Matt Nolan

Incompetence in Europe

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I fully endorse Krugman’s point here:

These alleged technocrats have in fact systematically ignored both textbook macroeconomics and the lessons of history in favor of fantasies. The European Central Bank has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience. Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised.

Not only are we seeing why the Euro was a silly idea in technical terms – we are seeing how endemic policy failure can be in places like Europe.

Seriously, the vast majority of economists knew that we just needed the ECB to act as a lender of last resort, and for the default in Greece (and policy changes in the rest of the PIIGS) to be determined in a reasonable amount of time – instead we’ve seen failure from both monetary and fiscal authorities around the region.  Embarrassing failure.

Matt Nolan

RIP Roger Kerr

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Over the weekend Roger Kerr passed away.

This is extremely sad news for both the family, and the wider community.  During his lifetime Roger did a significant amount to improve the level of debate around policy in New Zealand, and his efforts have helped to improve the shape and strength of New Zealand’s policy framework incredibly.

I never had the good fortune to meet Roger, but I was lucky to grow up in a country that has transparent fiscal policy and robust monetary policy – in a large part thanks to his efforts.

The Hand

Have you read the PREFU yet?

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Below is an excellent guest post from Andrew Coleman on the PREFU – pointing out one of the weird assumptions that the government is relying on to “balance the books”.

“Have you read the PREFU yet?” bellowed one of my colleagues as he sauntered down the corridor at Otago University last week. “Of course not – why would anyone do that,” was my glib response.

The answer, of course, is that the PREFU is one of the great components of New Zealand’s modern democratic process. It requires that the Government provides an internally consistent set of projections about the likely state of the fiscal position over the next four or five years. Internal consistency is a marvelous thing. It means if the government announces a tax cut, the direct and indirect implications of this cut for growth, tax revenues, and the government deficit are properly calculated.

It means if the Government projects a surplus, the assumptions on the evolution of different classes of government spending are clearly portrayed. In short, it provides transparency.

Internal consistency is hard work, and we should be genuinely grateful to the Treasury analysts who do this work. All the assumptions are clearly laid out for anyone and everyone to see. If the Government is going to balance the books by imposing significant real cuts on health and education expenditure, then it will be reported and no-one has any excuse for not being provided with the information or for not having a model able to do the complex arithmetic.

Actually, it does appear that the Government is claiming the books will be balanced because of significant real cuts in the health and education sectors. This is not directly mentioned in the Executive Summary, where the focus is on the predicted growth rate (2.9 percent per annum from 2012 to 2016) and the return to surplus in the operating balance in the year to June 2015. (Mind you, the summary does mention that core Crown expenses will decline as a percentage of GDP.)

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jamesz

Goff and Key agree on something

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Phil Goff:

[There is] no businessperson in New Zealand that would say when you are in difficulty the best thing you could do is sell off your best-performing assets.

At least both major parties now agree that that the election is all about finding a new CE to run NZ Inc. What a shame we’re not inviting applications from people with proven, international experience.

Matt Nolan

No wage growth was not 2%

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Before the stream of articles come out saying:

Wage growth was 2%pa

Wage growth was less than inflation

Let’s just say that Stat’s got the title wrong on this in strict terms.  “Productivity adjusted” wages rose 2.0% … the LCI is a quality adjusted measure, just like the PPI, and the CGPI – it is supposed to measure inflationary pressures stemming from the labour market, not how much more money people have in their pockets.

Average hourly wages actually rose 3.2% (the QES), as the composition of labour changed and productivity increased.  Furthermore, this is a gross wage measure – given that income taxes were cut to meet the increase in GST, we need to take GST out of the CPI number.  As a result, average hourly wages rose more strongly than consumer prices.

Actually, wage growth has been very strong over the last two quarters while employment has been weak – this is starting to look more and more like a “two-speed labour market” … which is a pain.  However, I doubt this real story will make it out as people are busily just going to use the LCI measure and CPI growth inappropriately to push whatever agenda they already wanted.

Why do I have to repeat this every quarter …