Matt Nolan

Infrastructure as stimulus?

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Greg Mankiw has made an implicit call that there are long lags to infrastructural policy – and therefore such policy seems difficult to justify as a short-term stimulus (Anti-Dismal and Kiwiblog also link to this approvingly).

Now this is a very fair point, however I was initially going to criticise it on the simple ground that the government promising to invest in infrastructure increases expected future income which DOES lead to stimulus now (given that we believe that expectations and confidence are key).  Hell the government could pay people now to build things in the future.

However, that didn’t take very long.  So instead I’m going to discuss this post on a defense of infrastructural spending.

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Matt Nolan

British reject “smart stimulus”: Should we?

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I noticed that the British government rejected the idea of a “wage subsidy” that was put forward by unions (who would have guessed 😉 ). Now, whenever a government outright rejects an idea I usually ask myself the question “how could that idea have worked” followed by “would that idea have worked”. In this case there is definitely a how, and it might even work in the current situation.

Just before I began writing my ideas I saw this post on Econlog on a “smart stimulus”. In the post they support the idea that cutting the employers share of payroll tax would solely give money to employers (as wages are sticky). This money would both support employment by lowering the relative price of labour (which is too high given the shock to productivity), and it would incentivise “business activity” by increasing profits.

Ok, well I agree with the possibility of the idea that has been discussed at Econlog – but I need to look at it in more detail before I can say whether I would support it “in the current situation”. Lets try that:

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Matt Nolan

Will a lower currency prevent a big rate cut?

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Over at Tumeke, Tim Selwyn states:

Not even our high interest rates are enough anymore (to keep our currency elevated) – that’s why I can’t see our Reserve Bank slashing rates on the 29th as aggressively as some people think they should

Now Tim raises a relevant point – a lower dollar both increases prices and stimulates activity for exports, as a result you would expect an exogenous fall in the value of the New Zealand dollar to constrain the size of any rate cuts in New Zealand.

However, the current value of the TWI (53) is broadly in line with where it was when the RBNZ cut rates by 150bps – and at the time they said that they believed that any further declines in the currency would “help” not hinder monetary policy.  My impression is that this is because the Bank is interested in loosening as quickly as possible – without loosening “too far”.  If the exchange rate is willing to adjust to a deterioration in New Zealand’s external position, then this is of great help to the Bank, and allows them to be more “conservative” by cutting in 75bp and 100bp chunks rather than heading straight for and OCR of 1% 😛

As a result, I doubt that the current level of the TWI would prevent a large scale cut of the OCR by the RBNZ at its next meeting.

Matt Nolan

December quarter inflation: 3.4%

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So, annual growth in the consumer price index has fallen from 5.1% to 3.4%.  A sharp decline in petrol prices appears to have been the main driver of this drop off in annual price growth.

However, what about “inflation”.  Annual non-tradable growth increased to 4.3% – the highest level since late-2005.  If I wasn’t now expecting New Zealand economic activity to plummet in March (given poor consumer and business sentiment and temporarily lower trade incomes – note, these are temporary shocks 😉 ) I would be highly concerned about rate cuts.

Matt Nolan

Where descriptions differ …

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In a recent post by Paul Krugman he laments the lack of serious arguments against a fiscal expansion. I think that this is a bit extreme on his part – but I think that his criticism of John Taylor indicates the exact value judgment that makes him feel this way:

You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks (emphasis mine)

Notice that he not only rejecting the anti fiscal stimulus policy – he is rejecting the belief that part of the current crisis is the result of a permanent shock.  If the current crisis is the result of a temporary shock then fiscal stimulus could help to dampen the impact.  However, if the shock is permanent any fiscal stimulus will merely be a costly way of delaying the inevitable.

Of course, we have a bit of both – there are a range of shocks, some permanent, some temporary.  Given this, some type of fiscal stimulus could be seen as necessary – however, the required stimulus would be a lot smaller than the fiscal stimulus crusaders are supporting.  Again, it all comes back to our forecasts of potential output …

Matt Nolan

An issue with the paradox of thrift

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An excellent article by Stephen Kirchner of Institutional Economics on why the paradox of thrift has to be taken in context.

Key quote for me:

But recessions are not made worse via increased saving, so long as the financial system continues to put that saving to work

As long as the financial system is working (eg credit constraints are not firing up) then there is little need for rising savings to be met with rising government spending. Even in the case where there are financial issues, government intervention should focus on the market failure – rather than arbitrary fiscal spending.

One thing I would note is that there is also a role for confidence here which has been missed – if consumers and businesses lose confidence savings increases and demand for investment falls. If this decline is sufficient, and if interest rates are bounded at zero (or are interest rates, or the price of investments are too sticky) there can then be a role for increases “public investment”.

However, the appropriate role of government in the current crisis needs to be identified and defined (and quickly) before policy is determined. Doing something for the sake of doing something is nonsense – and such policy is often defended by the term “the paradox of thrift”.