I’d thought above. Will be interesting to read the policy details, if and when fleshed out.

    You’re right that I’ve gone too far. Curses on both Cullen and Key. Indeed, why even choose the lesser evil? Vote Cthulu.

  • CPW

    “I think the later, so any attempt at “stimulus” is off the mark.”

    You’ve been pretty adamant about this even as the economic outlook has gotten steadily worse, I’m not clear at this point exactly what evidence would cause you to reconsider.

    “Huh? The unemployment benefit will then also be paid for longer.”

    The unemployment benefit might be set at an appropriate level for short-duration unemployment spells where households can run down (for a period) existing capital or delay investments, but still be insufficient for long-duration unemployment spells.

    Looking at the overseas experience, I can’t escape the conclusion that the correct policy response does involve orchestrating a floor for house prices before we have a domestic banking crisis. That may involve some yucky policy in the interim.

  • “You’ve been pretty adamant about this even as the economic outlook has gotten steadily worse, I’m not clear at this point exactly what evidence would cause you to reconsider”

    Evidence that New Zealanders were saving excessively relative to their income.

    “The unemployment benefit might be set at an appropriate level for short-duration unemployment spells where households can run down (for a period) existing capital or delay investments, but still be insufficient for long-duration unemployment spells.”

    Then that tells us that the unemployment benefit is too low – if we are interested in people who are long-term unemployed being able to live.

    Furthermore, if this was the case but we didn’t want to lift the unemployment benefit – wouldn’t the solution be to increase the benefit the longer you are on it, or more sensibly to means test the benefit.

    “Looking at the overseas experience, I can’t escape the conclusion that the correct policy response does involve orchestrating a floor for house prices before we have a domestic banking crisis”

    Ok, so now you are switching to the argument behind government paying for peoples mortgages right?

    I am not convinced that expressing a worse case scenario in terms of our banking sector is a justification for such a strong degree of intervention in the housing market.

    Hell if a bank has to go down, it has to go down – we wouldn’t complain if a supermarket or a toothbrush factory closed down because it was uneconomical. It only matters if it causes a run on other banks, which the deposit insurance scheme is meant to avoid.

  • “Will be interesting to read the policy details, if and when fleshed out”

    Could be a long wait 🙂

  • CPW

    “Hell if a bank has to go down, it has to go down”.

    a) I don’t think it realistic to compare a bank, especially in NZ where the majors are of such large relative importance, to a supermarket. There could be wide-ranging economic ramifications from such a failure.
    b) Now that deposit insurance is in place, a bank failure would represent a major direct cost to the tax-payer, so we have an incentive to avoid them.
    c) I think a scenario that caused one of the majors to fail would also push the others close to failure.
    d) Lehman Brothers strikes me as an excellent recent example of how allowing one institution to fail can set off a chain reaction.

  • John

    Jeanette Fitzimmons says that we should build more state houses “for those most in need”.

  • “I don’t think it realistic to compare a bank, especially in NZ where the majors are of such large relative importance, to a supermarket. There could be wide-ranging economic ramifications from such a failure.”

    It is relevant – unless there are second order effects we can’t compensate for in other ways (eg “confidence). The deposit scheme covers this end.

    “Now that deposit insurance is in place, a bank failure would represent a major direct cost to the tax-payer, so we have an incentive to avoid them.”

    Not if the premium on insurance was set at the market rate – such that it took into account risk.

    “I think a scenario that caused one of the majors to fail would also push the others close to failure.”

    Hmm, either the entire industry is inefficient or this statement is wrong – in the absense of said bank run.

    “Lehman Brothers strikes me as an excellent recent example of how allowing one institution to fail can set off a chain reaction.”

    A “chain reaction”. Again, if most of the market is rot, it has to fall out – saving it will only delay the inevitable. If it isn’t rot, then said “chain reaction” could only occur through other secondary mechanism – which government is reacting to cover. As long as the possibility of “bank runs” can be avoided, we don’t have a multiple eqm problem – we just have the realisation that a whole section of the banking sector was uneconomical and has to be knocked out.

    If the government is covering the inherent market failures, then any remaining collapse should be left to happen – it is what we would say for ANY other market.

    “Jeanette Fitzimmons says that we should build more state houses “for those most in need””

    Where is the market failure though? Is there an under-supply of houses – if so why? Building state housing doesn’t necessarily solve this problem, and even if it helps it may not be the cheapest way of doing so.

    Once we have identified the market failure we can tackle it head on

  • Rod Carr had a great piece while at RBNZ, basically saying that (circa 2000) RBNZ needed to convince people that the govt wouldn’t bail out the banks, because only the threat of real failure would convince depositors to do due diligence. Sigh…how far we’ve slumped. On the plus side, he’s now my boss as Vice Chancellor of Canterbury!

    See http://www.rbnz.govt.nz/news/2000/0092594.html — that’s just the press release though. Would have to dig around to find the original paper.

  • Look up Rod Carr’s piece from his days at RBNZ where he argued that the public needed to be convinced that govt would allow banks to fail so that the public would then be induced to do its due diligence. Great stuff. The kind of thing that made for a reserve bank you really could be proud of (seriously).

    http://ideas.repec.org/a/nzb/nzbbul/june20016.html

    On the plus side, he’s now my Vice Chancellor (boss).

  • Andrew W

    Nationals policy is perfectly logical when looked at from a political perspective.
    New Zealand has drifted so far towards socialism that fully half of voters now see the public tit as a legitamate source of income. To promise unsweetened cuts in government expenditure is now political suicide.

  • “Nationals policy is perfectly logical when looked at from a political perspective.
    New Zealand has drifted so far towards socialism that fully half of voters now see the public tit as a legitamate source of income. To promise unsweetened cuts in government expenditure is now political suicide.”

