AFR on the RBNZ

Harsh stuff from Grant Wilson at the Australian Financial Review ($):

Even with the RBNZ flagging macro-prudential tightening next year, via the reimposition of loan-to-value ratios, house prices are now a de facto constraint on monetary policy.

The "least regrets" formulation also assumes that the RBNZ’s approach to unconventional monetary policy, which was first articulated back in 2018, holds up.

While we agree that the first round of LSAP, in conjunction with other measures announced in March and April, was highly effective in lowering the local term structure of interest rates, the jury otherwise remains out.

We highlight (again) that the RBNZ’s expectation of LSAP imparting downward pressure on the NZD via the portfolio balance channel is in doubt.

In contrast to their pass-through model, non-resident holders of local bonds have not sold to the RBNZ.

Their percentage of ownership has fallen sharply this year (from 47 per cent to 30 per cent at end September), but the stock of holdings has remained steady, in a range of NZ$35 billion to NZ$40 billion.

Speaking plainly

Beyond these substantive points, there is the RBNZ’s communication strategy.

Back in May we noted that Governor Orr is known for speaking plainly, including his questionable comment that direct government financing was "achievable", and that there is "no right and wrong".

Assistant Governor Hawkesby managed to top this in mid-October, saying that preparations for negative rates were "not a game of bluff".

Perhaps not. But certainly the RBNZ over-represented its hand (in poker terms).

The result was seen on Wednesday, with the local money market strip abruptly repricing higher (and from negative to positive yields), by fully 30 basis points.

Then on Thursday, Hawkesby made perhaps the most asinine comment we have a seen from a central banker this year, in suggesting that the repricing was due to sell-side banks revising their forecasts, rather than the RBNZ’s decision.

As any intraday chart will illustrate, this was a daft thing to say. It belongs in the domain of alternative facts.

Journey ahead

Looking ahead, the RBNZ has its work cut out. It will need all the institutional credibility it can muster in tapering the LSAP program and in cooling the increasingly parabolic housing market.

Rather than continuing to emphasis the downside, the RBNZ would be well advised to contemplate the upside.

This includes the tourism sector, where Australians comprised nearly half of international visitor arrivals prior to COVID-19.

The RBNZ does not need to be the hero of the hour. It just needs to do its job.

I'm not a macro guy, and I'm certainly not one who watches the mechanics of these markets. 

It seems obvious that the Bank's policies have had the consequence of inflating house prices. If the supply side were less constrained, Bank easing would help fund more construction. The Governor is certainly right that the supply side needs addressing. Monetary policy needs mates, as they say. But given the constraint, it would be nice to think that the Bank views what is happening in housing prices as an unfortunate consequence to be mitigated.

I don't think the Bank should be blamed for having gloomy forecasts earlier in the year. Erring on that side seemed a lot less bad than what could have happened instead, and everything then looked horrible. Being unintentionally contractionary when the velocity of money plummets isn't good. 

Despite everything the Bank has pushed on, inflation expectations over the next two years seem firmly planted in the 1-2% range. If pushing the throttle to the floor keeps the speedo constant, is it because the engine's broken, because you're in the wrong gear, or because you're driving up the Otira Viaduct and Friedman's thermostat is running?* If it's the former, you might want to check into what's going on. A broken engine spraying oil all over the housing market without moving the speedo otherwise isn't the greatest. If it's the latter, shifting into neutral before cresting risks rolling downhill. And if it's because you're in the wrong gear, running a QE policy rather than implementing negative interest rates, well, I'm not enough of macro guy to know.

I do wonder whether there's anything the Bank could be doing to mitigate flow-through into asset prices though. 

* For those unfamiliar with Friedman's thermostat, here's a bit from Nick Rowe from the link:

And it bugs me even more that econometricians spend their time doing loads of really fancy stuff that I can't understand when so many of them don't seem to understand Milton Friedman's thermostat. Which they really need to understand.

If the driver is doing his job right, and correctly adjusting the gas pedal to the hills, you should find zero correlation between gas pedal and speed, and zero correlation between hills and speed. Any fluctuations in speed should be uncorrelated with anything the driver can see. They are the driver's forecast errors, because he can't see gusts of headwinds coming. And if you do find a correlation between gas pedal and speed, that correlation could go either way. A driver who over-estimates the power of his engine, or who under-estimates the effects of hills, will create a correlation between gas pedal and speed with the "wrong" sign. He presses the gas pedal down going uphill, but not enough, and the speed drops.

