Matt Nolan

Self interested story of the day?

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So an investment bank comes to the conclusion in a report that too few New Zealand firms are listed, especially on New Zealand’s stock exchange.

Aha.

Why do people take all this capital deepening rubbish seriously – we are a small open economy, with open access to financial markets.  As long as price signals are in place, and property rights are protected, people will invest in things given the incentives they face.  Trying to get people to invest, and invest in specific place, just for the sake of it is bad policy.

When the goal is to make sure that “NZ Inc” has the highest reading on the “GDP meter” as possible this might make some sense (I stress might) – but if we are actually interested in achieving the best outcome for society, I haven’t seen a good argument for capital deepening.  Yes, I’ve read papers on it – but I’ve always found that they didn’t cover the underlying concept of allocation and welfare in the context they should be covered.

Matt Nolan

Swiss national bank “pegs” the currency: What’s it mean?

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With people running away from European banks, and global investors nervous, they have been moving swiftly towards “safe” assets – such as the Yen and the Swiss Franc.

There has been sustained intervention in these currencies since late-July, but now the Swiss National Bank has gone a step further – they have set a minimum exchange rate. [Marginal Revolution also discusses here]

So they’ve pegged their currency to the Euro!

Not quite – they’ve set a cap regarding how high strong currency can be against the Euro.  They’ve said in their statement that:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

This is still, in a large part, consistent with an inflation targeting mandate – they have just said the following:  “be aware that we are going to print money and buy up foriegn currency until our currency is back at a level that is consistent with our inflation mandate” – they have just identified a level of the exchange rate that wouldn’t carry the strong risks of deflation they are currently experiencing.

Furthermore, it seems apparent that the Swiss National Bank views the current level of the currency as a bubble – people running to saftey see the Swiss Franc as attractive, and people who want to invest expect this to continue, leading to a self-fulfilling expectation driving up the value of the Franc.

Now I’m not the biggest fan of messing around with relative prices in this way – as it could just be that Europe is so far in the toilet that the weak Euro is telling us something … as a result, my preference would be for the Swiss to just print a whole lot of money and buy currency without setting an explicit “target” in the way they have (outside of stabilising inflation rates).

My CONCERN is that this will lead to further exchange rate management around the world – although not as dangerous as protectionism, I can still see nasty side effects from this.

The real problems are in Europe – and they need to sort them out.  However, given they won’t other countries are stuck introducing “second best” policies (with the potential for unintended consequences) which is sad.

In terms of NZ this means nothing – they are worried about an asset price bubble in currency markets due to people running to “low risk” currencies … we are the polar opposite 😉 .  Also they are worried about deflation, we aren’t.

Matt Nolan

If Europe’s bank don’t trust themselves, why would anyone else?

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Quite. (ht Marginal Revolution)

The issues in Europe remain the most concerning thing for me at the moment – the US has a large drought and a weak patch, but at least we don’t have to ask if their central bank has the ability to always act as a lender of last resort.

The fact that there is no central fiscal authority in Europe, and the fact that people are unsure whether they can trust the ECB in a worst case scenario, makes matters difficult over there.

My concern for NZ comes from the same place they always do during these financial crises: will it lift the cost of funding (which is happening in part – albeit at a time when additional credit remains cheap) and lower export commodity prices (which hasn’t happened).  With a stagnant Europe NZ can do fine, but if they lose the plot we will not be left unharmed.

Update:  For future reference (as I often use these types of posts when I’m going back to look at history – it is amazing how useful blogging has been in this context), growing issues regarding German’s willingness to bail out the region (following election defeats for the incumbent) are a major driver of increasing uncertainty at this point in time.  Also note that the decision to start suing US banks now, in the middle of a crisis, isn’t particularly helpful.

Will Taylor

Referendum Tool: MPP vs FPP etc..

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If you are looking for a way to kill 5 mins at the end of the day, this tool/quiz to help you decide whether you like MMP or FPP is interesting… I must say I felt weird after doing the quiz as I wasn’t sure it accurately represented my feelings. Preconceptions are there to be shattered though:)

 

Matt Nolan

Workers are different

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It is true, and yes it is obvious … however, just because it is obvious doesn’t make it a useless fact – in truth it is an essential, and oft ignored point to keep in mind.  As raised here (ht MR):

Those of us who actually work in industry and are involved in large engineering projects of the type the stimulus was designed to ‘stimulate’ could have told you this without waiting for a study. We tried to. No one was listening.

It is maddening to hear ‘workers’ talked about as if they are interchangeable – Oh, a whole bunch of home construction workers have been layed off? Don’t worry, we’ll build a road or a bridge and employ them!” The only problem being that the type of construction home builders are trained for has nothing to do with bridges.

This is an undeniable fact – and is something that it is important to keep in mind when discussing labour market dynamics.  Now, the article goes on to say that only Austrain economists look at this issue – I call bull on that, there is a whole bunch of literature on heterogenous labour in labour economics, during the recession New Zealand economists have constantly talked about job mismatch (an understanding of that is one of the reasons why any stimulus spending has been more targeted), and the only reason it is often not modelled explicitly is because it can be hard to describe/make the model solve.

Even in the most general and non-detailed areas of applied macroeconomics, economists often use empirical models with some sort of implied labour market friction that is meant to proxy the mismatch – not a perfect solution, but definitely an indication that it isn’t being ignored.

In fact, I’ve been reading a lot of commentators in NZ discussing the areas where skill shortages still existed in the middle of the recession – in this country policy analysts, economists, and humans all seem to have a good understanding of the differences in labour and the value of human capital … maybe this is just an issue that NZ is more informed on.

Matt Nolan

Youth training policy

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I see that Labour has suggested a youth training policy – I like it.  I am not a fan of their tax policy (I’d fund by reproritising spending, or just increasing tax rates if society so desires, or best of all – actually improving the tax system), but that has nothing to do with this.

I’ve long stated that tax, benefit, and training policies should be more highly integrated, and I see this as a step in the right direction.

I am surprised to see National’s reaction.  For one, they suggested a similar thing prior to last election.  Also, they seem to be going on that Labour keeps announcing this and never doing it – but if this is good policy (something National hasn’t disputed) then why does their policy differ?  If its good its good – criticise policy on its merits right.