Beware those bearing gifts of free exchange rate depreciation

I don’t like to write about other economists, unless it is to say how sexy they are.  But I can’t let this slide

Ganesh, why, why are you willing to sell soundbites that do not cover off the trade-offs you are advocating?

The Berl economist told deer farmers in Wellington the bank should become a daily trader till the exchange rate fell to “something sensible for our export sector”.

Asked if New Zealand had the resources to do this, Nana replied, “It’s called a printing press. I’m not kidding,” he said to laughter.

It would be a transfer of wealth, from the people who consume imports, “the baddies”, to the people who earn exports, “the goodies”.

I hope you are effectively saying that the dollar is well above any possible fundamentals (tis a bubble I tell ya), and the government should be willing to gamble on currency markets to try and make some capital gain with sterilized currency purchases.  This is the clearest way I can roll the argument- and I buy it, but I don’t see many benefits from such temporary policy, and I’m a bit more risk averse than you seem to be.  I have to note that you haven’t given that view as your impression in the quotes in this article.

Your willingness to say we should “run the printing presses” is strange to me.  If we print money to buy a foreign asset there is an increase the stock of high powered money, this will have an impact on monetary conditions themselves (Note: for endogenous money people, yes tis true that the money supply is determined endogenously – but shocks to the stock, for a given regime, also shift money supply – and generally the endogenous money people agree with this as well).  If we keep our inflation target, we will in turn have to lift interest rates and/or impose capital controls.  We will have to, in some way, sterlize purchases.  If we don’t sterilize purchases, we are easing monetary conditions.  Is this appropriate when we have a burgeoning rebuild?

If we then push inflation past target because we want to do this, who are the winners and losers?  A lot of people on the left asking for this policy would be among the losers, are you willing to admit that to them, or do you want to pretend that this is a magical free-lunch?  There is no silver bullet, and you are making it sound like there is one, why?

What is the real economy problem which the exchange rate, as a price, is a symptom of.  Or is it merely a result of the fact we have capital inflows, due to the rebuilding of Christchurch and a possible transfer of wealth TOO NZ – in which case the current exchange rate may not in itself be a concern.  Or is it an issue with the persistent CA deficits – which your suggested policy is virtually irrelevant with regards to, given that monetary policy doesn’t impact upon the medium-long term real exchange rate.  And remember, we can use our standard tools to analyse what is going on right now – and it is all about trade-offs, like always.

Isn’t the real question why the real exchange rate in NZ is doing what it is doing?  Why the CA deficit has been persistently elevated?  Why real interest rates are high in NZ compared to the rest of the world.  The RBNZ doesn’t set any of these things – monetary policy is the inflation target, and has no impact on medium-long term real rates or deficits.  Shouldn’t we try asking why these things are the case, instead of mixing up short and long run issues and confusing intelligent non-economists who are trying to interpret the trade-offs we are discussing?

This is all old hat, and one day if you clearly articulate your views in a paper (so not whatever this was) I’d be happy to go through and see what assumptions we differ on.  On this note, I would never have bothered posting.  But you know what makes me furious with you, this:

It would be a transfer of wealth, from the people who consume imports, “the baddies”, to the people who earn exports, “the goodies”.

I thought you were part of the end of the “left wing” section of the economics community in NZ.  I thought your concern was more about “equity” than “efficiency” as a result.  And I respect that.

But here you are calling the majority of New Zealand baddies, most of us are “net importers”.  What the frik.

And why the frik are “exporters good”, you do realise that they are simply people trading with other people overseas … New Zealanders do also trade with each other.  If we had no international trade we would be worse off (specialisation is good), but we would still make and trade goods and services with each other.

Exports and imports are things people do with people overseas!  Exports as a whole are good, as it means that we are paying for imports … which are what we actually value.  The gap exists because people are willing to loan us the income to buy more imports than export.  The persistence of that gap is an area of note, that is entirely unrelated to your point about attacking the dollar at this point in time.

