Matt Nolan

Power prices: A rolling list of links

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It appears the people very much care about power prices, and that the organisation of the electricity industry is something people are discussing.  It is an interesting issue, but large chunks of it are outside my area of knowledge (even moreso than what I usually write about!).  Furthermore, unless we get a guest blogger in to write on the issue (email if you are keen) our current blogging line up isn’t going to cover this.

But we shouldn’t ignore it.  Here are some links I’ve spotted post EA Report – feel free to mention other links about the issue in the comments, and I’ll throw them up here.  [Our discussions pre-report can be found here, here, and here.  Also, neat post from 2009 I don’t feel I have anything to add to these at this point].

A set of three articles on Stuff with people arguing details about the Electricity Authority Report (here, here, and here)

Business NZ.

Fabians.

Gareth Morgan.

Wolak.

Note:  John Small has comments and links on earlier discussion here.

Matt Nolan

Discussion Tuesday

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Via CPW we have this gem of a discussion point.  Once again, remember that these are points for discussion – I am not saying I agree or disagree with them.

Would economics, and economists, enjoy a better reputation and be more influential if they jettisoned most of macro-economics as being pseudoscience (as measured by its predictive power)

Matt Nolan

Housing shortage: When is a shortage not a shortage

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It is received wisdom that Auckland has had a housing “shortage” for a prolonged period of time due to insufficient supply.  However, on the face of it this is a bit strange as:

  1. Residential investment:  Yes building rates have been low during the past 7 years, but the value of residential investment in the prior 7 years was very high.  The “volume” was lower, but what does that mean (we’ll come back to it).
  2. Growth in rents have been low.  Low low low.

In this way many people have, justifiably, questioned the idea of a shortage.

However, there is one potential explanation that could match both these facts and still give us a “shortage” that can help to drive the high price for housing – a fundamental imbalance in the supply of “types” of housing.

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Matt Nolan

Immigration and monetary policy: Let’s be a bit careful

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Note:  I realise I have been writing about Labour’s policies and not other parties – I have been very busy, and only write about things when I get a chance.  If you want me to write about any specific party policy, email me, and I will try to have a go 🙂

Labour is talking about varying migrant visa approvals in a counter-cyclical fashion, as a way of helping out the RBNZ with monetary policy.  This bears some relations with stated thinking fro some members of the RBNZ [Update: Michael Reddell, the author of the paper, justifiably pointed out in the comments that the Labour type policy is not related to his work – and that my statement was unclear.  He is completely correct – his work and a counter-cyclical visa instrument are about different things, an important point to keep in mind!].  Now this isn’t about the level of migrants coming in – only the timing – so this isn’t a way of us shutting our borders.  I would like to keep the two issues separate in this instance, so we can think about the specific policy more clearly.

Furthermore, the focus here is very much on short term variation with regards to monetary policy – not a long term view of high interest rates and the real exchange rate.  This issue is much more contentious IMO, and deserves separate discussion.

Much younger (but far less charming) me, at the start of the blog, noted how inward migration boosts “demand” and “supply” in a monetary policy sense, so we need to consider our arguments carefully!  So the idea is that, when migrants first appear they have to set up in NZ and may not get integrated into the workforce straight away.  As a result, the first thing they do is “increase demand”.  The demand for housing, for building housing, for buying other non-tradable services pushes up the interest rate (although we also have to ask how they are getting the income to provide this demand – is it that they are bringing a capital inflow with them and this is the driver?).

As a result, lowering visa quotas when the economy is running hot and lifting visa quotas when the economy is cold could help to limit variability in interest rates right?  Well, not so fast:

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Matt Nolan

Two-handed economist: The accidental compliment

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As someone with the job title “economist”, a large number of my friends only contact me when they want advice on buying currency or whether to fix their mortgage or buy as asset.  After providing my thoughts about why things might happen, and what the risks are, I often get the comment “damned two handed economist, not willing to take a position”.

People think they are insulting me.  However, if that is the actual attitude of my friends in this case I’d gladly point out that they are being utter morons.  Instead, I take this as a compliment.

If I was going to “take a position”, why would I rattle it off to someone, instead of actually taking on the risk of doing so myself – if I genuinely thought that buying and selling currency offered me a good risk adjusted rate of return at this point in my life, then I’d do that, rather than just suggesting it to people.

When giving advice, I simply want people to be aware of the risk involved in the choices they are making – and the fact that there are reasons why asset prices may move one way or the other (and a good number of unforecastable, or unforeseeable, things that may pop up).  To give this advice, I need to to be two-handed.  It is my job, as a good friend, to help inform not to tell my mates what to do.

It would be the height of arrogance to pretend that, with my training as an economist, I could instantly turn around and fill the role of a professional risk manager for a certain asset class, or the CEO of a firm for a certain product.  Instead, I pull together news, ideas, and a good dollop of statistical analysis to provide information for people that will make decisions – filling a role in the production process, not trying to control it.

So economists, stop being so defensive about being called “two-handed” and stop feeling as if you have to take a specific “position” to have worth.  The world is complicated, and your advice (if based on intense questioning and analysis combined with clear communication) is valuable in the way it helps people make choices.  Embrace the fact you’re born with two hands and make sure you use both of them!

Matt Nolan

New Zealand’s bubble

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I know, I know, I’m very late to the party – while I was busily writing about factor shares and income inequality the big news in New Zealand was this discussion of how our housing market is a “bubble”!

A bunch of points have already been made about why the US to NZ comparison isn’t fair, our shortage of housing being key among them.  Shamubeel also did an excellent post last week noting how the framework for thinking about the issues wasn’t really there – and what was missing from each of the points raised.

However, there were a few things that didn’t get play that should have over the last couple of weeks.  As a result, and after conversations with a bunch of wonderful people who were interested in the issue, I thought I would do a blog post noting these points.  Here is what I said in the conversation:

Remember, New Zealand banks have already been stress tested on 30% house price declines – and found to still be solvent.

It would be fair to discuss risk if the conclusion was only a fall in house prices by itself.  But picking a gigantic recession for a small open economy, with a fragile global financial market, is virtually meaningless for planning purposes without a catalyst/narrative.  It sounds more like marketing than a real forecast.

We would need a situation with massive household bankruptcies for the NZ banking sector to struggle (loans aren’t nonrecourse).  To me that suggests our banks have strong power over consumers, and there are more important regulatory failings than banging on about bubbles.

Also, our external debt is mostly in NZD nowadays, with maturity of over 90 days.  Crisis happens, dollar drops, foreign investors have taken on that risk.  I find it surprising – but good for NZ.

The key points raised here:

  1. Unlike the US, NZ loans are not non-recourse.  People are still stuck with their mortgage if house prices fall.
  2. NZ banks have been stress tested on a large house price decline, and the banking system was still holding together.  We need to think about specific shocks to think about risk – the real fear is a massive drop in export prices, which leads to greater defaults in both agricultural and housing loans.
  3. Banks have changed their external funding significantly in recent years – with the maturity a lot longer and currency risk being shifted further towards overseas investors.  If a crisis strikes, this implies that the liquidity issues will be less severe, and the value of our gross debt will also drop (due to a lower currency) – a fortuitous situation!  These figures are all available on the RBNZ’s website if you want to check them out!

We aren’t like the US prior to their housing market imploding – we have our own sets of risks and concerns we need to think about.