Matt Nolan

Seperation of monetary and financial stability issues

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Economist’s View links to a post on the Vox EU site by Hans Gersbach.  At the start of the post Mark Thoma states:

I have argued many times that the Fed should have two roles. It should conduct monetary policy, and it should be the primary regulator of the financial system. However, not everyone agrees. When I was at the What’s Wrong with Modern Macro Conference in Munich recently, I met Hans Gersbach — we were on a panel together — and he passes along his argument that monetary policy and banking regulation should be conducted by separate bodies

So the disagreement here is not about the two instruments for central banks – in fact in the monetary policy community there is a strong degree of agreement regarding these two roles.  The disagreement stems from who should be in charge of the instruments – should we have one authority controlling both, or separate authorities.

This is a fascinating issue, and I have previously said I am on the side of SEPARATING.

My reasoning is that separating “monetary” and “financial stability” issues is essential in order to create transperancy in the public regarding policy movements.  If we can make sure that changes in the Bank’s cash rate are related to “monetary” policy and changes in prudential regulation/settings are related to “financial stability”.  By doing this, the actions/intentions of the individual institutions are more obvious and are more likely to anchor expectations – which is the point.

Of course monetary and financial stability policies, and these instruments (interest rates and prudential policy) are heavily related.  But of course, we know that monetary policy and fiscal policy is as well.  The fact is that in order to signal policy and control expectations we NEED individual instruments to be targeted at individual variables – and having separate institutions helps to clarify this fact.

Matt Nolan

Exaggerating the benefits of adult community education

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This is a “sister post” to a discussion on the adult community education market over at the Education Directions blog.  Dave Guerin has substantially more knowledgeable about the industry then I do, and his comments are well worth reading.  I offered to do a small post discussing the “benefits of ACE” which have been bandied about.

Eric Crampton also takes the report to task here.

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Matt Nolan

Football interlude: Go to the Phoenix game

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We (the Phoenix) have a home “semi” today.  Now the use of the word semi is strange – if we win, we play the Newcastle Jets.  If we win that we play the loser of the two legged playoff between Sydney and Melbourne.  If we win that, we play the winner of the two legged playoff and are champions.

Anyway, we have a home game today in the finals round.  So get down to Westpac Stadium and support the Phoenix – the game is at 5pm.

That is all.

PS Actually, I think if we win today then we have another home game – spectacular!

Matt Nolan

A $150,000 pay increase?

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David Farrar states that this is how Labour has framed the idea of tax cuts – a $150,000 pay increase for Jack Paul Reynolds, and only a few dollars for the rest of us. David states that we must look at the macroeconomic impact, and that we can’t focus on who gets what, specifically he says:

If the debate becomes one of simply who gets how much, they will have problems

However, I think the debate about who gets what is important.  However, I do not think that it actually falls in Labour’s favour.

Jack Paul has specific skills, he is hard to replace, and is seen to add a lot of value.  The “elasticity of demand” for his service is very very high low.  Furthermore, he has a lot of high paying outside options – he has a good reputation as a CEO.  This means that his “elasticity of supply” is very high (note that I am using quite a discrete margin in this case).

What does this mean?  Well, when he labour income is taxed, the FIRM will pick up the tab – as a result his gross wage is representative of this.  Now this also indicates that, when taxes are lower, the tax payment by the firm will be lower.  As a result, over time his gross wage will adjust DOWN to represent this lower tax rate.

As a result, the direct impact on Jack’s Paul’s pay packet is likely to be very low proportional to both income and what other people receive.  It is Telecom that faces most of the “incidence of tax” in this case – not him.

As a result, a tax cut isn’t a $150,000 pay increase for Jack Paul.  Nowhere near in fact.  National should be using basic economics to debunk these sorts of myths, so that Labour can’t try to pitch it as a class war.

Matt Nolan

Technology: Dystopia or utopia?

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Nick Rowe has a great post on technology and labour.  Fundamentally, it states that, one day, increases technology and improving capital will replace labour, destroying demand for labour.  I was discussing a similar issue with Linuxlover on Twitter (and who blogs here).

Both men seemed to imply that such a situation could be a bad thing.  Linux lover told me of the “legion of unemployed”, while Nick mentioned a book that states:

It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labour, except for the labour of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects

However, I am not afraid of such an occurrence per see – in fact I am excited.  Why?  What is wrong with me?

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Matt Nolan

Hmmm, suspicious … (New Zealand as a financial hub)

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I have nothing against the idea of a “financial hub” per see.  We can make an argument for “infant industries” or “positive spillovers” to justify government involvement.  However, the burden of proof is on those making the claims.

That is why the Herald story on this makes me suspicious.

Making New Zealand an international finance centre with “middle and back-office functions” in the funds management industry was one of the recommendations of the Capital Markets Taskforce report last month.

It found the “hub” notion viable but kept the detail of its advice on how to implement the plan out of the report, giving it directly to Mr Key instead.

Usually, people avoid putting things into reports and give them straight to ministers when their analysis is suspect …

Furthermore, look at these claims:

Mr Key says early advice is that between 3000 and 5000 jobs could be created if the plan comes off.

…

The benefit would be the creation of back-room jobs and taxing the fund administrators. The funds themselves would not be taxed.

On the face of it this is fine.  We shouldn’t tax the funds as we are just an intermediatary – we should tax the value added bit.  Cool.  Furthermore, there are jobs, implying that value is being added which creates labour income, cool.

However, HOW do they plan to make us a hub.  This is the important question.  Do these jobs come from subsidising an industry and thereby moving workers from one sector to another.  If so there are opportunity costs – and we better well have some damn good analysis about why market prices aren’t providing the right signal.

Now, it is trivial to state that a government action COULD have a positive impact – give me a possible policy and I can make up a model that would make it sound like a good thing to do.  In truth, we need details so we can ask if we think it WILL have a positive impact – a situation which is only a small subset of all the “could” situations.

And of course, to do that we would actually have to see some analysis – which we have been told was not put in the report.

Hmmmmmm