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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jamesz

Greens on poverty

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The Green party has recently released their policy program for helping the poor:

[Turei’s] party wants to extend Working For Families tax credits by $60 a week for the poorest 140,000 households, reinstate the Training Incentive Allowance for university-level courses to help beneficiaries get educated and into work, raise the minimum wage to $15 an hour and create minimum standards for rental properties to ensure they were warm and healthy.

I like the idea of helping poor families but is the best plan really to:

  • raise marginal tax rates on them,
  • give them cheaper bachelor’s degrees,
  • increase the barriers to entering the workforce at the minimum wage; and,
  • increase the cost of rental properties?

I’m sure Matt will have a more thoughtful analysis up soon but does this policy really tackle the problems that our poorest citizens and their children face? I don’t know for sure but I imagine that the cost of a university degree isn’t a binding constraint for many of them, for example.

It’s going to be fascinating to see all the parties releasing more meaty policy agendas as we approach the election!

Matt Nolan

Media uses wrong data to reach wrong conclusion … again

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“Wages not keeping up with inflation” that is the headline we get here.  While I’m sure that will get a lot of people wound up and complaining about something, its a load of cr*p.

Actually looking through the numbers, we see that gross wage growth is roughly inline with the growth in consumer prices excluding GST.  Why do this?  Well the increase in GST was met with a corresponding cut in income taxes, so that NET wage growth is that much larger than gross wage growth.

But lets ignore this, and lets focus on what they said:

That took annual wage inflation to 1.9 per cent … well-short of the 5.3 per cent annual pace of inflation.

Looks like a big difference.  And that is what you can do when you cherry-pick and compare incomparable data series to fit the story you want to write.  Let me explain step-by-step.

The 1.9% figure comes from the Labour Cost Index – this is a quality adjusted index that captures growth in wages that are unrelated to the type of job or changes in productivity.  This doesn’t tell us anything about income gains for people – in fact, I use this as a measure of inflation expectations not wage growth.

If we want wage growth we should probably look at … wage growth figures right.  So, average hourly earning according to the Quarterly Employment Survey were up 3.1% from a year earlier.  Taking into account hours have risen, total wage income (excluding sole traders and agriculture) was up 4.7% from a year earlier.

Given that the changes in tax cancel each other out we have to ignore the increase in GST when talking about the cost of living (or include the tax cut in the wage growth figure above).  As a result, labour income growth has well beaten increases in the cost of living.

Furthermore, again inflation is a whole different concept – however, I’m not going to ping them too hard for using that term here.  What I will ping them about is the fact that:

  1. They didn’t understand (or wanted to misrepresent) the data and used the wrong series
  2. They didn’t understand (or wanted to misrepresent) the data and inappropriately included/excluded tax changes

Overall, both of these “adjustments” were to make the data fit their narrative – which is a load of bullsh*t.

How about writers either learn what the data is before writing this sort of thing – or talk to someone (either at Statistics NZ or an economist) who knows.  Then they wouldn’t write factually false pieces like this.