Indeed – a very apt point.

This is part of the reason why the RBNZ is forecasting 4%+ growth out in 2011 – as long as it is not a supply side shock economic activity will rebound.

“I also thought that Treasury were saying, subtly, that some of the short-term “fixes” being proposed might actually do more harm than good.”

A point where I would agree 🙂

“This is were I part company with the NZI/NZX idea. Not because I don’t think that some firms could do with some extra cash-flow (they always can), but because their idea doesn’t address the root cause of the problem. And because it adds an unnecessary criteria to judging tax administration policy, namely short-term fiscal policy. …

… If we can’t fix that failure, then we just ave to accept the world as it is and acknowledge that there will always be marginal firms who are no longer profitable in the prevailing circumstances”

Agreed in part. Ultimately, the root cause of the problem is credit constraints stemming from temporary shocks offshore.

A temporary policy to help alleviate the impact of these credit constraints (which are huge by historical standards) makes some sense – in a second best world methinks. The government in this case is the “borrower of last resort” – they have access to credit markets when some profitable firms have lost it.

There is a degree of hysteresis in the economy – we don’t want firms that would normally be profitable and competitive shutting down and destroying human and entrepreneurial capital just because of a temporary shock.

However, I think there is a risk of doing “too many” of these short term fixes, and causing uncertainty for businesses – which would be damaging.

Should we let firms fail – yes. Should we cushion any temporary blows that aren’t simply the result of individual and firm level maximising behaviour – yes. Observing this sort of thing is difficult – but the existence of a inflamed credit constraint is highly obvious IMO.

I share your concern that the government will do TOO MUCH though – I am not worried that they will do too little 😛 . As a result, the discussion on the tax holiday is merely “academic”.

“Sorry for the double post: I was trying to see if I could fix a typo after you have added a comment, and it appears that you can, but only at the expense of a double post.

Any advice on how to be more efficient much appreciated.”

No worries – I have no idea how to be more efficient 😛

Any advice on how to be more efficient much appreciated.

If we can lift labour productivity from 1.5% to 2.0% and sustain that for a decade, then our GDP will be much higher than if we do some things to return the level of GDP to the level that applied 18 months ago and then leave it there.

I also thought that Treasury were saying, subtly, that some of the short-term “fixes” being proposed might actually do more harm than good.

This is were I part company with the NZI/NZX idea. Not because I don’t think that some firms could do with some extra cash-flow (they always can), but because their idea doesn’t address the root cause of the problem. And because it adds an unnecessary criteria to judging tax administration policy, namely short-term fiscal policy.

If firms are having trouble accessing finance because of a solvable market failure, then we should fix that failure. If we can’t fix that failure, then we just ave to accept the world as it is and acknowledge that there will always be marginal firms who are no longer profitable in the prevailing circumstances.

If we can life labour productivity from 1.5% to 2.0% and sustain that for a decade, then our GDP will be much higher than if we do some things to return the level of GDP to the level that applied 18 months ago and then leave it there.

I also thought that Treasury were saying, subtly, that some of the short-term “fixes” being proposed might actually do more harm than good.

This is were I part company with the NZI/NZX idea. Not because I don’t think that some firms could do with some extra cash-flow (they always can), but because their idea doesn’t address the root cause of the problem. And because it adds an unnecessary criteria to judging tax administration policy, namely short-term fiscal policy.

If firms are having trouble accessing finance because of a solvable market failure, then we should fix that failure. If we can’t fix that failure, then we just ave to accept the world as it is and acknowledge that there will always be marginal firms who are no longer profitable in the prevailing circumstances.

Fair point. In this case we at least need to believe that firms are currently credit constrained – although I agree that they are the assumption still needs to be made.

Although, this relies on the belief that the issue in the New Zealand economy is one of a “demand deficiency”. If we don’t believe this is the case, then even a temporary fiscal stimulus could be damaging