Matt Nolan

More on the recent labour market data

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Via Twitter, James Shaw informs me of the following critique of my post where I stated the media were misrepresenting the latest wage-price data.

Lies, damn lies & statistics. A friend reckons TVHE is also only painting a partial picture. QES includes merit promotions, so wages have kept up with inflation *if* you got promoted. Promotions are meant to be about getting ahead, not keep…ing up, otherwise how’s the next guy going to feed his family? Moreover, while TVHE strips out tax changes from inflation (a little rough if employers factor this into wage rounds), it ignores that Stats themselves picked out food and electricity as rising by more than the headline 5.3%. The Salvation Army reckons that CPI actually understates how difficult it is for lower income families to afford the basics.

There are a lot of points here – and while they are important things to keep in mind, I’m sticking to my conclusion that the initial headline was misleading.  Let me try to explain myself here.

[Note:  The new headline and first paras of the article I linked to in the initial piece are completely reasonable – as I’ve just gone back to read it again to see if there had been changes.  As a result, I am not criticising the article in its current form – I actually quite like the current one.  However, I am still criticising the initial suggestions that came from the article and other ones like it which will be discussed below … what can I say, there is only so much you can listen to John Campbell talking cr*p before you have to write something about it 😉 ].

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Matt Nolan

Tackling the core

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NZIER raises an important point regarding New Zealand – the core costs of government look set to increase substantially in the next 15 years.

Now I don’t want to overplay the increase in health costs and superannuation – those will occur, but at the same time a smaller proportion of people in the youth category will lead to relatively smaller costs for education and health care for the young.

However, in net-terms the dependency ratio will increase, and the average “cost” of each dependent will rise.  As a society we will undoubtedly want to look after the most vulnerable among us – but if we are truly serious about that we need to keep in mind what we can afford.

In reality, if society is serious about looking after dependents in the future there is a significant liability in the future – and this is a liability we need to fund now.  Although some may say we should do this by increasing taxes, lets not forget that our current rate of government spending as a % of national income is fairly high.  As a result, we may have to cut back on some of our “golden cows” such as the age of eligilibity for super, the degree of funding for health care, our comprehensive ACC system, and our willingness to give families income through Working for Families.

If the US can get downgraded for not facing up to these challenges, NZ can too – it is best for everyone that we face them now, and try to decide where society as a whole is willing to make cuts to fund these future costs.

So I have to ask, given that economists have been walking around trying to get this issue on the agenda for over the past decade how can we actually inform the voting public of how much of a big issue this actually is?

Update:  Bill Kaye-Blake from NZIER adds the following important point on Twitter:

Another thing to think about is the difference between the size of liabilities – because we are all aging – and who pays

So the size of the liability is increasing, but we also need to remember that the pool of people who will be paying for this liability is shrinking (or at least growing at a much smaller rate).  There are a growing number of “dependents” that society needs to cover for each taxpayer – which is why we really need to fund some of this now.

Matt Nolan

What to watch for during the sovereign debt crisis

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Note:  Europe is where the real crisis is now – hence why this is the focus of the post, not the US.

While Europe tries to figure out how it can use the ECB as a lender of last resort, the current credit issues are likely to have some impact on the New Zealand economy.  In order to understand how, and what to look out for, we can use the same framework we did following the failure of Lehman Brothers.

This crisis is not on that level in its current incarnation – but the fact that it is borne of issues in the financial market does give us an idea of what we should look at, namely:

  1. What’s happening to our commodity prices?
  2. What’s going on with bank funding costs and access to credit?
  3. In what ways will uncertainty about the outlook lead to a delay in investment/durable good spending.

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Matt Nolan

The driver of the latest market meltdown

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Although some people think its poor US economic data and increasing concerns around European sovereign debt driving the current market crisis, the Onion has unveiled the true story:

Bernanke, who sources confirmed was “totally sloshed,” arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was “pretty goddamned awful if you want the God’s honest truth.”

Interesting.  I especially enjoyed this part of the story:

While using beer bottles and pretzel sticks in an attempt to explain to the bartender the importance of infusing $650 billion into the bond market, the inebriated Fed chairman nearly fell off his stool and had to be held up by the patron sitting next to him.

As it reminds me of the sort of thing I like to do when I’ve been drinking – namely talking economics and falling over repeatedly.

Although this behaviour by Bernanke was irresponsible, it does add an alluring human element to him – something that I haven’t seen from a central banker since reading Alan Bollard’s 2010 annual RBNZ report 😉

Update:  Just as a pointer, although I’m making fun this is a serious crisis at present.  I don’t mean to demean its seriousness by joking around, so keep this in mind.  This is an event I am going to be keeping an eye on all weekend.  I will post some general points once I feel that what is going on has become clearer – but I will save more timely and detailed analysis for clients 😉 … what can I say, I love you all – but I love clients as well and they pay the bills.

Matt Nolan

Metaphor for today

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Protecting your economy from vulnerabilities is like protecting you computer.  The more you reduce how vulnerable your computer is, the worse your computer’s performance is.

In the same way, the more we introduce policies to try and reduce New Zealand’s vulnerability to shocks, the more we lower the average performance of the New Zealand economy in the future.

This is a trade-off, and we need to make sure we have a clear idea of what the trade-off is, and that society is willing to accept the costs associated with it, before we introduce any policies to reduce “vulnerabilities”.

Matt Nolan

The case of New Zealand: Inflation targeting, relative prices, monetary policy and industrial policy

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According to this piece on Rates Blog, in a recent presentation Dr Geoff Bertram discussed the inflation targeting framework, and the idea of the NZ$ being overvalued.

Back in the day I had him as a lecturer, he is an extremely smart man and he brings up a number of important points.  However, I have to disagree with his view regarding inflation targeting and relative prices in the economy.  There are two main themes where I feel our views differ, fundamentally these are:

  1. The driver of the change in the relative price of non-tradable and tradable goods
  2. The relevance of industrial policy in relation to monetary policy.

Let me flesh these out.

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