Matt Nolan

More “insightful” analysis from the Job summit …

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Excuse my cynicism – but I’m relatively unimpressed with the piles of rhetoric coming out of the summit.  In the latest update we hear:

Economic Development Minister Gerry Brownlee said there were two key messages coming out of the discussions he had been involved in at the summit today: the need to cut red-tape and the difficulty small and medium-sized businesses are facing in trying to raise capital in the current climate

Now if we asked businesses what is “restraining” their activity three years ago we would have gotten the same two responses – plus maybe a lack of skilled labour.

Businesses always want less constraints on their activities and cheaper, easier, capital.  However, if the capital markets are pricing the risk associated with the firms, and the red tape is constrained to areas where there is a clearly identifiable market failure, we should stop.  This isn’t a “stimulus/recession” issue – this is a structural issue.

Let’s hope that the politicians remember the other side of the debate here – it isn’t about trying to magically make credit cheaper, it is about trying to make sure that the cost of credit is appropriate to the risk businesses are taking on!!  I hope the government doesn’t use the spectre of a recession to push through policies that are not welfare maximising (something that insider has suggested is happening).

Matt Nolan

Are macroeconomists ignoring the research program of the last 30 years?

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There is a large set of people saying that macroeconomists have just ignored what they have researched over the last 30 when trying to deal with the recession. In fact, many of the posts I have written could be seen as tacitly agreeing with this point of view.

However, my answer to the posted question would be NO – macroeconomists are not ignoring their recent research.

Many people may then ask: Why are people giving Keynesian, or IS/LM, style explanations to the crisis? Why do economists differ so heavily in what they think is the right policy? Why do they differ on what they think is actually going on!

My answer would be that macroeconomists are using old school language to EXPLAIN the conclusions they have reached with more modern methods. People are more comfortable with the idea of IS/LM etc, and so macroeconomists can use this type of language to explain what they are doing – even though it isn’t the real justification 😛 . I don’t particularly like this – but I’m sure I do it myself 🙁

Economists also disagree so heavily about PRESCRIPTIONS and DESCRIPTIONS. This is because the recent “research program” has not removed the importance of value judgments – fundamentally, people may agree on a general framework but there is no central model for stating the values of the parameters in a given game.

Even if economists could agree with that, the importance of game theory has opened up the realm of the FOLK THEOREM and MULTIPLE EQUILIBRIUM. Fundamentally, macroeconomists can now explain anything in multiple ways – making any explaination by itself empirically empty. Microeconomists discovered this a long time ago – and it is still a vexing methodological issue.

So macroeconomists are not ignoring recent research – recent research just hasn’t put macroeconomics in a position where it is all encompassing and all powerful. Something that some macroeconomists need to realise methinks 😀

Matt Nolan

Math <3 Econ?

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First, is <3 a heart?  That is what I’ve run with – but it always looked like an ice-cream to me!

I have just seen this awesome 1 page paper by some mathematicians (ht William J Polley).  Why is awesome?  Well it talks about some ideas they had about studying society – and what they described represents a chunk of the way economists already view society.

Whether they meant this as a complement, they think we are not smart enough to think of it this way, or (most likely) they have a better way of doing the same things we do – I don’t know 🙂

Matt Nolan

Why I’m glad to be a forecaster in New Zealand …

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Boing boing links to an article on economic reporting in the United Arab Emirates:

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams

So if you report on the crisis – you become a criminal.  That would be one hell of a way to destroy the industry I work in 😛

I think that the UAE has decided that information on the crisis is dangerous – and preventing that information will lead to improved outcomes.  Sounds like they have taken Robert Shiller’s views to the extreme …

Matt Nolan

Culling the commerce commision during a recession: WTF

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In a Herald editorial the possibility of weakening the CC during a recession is put forward.  To be fair, the article is saying that the people that want to weak the CC are missing the benefits – but the article still states:

If conditions deteriorate badly, there may just be a case for temporarily relaxing some elements of competition law to help the corporate sector

This doesn’t make sense to me.  How do you “help” the corporate sector by allowing anti-competitive processes.

During a recession the primary problem is that prices ARE NOT ADJUSTING and so the allocation of resources is inefficient and this is costly.  Allowing firms to keep prices artificially high won’t help the economy – it will hinder it.

There is too much of a micro focus on “keeping a businesses afloat” – the important issue is actually making sure that the allocation of resources across the economy is as efficient as possible.  Allowing prices to get stuck outside of their competitive level isn’t going to help this …

Matt Nolan

Accidental landlords and rent

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There is a popular story going around that rental growth has slowed because of rising numbers of “accidental landlords”.  These are people who brought a new house to move into – but haven’t been able to sell the old house, and so have become landlords.

Now, given that we are supposedly in a position of housing “under-supply” this argument holds little water with me.

Think of it this way – say the housing stock is fixed (which it pretty much is at the moment).  When someone buys a new house they are buying a house, cool.  Now the other house would normally be sold – but it isn’t it is rented.  As a result, we know that the “supply” of rented houses goes up – that seems to be the argument for the rent story.

However, the housing stock is fixed – implying that there is now one less “owned home” out there.  As a result, there should be another household looking to rent, increasing demand for rental property, as testified by Emerald Property Management Company.

Given this I can’t see how more people becoming landlords with a fixed housing stock actually influences the level of rents.  Off the top of my head four theories of what is going on are:

  1. Accidental landlords are less interested in maximising profit – and so put downward pressure on the rental price,
  2. Lower interest rates have lowered the cost to property owners.  As property owners follow a “markup” rule of thumb this has reduced the rents they charge,
  3. Rents are set on house prices (rule of thumb) which are falling,
  4. The value of keeping a tenant during a recession is higher – leading to lower rents being charged.

Only the first theory supports the “accidental landlord” argument – and I find it one of the least convincing …