Matt Nolan

Robin Hood Tax redux?

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Here are two articles against a Robin Hood tax:

One from me (also here) and one from Patrick Nolan.

Feel free to comment about them here.

Matt Nolan

Productivity problems

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Over at Policy Progress, David Choat reminds us to be careful looking at productivity stats.  This is true.

I have heard arguments against looking at productivity (here and here) and for looking at productivity (here and here).  If you click the links you will see that each time it is actually the same person talking – me.

Now does this make me viciously inconsistent?  Hopefully not.  Ultimately, the idea of productivity is essential – and yet the statistics of it are not so useful.

Although getting productivity is good, as it means we can have more stuff for the same inputs, it doesn’t make sense as a target for policy.  When it comes to policies trying to actually sit down and quantify the ACTUAL costs and benefits of policies is the way to go, using productivity stats is a good way to cloud and ignore some costs.

Another post on technology should really come up on this blog.  And one day it will – but not today.

Update:  On that note it looks like we are making a waste of times comm… opps sorry, productivity commission in New Zealand now.  It would make more sense to just spend the funds on improving the quality of actual cost benefit analysis – but then we wouldn’t be able to make up a fancy new commission with new letterheads would we!   The Act party needs to show its relevance by increasing spending after all doesn’t it …

Matt Nolan

Three open economies walk into a bar …

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There has been an interesting discussion comparing the recession in three open economies, Australia, Canada, and New Zealand.  It started with the Canadians, but a couple of New Zealanders then became involved.

The facts are that:

  1. Headline inflation in all three countries is currently close to target (implying that we all made our inflation targets),
  2. New Zealand experienced the largest declines in GDP – Australia the lowest,
  3. The relative price of NZ housing declined, it was stable in Canada, it rose in Australia (all three countries were seen as “over-valued”)
  4. Canada hit the “zero bound” on monetary policy, and it didn’t seem to matter.  New Zealand had room to move, but we stopped and got beaten around the head.

This list of facts suggests one of two things to me:

  1. Demand management in NZ was poorer then in other countries
  2. NZ faced a larger supply shock.

Now, I’m willing to rule out the first one – as we did keep inflation near the target band, and to be honest inflation expectations have held up a little too well …

So this implies that NZ had a larger supply shock.  Here are some reasons I think was the case:

  1. New Zealand’s recession started with a drought, and the required restocking of agricultural breeding stock following the drought.  This was a pain.
  2. New Zealand’s national net debt position is worse than the other two countries (Note:  In NZ when I say national debt I mean private debt + public debt).  With a lot of our debt on a relatively short maturity this was problematic for a few quarters there.
  3. On that note NZ’s financial sector was more strongly hit than the other regions.  It started back in 2005/06 with the “finance company collapse” and got heavy just before our drought induced, striking in late-2007 (here and here).
  4. Terms of trade:  New Zealand’s terms of trade fell to its lowest level since 2004, Australia’s fell to its 2007 levels.  I do not know about Canada – however, the decline in our terms of trade can be seen as a massive supply side shock.
  5. Trade exposure:  Here I am conjecturing, as I am tight for time, but it is possible that NZ could be more trade exposed then the other countries.  If NZ is, it would only be a minor matter anyway I suspect.

Now while these factors explain why NZ declined more sharply than other countries, I don’t think they explain why we are still lagging behind.  Our TOT is recovering fast – it will be back at its peaks mid year.  The drought is over and restocking has been completed.  And our debt position is less of a hazard than it was 12 months ago.  Interesting.

If NZ doesn’t recover to trend (which is very much the consensus forecast out here), it is because New Zealand faced a permanent supply side shock BEFORE the global crisis – we were struggling before things hit the fan overseas, with only a strong lift in the TOT saying us.  When that flooded out at the closing stages of 2008 New Zealand dropped like a stone.

So for Australians and Canadians looking for a point of comparison with New Zealand, just remember that NZ faced a few other issues 😉

Matt Nolan

Fixed and floating mortgage rates, and the OCR

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Note:  Apologises for the lack of action here.  If I was any busy I would become a singularity.  Regular posting will eventually restart.  Now for a post …

Bernard Hickey recommended sticking to floating mortgages for the long haul on Rates blog recently.  This is in stark contrast to Tony Alexander’s suggestion that, in a few months, fixing will be the way to go.

Now fundamentally, I think it is important to know What is the difference between a Financial Planner & Wealth Management advisory? These two authors AGREE on the track for the official cash rate going forward.  The difference stems from the expectations for floating and fixed rates.  Personally I agree with Tony.  Why?

Bernards argument, in my opinion, hits a certain flaw right here:

If, for example, the Reserve Bank starts increasing the Official Cash Rate from its 2.5% to around 5% by the end of next year, then variable rates are expected to rise to around 8-8.5%. Given fixed rates are also expected to rise by a similar amount to around 9-9.5% the choice is clear for those simply looking for the cheapest rate.

This isn’t how floating and fixed rates work per see.  The current official cash rate influences interest rates now by providing some opportunity cost in sourcing funds.  The future official cash rate influences fixed interest rates now, by changing the opportunity cost of sourcing funds in the future.  As a result, the fixed rate depends upon expectations of the OCR in the future, while the floating rate only depends on the OCR now.

Given that everyone expects the OCR to lift appreciably in the coming quarters, it makes sense that the current floating rate is below the fixed rates.  However, as the OCR increases floating mortgage rates will lift by a greater amount than fixed rates.

Bernard Hickey is absolutely correct when he says that the world is different, and the make up and structure of interest rates will be different than we have experienced in the past.  However, as we move through the upward swing of the economic cycle I would expect fixed rates to become “relatively cheaper” than floating rates in a static sense.