How could the passenger figure out if the gas pedal affected the speed of the car? Here's a couple of ideas:

1. Watch what happens on a really steep uphill bit of road. Watch what happens when the driver puts the pedal to the metal, and holds it there. Does the car slow down? If so, ironically, that confirms the theory that pressing down on the gas pedal causes the car to speed up! Because it means the driver knows he needs to press it down further to prevent the speed dropping, but can't. It's the exception that proves the rule. (Just in case it isn't obvious, that's a metaphor for the zero lower bound on nominal interest rates.)

2. Ask the driver. If the driver says that pressing the gas pedal down makes the car go faster, and if the driver says he wants to go at a constant 100kms/hr, and if you see the car going a roughly constant 100kms/hr, then you figure the driver is probably right. Even more so if you ask him to slow the car to 80kms/hr, and he says "OK", and then the car does slow to a roughly constant 80kms/hr. If the driver were wrong about the relation between gas pedal and speed, he wouldn't be able to do that, and it wouldn't happen, except by sheer fluke. (Just in case it isn't obvious, that's a metaphor for inflation targeting.)

3. Find a total idiot driver, who doesn't understand the relation between gas pedals and speed, and who makes random jabs at the gas pedal that you know for certain are uncorrelated to hills or anything else that might affect the car's speed, and then do a multivariate regression of speed on gas and hills. But you had better be damned sure you know those jabs at the gas pedal really are random, and uncorrelated with hills and stuff. Which means this can only work if you are certain that you know more about what is and is not a hill than the driver does. Or you are certain he's pressing the gas pedal according to the music playing on the radio. Or something that definitely isn't a hill. Are you really really sure your instrument isn't a hill, or correlated with hills? And if so, why doesn't the driver know this, and why does he jab at the gas pedal in time with that instrument? You had better have a very good answer to those questions. And no, Granger-Sims causality does not answer those questions, or even try to.

Why retire?

I've never quite understood why academics retire. Jeremy Bentham wanted his auto-icon propped up in the University long after his death; he's apparently still brought out for the occasional meeting of Council where he's listed as "present but not voting". That doesn't seem all that bad.

Nick Rowe wonders why people bundle so much leisure into retirement. It's difficult to conceive of models in which doing so is optimal. Sure, work gets harder as we get older, but so too does leisure.

The obvious answer is that our productivity falls as we age. So it makes sense to consume more leisure when the opportunity cost is least. But there's also an obvious problem with that explanation. If our productivity at work falls as we age, maybe our productivity at leisure falls as we age too. Which will get worse more quickly: my ability to give an economics lecture; or my ability to portage a canoe?

Honestly, there's a very short list of things that would have me retire from lecturing:

1. Being forced to retire;
   • But this does require either legislation mandating a retirement age, or constraints on recontracting for reduced duties and wages commensurate with depreciated human capital. I'm pretty sure Canada has the former. [David Giles, in comments, says Canada no longer forces retirement.]
2. Health problems that affect labour in more embarrassing fashion than leisure coupled with a stronger sense of shame than I currently have;
3. Strong technological innovation in leisure-complementary activities;
4. Technological changes in academia that make lecturers obsolete [read read read]

The fourth I most worry about because it could hit rather sooner than I'd like. Society invests too much in higher education. The bottom tier of students would do better in taking a trade qualification than a Bachelor's; rather too many undergraduates are learning absolutely nothing^* [HT: Isegoria]. Things like MITx (InsideHigherEd) will let top institutions provide more credentialling services for those who ought to have university training. Government R&D funding has been being crowded out, so when the sector eventually loses the funding coming from students who never really should have been there, academia will contract (and especially severely if MITx takes off). The good times can't last forever.

On the plus side, much of what universities provide isn't really instruction. Instead, it's a bundle of instruction, signalling, consumption, and complex relational and social capital not easily provided elsewhere. The instruction can be handled by MITx, but I'm not sure the rest of it can be. Teleconferencing hasn't eliminated either face-to-face business interactions or academic conferences. That gives me hope I can still be in the classroom in my 80s. But if teleconferencing ever advances sufficiently for virtual conferences to supplant traditional ones,^** I'm going to get just a little bit nervous.

