Alex's politico-economic blogroll: Matt Nolan defends NZ monetary policy; Farmers driving National's economic policy?; Pros and cons of a high NZ$; Kerr on rates rises

Here's my blogroll for the week. Good fun with all the pollies back in Parliament, and having a great time with my flash new camera. Have a good weekend all.

Economics blogs

1. Monetary policy has merely tried to steady the ship.  Matt Nolan at TVHE responds to Geoff Bertram's views in his interview with Bernard here that NZ's monetary policy has been the cause of so much pressure on our export sector. Nolan disagrees mostly with his former lecturer.

Now he is completely right the price price of tradable goods has been declining relative to non-tradables.  There are two reasons for this:

1. High non-tradable price growth due to competition issues, government (local and central) creep.
2. LOW tradable good price growth – due to productivity growth in developing economies.

Hold up a second here – where was that last factor in the analysis provided?  In my opinion, the exceptionally low tradable good price growth (look at the data man, it has been weak) has also been very important.

Inflation targeting didn’t CAUSE either of these relative price changes – instead overseas growth, and domestic industrial policy were the drivers of the “relative price change”.  Monetary policy has merely tried to steady the ship.  As a result, when thinking about the relative price changes we have to ask “what do they mean, and is there anything policy relevant here” … it does not imply we have to do ANYTHING to monetary policy.

Causes, industrial policy, terms of trade

Now could it be that there are competition issues that have seen the cost of non-tradables (building costs, local council rates, owner occupied rents) rise more quickly – potentially.  And these are issues for the commerce commision, and also to keep in mind when we look at social policy.  Again, this does not imply that monetary authorities have failed – if anything it merely implies that government officials have failed here.

Also, don’t forget that we haven’t only experienced low growth in imported good prices … our export prices have been pretty good.  This sharp increase in our TERMS OF TRADE would be expected to push up the relative price of non-tradables to tradable goods.

2. Pros and cons of a high NZ$. I just came across this blog today. Mark Johnston is head of economics at Kings College, and has set up a blog to help his students. Here he discusses the strength of the New Zealand dollar over July (so before this week's 6 USc drop).

Advantages of a Strong Dollar

• A high NZ$ leads to lower import prices – this boosts the real living standards of consumers at least in the short run – for example an increase in the real purchasing power of NZ residents when traveling overseas
• When the NZ$ is strong, it is cheaper to import raw materials, components and capital inputs – good news for businesses that rely on imported components or who are wishing to increase their investment of new technology from overseas countries. A fall in import prices has the effect of causing an outward shift in the short run aggregate supply curve
• A strong exchange rate helps to control inflation because domestic producers face stiffer international competition from cheaper imports and will look to cut their costs accordingly. Cheaper prices of imported foodstuffs and beverages will also have a negative effect on the rate of consumer price inflation.

Disadvantages of a Strong Dollar

• Cheaper imports leads to rising import penetration and a larger trade deficit e.g. the increasing deficit in goods in the NZ balance of payments in 2001
• Exporters lose price competitiveness and market share – this can damage profits and employment in some sectors. Manufacturing industry suffered a steep recession in 2001 partly because of the continued strength of the NZ$, leading to many job losses and a sharp contraction in real capital investment spending and the lowest profit margins in manufacturing industry for over a decade
• If exports fall, this has a negative impact on economic growth. Some regions of the economy are affected by this more than others. The rural areas are affected by a strong dollar in that our produce becomes more expensive to overseas buyers.

3. Try convince me on capital gains tax. Eric Crampton has this in-depth look at some arguments for a capital gains tax, and responds by saying he still can't see the light on this one. See here if you'd like to convince him otherwise.

From the left

4. Farmers driving the Nats economic policy. Phil Goff received a bit of stick by saying Fed Farmers were the National Party in gumboots, now Revenue spokesman Stuart Nash picks up on three farmer MPs leading the Nats' opposition to Labour's capital gains tax policy.

Interesting to note in today’s estimates committee stage debate the 3 Nats who spoke were Bill English, Amy Adams and David Bennett. All spoke about the “twin evils” of debt and capital gains tax.

English, Adams and Bennett are all farmers (2 South Island drystock and 1 Waikato dairy), hence the irony of being lectured on debt and tax considering the farming sector has around $40b worth of debt, or a quarter of NZs total debt (most held by overseas-owned banks), and many in the farming community are masters at ‘optimising’ their own tax obligations.

Obviously all three would be subject to a capital gains tax when they sold their farms (I know Adams and Bennett have more than one farm, but unsure about English). So I was left wondering who these three cockies are representing – the NZers they claim to speak for, or their own back pockets..? Call me cynical, but I suspect its the latter.

5. Here's Bomber Bradbury's take on the last couple of days:

Dow Jones down 514 points, Nasdaq down 136 points, VIX up 30%, S&P down 60 points, gold and oil prices in collapse - it's a bloodbath, a god damned bloodbath.

And it's just about on time. The second part of the W recession is now on and the crimes of corporate greed that destroyed the global economy in 2007-2008 due to the madness of neoliberal, low tax, deregulated Milton Friedman free market dogma need to be remembered when John Key attempts to implement the exact same failed ideology here in NZ.

Some middle class NZers are about to not feel middle class for the first time in their life, and for the poor, that massive $2 billion deficit that Bill English intends to make with massive cuts into welfare don't really suggest much of a solution when austerity clearly doesn't work...

From the right

6. Have another look at the supermarkets. Homepaddock isn't so sure that there's enough competition on the price of milk at retailers.

Federated Farmers and Fonterra are both pleased that the Commerce Commission has decided it has no basis for a price control inquiry into milk.

However, it’s not ruling out a further inquiry  into how Fonterra sets the price it pays farmers and what it charges other processors.

Sue Chetwin from Consumer is calling for a milk commissioner and  Labour and Green MPs want the Commerce select committee to launch another inquiry.

If they’re doing that, should look at the whole supply chain.

The Commerce Commission report said there was enough retail competition between  two major supermarket chains, dairies, service stations and other retailers.

I’m not so sure about that. Almost everything is more expensive at dairies, service stations and other small retailers. Those are the places you go for emergency supplies, not normal grocery shopping.

That leaves the supermarket duopoly.

7. Local government rates a drag on growth? Roger Kerr blogs on where he thinks council rates will head over the next few years (or else GDP's going to fall).

Two points are worth noting. 

The first is the steep rise in the ratio of rates to GDP following the introduction of the Local Government Act 2002.  This is a departure from the trend in the last century when council spending and rates stayed a fairly constant proportion of GDP (while central government spending and taxes rose).

The Clark-Cullen government maintained that the wider purposes and power of general competence bestowed on councils in that Act would not lead them to spend and rate more.  This claim was naïve, as the chart confirms. The forecast implies local government revenue increases of 6.3% per annum to 2019.

Second, the projections suggest that rates will double from around 2% of GDP a decade ago to 4% by 2019. Councils as well as central government are crowding out the private sector.

Video

John Key's office has released the trial video they made for Letterman. This is why he'll get re-elected. He comes across as a normal bloke, happy to laugh at himself and dance on catwalks.