“Rebalancing” and other morality plays

On my list of future things to post on I had this post – which was intended to be a “bitch about rebalancing and targeting house prices for financial stability”.

Ever since the crisis erupted I have, especially privately, called the “rebalancing” argument one of the most pathetic quasi-economic arguments imaginable.  I found it difficult when a large section of the New Zealand economics community started using it (even papers from the RBNZ got in on the act), because apart from being a close to meaningless metaphor it also has the disadvantage of misleading people – confusing macroeconomic policy ideas with “compositional” issues, leading to the typical “fallacy of composition arguments” which lead to bad bad policy.

It is with this in mind that a good friend of mine sent me this BERL report on rebalancing the macroeconomy.  And it is with the recognition that it is not just BERL – but a large section of New Zealand’s economists – who make this argument that I aim to discuss why the focus on discussing rebalancing is bad economics.

Rebalancing is a term used to hide value judgments and sell a moral argument about the “right structure of the economy” – it is not an objective way of facing the trade-offs of policy choices, and as a result is it a bastardisation of what economists should be describing for the public.

“Rebalancing is a morality play about borrowing – nothing more”

When talking about rebalancing people throw out lots of statistics and ratios, making it sound like we can be better off in some way by changing what “NZ Inc” produces.  This is popular with the left and right – with left wing and right wing think tanks both going on about this.  We need to “improve tradable GDP” and do less “non-tradable GDP” and make NZ Inc more like China Inc.

But like political discussions on productivity, or the assumption that we can redistribute income without any efficiency cost, this is entirely missing the point.

See this line in the BERL report:

We conclude that the underlying factors driving New Zealand’s macroeconomic imbalances have deteriorated considerably since 2008
Actually, they never do this.  Most of the people that talk about “rebalancing” never do this.  It is a set of value judgments hidden in technical language – the very opposite of what I believe economists should be doing when they discuss issues with the public.  And like I said, BOTH the left and the right are guilty of this – economists from all over the spectrum are using the same value-laden concept to sell completely different policies.  And they can do this because none of them are asking “what are the underlying factors driving the changes in New Zealand’s macroeconomy“.

The reason the BERL report caught my ire is because it did this in a way that was worse than some of the recent examples I’ve seen (in terms of being misleading for policy).  The comment about tradable vs non-tradable inflation in their piece is incredibly out of context – the tradable-non-tradable price level will change due to rising productivity in tradable industries, the Balassa Samuleson effect.

Furthermore, we have seen MASSIVE productivity improvements overseas.  As NZ Inc (urg I hate that term) has stuck to making things that it has a comparative advantage in, the productivity improvements overseas have pushed up our terms of trade … part of the reason for this shift.  Without asking why these shifts have taken place we CANNOT interpret the figures they have in the BERL report – and for that reason the conclusions they make rely on hidden assumptions about what is going on.

Also we can go a step further if we decide we want to “rebalance”.  Did you know that suggesting that tradable sectors aren’t competitive is essentially the same as saying wages are too high in New Zealand – so if we want to “rebalance” we need to CUT the wages of New Zealand consumers and households through transfer policies.  There is a fundamental equity efficiency trade-off – and economists should be mentioning this TRANSPARENTLY … I thought this was our actual job.

So what is the problem

Issue, let’s use the word issue.

We are concerned about the size of our net foreign liabilities as a country, as we realise that if people suddenly change their willingness to lend to us we are very vulnerable.

Furthermore, when we compare ourselves to other countries the REAL EXCHANGE RATE relative to productivity and the terms of trade, and REAL INTEREST RATES, are both high.

Armed with these stylized facts about New Zealand, we need to ask “why”.

Contrary to the inference in the BERL report – we are NOT targeting a certain “structure” for the economy.  And we should not.  Instead, we are asking why New Zealand is experiencing these factors, and trying to figure out if policy can help by checking two things:

  1. Is there a market or policy failure that can be corrected.
  2. Is there an issue of systemic risk somewhere in the economy, which we may want to insure against.

