Matt Nolan

Bubbles no, resilence sure, market failure yes

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Hmmm, it looks like no-one wants to dissuade people from viewing the new RBNZ tools as ways to “stop bubbles”.  I think this is a dangerous mistake.

The focus on financial stability, and system risk in the banking system, is due to concerns that a sudden shift in asset prices could lead to a breakdown in the financial system – due to concentration, bank-runs, or some concern about fragility.

This is all well and good.  I think we need to be careful with these arguments.  I think we also need to identify why and what the failures are.  But, overall this is a way forward.

And it does nothing to truly “prevent bubbles”.  If someone wants to “overpay” for something, they can, and will – and as a society we shouldn’t give two hoots about someone pissing their own money against the wall.  True story.

If we tell people the RBNZ is “stopping bubbles” they will just assume that whatever is happening isn’t a bubble.  Does this actually seem like it will help anyone?  The RBNZ can’t really control asset prices, and it definitely can’t control them in the face of “irrational exuberance” (protip, the RBNZ doesn’t control people’s expectations of future house price appreciation).  The goal is to prevent the popping of a bubble having enormous spillover effects onto the broader economy.  If the RBNZ is doing its job right we will STILL HAVE BUBBLES – and people who took on the risk will still HURT THEMSELVES.

As a result, I hate the current description.  I hate the focus on asset prices themselves, rather than the direct stability of the banking system.  And I hate that we aren’t more focused on trying to identify where the risks and failures and and how to quantify them.

Matt Nolan

All I want for budget day

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  • Is a clear plan regarding the medium term budget.
  • A clear plan around how we will fund long-term expenditure.
  • A movement towards treating asset classes the same way through the tax system.
  • The reintroduction of interest on student loans

I’m not being greedy, these four things will pretty much do me 😉

I’ve noticed that they are talking about building costs, and housing supply.  Fair enough.  I also noticed something about milk/food in schools, fair enough as well (wonder how it will compare with the Labour scheme, which I was favourable about – and note nice post over at Offsetting).  Will be good to see these points comes out.

What are you hoping will be in your Budget day stocking?

Update:  I see alternative budgets from Don Brash and Roger Douglas.  While I agree about the long-term budget concerns (due to things like healthcare spending and superannuation), and I can understand the worries about housing investment I broadly disagree with everything else in these pieces – it isn’t that I think they are being inaccurate (they are not), I’m just not persuaded that the arguments they are making reflect the full equity-efficiency trade-off society is willing to undertake.

jamesz

Monetary policy is not the interest rate

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It’s the rule, writes Christy Romer:

The regime shift we are seeing in Japan is just the kind of bold action that might actually succeed in changing both inflation and growth expectations a substantial amount. As a result, it may be an effective tool for encouraging robust recovery and an end to deflation.

Nick Rowe has been saying that for a while but, before we get too gung-ho, Romer cautions:

I don’t know if the Japanese experiment with monetary regime change will work. But I am confident that we will learn a great deal because they had the nerve to try.

Matt Nolan

Series on tax: Part 2 – distortions and burden

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Over at Rates Blog I have put up part 2 or a 6 part series on tax (it was going to be 5 but I’ve extended it.  In part 1 we asked “why do we tax“.  In part 2 we are digging deeper into the costs of taxation.

We focus on two specific issues, the way taxes distort behaviour, and the idea of where the burden of tax falls.  As we explained in the first article these issues are really really difficult to actually work out – and the purpose of the second argument is just to give a “flavour” to the argument.  In honesty, if you wanted to figure out the true burden and distortions you’ll have to get yourselve a series of these CGE modeling economists armed with other economists who focus on normative judgments.

Last time I promised to discuss tax systmes that seem idea, that we don’t use.  And why we don’t.  Well, that is now the next article.

Also, thanks to Agnitio who helped me clear up this article.  It is a fairly wonkish one, and he came in at the last minute and helped me clarify what the hang I was doing 😉

Matt Nolan

“Rebalancing” and other morality plays

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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.

Read more

jamesz

Rodrik’s idealism

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In the aftermath of the Reinhart/Rogoff fiasco, Dani Rodrik has called for economists to stick to their knitting:

…economists [should not] second-guess how their ideas will be used or misused in public debate and shade their public statements accordingly. …few economists are sufficiently well attuned to have a clear idea of how the politics will play out. Moreover, when economists adjust their message to fit their audience, the result is the opposite of what is intended: they rapidly lose credibility.
…
economists should match honesty about what their research says with honesty about the inherently provisional nature of what passes as evidence in their profession.

Rodrik’s view is very noble but difficult to successfully implement. On the one hand we need only look at Paul Krugman’s slide in credibility among economists when he became a nakedly partisan blogger. However, avoiding any perception of political alignment is incredibly difficult and Krugman has become a household name with his writing for the NYT.

If you want to have some impact on policy then you need to confidently relate your research to the hot issues of the day. The majority of research slides by unnoticed because researchers are so concerned about remaining politically neutral that they’re afraid to voice a strong opinion on their work’s policy relevance. That’s understandable because having an opinion usually requires a few leaps of faith that aren’t fully supported by your evidence. For a start, research you started over a year ago rarely has the same currency when completed that it did when you started. If you want it to be noticed the press release and the substance may have to part ways slightly. Failing to make those leaps, sadly, is likely to condemn your research to irrelevance: it’s more important for the purposes of persuasion to be confident than to be right.

Facing that difficult choice it’s no wonder that many academics mix opinion with evidence in their public pronouncements. The technocrats of this blog may dream of a day that Rodrik’s mantra becomes the norm, but the incentives are against us.