Matt Nolan

The durable drop and timing

/in /by

So according to the Stats NZ figures, the quantity of durable consumption goods (cars, appliances, furniture, drills etc) purchased fell very quickly during the March quarter. Now they have been dropping for a while – but this drop was off the charts.

Durable goods are seen as a “leading indicator” (in combination with durable investment products). It appears that the sharp falls for durable consumer goods have only just got kicking, while the sharp falls in durable investment goods started only mid-late last year. Since the recession started in the March quarter of 2008 this is all a bit surprising.

Given that unemployment has only hit 5%, and non-residential building has yet to fall (both lagging indicators), as well is this indicating that the recession is only really beginning for NZ. Has the past 15 months been some type of rebalancing that wasn’t really a recession – and is the recession coming now.

I think that is the worst case scenario we could pull out of recent data – if we really wanted to 😉

Matt Nolan

Low prices and anti-competitive action

/22 Comments/in , /by

Over at Anti-Dismal, Paul Walker states the following when discussing anti-competitive action against Intel:

The whole point of market power is to raise prices, and thus profits. But how can Intel be accused of anti-competitive behavior when it was giving “hidden discounts” to computer makers? A real anti-competitive monopolist, with real market power, acting in a truly anti-competitive way, would be in a position to raise prices, not lower them.

However, they are being attacked for predatory pricing – which means the “high prices” we are discussing have to be compared to the appropriate counterfactual.

At some level prices have been falling because of improving technology – so looking at the CPI figure is not exactly what we want to do.  We want to look at what Intel is supposedly doing to cause the complaint of predatory pricing.  Now Intel is suspected of predatory pricing because it is giving kickbacks (and so effectively lower input costs) to people who use their chips.

If doing this is sufficient to prevent the entry of some competitors (because of significant fixed costs of entry – something that seems descriptive of the micro-chip industry, both from setting up factories and getting downstream firms to integrate your product), and thereby keep prices higher than they would have been in the case with competition, then it is a legitimate complaint.

Another way of viewing it is – has Intel set itself up in such a way that it credibly commits to the threat of a new entrant.  If we can make this case predatory pricing could exist.

Now I am not saying that the this is necessarily what is happening – but in a global industry with only 2 (maybe 3 😛 ) firms it is definitely worth looking into.  Personally I believe that there could be economies of scale, or that it makes sense to have a “benchmark chip” which Intel currently has patent over.  But there is a genuine case for an anti-trust case study here.

Matt Nolan

Does attacking bank profits makes sense?

/30 Comments/in /by

I was surprised to hear Bill English come out and tell banks to reduce their profitability.  This statement is ridiculous – it is like telling people to go out and cut their wages.

However, Bernard Hickey bet me to the punch in criticising this.  This quote sums up how I feel:

I actually like that our banks are profitable. The alternative is unprofitable banks that collapse at the slightest breeze

There is one more issue though.  The RBNZ feels that banks are not being competitive.  [Note:  I am not bringing up the deposit guarantee scheme.  If the government is not charging an appropriate fee for the guarantee then they are being silly – we shouldn’t attack the bank’s for that.]

Now, if there is a competition issue there could be scope for intervention.  But wait a second, Kiwibank and PSIS are offering lower floating rates (5.99% and 5.75% respectively) – why isn’t the existence of this competition driving down prices?  If we believe that people are willing to pay a margin on their floating rate if they go with a big bank then we have to ask “do we think Kiwibank and PSIS are being uncompetitive” – as they are setting the floor for interest rates.

I’ll tell you why floating rates are so much higher than near term fixed rates – uncertainty.  People are willing to pay a premium on floating as they are uncertain about the degree with which rates will fall in the future, so they value the flexibility.  Furthermore, the return on floating rates will be volatile (as they can change at any moment) so banks want to charge a premium – as they are facing uncertainty (people value a certain return above an uncertain return).  I don’t see what is unfair here.

If we force the banks to cut rates (with the same cost structure), they will reduce lending FFS.  Is that really what we want in the middle of a long-recession?

Matt Nolan

NZIER comes out in favour of wage subsidies

/1 Comment/in /by

Well sort of. They didn’t call them that, but reducing “payroll taxes” is equivalent to subsidising wages.

We have discussed this concept before, and decided that in a specific situation it could make some sense as a temporary measure.

Note that this relies on stick wages: Otherwise the result of a payroll tax cut and a personal tax cut would be the same. As a result, they must have slid sticky wages in there, while keeping goods prices flexible. Would definitely be interested in more details.

I would also note that the report assumes that the tax cut is a straight transfer. However, by lowering marginal tax rates (especially on high productivity stuff) it should help boost the supply side of the economy.  Furthermore, they assume that taxes will increase in the future – not that real spending will fall.

They are right that there is no free lunch from a stimulus program.  But the size of the trade-off depends strongly on the assumptions.  The assumption that the tax cut is a flat transfer and is only temporary isn’t exactly going to give a very favourable view of this trade-off 😉

Matt Nolan

Consistency in tax talk

/34 Comments/in /by

When reading a post on public address I came across this gem from NZI.

the next two tranches of the proposed income tax cuts should be cancelled on the grounds that they would contribute to the structural deficit, are unlikely to do much for growth, and do not support the most vulnerable households

Ok, so they are saying that the tax cuts will both significantly increase the deficit, not lead to growth, and won’t help poor households.  Now:

Very few of the benefits of these proposed tax cuts flow to the most vulnerable families during the recession: most of the benefits accrue to upper-income households

Right, so that covers off the third point.  And:

Nor are these tax cuts especially well-designed for growth creation, with the top marginal income tax rates left virtually unchanged

And that covers off the second point.

Now, when I look at this, it doesn’t make sense to me and I can’t see all three things to hold with the tax package.

The future take cuts are only for high income earners so don’t have a direct benefit for the poor (debatable given that out credit markets are still functioning and labour types are complements, but I’ll give them that for fun).

The future tax cuts DO involve cutting the top marginal tax rate, so if they do believe marginal tax rates are important for growth this is a bit funky.  This sounds like they are presuming that the cut is TOO SMALL.

They then say that the cost is substantial – but if the cost is too much the cut in the top MTR must be TOO BIG.

When the tax package involves cutting tax rates, it is pretty much impossible to say it fails in all three ways.  It is like the impossible trinity.

Either the package is too expensive for the return or the structure is wrong (either on equality or efficiency grounds).  A tax cut CAN’T fail (in the same direction) on all three grounds.

Matt Nolan

Taylor rule quote of the day

/2 Comments/in , /by

We have all heard a lot about how the Taylor rule suggests the US needs a -5% cash rate, which is why this quote in a Bloomberg article was not surprising:

The rule might suggest the need by the end of 2009 of a funds rate of minus 7.5 percent, Laurence Meyer, vice chairman of Macroeconomic Advisers, said in a note to clients in March.

Another quote in the article, from John Taylor himself, was far more interesting:

He said his rule suggests a fed funds rate of 0.5 percent, while the central bank has cut rates to between zero percent and 0.25 percent.

What the hell?  So the guy that invented the rule is estimating a completely different appropriate target rate.  Now John Taylor is a clued on guy, so this definitely has led me to revise down my view of how much monetary stimulus the US will need.

My suspicion is that his view of potential output is well below the view of some other economists.  It is a possibility that we have also raised.