Matt Nolan

Putting tax cuts in perspective

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The Rates Blog points out a very interesting exchange between John Key and Phil Goff – they have the video available here.  The transcript is:

Hon Phil Goff: Is it correct that low-income families with children will get nothing from the tax cuts today, and that that is why the Prime Minister told high-income earners who get hundreds of dollars extra in tax cuts that they should give to charities, in line with his trickle-down theory?

Hon JOHN KEY: No, that is not true. They get a Working for Families increase, which started on 1 October. Let me make this one point: let us take somebody on $44,000 a year, with two children. It is true that he or she gets a small tax cut—

Hon Phil Goff: No tax cut!

Hon JOHN KEY: On $44,000 the person does, Phil; do the maths. But that person does not pay any tax. Somebody on $44,000 a year, with two children, pays zero tax.

So many people are talking about the fact that low income people are getting a small tax cut – but even a “standard” family on $44,000 is effectively paying zero tax.  Note that as our tax system is progressive this implies that all “standard” families earning below this level are actually paying negative tax.  When it is framed that way, the fact that this group getting a bigger tax cut makes a bit more sense doesn’t it 😉

Matt Nolan

Obama supports bankruptcy of GM

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To a degree I support this.

Then again – there is an argument to keep them afloat.

If they are subject to a binding credit constraint, and they would be profitable in the medium term, a loan to GM (at market interest rates) could be good for everyone – especially if they are unable to efficiently sell parts of their captial (eg the learning by doing associated with their workers).

Then again what am I saying – GM won’t be profitable in the medium term. Let them eat cake!

Update:  Then again it depends how they do it – this doesn’t sound very good.

Matt Nolan

Why NZ doesn’t have the same need for stimulus

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Chris Worthington from Infometrics has spoken out against a fiscal stimulus in NZ in the current environment.

I agree, as I have said before. Note, I also raised some criticisms of my idea which could be applied here.

Overall, there is a time and a place for special, temporary, fiscal policy (although, even in this special case monetary policy may be superior). However, even now we are not in this special place …

Matt Nolan

Scott Sumner: Insightful analysis

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Seriously, lets all go and read Scott Sumner.  He discusses how monetary policy can still be effective even when the cash rate hits zero, and I find it difficult to fault his reasoning.

I would suggest reading all the posts, but there are a few that touched me:
Read more

Matt Nolan

Long term rates out of whack: Larger OCR cut all on

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The RBNZ stated today that long-term interest rates have risen too quickly. There forecast recovery was premised on a low dollar and a relatively flat yield curve – however, it seemed a bit disingenious to suggest that we would have a foreseeable strong recovery and a flat yield curve 🙂 . However, this logic was based on a special assumption – a slumping terms of trade.

As a result, the bank is likely to slash rates by at least 50bp at the next meeting. This was already more likely than during the meeting given the exchange rate – as we’ve discussed. This is a big announcement on their part – effectively we may well be pushing towards the lower bound of the OCR. In this case, we need to think more carefully about our monetary policy …

There will be a post at 11am that points out some good suggestions on this issue.

Note that the general market also feels this way – hence:

nzdtwi_1_hourly

Source NBNZ

Will Taylor

Open Source software vendors: recession resistant?

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Apparently Red Hat, a vendor of a commercial linux distribution, has been doing well during the recession. This makes sense intuitively, people are looking for ways to cut costs due to the economic climate, and giving Microsoft less money seams to be a good way to go about it.

This reminds me of a classic interview question people get asked by investment banks, “Can you think of an asset with a negative beta?”

So next time someone gets asked that question they can say something besides “funeral homes” (stocks brokers jump out windows during recessions etc.. the most common answer or so I’m told!) . They can say that open source software vendors might also:)