Matt Nolan

Careful reading statements – the July 12 OCR

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Over at NBR, Rob Hosking suggests that the RBNZ is saying a couple of things following today’s statement – a couple of things I believe they are not saying.  Implicitly these are:

  1. Relative to June, the Bank wants a lower average official cash rate in the coming years (so a lower track, and potentially a cut to the OCR).
  2. The Bank feels that the “neutral” interest rate is lower (as this is how a level of the OCR goes from stimulatory to not stimulatory).

The reason for this view is the change to the last line of the statement between June and July – it has gone from having “stimulatory” in it to not having stimulatory in it.  This is true, but I feel it is being taken out of context – note that in April stimulatory was also missing.  Furthermore, the rest of the statement is banging on about how the Bank’s view is unchanged since June … a pretty clear signal that their view is unchanged.

In order to flesh out the argument Hosking states:

It suggests the OCR is going to remain lower for longer, especially when put alongside economic forecasts in the previous statement which said New Zealand’s capacity for economic growth is now lower than previously because of high debt levels and the need to rebuild from recent shocks, both economic and geological.

It is true that the RBNZ “lowered potential”.  However, lowering potential implies that the Bank needs to do less to stimulate the economy – not more.  All other things equal, lowering potential growth output, or shrinking the output gap, suggests that rate will be HIGHER going forward – not lower.

Although I appreciate that it is difficult to read these statements, and that Hosking is right to try to read into slight changes in wording by the Bank – I feel that the interpretation he has given to today’s statement goes a little too far.  In truth, the Bank has reiterated what they said in June – rates are staying at current levels for a while, unless Europe goes bang.

jamesz

The tyranny of positivism

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McCloskey:

Anyone who is not a positivist before 25 has no brain; anyone who is still a positivist after age 40 has no heart.
…
[Positivists promote] the tyranny of the lonely genius, seeking by contemplation in his warm room a universal system to impose upon us all.

Read more

jamesz

The cost of Batman

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Centives blog

Matt Nolan

An “ecosystem” of relative prices

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I just noticed an article on the industrial research limited site discussing how NZ needs to think.  Money quote is:

What I take from that is we need to think laterally, not literally. When we think about investing in particular sectors, we must realise we will need capabilities that aren’t necessarily obvious to us. We just won’t know what types of knowledge we are going to need to build particular parts of our economy.

The interesting thing is that many economists agree with some of what the author mentions in their piece, in terms of discussing scale and the inter-relationships of firms – but from this loose description there is no clear role for policy, or understanding.

In truth, we need to understand the idea behind inter-relationships in a way consistent with methodological individualism.  Then given that theory, we need to go back to data truly quantify what is going on – given the framework that this theory provides.  From there, we can try to decipher if policy can help of not.

And any such theory relies strong on relative prices – contrary to the inference the article appears to be making, we do not have a command and control economy, and the government is not trying to work out the allocation of resources.  Relative prices, both implicit and explicit, are the driving force of any description of what is going on in New Zealand – and our starting point, and final discussion in terms of policy needs to rely on these.

Think about it, we are told how these firms rely on each other, how they add value to each other, and in each others markets.  This doesn’t make an “externality” in the traditional sense, it just tells us that we have firms whose markets are interconnected – and as a result, there will be some implicit contracts between these firms (and implicit prices) that help to share the surplus of their trade.  In an extreme case, when the benefit is enough, and the outside contracting is weak enough, these firms would horizontally (or vertically depending on the relationship) integrate.

The fact that firms are inter-related doesn’t suddenly provide a role for government.  The fact that scale matters for output does not mean that FORCING an increase in the population distribution will increase welfare.

Update:  Bill discussed this here.  And Eric.  How did I miss it when I read both of those blogs daily … I blame my new Kindle for making me focus on Mill instead of my blog reading.

Sidenote:  I have to mention this statement:

Because New Zealand doesn’t have a truly large city by international standards, we must work harder at innovation to compensate for our economic geography and collaborate as if we were a city of four million people.

I have tried to be kind in the rest of the piece, but I have to admit that this statement is blatantly ridiculous.

Two things:

  1. The benefits of population density in large cities come very much from population density – saying we are a city doesn’t do anything to change this.
  2. More importantly, saying we need to “innovate more” because of our disadvantages doesn’t necessarily make sense – it depends on the marginal benefit of innovation relative to the cost.  If our distance from market reduces the marginal benefit from innovation, then this statement isn’t just wrong – its harmful if its followed through with.

I love to hear scientists describe the potentials for technology, and discuss the production possibilities they face.  But they really should get an economist to join the party when it comes to discussing issues of allocation – given that this is the economists area of expertise.

jamesz

The moral imperative of amoral theorising

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Luigi Zingales:

Oddly, most economists see their subject as divorced from morality. They liken themselves to physicists, who teach how atoms do behave, not how they should behave. But physicists do not teach to atoms, and atoms do not have free will. If they did, physicists would and should be concerned about how the atoms being instructed could change their behavior and affect the universe.
…
My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.

jamesz

The dangers of writing widely

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Pankaj Mishra is “…the author of “Temptations of the West: How to be Modern in India, Pakistan, Tibet and Beyond,” “The Romantics: A Novel” and “An End to Suffering: The Buddha in the World.”” He doesn’t know anything about economics or economic history and yet writes about it on Bloomberg as though he is an expert. When speaking to an expert audience that is dangerous, and perhaps a little foolish.

Rothbard memorably wrote that

…it is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

You could easily substitute any discipline for ‘economics’ and it would be as true. Why is it that people with so little expertise are so willing to pass judgment?

For economics it may be the familiarity with the subject matter since everybody lives it every day. While an ignorance of Abelian rings is obvious to us, the gaps in our knowledge of optimal taxation are less so. The everyday language of economics and its subject matter seem familiar enough that people feel they have an intuitive understanding of the subject. While it is fantastic to have such engagement with the discipline, it often seems to lead to overconfidence in untrained commentators. For instance, Mr Mishra might have been hesitant to voice an opinion on the Bourbaki project, yet he felt no such qualms about commenting on the reasons for economic growth.

It may also be that the same lack of kjnowledge precludes people from understanding the limits of their knowledge. Bertrand Russell boldly claimed that “…those who feel certainty are stupid, and those with any imagination and understanding are filled with doubt and indecision.” However, modern research by Dunning and Kruger suggests that the effect has more to do with knowledge than intelligence. Their experiments show that those who are ignorant in a subject vastly overestimate their own skills. Yet, with only a little bit of tutoring, they gain a far better understanding of their level of understanding.

The lesson I take from all this is that poor writing about economics is a consequence of too little economic education. As economists we all have a role to play in helping people to understand the basics of our discipline. Every time we turn up our nose at a casual discussion about economics among non-experts we are promoting the spread of misinformation by our omission. Rather than just pointing and laughing at people who are plainly wrong we should be there to help.