* The book cited finds no improvement in complex reasoning, writing, or reading skills among a substantial proportion of undergrads. I haven't read the just-released book, but I expect the problem's largely one of fit. A bottom tier of students just cannot be taught by the methods that are appropriate to the middle and upper tiers of their classmates and would have better outcomes in community college or technical training environments. Starting g matters.

** I think it'll require holodeck-style virtual hospitality suites.

Finding the birds

Nick Rowe (this time, definitely him) describes a recent bird-hunt: an econometric search for which courses at Carleton were outliers in terms of grading standards.

The basic model is this:

Student i's grade in course j = student i's smarts + course j's birdiness + random error.

I think it's called a "two-way fixed effects model with panel data". We don't observe student i's smarts, so each individual student gets a dummy variable. We don't observe course j's birdiness, so each course gets a dummy variable. That's a very large number of dummy variables, for a medium sized university, even though we did it by department and year-level, rather than down to the level of specific courses.

We got the data (stripped of anything that could put a name on an individual student) and Marcel fed it into a supercomputer, which made a loud crunching sound for a long time, simultaneously estimated every student's smarts and every course's birdiness, then spat out the answers for birdiness. That was the success. The model gave me a numerical estimate of each department's birdiness.

But closer inspection revealed that Operation Birdhunt had failed miserably. The standard errors were very large -- larger than the difference between any two departments' estimated birdiness. So I was unable to say, with any confidence whatsoever, that department X was more birdy than department Y.

He says the problem was too few students who did courses in both Arts and Sciences, so identification was an issue.

Our version at Canterbury is a bit more relaxed. Every student's grades go into the computer. The student's grade in a course, relative to his average grades across all courses at the same level, is taken. So if Joe gets a B average but gets an A+ in Econ 104, then he's scored four points higher in 104: Econ 104 earns a +4. Then, the average of those differences across all students for a particular course is taken and called the difficulty index. Papers that award grades on average a full grade above the enrolees' average in other courses are tagged as "easy"; "hard" courses on average give grades a full grade lower than enrolees' other course grades. Then every academic in the University is forwarded a PDF report listing the outlier papers for those courses with sufficient students. In 2009, our first year macro paper was rated as hard. We were a bit surprised as we'd relaxed the grading standards a bit to keep our intro papers in the middle of the pack.

The method we use isn't as robust as it would be if there were lots of students taking courses from different faculties: if Economics students tend to take courses from other departments with relatively easy standards rather than ones from other departments with relatively harder standards, Econ courses will be flagged as hard more often than they should be. So we don't impose a curve on our outliers. Instead, negative outliers who haven't particular reason for being negative outliers (core courses intended for honours-bound students ought to show up as "hard") note the data and adjust grading to avoid eventual drops in student numbers (and potentially having to put on an extra course to compensate). We haven't many easy graders to worry about.

Minimum wages and poverty

The general consensus of the academic economic literature is that minimum wages increase unemployment for marginal workers. And so it wasn't at all surprising that the big increase in the minimum wage affecting young Kiwi workers in 2008 led to very large increases in youth unemployment relative to adult unemployment.

What's been more ambiguous is the net effect on poverty or welfare. Sure, some folks lose their jobs. But other folks get more money.

Nick Rowe Stephen Gordon points to some work in Canada showing minimum wages increase poverty rates. Minimum wage workers are mostly second earners and young folks. The ones who lose their jobs push their families into poverty. Here's Nick Stephen:

My colleague Guy Lacroix has brought to my attention a recent study that suggests that when minimum wages are increased in Canada, the net effect on poverty rates turns out to be positive.

The study in question was written by Aninda Sen and two of his U of Waterloo colleagues, and it recently appeared in Labour Economics. (If the link to the Labour Economics site doesn't work, there's an ungated version on his web page.)

The first set of results address the question of the effects of minimum wages on teen employment (2/3 of minimum wage workers live at home or with a family member) and obtains estimates consistent with the existing literature.

Of particular interest are the results in Section 5.4 and Table 4, which estimate the effects of changes in the minimum wage on the proportion of families with income below the LICO. Here, we see that the effect of a minimum wage increase on the incidence of poverty is significantly positive, and the effect is most strongly felt in two-parent households. The effect on older workers is insignificant.

