Matt Nolan

Should the US really keep blaming the exchange rate with China?

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Bemoaning the Chinese exchange rate when talking about the structure of the US exchange rate is looking increasingly unreasonable.  I don’t think either country should be messing around with trade policy and intervention, and I think they are both doing irresponsible things.  But if we are just going to look at the exchange rate lets actually look at it (thanks FRED).

Take into account that inflation has been stronger in China than it has in the US, and you get a story where the real exchange rate is probably lower than it was in 1994!

China is buying up US bonds at an incredibly low rate of return, as long as US isn’t “pissing the money in the wind” I can only see this sort of action hurting China – not the United States.  If the US is going to criticise China for creating and now maintaining “imbalances” I would like a slightly more sophisticated argument than “look at the exchange rate”.

How about “look at the artificially low rates of return in the past due to excessive artificial savings” – you make that argument, and it becomes obvious that fighting against China loosening global monetary conditions during a period where the world is suffering from tight money (even with amazingly low interest rates – as the equilibrium real interest rate has dropped markedly) and the  developed economy’s central banks wont doesn’t really make sense …

Matt Nolan

Facing the bloggers

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I will be doing a free presentation to the blogsphere in Auckland on December 2, followed by a Wellington presentation on December 10.

You guys have been good to me, challenging my preconceptions and helping me to develop my ideas understand (ideas was a stupid term – I never come up with anything original, I just aim to try to understand the world around me given the knowledge that already exists 😉 ).

I want to give something back by giving you guys a rundown on what has been going on in the economy, and some of the issues we should be keeping an eye on over the next three years.  Given that it is after the election I’m calling it a “post-election economic update for bloggers”.

I will pop up more details closer to the time – I just wanted to give you guys a heads up that this is happening, and that you are all more than welcome.

For those that cannot make it, I will pop up the slides on the site after the Wellington presentation.

Matt Nolan

A minimum income can replace a minimum wage

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That is the suggestion here from Gareth Morgan.

I agree of course, I have said the same thing here before – both when raising what my policy platform would be and discussing the minimum wage more recently.

It is fine to disagree with this and say “only people who are part of the labour market are part of society” – but in that case lets make that transparent and build our policy platforms from there.  I don’t agree that platform (hence why I would push for a minimum income) – but the current state where we don’t face issues of income adequacy OR fairness simply leads to inconsistent and unfair policy.

Matt Nolan

Global youth unemployment, why?

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Arnold Kling raises the issue that youth unemployment has risen disproportionately during the recession.  He raises three stories and says only one makes sense – his third story:

  1. Sticky wages,
  2. Shift in demand/technology
  3. His PSST story – where it is taking time for entrepreneurs to utilise labour/match skills following a structural shock.

This is all well and good, but there is a massive story missing here.  Young workers require training, and have no prior experience with which to base their quality on – they are a “risky investment”.

Firms pull back on investment during times of uncertainty and distress, as a result we would expect to see youth unemployment rise disproportionately around the globe.

That is why its always made sense to me to have skill training as part of any unemployment program, so that an unfortunate recession that leads to the exclusion of part of the labour market only has a limited long-term impact – without this type of intervention we run the risk that the young people suffering from misfortune today have permanently lower income as a result!

jamesz

Fiscal forecasting bias

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If you’ve read this blog much you’ll know how obsessed Matt is with independent fiscal forecasts. He has variously called for an independent body to cost parties’ election proposals — Peter Dunne’s with him on that one — and independent bodies to set tax rates and maintain medium-term fiscal balance. The two have been jointly brought to the fore by the arguments about Treasury’s PREFU economic forecasts and the ability of each major party to balance their budget. Each party has accused the other of wild optimism but I haven’t yet noticed people taking pot-shots at the PREFU forecasts themselves. But can we really trust the government’s forecasts?

A recent paper on just that topic (ht. Robin Hanson) has, conveniently for us, investigated whether governments’ economic forecasts tended to be systematically biased in any particular way. It turns out, slightly unsurprisingly, that they are almost always optimistic and more so in the medium run than the short run. That, in turn, leads to over-spending by governments and constant budget deficits relative to forecasts:

Over-optimism in predicting growth appears linked to over-optimism in predicting budget balances. On average, the upward bias in growth forecasts is 0.4 percent when looking one year ahead, 1.1 percent at the two-year horizon, and 1.8 percent at three years.

So that’s bad news for governments and bad news for Matt’s budget-balancing agency, you might think; but not so fast! Read more

Matt Nolan

A point on NGDP targeting and inflation expectations

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I’m increasingly hearing people call for an NGDP target.  I’m not really convinced it is superior to inflation/price level targeting to be honest.  Let me discuss below.

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