How is this even different from rebalancing

Rebalancing PRESUMES we need to shift a bunch of variables somewhere.  Asking what a failure is and why tells us the TRADE-OFFS we face, so we can decide where to move forward as a society.

Even more perversely, rebalancing assumes that the structure of an economy is something that should be fixed – when anybody with a cellphone and anyone who has tried out a 3D printer will know that technology and the structure of transactions changes a lot.

Now I don’t want you to think I’m picking on BERL, they are smart guys who are just trying to make these issues “accessible” – just like other economists who use “rebalancing”.  I was genuinely writing this article when the BERL report came out – so I was able to easily use it as an example!

The term rebalancing, and the way it is used, is completely and utterly misleading.  It is the metaphor of lazy economists and analysts – hence its massive popularity around the world.  Productivity is not a target, inequality is not a target, rebalancing is not a target – they are intermediate factors that change DUE TO actual causes, the welfare consequences of the real causes are what we care about.  These three ideas give us an indication that this is an area that we should look at – not something we can “target” directly.  This isn’t a small point, this is an incredible important point.

There are always trade-offs here, and going on about rebalancing does more to obfuscate them than to inform people and enlighten debate.

19 replies
  1. Eric Crampton
    Eric Crampton says:

    “Virtually the entire New Zealand economics community”? Bah. Googled Offsetting, found 2 posts that used the dreaded word. The first used it entirely appropriately: rebalancing the composition of spending post-quake, the second quoted somebody else using the term, then poo-pooed that the dollar is cause rather than effect.

    • Matt Nolan
      Matt Nolan says:

      Definitely wasn’t thinking of you – I was explicitly calling out the area I work in as a job.

      I will rewrite that bit to say “many people involved in the NZ economics community instead”.

      • Eric Crampton
        Eric Crampton says:

        Oh I know! I’m redefining the NZ economics community to consist of those aggregated at Dismal Science. And none of us do that rebalancing nonsense.

        • Matt Nolan
          Matt Nolan says:


          Tbf, I am certain that most economists using the rebalancing metaphor mean well – they are making a choice regarding a “clarity-truth” trade-off they believe exists.

          I’m not convinced the choice makes sense though. This is an issue I am to cover at NZAE this year 😉

  2. VMC
    VMC says:

    Dont you think that a better explanation for the BERL report is that its a paid for piece and the party doing the paying got exactly what it wanted?

    • Matt Nolan
      Matt Nolan says:

      It may be easy enough for me to turn around and make that argument – but it would have two flaws:

      1) I am paid by a competitor to BERL – merely stating that would simply sound like a competitor disagreeing with a competitor, that is hardly of much use.
      2) Furthermore, I wouldn’t be saying why I disagree with the metaphor – why I think the framing is inappropriate – or what I think is a better way for us to articulate the real issues New Zealand faces, and the real decisions New Zealand’s society needs to make about the trade-offs it faces.

      It is best for me to take a generous view – that BERL was covering this issue, given they were paid to do so, and decided to push through in the framework they have seen others use – and then discuss why I think this is fundamentally flawed. That way, anyone with the patience to read through my walls of text may figure out what my issue is, and why I see it as important 😉

  3. Blair
    Blair says:

    Maybe because the economics community has discussed the trade-offs ad nauseam over the past 30 years and decided that the existing regime of policy choices isn’t the best available. As such “rebalancing” is just a synecdoche for a whole raft of potential policy changes, and in my view a perfectly acceptable one. These changes have been discussed extensively in our main policymaking institutions and on these pages – like pornography, rebalancing is hard to define but you know it when you see it. However it has a pretty respectable intellectual foundation from people like Brad Setser today going back beyond the bancor debates post WWII to Chapter 23 of the General Theory who traces mercantilism back to the 1300s, and Charles Arthur Conant in the late C19th. Given how frequently large imbalances have been implicated as triggers for war, it would seem silly to ignore them in politics.

