Cutting costs is not recessionary

Over at Kiwipolitico Anita states that the government will cut spending on government services by at least the same amount that they are going to increase the size of the fiscal stimulus by spending on infrastructure – and implies that this means that the fiscal stimulus is even smaller

Now, if the government cuts spending but continues to produce the same output this ISN’T akin to “removing stimulus” persee – we instead need to find the appropriate counter-factual.

First say that the government is going to cut the unproductive spending and use it somewhere else – in this case the action would actually increase the immediate income of the economy and help pull us out of the recession.

Say instead that the government held the money – this reduces the amount of debt they are going to take on, which allows the private sector to borrow (lower future tax burden and all that jazz 😉 ). Of course, people are currently more willing to loan money to government instead of firms – so this may not be a wise move on the part of the government in terms of short-term stimulus. However, then the question should be “why don’t you spend this saved money productively” not “why don’t you keep throwing the money at areas that are not producing anything”.

The main counter to this may be that “government cost cutting will lead to a lower level of government outputs”. If this is the case then we have an issue. This brings us to the fundamental question – is the $250m of spending the government is looking to cut currently being put to its best use? If it is then Anita is right – if it isn’t then the government is right.

The issue of data

I will give people a little more time to write comments on this post on economists and predictions before I discuss it – let me say that I’m very happy with the two comments (from HH and Kimble) so far.

There is a related issue that I think needs a bit of attention before we start discussing these things – data. Statistics New Zealand does an excellent job getting together data and putting together clear, transparent, and useful, data series. However, even with all the hard work they put into the process there will always be some issues with the data, namely:

  • Not all the survey responses arrive, or arrive at the same time – implying that there is constant revisions to the data,
  • Changes in methods mean that there is constant revisions to the data
  • Changes in methods implies that some data series for the same thing (eg private consumption over time) are incompatible,
  • Seasonal adjustment and trend estimates can be subject to an “end point bias” – which implies that the figure we have at the time is different to the “true” figure that will be available in the future,
  • Quality adjustment is a subjective process – but the adjustments are not always transparent,
  • In a country like NZ sufficiently disaggregated data cannot be released,
  • In a small country the “timeliness” of surveys can be poor (GDP is out three months after the event for example),
  • The length of data series – for many types of statistics there just isn’t much data!
  • Even if the definitions of what the data does is transparent – the data will often be misused by people interpreting it.

What does all this mean – well, even though Statistics NZ does the best job in getting data that is possible, and even though economists might make the best use of the data that they can, it takes a long time (several years) until it is clear (in a quantifiable sense) what has actually happened.

Question: Have economists been over-confident regarding their ability to predict things?

My unequivocal answer here would be yes – but I’m not asking me, I’m asking you.

Do you guys think that economists have been over-confident about their ability to predict things?

We have repeatedly said on this blog that economic science “frames issues” – but predictions only stem from virtually untestable value judgments (although we can inform these, and narrow the band of judgments, by using data).

However, it appears that many economists have tried to sell their ability to predict – something that has caused issues.

This blog post really sums up how I think people think about economists right now (ht Market Movers).  I think the issue is that economists have sold this story to the public about their ability to predict – an ability that doesn’t exist.  The risk from this is that the value that economists can add (framing issues, even describing what has happened) may get ignored as a result of this perceived failure.

Japan’s economy in free fall: What does this mean for NZ?

Japan’s economy contracted by 3.3% over the December quarter – a massive fall. To put this in context, the New Zealand economy has shrunk by 1% over the past nine months (to September) on the back of a drought induced recession.

On the face of it this seems scary – Japan’s economy is falling because exports are falling, implying that “world demand” is falling.

However, then I stop and think about it. Japan produces manufactured goods – these are the things that we import. A collapse in world demand for manufactured goods will lead to lower manufactured good prices – which is an effective income boost for NZ.

Furthermore, a weak Japanese economy makes NZ seem “relatively” less risky – something that could help prevent our ability to borrow from overseas from deteriorating.

This isn’t all bad news for NZ – it is possible that global “rebalancing” could work in our favour yet …

Update:  Paul Walker rightly points out that Japan is a major purchaser of NZ products – implying that a slowdown in Japanese growth will hurt us.  This is true.  However, my view is that what matters is the “relative price” for what we sell vs what we buy.  We are a small country, so what we produce can be sold anywhere – what matters is the return.  With global demand slowing it could be the case that the price of manufactured goods falls further than the price of soft commodities – something that would actually provide an income boost for little old NZ.