The transfer you are talking about is taking wealth away from the poor, the old, and households in general to give it to exporters.  This is not about jobs, or making us a “high wage economy” – this is about temporarily cutting wages to temporarily increase exporters competitiveness … until the real exchange rate adjusts back and we have to face the same old issues again.

This is why I fight about this issue at every turn.  Economists are supposed to discuss trade-offs, and this involves making the costs to those who don’t have loud interest groups (such as the disparate interests of consumers) apparent.  You are suggesting temporary pain for NZ’s most vulnerable for no long-term gain – all to give exporters a temporary increase in their bottom line.  And if it isn’t bad enough, you don’t seem to be admitting that this is the trade-off you are pushing through – and that’s why I had to write this.

  • Ganesh Nana is a joke. He is an example of how having an economics PhD != having a grasp of basic economics. The counterfactual would be that he is a sophisticated troll who knows he is simply telling clients what they want to hear?

    • I would like to have a conversation with him about it, I do not understand where the policy conclusions are coming from – and would prefer the trade-offs associated with them to be more transparent.

  • boristhefrog

    He really is a Nana…

  • dragonfly

    I met someone once who had been a Member of the Employment Relations Authority. Although it was indisputably true that he had been a Member of the Employment Relations Authority, I felt something was wrong, so I checked what I could of his stated profile. He claimed to have a first class honours law degree and to be a member of AMINZ (the Arbitrators and Mediators Institute of NZ). I found that he only had a second class honours law degree (easily discoverable on the Auckland University website) and that he had resigned from AMINZ two years before. There were many subtle things that made me feel something was wrong, but one of them was that he didn’t seem to be as well-acquainted with employment law as he should have been. And another was just an intuition I had that there was something wrong with him personally.

    • If that is about Ganesh, he does have a Phd doing CGE modeling, he is a smart cookie. If it is about me, I swear I do have my Masters degree – it should be loitering on the Vic site if you want to waste an afternoon reading me wax lyrically about how firms hire skilled labour as a way to pre-commit to future output 😉

      In this I am just stating why I find these arguments unpersuasive and possibly misleading given that the trade-off is not being addressed.

      • dragonfly

        What it’s about is I sense something is wrong, but I don’t know what. Courtesy of your blog and others I have been aware of Ganesh Nana and BERL for some time now, and there seems to be a repeating pattern of bizarre, made-to-order reports and opinions (reminiscent of the opinions of scientists employed by tobacco companies in years gone by). If Nana is as smart as you say he is, he shouldn’t be coming up with the crap he’s coming up with. Either he’s not that smart, or he is a person without scruples.

        As a stats person looking in on economics, I note that the mathematics used in economics seems often sort of basic (not trying to make out I’m any kind of maths genius myself though). My suspicion is that this CGE modeling is nothing amazing and may even be a bit of a scam in its own right (but perhaps I’m just being ignorant about that).

        As for your Master’s degree – I’ll pass up (very reluctantly, but my life is terribly, terribly busy) on the joys of reading your thesis and take your word for it that you have a Master’s degree – you seem like such an honest, sweet, innocent kind of person 🙂

        • “As a stats person looking in on economics, I note that the mathematics used in economics seems often sort of basic” “My suspicion is that this CGE modeling is nothing amazing and may even be a bit of a scam in its own right”

          The thing with maths in economics, is that we shouldn’t view it outside of its methodological purpose. Marshall capture this well at the turn of the twentieth century:

          “(1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). This last I did often.”

          None of us are innocent. If anyone believes the things I say because they feel they can trust me, I don’t believe I am appropriately discussing them. Economics is part of general social science – it is simply a section that is willing to face trade-offs that exists from our choices as individuals (methodological individualist sociologists will see what economists do as a subset of their general field). It is in this space, where the trade-offs involved in policy need to be clear, that I am demanding of other economists!