As far as I can tell, the story the authors want to get across goes something like this: most minimum wage earners are young, and the income of these workers is a significant contribution to low-income households. For families in which the minimum wage worker keeps her job, the increase in the minimum wage can increase family income above the LICO so long as hours worked are not significantly affected. For families in which the minimum wage worker loses her job and/or loses too many hours, the lost income may bring family income below the LICO. Canadian data suggest that the latter effect dominates: the net effect of an increase in minimum wages on poverty rates is positive:

From a policy perspective, a common argument has been that even if a higher minimum wage does result in lower employment for some, the corresponding welfare costs are low since the number of minimum wage earners as a proportion of the labour force is relatively low. Further, the effects of unemployment (from a minimum wage hike) may not be severe as a significant majority of minimum wage earners live with another family member. Therefore, a higher minimum wage should unambiguously make lower wage earners better off through higher earnings, and therefore, a reduced incidence of poverty.

Our results suggest the contrary. The ‘negative’ effects of an increase in the minimum wage might not be restricted to higher teen unemployment. A higher minimum wage may paradoxically result in more poverty as teen unemployment results in a drop in household income among low-income families. Therefore, the negative spillovers of a higher minimum wage may be significant and mitigate the benefits of higher earnings to the working poor who remain employed.

For once, the traditional final sentence of academic research papers is not empty boilerplate:

At the very least, the results of this study suggest the need for more research on the nexus between the minimum wages and poverty.

Indeed it does.

The Canadian study suggests a 10% increase in the minimum wage yields about a 5% increase in the percentage of families living below Canada's Low Income Cut-Off line. If those results held in New Zealand, increasing the minimum wage from $12.75 an hour to the union-demanded $15, an 18% increase, would increase the proportion of NZ families in poverty by about 9%. Results here could reasonably vary: labour demand elasticities may not be the same and incidence of the minimum wage will vary as well. But it ought to be our base guess from which we'd adjust for New Zealand conditions.

Nick Rowe on campus administration

It's not enough (in some cases) to put the carrot in front of the donkey. You have to point to the carrot, tell the donkey it is a carrot, and that he can eat it. And work out marginal revenue and marginal cost for the donkey too. And repeat this several times. This is most true for departments in subjects that economists' prejudices tell us are less likely think like economists.

Nick Rowe explaining one of the lessons of his Associate Deanship. He also gives some nice anecdotes about the principal-agent problems within academia.

The university as a whole faces a hard budget constraint. Individual departments face a soft budget constraint. Individual profs face none.
...
The very worst case I saw was when Barney was cancelled. Barney, a very large first year course, about dinosaurs or something, was one of the most profitable courses in the university. And it was cancelled, by the department.....to save money. There was any number of prissy little boutique courses that could have been cancelled. But they cancelled Barney. We had to go all the way up to the VP Finance to get Barney a reprieve.

The problem is obvious. Barney made tons of money for the university. But the individual department saved money by cancelling Barney, since nearly all the students taking Barney came from other departments and faculties. The incentives just didn't line up.

Fortunately, Canterbury's internal funding model has been a fair bit more sensible than that: departments pay a per-student tax to the centre for centrally provided services and keep the rest. That works because government funding varies by type of student, so the bench sciences' usual excuse for cross-subsidization, kit costs for students, are already factored into the per-student government subsidy. We do find other ways to make life difficult though.

Avatar - again

I've still not seen Avatar, mostly on basis of the fine review linked here.

But Nick Rowe has excellent commentary, also not having seen the film:

The policy problem in Avatar is that some blue people own all of some valuable natural resource, and won't let anybody else have any.

Lloyd George, as UK Chancellor of the Exchequer, addressed the same policy problem in his 1909 "People's Budget". The British aristocracy owned the land, just as the blue people owned the valuable natural resource in Avatar. I don't know if the blue people in Avatar used it for hunting foxes; probably they had peculiar customs of their own.

Inheritance taxes, and taxes on undeveloped natural resources, could have solved the problem in Avatar just as well as in the UK. Wealth taxes could have worked also. The blue people would have needed to sell off some of the valuable stuff, just to pay the taxes on it.

Progressives generally support such taxes. I don't know why Hollywood made such a reactionary movie. Maybe the blue people are just cuter than the British aristocracy, so we ought to be on their side, against progressives like Lloyd George.

Why are our ethical views so ethereal? Why are we all such suckers for framing?

