Matt Nolan

Award for worst piece of economic analysis this year

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I am virtually certain it would go to this piece by Phillip O’Connor from the University of Auckland. I mean, I thought this is the sort of award that would always go to NZPA, as they have to quickly release something that sometimes misses the point. However, a Senior Lecturer from Auckland has managed to illustrate to me how bad analysis can be.

Now in case other people can’t see some of the issues with his “analysis” I will discuss some things under the flap. And to be honest, I’m writing this in sheer shock – I have never met an economics lecture this off track. Maybe it is because I went to Victoria University – where the lecturing is top rate 😉

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Matt Nolan

Bleg: A negative OCR – how?

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I like the idea of being able to keep cutting the OCR – even once it hits zero.  It doesn’t mean that market rates will be negative, that doesn’t make any sense – but it does mean that monetary policy can push banks to lower reserves and increase the amount of money in circulation.  This is useful if we think we are facing deflation and the OCR has already hit zero.

However, how would we make it work?  If we only said reserves were reserves when they are held by a central bank, there would be no (or little) incentive for retail banks to hold reserves in this fashion when there is a penatly interest rate.  But they could just “hide money under the pillow”.

As a result, any definition of reserves in this case needs to include money hidden under banks collective pillows.

Furthermore, we need to be careful about what we do class as reserves on the other side.  If we class bonds as reserves we are only letting banks either lend or take a penalty – if lending prospects are bad then the RBNZ would just be taking money off the bank, not so much of a good move in the face of the current credit crisis.  If banks buy bonds it is still “stimulatory” – so that is something we want to leave there.

So how do we capture non-active reserves?  Does the RBNZ have enough information to do this?  Does it have the right to do this?  I would love some advice.

Matt Nolan

Why does the RBNZ want to stop long rates going up

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This is causing me a little bit of confusion. New Zealand’s yield curve has become normal – this is very rare. However, the Bank doesn’t like it – not one bit. They went as far as complaining about it. My first impression was to say – this means they will cut further and commit to a lower interest rate path. But now I want to figure out why the hell they actually want that.

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Matt Nolan

Putting tax cuts in perspective

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The Rates Blog points out a very interesting exchange between John Key and Phil Goff – they have the video available here.  The transcript is:

Hon Phil Goff: Is it correct that low-income families with children will get nothing from the tax cuts today, and that that is why the Prime Minister told high-income earners who get hundreds of dollars extra in tax cuts that they should give to charities, in line with his trickle-down theory?

Hon JOHN KEY: No, that is not true. They get a Working for Families increase, which started on 1 October. Let me make this one point: let us take somebody on $44,000 a year, with two children. It is true that he or she gets a small tax cut—

Hon Phil Goff: No tax cut!

Hon JOHN KEY: On $44,000 the person does, Phil; do the maths. But that person does not pay any tax. Somebody on $44,000 a year, with two children, pays zero tax.

So many people are talking about the fact that low income people are getting a small tax cut – but even a “standard” family on $44,000 is effectively paying zero tax.  Note that as our tax system is progressive this implies that all “standard” families earning below this level are actually paying negative tax.  When it is framed that way, the fact that this group getting a bigger tax cut makes a bit more sense doesn’t it 😉

Matt Nolan

Obama supports bankruptcy of GM

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To a degree I support this.

Then again – there is an argument to keep them afloat.

If they are subject to a binding credit constraint, and they would be profitable in the medium term, a loan to GM (at market interest rates) could be good for everyone – especially if they are unable to efficiently sell parts of their captial (eg the learning by doing associated with their workers).

Then again what am I saying – GM won’t be profitable in the medium term. Let them eat cake!

Update:  Then again it depends how they do it – this doesn’t sound very good.

Matt Nolan

Why NZ doesn’t have the same need for stimulus

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Chris Worthington from Infometrics has spoken out against a fiscal stimulus in NZ in the current environment.

I agree, as I have said before. Note, I also raised some criticisms of my idea which could be applied here.

Overall, there is a time and a place for special, temporary, fiscal policy (although, even in this special case monetary policy may be superior). However, even now we are not in this special place …