2013 – Page 52

The currency “war” myth that won’t die

Over on Rate’s Blog I’ve seen an approving link to an article discussing the “currency wars” that are going on around the world.

As Lars Christensen says here, and as we’ve said on many occassions ourselves given that monetary policy is pegged to an implicit inflation target this isn’t “beggar thy neighbour” policy at all – this is just standard monetary easing.

Now in New Zealand the big complaint is about the exchange rate – many people feel that the New Zealand dollar is “too high”. However, there are two issues here:

Monetary policy – has NZ monetary policy just been too tight?
Structural policy – are there structural reasons why our exchange rate has been (potentially) persistently over-valued.

We have discussed this before here.

This isn’t a currency war, let me requote something we’ve said before:

Central banks are not breaking the rules, this isn’t a prisoner’s dilemma – competitive devaluations HELP when demand is suppressed … just look at the Great Depression, and the choice of countries to go off the gold standard!

Yes, there likely are structural issues in the New Zealand economy. But policy makers should be focused on those specifically (why is there insufficient residential building activity, why is the real exchange rate so high) – they cannot be solved by monetary policy or the Reserve Bank. Even when we think a policy issue is clear we need to be careful, as Noah Smith points out:

It’s important to belabor this last point. Economists know some things, maybe a lot of things, but this is absolutely dwarfed by the size of the things we don’t know and don’t understand. If this blog has had one “unifying theme,” it would be the depth of our ignorance. So when economists urge caution in using policy to change large sectors of the economy, this doesn’t necessarily mean “We know that the free market is always perfect and good and that policy can’t help.”

Instead, caution about policy is very similar to doctors’ maxim of “first, do no harm.” As a doctor, you wouldn’t say “I can’t figure out how this organ is helping the body function, so let’s just take it out.”

Joining in on the robot pileup

January 23, 2013/1 Comment/in Articles, Political economy /by Matt Nolan

Here is me talking about robots. Here is the conclusion:

One of the concerns is that even with current technology robots can essentially work for an implied wage of $4 an hour achieving many of the same tasks that a low skilled worker can achieve. If robots could do all unskilled work for $4 an hour, where does that leave our hypothetical low skilled worker?

Even in the extreme case, where there are a set of people who could never have the skills to be gainfully employed due to the arrival of robots, the answer here is not to stand in the way of the technological improvement.

The key question to ask is how does the individual live in a society where the “reservation job” now pays a lot less?

The simple answer seems to be that we allow people in this situation the opportunity to increase their skills, and where they can’t redistribute some of the gains from mechanisation to these people in the form of an income payment – where the income payment represents the fact that the “reservation job” that previously gave an individual a certain standard of living no longer exists.

The existence of an unemployment benefit, the existence of student loans, and the subsidisation of education are clear and consistent methods that society has already taken on board to deal with the possibility of the increasing mechanisation of low skilled work – and it is this these types of solutions that are appropriate moving forward, not an arbitrary call to stand in the way of technological innovation.

As a result, the rise of the robots is not something to fear, as long as society and the government that represents it are conscious of the changes that are occurring – and that they provide a security net for those who may otherwise lose out.

Looking for stock advice? Buy a cat…

January 15, 2013/2 Comments/in Financial Economics, Humour /by Will Taylor

Via @NBR I came across this awesome article on the Guardian about a cat named Orlando that was pitted up against some investment professionals and students in a stock picking challenge. How did the cat pick stocks?

While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.

And the results? Orlando the cat unsurprisingly (to anyone who has studied finance and whose job isn’t giving investment advice) earned more money than the professionals.

At least the kids didn’t beat the pros, that would be embarrassing if they did….

With great power comes great responsibility

January 14, 2013/in Articles, Macroeconomics, Monetary economics /by jamesz

Romer and Romer think monetary policy could do more if only central bankers believed in themselves. Scott Sumner might agree these days.

Our thesis in this paper is that overly pessimistic views about the power of monetary policy have been a more important source of these errors than have overly optimistic views. There is little doubt that an overinflated belief in the power of monetary policy has contributed to some major policy errors. Most famously, policymakers in the mid-1960s believed that they faced an exploitable long-run inflation-unemployment tradeoff, and thus that monetary policy could move the economy to a sustained path of low unemployment and low inflation. This belief led them to pursue highly expansionary policy, starting the economy down the path to the inflation of the 1970s. The record of such errors has led many to argue that perhaps the most important attribute of a successful central banker is humility.

In this paper, we present evidence that the opposite belief—an unduly pessimistic view of what monetary policy can accomplish—has been a more important source of policy errors and poor outcomes over the history of the Federal Reserve. At various times in the 1930s, faced with the Great Depression, Federal Reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal. In both the midand late 1970s, faced with high inflation, policymakers believed that monetary policy could not reduce inflation at any reasonable cost. And there is evidence that in the past few years, faced with high unemployment and a weak recovery, monetary policymakers believed that policy was relatively weak and potentially costly. In each episode, the belief that monetary policy was ineffective led to a marked passivity in policymaking.

Matt Yglesias comments.

Embarrassment is a barrier to sales

January 13, 2013/in Articles, Microeconomics /by jamesz

Why shop online? Avoid the embarrassment of mispronouncing foreign words or being viewed as a giant fattie! Nom nom nom nom…

Abstract:

We show that social interaction reduces the diversity of products purchased by consumers in two retail settings. First, we consider a field experiment conducted by Sweden’s monopoly alcohol retailer and find that moving purchases from behind the counter to self-service disproportionately increases the sales of difficult-to-pronounce products. Second, we use individual-level panel data from a pizza delivery restaurant to show that online orders have greater complexity and more calories, which increases both consumer and producer surplus. Combined, these results suggest that social inhibitions can substantially affect market outcomes, likely due to consumers’ fear of embarrassment.

Impact of file sharing on film industry

January 12, 2013/in Articles, Intellectual property, Microeconomics /by jamesz

Interesting that movie downloads haven’t had a significant impact on video rentals. That will probably change as video streaming services like Netflix become more common.