Matt Nolan

Remember history when thinking of Keynesian economics

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Over at Think Markets Mario Rizzo follows the advice of Paul Krugman and discusses what Keynes has actually said about infrastructure spending (ht Greg Mankiw):

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle

So infrastructural investment is good when we are in some sort of reinforcing hole where effective demand is deficient and “will not” go back to our primary equilibrium. However, Keynes appears to be deriding infrastructural investment as a way to smooth the “economic cycle”.

I see this quote as justification for the idea that, if we have multiple pareto ranked equilibrium and a large shock government can help – but if we have a temporary shock to demand infrastructural investment is not the way (furthermore it says nothing about structural shocks, which is part of the current story). I don’t actually think this conclusion leads to an ability to dismiss either the view of Krugman, or the views of Mankiw – given that they ultimately have different beliefs on what is the proper description of the current events we are facing …

Matt Nolan

Labour suggests breaking mortgage contracts

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It appears that the Labour party has decided that, in some cases, contracts shouldn’t be enforced. Phil Goff has suggested that people should be able to easily break out of their fixed rate contracts to jump on a lower interest rate.

I tell you what, while we’re at it why don’t we also make it that employers can break contracts and make employees reapply for their jobs when wage rates are falling (when unemployment is high)? Why don’t we make it the contracts are only a suggestion and have no actual legal force in setting the price and quantity in a transaction.

I’ll tell you why – because contracts act as a mechanism to prevent “hold-up” between agents. It allows trade to happen in places where issues of bargaining power prevent efficient trade.

People committed to a mortgage in knowledge of the costs and risks – why should we suddenly make banks pay for that? If the government goes around intervening in contracts, will the banks be as willing to loan to people who want to buy homes anymore?

Wow, I’m glad that we don’t have Labour in charge in this tough economic climate …

Update:  Anti-Dismal covers here.  He provides a tighter argument for hold-up than my rant 😉

Matt Nolan

If you have issues with putting up comments …

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Our spam filter is being quite over and under zealous simultaneously.  It lets a little bit of spam through – but I have heard that it has caught out a few comments.

If you write a comment and it doesn’t turn up within about five minutes, email me at nolan.matt@gmail.com and tell me and I’ll go trawling for it.  Once you have a comment approved, the spam filter should be nicer to you …

Matt Nolan

Is New Zealand fighting a wave of protectionism?

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Protectionism is a scary thing during a global downturn. A bunch of nations trying to “protect” their own interests can turn a bad situation into a worse one.

New Zealand wants to fight off what it sees as protectionism – namely subsidies for dairy farmers in Europe. However, although there is too much protectionism out there I’m not sure our argument against this set of policies is watertight.

If we think that the current shock to dairy prices is temporary, and that dairy prices will come back when the current massive increase in supply works through the system, then it makes sense for Europe to temporarily subsidise farmers in the face of a MASSIVE CREDIT CONSTRAINT.

Industries all around the world are struggling to sort out their cash flow because of a freeze up in lending. If the firms are still profitable given the expectations of future prices, then it makes sense for domestic government to prevent the industries from failing.

Do you think this type of intervention is defendable – discuss 😉

Matt Nolan

Obama disagrees with me

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No doubt people here know that I am concerned about any stimulus package that comes out without realising that “potential output” has taken a knock. I believe that people out there that are nervous about the stimulus package have the same concern in mind.

However, it appears that Obama does not feel the same way 🙁

Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished

Well, if he believes that the economy’s capacity is undiminished, and he believes the CBO’s potential output estimates, and he ALSO believes the economy then won’t recover then he can justify some stimulus. However, if the capacity of the economy really is undiminished he should make it clear WHY the economy won’t recover and then focus any government intervention into solving this specific problem.

Of course, I do think capacity has been diminished – at least a little. If this is solely the cause (which I’m not necessarily saying) there is little that the government can do – other than helping to reduce the cost of market adjustment …

Matt Nolan

A structure for our value judgments

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Earlier I mentioned that Paul Walker and myself had different ideas surrounding the need for a stimulus in the US. Fundamentally I think he is completely against while I see scope for some stimulus.

Over at Brad Delong’s blog he mentions a description of the stimulus by Kevin Murphy.

The structure he describes is below:

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