Matt Nolan

Bubbles, FDI, winners and losers

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I’m so sorry I am still away – currently a bit caught up!  I will be back posting properly and answering comments in a few days.

For now, here is the latest article I’ve popped up on Rates Blog.

In it I discuss what it means for there to be a “bubble” due to foriegn investment, and I mull over long-term foriegn investment.  I am relatively terse in the article, this probably stems from my lack of sleep and the fact I’m busy 😉

I conclude:

Foreign investment and the associated capital flows have been a net positive for New Zealand in the past.

Let’s not forget this as we try to figure out what policy to set in a post-Global Financial Crisis world.

I have no doubt that this article will be unpopular with close to everyone.  That is fine.

Will Taylor

“Living wage a test of small business’ mettle”

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Via Stuff this morning, great quotes from FIRST union leader Robert Reid:

“Why should a worker suffer for being employed by a business that maybe shouldn’t exist,”

As the debate about the living wage continues, we get yet another indication that unions are fine with unemployment – as their clients aren’t the unemployed.

Dom Stephens from Westpac (NZ’s 17th sexiest economist) is quoted further down in the article and rebuts things nicely, so I will just leave it there:

Large increases lifting the minimum wage above where the free market put it – “and I think it [proposed living wage] may be moving toward that” – very clearly affected employment, Stephens said. “It would worsen things for the most vulnerable members of society and improve the lot of those who stayed employed.”

 

Matt Nolan

Keeping it all together on bond sales

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Hey all, I’ve been away – and I still am.  I’ll be back next week.  However, I have to write on this.  Over on Rates Blog, Bernard Hickey stated the following:

The most interesting revelation from today’s Monetary Policy Statement was Graeme Wheeler’s comment that he knew other central banks were buying New Zealand government bonds as part of their Reserve buying programmes.

This is how printed money is lifting our currency to over-valued levels.

Ok, now I don’t know what the RBNZ has been saying – I don’t go to their media lock-up.  But lets think through this a bit.

“Bond buying” will push up the currency if there is some sort of financial flow – such as the government increasing borrowing (and it being funded from overseas) or bond holders in NZ selling bonds to overseas buyers.  From what is indicated, it seems like we’ve had a bit of both.  So the government is borrowing to pay for a bunch of stuff, and this is increasing the current account deficit.  We need a corresponding lift in the capital account surplus to pay for it – hence we have this financial inflow.  People are willing to lend to us incredibly cheaply so this is pretty nice of them.

The two complaints I’m hearing are:

  1. It pushes up the dollar:  Investment+consumption > savings, so yes this pushes up the dollar.  The question is why the interest rate and exchange rates that puts us in our current “balance” seem so high relative to other countries.  Is it because our growth prospects are better?  If so this is good.  Is it because of some structural issues in our economy?  If so this could be bad.  Is it because, as the RBNZ seems to believe, there is a bubble in the dollar/bond markets – if so we have people overpaying New Zealander’s to buy bonds that will decline in price … interesting.
  2. Why don’t we print/pay for it domestically:  This is part of the “QE for NZ” crew view, and it is inappropriate.  Keep the ideas together here, what are we trying to “solve” by getting the central bank to buy government bonds?  Are we trying to loosen monetary conditions … if so cut interest rates, as QE is really a form of this.  Are we trying to reduce foriegn lending … if so we need to reduce domestic borrowing, we are a small open economy and so we pay the world interest rate to borrow as much as we want (in a sense).  If monetary conditions are appropriate, then QE will just be inflationary, and it does nothing about the inherent “savings-investment imbalance” that people are concerned about when they discuss people lending to NZers.
Matt Nolan

Remember, we can “overlabel”

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Following the unfortunate death of a woman from drinking far too much Coke, there have been calls to label Coke.  I’m all for information, and that often makes me pro-labeling, but in this case I’m not … it is important to recognise that we are targeting providing information, and so we can “overlabel”.

A label gives information as an abstract concept, but it is costly to interpret and so the existence of a label is often taken as a signal, and used as a rule of thumb.  As a result, too much labeling of things could reduce the true information content – leading to people making more poorly informed decisions.