Canadian economics

A Canadian civil service economist writes to 2blowhards:

Although I was born and raised in Ottawa, many of the friends I made in grad school were not. Pretty much all of them, having studied Economics, wound up working in various capacities for the public sector in our nation’s capital. This has given me the unique experience of observing their reaction to finding out exactly what our government does with the mountains of cash it extracts from the productive regions.

Their reaction can be summarized thusly:

If everyone knew what actually happened in this city, no one would ever vote against the Conservatives, ever again.

[anecdotes of slack public service in Ottawa]...

Compared to other public servants, Economists seem to be unduly put upon in terms of workload. Most of my grad school friends are assigned somewhere around 20-40 hours of tasks per week of. One of them even puts in unpaid overtime occasionally. The work we do however, is largely worthless. We write analyses no one ever reads, collect data that no one ever uses, offer input on decisions that never get made. Much of our time is spent “forecasting,” which basically means making a common-sense appraisal of what some indicator or variable will do in the coming years, and creating a statistical model that confirms it. The second step adds nothing of value to the prediction – the math is just there for show, a means of impressing the innumerate by camouflaging shot-in-the-dark guesses in rigorous clothing.

Hmm. I'd have thought that the economists would be the ones most disappointed by the Conservatives; perhaps their expectations were lower than mine.

My impression is that the economists here get a lot more say in policy. Co-blogger Seamus Hogan, who worked for Health Canada in a prior life, may have more useful comments. I do like the quip on forecasting though.

Being far more macro-minded than I am, Seamus may also have more useful comments on this interesting question from Nick Rowe over at Worthwhile Canadian Initiative:

I want to compare the economies of Canada, Australia, and New Zealand over the last couple of years. I know I will get things wrong, and leave important things out. That's what comments are for. Especially comments from Australia and New Zealand.

Why these three countries? Apart from any historical, cultural, and political similarities, all three are small open economies with an inflation targeting central bank. But there's one big difference between Canada and the other two.

The Bank of Canada hit the notorious "Zero Lower Bound" on nominal interest rates (or felt it had). That's supposed to matter. A central bank that hits that constraint cannot loosen monetary policy enough to offset a decline in aggregate demand. The Reserve Banks of Australia and New Zealand didn't even come close to the lower bound. So seeing how the otherwise similar Australia and New Zealand did compared to Canada should tell us if the ZLB matters. Australia seems to have done better than Canada, which fits the theory. But New Zealand seems to have done worse.

Seamus has a comparative advantage in macro; I'll punt on it for now. Seamus, any thoughts?

Scott Sumner usefully comments at Rowe's blog:

Nick, I have to agree with those who point out that there isn't enough information here. Obviously the zero bound didn't matter for Australian and New Zealand, but on the other hand they were impacted by something the US was not impacted by--and exogenous shock of a worldwide recession. So unemployment might rise even with optimal monetary policy. In that sense, of course, Canada is more like Australia than the US. So the only real question here is whether the BOC wanted to do more easing, but felt unable to because of the zero bound. What do they say? At the Fed you had Janet Yellen saying "we should want to do more." Did BOC officials spout any similar nonsense?

Kien's comment is very interesting. I haven't heard Krugman's views on optimal monetary policy in small countries. The zero bound isn't a factor, as they can always depreciate their currencies without limit. Does Krugman say fiscal stimulus never makes sense in small countries? Or can it be optimal if there are international (real) AD shocks impacting the small country

Some comments there suggest NZ had no fiscal boost over the period; that's not quite true. Rather, what fiscal boost we've had has been more permanent spending increases than temporary spending jolts. Labour implemented Working For Families (EITC) in its last term in office; National cut taxes very slightly in its first budget (by much less than they'd promised). And, National's brought forward some infrastructure projects; that spending couldn't really be brought forward enough to have any substantial effect during the worst of the recession. On NZ's stimulus spending, see NZIER, discussion at TVHE which eventually concludes that OECD overestimated the extent of NZ fiscal stimulus; TVHE later wonders whether we really had any substantial discretionary spending increases..

We're now in rather large deficit, mostly due to the permanent spending programs inherited from Labour rather than because of any stimulus push in the current administration. We might expect that National will cut those back a bit after the recession fades, but such expectations don't really make the current spending levels temporary.

I'll punt on the rest for now and see what Seamus has to say on the dark arts of macro....