Tuesday, 13 May 2014

Welcome Kirdan

The excellent Kirdan Lees has a post on Labour's proposed monetary policy up at TVHE. I don't know for sure, but since he posted under the byline "Kirdan" rather than "The Hand", (the catch-all for guest posts at TVHE), I am assuming he has joined the TVHE team. If so, that is great news.

Mostly, Kirdan is spot on with his post. But blogging is boring if it becomes an echo chamber, and I disagree with one aspect of his post, which is summarised by his statements that "Getting kiwis to save more is probably a good thing", and "compulsory Kiwisaver probably pushes in the right direction".

Here is my comment on the post at TVHE
Kirdan, I am puzzled by your statement that making kiwisaver compulsory pushes in the right direction, and that encouraging New Zealanders to save more is probably a good thing. Saving means forgoing one good thing (consumption today) in order to get a different good thing (consumption tomorrow for yourself or your heirs). What is the welfare framework for thinking that people are making the wrong decision on that margin? Note that Investment is an intermediate good into the production of future output. If we did proper intertemporal accounting of GDP we would consider future discounted consumption as part of GDP, but deduct Investment spending as an intermediate good. Having one-period measures of GDP means that we double count investment twice: I is included in current GDP and future C is included in future GDP, but mis-measurement is not a reason to favour one consumption path over another.
And here is Kirdan's reply.
On balance I have enough sympathy with macroeconomic balance models – which show lower real interest rates and exchange rates from a better savings-investment balance – to favour promoting savings a bit more.
I used the phrase “probably pushes in the right direction” since most microeconomic studies suggest sufficient savings while the macro evidence suggests New Zealanders have a way to go.
Both the micro studies and the macro data are pretty fraught though. The revisions to GDP and the savings track in the UK show just how fragile the conclusions economists draw in this space can be.
The Treasury, the Reserve Bank and the IMF all suggest the exchange rate is 5-15 percent “overvalued” and point to savings being an issue. So some savings imbalance seems a reasonable problem definition for the Labour Party to start from.
I don't see GDP as the discounted sum of current and future consumption.
I'm afraid this still doesn't do it for me. Let me note that I can see all sorts of reasons based on market failures, externalities, paternalism, or intergenerational equity why one might reach the policy conclusion that the market is delivering too much current consumption. My problem with much of the policy debate is that these underlying values are never made explicit. As Matt at TVHE would say, we need to discuss trade-offs. Yes, Treasury, Reserve Bank, and the IMF: I am looking at you.

It is hard to make every part of one's analysis explicit in a blog post, and even harder in a reply to a comment, but I want to push Kirdan to provide a bit more.

First of all, what is a macroeconomic "imbalance"? I know we hear that term all the time, but I don't understand it. Countries don't borrow and lend, individual people, firms, and governments do for their own reasons. The sum of all borrowings less the sum of all lendings, may not necessarily equal zero at any time, but it is exactly balanced (by the laws of arithmetic), but the sum of all overseas lendings less the sum of all overseas borrowings, and is equally balanced by the difference between the sum of all NZ individual decisions to import less the sum of their decisions to export.

Second, why does the fact that models show lower real interest rates and exchange rates from higher savings (or lower investment?) imply that one should favour promoting savings. Those of us who are net savers and net importers beg to differ!

Finally, no, GDP is not the discounted sum of current and future consumption. It is what it is, and shouldn't be blamed for not measuring what it doesn't try to measure. But the discounted sum of current and future consumption is a better welfare measure than the discounted sum of current and future GDP. Focusing on the latter would lead one to see favouring savings as a way to increase welfare, but without articulating a reason for believing that the current decisions about consumption versus saving are inappropriate in some way, it does seem to be begging the question.

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