          • dragonfly

            I guess what I’m saying is that if you’re in a discipline that doesn’t (on average) use a lot of mathematics, it’s not that hard, if you know a little bit more statistics or mathematics than your peers, to come to be regarded by those peers as some sort of stats/maths guru. If you’re unscrupulous, or perhaps just suffer from that fatal combination of ignorance and arrogance, you may even encourage this perception. Essentially you are operating as a fraud. It happens in ecology, and it seems to have happened with the East Anglia climate scientists. Maybe it happens in economics too.

            And by the way, one of the things I’ve really appreciated about getting to know a bit more about economics is seeing how it brings the trade-offs out of the shadows. I’ve changed my views about several issues as a result (minimum wage would be an example). And I like very much that economics seems to essentially be about human behaviour as it actually, truly is – that is a subject I have always been fascinated by.

            • The maths business is quite interesting – you don’t see much maths out of me, or on the blog. But the real deal academic economists do a lot of maths – the discipline took the idea of trying to be a real science extremely extremely seriously. This is the general first year grad textbook for the “core” of the discipline (microeconomics):


              On the statistics side, econometricians can get pretty serious, although I suspect this is more in line with applied statistics (?).

              Glad to hear you’ve picked up the trade-offs element in your economics journey – once you start thinking in trade-offs it becomes impossible not to ask “why” about everything. The risk is going to far the other way and always refusing to confront policy choices “because” … that is probably the main issue people get annoyed with economists about!

  • VMC

    I read that and thought “how sad”. I guess what ‘dragonfly’ is saying below is that anyone can call themselves an economist and there is nothing that anyone else can do about it. Maybe time that economists became a proper profession. But, then of course, I might say that – after all I am a baddie it seems. As it happens deer farmers rely on stock that originally had to be imported, so maybe they are not such goodies either!

    • I am sure Ganesh has a well thought out position – it is just his language and his analogies, perhaps inadvertantely, misleading people about the trade-offs involved.

  • Imports bad exports good… didn’t we smash mercantilism with a big hammer a couple hundred years ago?

    • I always thought traditional mercantilism was one of the “major common sense fallacies” that economists were trained to stop people running into. Like the lump of labour fallacy.

      Neo-mercantilism is completely different, and admits it is a version of interventionist fiscal policy due to very specific assumptions … assumptions that largely don’t hold in the NZ context. So I can’t even pretend to defend this on those grounds 😐

  • Shamubeel Eaqub

    I loved the Orwellian line: exports are good consumption is bad. There is also the marxist line that its all about production and not consumption. At least it so appears from the bylines in the story. When I have spoken to Ganesh he has been considered in his arguments – so I suspect the story wasn’t totally fair.

    I am fond of open debate, but I struggle to understand what the problem definition is and what the policy response is meant to solve. The ‘of course’ arguments are too shallow to mention.

    I wonder if there is serious thought given to the exchange rate being a relative price, which reflects fundamental factors. Rather than trying to fix the price, perhaps we need to fix the drivers? We have talked about real exchange rates and savings-investment imbalances in the past. In which case Ganesh could perhaps call borrowers the baddies and savers the goodies? Oh wait, moralising even here is no good: borrowers borrow from savers.

    Doh. Apparently there are no free lunches and moralising about tradeoffs is a bit silly. Printing presses be damned….

    • “When I have spoken to Ganesh he has been considered in his arguments – so I suspect the story wasn’t totally fair.”

      I have not spoken to him – but this is 100% how I would view the situation myself. This of course does not change the line of importers being “baddies” and exporters “goodies” which I can not see a justification for.

      “Rather than trying to fix the price, perhaps we need to fix the drivers?”

      On this line I am always in agreement – when we see a price we need to ask why that price is where it is, arbitrarily trying to change it makes little sense.

      The big thing that comes out here is that, if there is a real exchange rate issue, “printing” makes no sense – domestic inflation now will lower the nominal exchange rate, but not the relative competitiveness of exports in the medium-long term. If we want to face the “issue” we need to work out what the issue is, not resort to forcing monetary authorities in NZ breaking down the very credibility that the rest of the world is jealous our central bank has!

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