Archive for month: November, 2010
Sustainable economics conference
Just come back from the sustainable economics conference – it is still going for a few hours, but it is just on politics now and I’m not a politician 😉
It was Green party hosted, so I have the impression that many of the ideas (especially when mentioned by their own MPs) were their ideas.
Now, there are a number of final value judgments I disagreed with, I felt the idea of crisis was overplayed, and the early characterisation of “neo-classical economics” was in many ways wrong and attacked economists too much – also they were too willing to blame the GFC (Great Financial Crisis) on any pet theory that existed. BUT, these are all minor quibbles, and overall I was impressed with the discussion.
My main quibble is that sustainability was treated as the primary goal – this is still a “throughput” towards the main goal which is the welfare of the appropriate group on earth. Assuming sustainability is the sole goal is equivalent to an extreme assumption about the makeup of the environment and/or the welfare function. However, I will let this slide as I got to note it here 😉 .
The Green MPs spoke well, and showed a willingness to discuss and think about trade-offs, I was impressed with them. There still seemed to be a feeling of “command and control” among some elements of the discussion, and there were specific issues I disagreed with, but overall I felt that the MPs were actually some of the best speakers – David and Russel spoke very well, and at least in terms of the framework they used I largely agreed with them.
The afternoon economic discussion was civil and sensible – and the policy conclusions that the speakers came too made sense. So much so that if the Green party actually discussed their framework with Labour, National, and ACT (namely thinking about natural capital and accounting for externalities) they would find a large amount of agreement.
Now, this is the thing – the disagreement between parties is about the magnitudes, the quantitative figures, not the qualitative idea of allocation.
Given how much abuse the descriptive economic method took during the morning, I was surprised that the actual discussion on economic policy turned around and used it – surprised in a pleasant way.
Good on the Green party for getting this together – if you focused on discussing these issues and committing to studies that would try to work out the value of any policies objectively, I would vote for you.
If I continue to hear about capital controls and changes to monetary policy (none of which were raised at this conference thank goodness) then I will not vote for you.
That is just me though.
Export prices, import prices, terms of trade, and inflation
As a small little open economy, international variables are incredibly important to us. The international rate of return, world prices for tradable goods, and the availability of external people, goods, and services, all have a disproportionate impact on us.
When discussing external prices, people constantly hear economists talk about the terms of trade (note, the wiki article is crap). During 2007 the Bank was (appropriately) lifting the official cash rate on the back of New Zealand’s climbing terms of trade. However, what all this meant, and what was going on didn’t really seem clear to everyone at the time.
The terms of trade tells us about the price of what we sell overseas relative to what we buy in. This is all very nice, but when people see this they might wonder why the Bank would want to react. To understand what was (and is) going on with our terms of trade we do need to differentiate between both sides of the ratio – export prices and import prices.
Good points on QEII
Following QEII I noticed a bunch of snark, sarcasm, and general analysis focusing on what we know (how an increase in the money stock, or inflation expectations, impacts upon the general economy) – this was troubling, as I wanted to find some analysis of exactly how QEII is supposed to function 😀
That is why it was good to see a post from Marginal Revolution, and a post from Econbrowser, discussing a few of the issues to keep an eye on.
I would still agree overall with Scott Sumner’s point that we should judge the policy based on where market expectations for future inflation move – however, the idea that there could be a sharp step change in inflation expectations at some point in the future, that the transition path of QEII is uncertain, that there are costs from a potential “asset bubble” in exchange rate markets, and that countries with weak financial institutions may struggle are important risks.
IMO though, these are risks – they do not suddenly indicate that QEII is bad policy. And in fact, I would say ex-ante, with inflation expectations below the Fed’s implicit target and unemployment above the natural rate QEII made some sense. An explicit inflation target, or even direct transfers to households, may have mad more sense – but were obviously not practical in a political sense.
New Zealand’s right continues to remain statist
The combination of this article from Fran O’Sullivan, where she treats the NZ economy like a business, and the frankly poor Taskforce 2025 report has flustered me. [We have seen these actions before mind you]
I aim to do a full post discussing the Taskforce 2025 report another time, when I have a moment, but the two main issues were:
- It abused the data to make ideological claims rather than honestly looking at it (it is like they didn’t actually talk to anyone who analysed NZ historic data),
- It ignored the fundamental trade-off between efficiency and equity – this can be forgiven as long as it is mentioned as a policy relevant factor to be looked at before setting policy itself.
In a similar vein, O’Sullivan seems to think that government needs to pick winners (how they can judge business conditions better than the people actually trading I do not know) and subsidise exports – because for some reason giving other people our produce is a good thing because it makes the GDP stat look bigger.
She bemoans “purists” – a camp I guess I am in – because we care about the efficient allocation of resources, and the welfare of society, rather than using a bunch of business jargon and pretending we can centrally run an economy.
I believe that in both cases, the Taskforce report and O’Sullivan’s article, the authors believe they are suggesting what is best for everyone – what is best for society. But this just tells me that they are confusing what a firm is and what a country is when making recommendations – it is not governments role to centrally determine society, and anyone that thinks government can pick winners, or that cutting the fiscal deficit right now will make magical things happen, is mistaken.
The exchange rate and the RBNZ
I see that we are back to discussing this sort of stuff, fair enough. There is a Herald article with Cunliffe expressly mentioning that the RBNZ should reduce volatility in the exchange rate, and Brian Fallow discussing currency intervention following the Fed.
There are a few key points I would like us to keep in mind here:
- RBNZ policy depends on inflationary pressures. A higher dollar (all other things equal) lowers tradable prices, which may have a downward impact on inflation expectations, which in turn will lead the Bank to lower the interest rate. As a result, if people overseas start stimulating policy – then unless this leads to a significant pick up in external demand and commodity prices the Bank could well cut rates on its current mandate.
- For all the talk of volatility it is important to note that the NZ$ has actually been less volatile than the Australian dollar over the crisis years – surprising fact.
- Is it volatility in the exchange rate we care about, or volatility in the prices people actually face – remember that the “world price” of the things we sell overseas have been moving around violently, and the floating dollar has actually helped to reduce variability in the prices many exporters faced.
- Exporters and importers can hedge … combined with the fact that movements are smoothing external prices, this makes me feel that the volatility argument is often overplayed.
- Given that the exchange rate is seen as a random walk – and we have no idea what (short run) fair value really is a lot of the time – isn’t it just as likely intervention will increase volatility!
- If we are worried about the “relative price” argument (our dollar is too high because we are running a CA deficit that is “too large”) we should try to figure out what internal/external imbalances are causing that and deal with them directly. This is not a volatility argument – and it should be well thought through and communicated before anything happens.
- If we believe the “exchange rate is too high for manufacturers” we need to ask why – is it the relative price impact above (which we have discussed), or is it “Dutch disease” – something that I don’t really believe is a disease, but merely the diagnosis of a side-effect stemming from a POSITIVE shock.
We all know I’m a sucker for the status quo, but I have no problem discussing these issues. We should recognise that there are two perceived issues: (1) volatility, (2) the relative price. And then we should investigate why these things are happening, if there are associated welfare costs that we can reduce at a lower cost, and if so then clearly communicate why and what is going on.
Given my lack of faith in central government to achieve these things, as they enjoy using monetary policy as a political football, I am a strong proponent of the status quo.