The solution?  There is a trade-off for the amount we label a given piece of food etc – and we need to accept that.  However, we can also make more detailed information and standards a necessary requirement to be on some sort of central website – so people who do want to take into account greater information can do so at a low cost.  I would also note that people that design easier to interpret labels which don’t sacrifice information are “shifting out the information curve” – this is a real productivity improvement, and these people are cool as a result.

The overall goal of the regulation is to “maximise information” so that people can take costs and benefits into account when they do something.  That should be the guiding principal – not saying people should have one thing or another.

Note:  Look, no need for me to go on about personal responsibility, or insult the woman about her life choice to get this result – which I’ve seen a bunch of.  We don’t know her life, preferences, or situation – so we shouldn’t suddenly decide that since it is a choice we wouldn’t make we should either ban the product or attack the choice.  I’ve noticed a lot of both, and its generally a bit disrespectful, which is also why I delayed this post until people stopped being rude.

Matt Nolan

Quote of the day: On bank subsidies

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Via this excellent review by John Cochrane, I decided to read “the banker’s new clothes“.  I’m only a small way in, but it already seem like a pretty good book, written for a non-technical type of audience.  Excellent.

My view has been that there is potentially some type of externality from bank’s actions (systemic risk stemming from asymmetric information and potentially linkages), and that there has been a implicit subsidy to  deal with this – and so the clearest solution would be to treat the lender of last resort function as enforced insurance … and make banks pay an insurance premium (*,*).

The book is taking a very similarish line, although it is focusing on capital ratios.  Essentially, banks become highly leveraged because debt is lower risk than capital funding when they go to borrow (as bondholders will get bailed out, but equity holders won’t) – so they appear to be pushing towards (as Cochrane is) much higher minimum capital ratios.  I would note that this is where the NZ Reserve Bank has been pushing regulation since prior to the crisis (to prove this I was looking for a paper I saw from 1999 … and ran into this bulletin from 1996!), and a number of measures have been introduced or are close.  By default I prefer price to quantity mechanisms, but I’m leaving myself open to be persuaded by the book.

In any case, the quote.  Here:

Subsidizing banks to borrow excessively and take on so much risk that the entire banking system is threatened is like subsidizing and encouraging companies to pollute when they have clean alternatives

On thing missing in the quote is the cost – we haven’t pinned down the true relative price for clean vs non-clean.  But adding a subsidy in the face of an externality is peverse, and is a good motivator for looking at the issue.

Matt Nolan

Why is this wrong?

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When the minimum wage change was being debated, I saw this tweet pop up from Duncan Garner.

Simon Bridges admits WINZ is there as a backstop if wages are too low. Can you believe it?

After the tweet follows a range of comments about corporate welfare etc etc.

This is all well and good, however I’m not sure I agree.  As I have said previously, I don’t agree with the minimum wage being used as a way of ensuring income adequacy (*,*,*).  If our true goal is to help those that are the “worst off” in society, than a direct minimum income – something that would be provided by WINZ – is the most direct means of doing this.  It sounds to me that Simon Bridges may have also been making that point (although we can argue about the degree and level of any said minimum income).

Now here is the kicker, people want to differentiate between the deserving and “undeserving” poor by using a minimum wage instead of transfering across a minimum income.  If we have to admit that transparently, does that seem fair, does that seem just?  These are the sort of question we should be asking ourselves, and society more generally, but they seem to have been missed in this situation – with people just looking for a reason to attack Simon Bridges.  Disappointing.

Note:  Via Economist’s View, Christina Romer on minimum wages.  The favoured solution over there tends to focus a lot more on the labour supply response than a strict minimum income/negative income tax would – and this is because it involves a broader set of redistributionary policies, rather than just the existence of a security net.  As you know, my focus tends to be on the security net issues with a pointer towards broader restribution given the rising potential for labour saving technolgy (*,*,*) – something that the Economist had a good piece on recently.  Remember, “potential parteo improvements” require redistribution for no-one to be worse off, there is no mystical tendency.