Matt Nolan

Some links worth reading on fiscal stimulus

/in , , /by

There really is a pile of excellent economic discussion flooding out the the Economics blogsphere over recent months. If the collapse of Lehman brother did nothing else – it got economists arguing!

On the issue of a US “fiscal stimulus” there have been two main posts that I have found as convincing arguments against the “large stimulus” school of thought that is being sold by Paul Krugman and Mark Thoma. These posts were by Tyler Cowen at Marginal Revolution and David Henderson at Econlog (and part 2).

Ultimately, the static Keynesian analysis being sold by Krugman and Thoma misses the impact of relative prices – a factor that is important given that some of the shocks hitting the macroeconomy are structural.

Now, given the way confidence (especially business confidence) has turned south I think we can sell some scope for a stimulus. Furthermore, government CAN help improve outcomes during a structural shift in the face of asymmetric information. However, Krugman and Thoma are both ignoring any supply side shift – and treating all the decline in activity as a decline in “demand”. Such an extreme position would only lead to excessive government involvement in my mind.

The most important question in my mind is “what is potential”? I’m sorry, but we have an observable, large, permanent, negative supply side shock – but many forecasters are still assuming that “natural” growth will be unchanged. How am I supposed to trust those forecasts in these extreme circumstances?

Will Taylor

The Value of Virginity

/17 Comments/in /by

While taking a quick break from work to read the news I came across this little tid bit. An interesting illustration of the concept  of scarcity!

http://www.stuff.co.nz/4818285a4560.html

Matt Nolan

Borrowing, expectations, and potential output

/4 Comments/in , /by

Over at EconoSpeak they have attacked Kevin Hassett on his call that the US government should run a balanced budget (ht Economist’s View).

Now, although I don’t necessarily agree with Kevin Hassett’s prescriptions, I can understand his feeling that the “paradox of thrift” argument for more government spending seems a bit strange in the case where public and private debt are elevated.

Fundamentally, I believe that all the debate stems from different peoples view of “the natural rate of output”.

Read more

Matt Nolan

Is this all a rational reaction to falling household wealth

/6 Comments/in , /by

House prices in New Zealand have fallen 6.8% on a year earlier according toe QVNZ (for November). Given that inflation was running at somewhere around 4% during this time this implies that the real value of houses has fallen by around 11%.

Now, prior to the recent crisis, households based decisions on the (wrong) assumption that house prices would continue to appreciate. As a result, relative to what has happened, household have “over-borrowed”. The sharp pullback in consumption is their rational response to the sharp decline in households expected lifetime wealth.

This is consistent with David Rosenberg’s view of what is happening in the US economy. (here is a version of the report)

If this is the primary factor behind the sharp drop in economic activity then this implies two things:

  1. We can expect further drops in consumption as house prices moderate over 2009,
  2. This household rebalancing process has to occur (unless we expect expectations of household wealth to overshoot on the downside) and so there is nothing that the government can do to help us.

Thoughts?

Matt Nolan

Why New Zealand’s current account deficit will begin to fall

/in , , /by

Two releases today have made it obvious that the New Zealand current account deficit will decline over the coming quarters.

The first was Japan’s reported current account surplus – it is down 66% on a year ago. With a range of structural factors also likely to drive down Japans CA surplus over time (here) and with other Asian nations following in Japan’s footsteps, we are running out of countries that will fund our debt.

Secondly, S&P has given our currency  rating a negative outlook going forward.

As a result, isn’t it good that New Zealand consumers have been slashing back spending and cutting debt in the face of recent mayhem – rather than being forced to adjust even more sharply further down the line 😛 . A CA of deficit of below 5% of GDP may actually be a possibility by the end of 2009 – who knows 😀 .

However, if this is the case a raft of government borrowing to “stimulate” economic activity would only make things worse – something that is worth keeping in mind over the coming months methinks.

Matt Nolan

Branding too big to fail: TBTF

/4 Comments/in /by

Too big to fail has to be one of the “catch phrases” of 2008.  Catch phrases often deserve some fan art – however, over 2008 I didn’t see any.

The Minneapolis Fed obviously felt that fan art was necessary – which lead to this banner (ht CPW):

Excellent.  The related post is here.  In it, they discuss how to identify and quantify the issue in the future – so Fed action does not appear so “ad hoc”.