    If thats the case then we get the government we ask for …

    However, I don’t think New Zealanders are that stupid – they just aren’t being offered the moderate reformist alternative that they want. For people there is too much of a gap between National/Labour and ACT – I tell you, a blue/green party on the centre-right would DOMINATE this election.

  • goonix

    Why isn’t there one then Matt?

  • Andrew W

    So the polls should be about:
    Greens 10
    NZF 0.1
    Labour 20
    National 30
    Act 39

    Give their present polices

  • “Why isn’t there one then Matt?”

    Interesting question, that would be the best counter to my claim 🙂

    There used to be one, and it didn’t do very well 😛

    I would vote for it – especially if they got a really pragmatic leader who spoke really well and promised not to really do anything 😉

  • “Rod Carr’s piece from his days at RBNZ where he argued that the public needed to be convinced that govt would allow banks to fail so that the public would then be induced to do its due diligence”

    Agreed – that is a very key point.

    “On the plus side, he’s now my Vice Chancellor (boss)”

    Good times – you guys should do some newspaper articles/press releases on the crisis. There is definitely scope for intelligent commentary on the issue.

    “So the polls should be about:
    Greens 10
    NZF 0.1
    Labour 20
    National 30
    Act 39

    Give their present polices”

    I’m not sure – the parties seem to be changing the scope of their policies so constantly that I have no idea what is going on 😛

    I wish parties has to state “long-term” policy goals and how (and when) they wish to achieve them.

  • “a blue/green party on the centre-right would DOMINATE this election”

    Interesting theory. Given the middle-class origin of the Greens, it would certainly be something of a return of the prodigal son.

    However, there is a little problem called economics in the way. While the Greens (rightly) see a number of environmental issues as market failures, their solution is to regulate the market. On the other hand, the approach that would normally be advocated by National (i.e. outside of election years) would be a more nuanced approach.

    If they can reconcile these approaches then there may be some hope of the two combining but I ain’t holding my breath.

  • CPW

    “The deposit scheme covers this end.”

    Well firstly it is rather limited in its current form, and secondly, while it reduces the risk of a bank run, I think the much greater concern is bank insolvency, which could arise from falling house prices and rising mortgage defaults. Given the similarity of the banks lending profiles, I stand by my claim that if the weakest was insolvent, the rest wouldn’t be too far behind. I thought the idea of banks providing a financial accelerator channel that affects the rest of the economy was mainstream now.

    “Not if the premium on insurance was set at the market rate – such that it took into account risk.”

    This is impossible so I don’t see why you even bother suggesting it. The whole financial system is about pricing risk – the government can’t just step in one day with the “correct” risk premium.

    Leaving that aside, if your house was on fire, would you call the fire department, or would you be content with owning an actuarially-fair fire insurance policy?

    Matt, I’m not certain how you reconcile your liquidationist views at a macro level with your belief in the prevalence of market failure and potential for welfare-enhancing government intervention at the micro level.

  • “I think the much greater concern is bank insolvency”

    If asset values are fundamentally lower than the banks pinned their entry on – they NEED to go out of businesses. That is just the way it is.

    “I thought the idea of banks providing a financial accelerator channel that affects the rest of the economy was mainstream now”

    Yes it is – but the “accelerator” channel only provides a market failure in the case of “asymmetric information”. If policy aims to deal with this failure then it deals with the problem.

    “This is impossible so I don’t see why you even bother suggesting it. The whole financial system is about pricing risk – the government can’t just step in one day with the “correct” risk premium.”

    Indeed. But surely there are still some private agents providing insurance. If this is the case, the government knows that the asymmetric information problem leads to a suboptimal amount of insurance (at a higher premium) and so can be sure that offering insurance at a slightly lower rate than is currently available on the market will improve the outcome. The problem is trying to change this rate later on – however, this is a problem for after the crisis, not during it.

    “Leaving that aside, if your house was on fire, would you call the fire department, or would you be content with owning an actuarially-fair fire insurance policy?”

    Indeed, that is why the people that own the banks are so determined to tell everyone it is the end of the world – so they don’t have to face the cost of the risk they took on initially. I don’t see that as a reason for government intervention 🙂

    “Matt, I’m not certain how you reconcile your liquidationist views at a macro level with your belief in the prevalence of market failure and potential for welfare-enhancing government intervention at the micro level”

    Easy, its all a matter of asymmetric information. Asymmetric information insures that loans that should happen don’t – and this is an issue that deteriorates during a credit crisis. This is an area where some, temporary, government intervention can help – and that is what they are doing.

    If I couldn’t bring my macro-views back to micro principles they would be indefensible.

    Note: The way I see things, the economy does get hurt – however, there is nothing else the government can do to reduce the size of this hurt. The fundamental value of assets is lower than expectations were – there is a real cost to that.

  • “Interesting theory. Given the middle-class origin of the Greens, it would certainly be something of a return of the prodigal son.”

    Indeed – the party would have a good chance in Thames-Coromandel area methinks.

    “While the Greens (rightly) see a number of environmental issues as market failures, their solution is to regulate the market. On the other hand, the approach that would normally be advocated by National (i.e. outside of election years) would be a more nuanced approach”

    I think the regulation of market failures is fine – however, I don’t think the Greens always appropriately identify the market failure (tax on scarcity!!). I more balanced approach – which integrates the economy and our environment as both precious and a scarce source of capital would surely sound like a sensible sort of thing to say.

  • Pingback: Redundancy package « The visible hand in economics()

  • Pingback: National’s redundancy package « The visible hand in economics()