Hi Blair,

We won’t really know what impact the tax reforms had until we have a bit more data – especially since we have a great big earthquake and financial crisis thrown in right in the middle of it! At this point it is probably pretty important for policy makers to ask if they still believe that the long run RER is to high – and if this is the case then why.

In terms of China, we need to ask why the Chinese RER is “low” to understand what is going on – ultimately we can easily make the arguement that their RER is low because Chinese household savings are so high rather than the other way around!

Remember, there is no significant security net over there, choices are severely limited, and they have had to deal with a sharp change in population demographics through the one child policy – as a result, there has been a lot more saving for retirement. In that sort of environment, private savings relative to investment go up, and the RER (and real interest rates) fall.

With people in China relatively more willing to save, and accepting a lower rate of return, then in a small open economy in NZ we do not need to save as much to fund investment – so we borrow at low interest rates to invest. This is all cool … unless there is some sort of misallocation of investment going on. That is why all these concerns fundamentally come back to thinking about structural problems onshore – rather than trying to explicitly lean against whatever is going on overseas.

It is an obvious point for economists – but not non-economists. If there is one thing I’ve learnt overtime it is that the counterfactual economists have in mind, and the counterfactual that non-economists jump on are often very different … and neither side realises that as we argue past each other!

I would hope that no economist would ever say that. What they should say is that markets are imperfect but better than the alternative.