    Finally, it isn’t necessarily the best thing for the tradeoffs in any economic transition to be made explicit due to the phenomenon of Demosclerosis (Jonathan Rauch). Policymaking is by necessity a Straussian process where there are multiple layers of narrative. “Rebalancing” works well in this regard as it sounds vaguely positive (compared to say “Ruthenasia”). The BERL article may not make any sense, but that’s not the point. What it’s really about is reaching out to the left parties to get their buy-in for another round of economic reform.

    • Matt Nolan
      Matt Nolan says:

      “Policymaking is by necessity a Straussian process where there are multiple layers of narrative”

      This is very true – and note that in political economy terms I do agree with a lot of what you are saying.

      However, I view us at the point where I believe current policy settings are sufficiently close to “target” that we can explicitly describe trade-offs. Given that (and actually probably even without it, although the argument is then more stretched) an economists description of trade-offs needs to be more multi-layered and general – the explanation of one-trade off should be inherently tied to other descriptions, rather than based on some fallacy of clarity that allows us to separate policy decisions in our mind.

      Let me redefine this. When we say “rebalance and stuff” people think we are giving them a model to understand the world – when actually we are not doing this, we are giving a weak and fragile description of one element. Like a programme designer that tries to increase the flexibility of a programme, economists who want to communicate need to make the elements they communicate through more amiable to manipulation by the end user!

      I would love to say that New Zealand economists have discussed trade-offs “ad nauseam” … but I have never seen them do it. At what point in public have economists actually honestly defined a set of trade-ofs stemming from a policy prescription?

      Now this is a criticism – but it is one I only make with an acceptance of how hard it is to do that. Creating frames like “rebalancing”, “productivity”, “inequality”, and my favourite “a higher exchange rate lowers inflation” are the result of laziness – not the optimal choice between clarity and truth. This is a very interesting, and difficult, issue from my perspective – possibly because I haven’t thought about it enough, and possibly because it is genuinely difficult.

      • Blair
        Blair says:

        Maybe you are right. I read the proceedings of the Tax Working Group, Savings Working Group etc with interest, but found the policy discussions to be mealy-mouthed. For for every potential policy, they would mention a trade-off, but never come out and say whether it was worth it. A classic example is the tax breaks for residential property.

        • Matt Nolan
          Matt Nolan says:

          Indeed – trade-offs without context are very difficult. Economists are not trained to apply value-judgments or motivate trade-offs – and my fear is that no-one is really trained to apply value judgments to the method of description economists use.

          Hence, why I think that this is a discipline in of itself – and attempts to do this through calls to ideas like “rebalancing” are merely bad versions of what is attainable in this discipline.

          There must be some attainable “hard core” for communicating economic ideas, where if you can get that across the framework can be used to easily communicate the important element of economic ideas.

          I almost see it as a form of “controling the frame”, and being able to strip back layers of the narrative to fit in “contrary arguments” and make the other assumptions transparent. However, it is easier to look at this idea than to understand how to do it.

      • jamesz
        jamesz says:

        I don’t have a firm view on this but I lean towards Blair’s. What would convince me is some empirical evidence on what public discourse leads to the best policy outcomes. Until then I don’t really see how we can evaluate the terminology unless it is genuinely misleading. At the moment ‘rebalancing’ seems more like an accessible way to wrap up a complex idea that embodies both descriptive and normative elements. As you acknowledge, there’s nothing wrong with that goal.

        • Matt Nolan
          Matt Nolan says:

          Perhaps my issues is that is provides inappropriate value judgements. After all, since the left and the right both support “rebalancing”, this makes it sound like a thing we should want. However, it is just a different way of packaging an equity-efficiency trade-off that has winners and losers!

          In this context, it makes me very uncomfortable

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