Stevens versus Bernanke: What the WSJ Won’t Tell You

Another one of those laughable WSJ editorial comments:

The biggest problem in emerging economies isn’t “the credit crunch about which we hear so much . . . but inflation.” So said Glenn Stevens, Australia’s central bank governor, to a business crowd in Melbourne Friday. It’s too bad U.S. Federal Reserve Chairman Ben Bernanke wasn’t in the audience.

Unlike his Fed peer, Mr. Stevens has ruthlessly resisted inflationary pressures.

Never mind that Australia has a much more serious inflation problem than the US on most measures, none of which the WSJ sees fit to mention. The US core CPI was running at 2.4% y/y in March compared 3.5% y/y for the comparable Australian measure. If Stevens has taken a tougher rhetorical stance on inflation than Bernanke (which is by no means obvious), it is because Australia has a much more serious inflation problem. The WSJ cites Australia’s nominal cash rate as a measure of the tightness of monetary policy, but this only highlights the inflation premium built into Australian interest rates. The real cash rate, which is the more appropriate measure of the stance of monetary policy, is only around 3%.

The more significant difference between the Fed and the RBA, however, is that the Fed considers inflation too high at 2.4%. In Australia, 2.5% is the mid-point of the target range. The RBA doesn’t even aspire to beat the Fed on inflation and has the inflation outcomes to show for it.

posted on 16 June 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.

posted on 14 June 2008 by skirchner in Economics, Financial Markets

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Embrace the ‘Bubble’

Business Week’s Chris Farrell, on why we should welcome so-called ‘bubbles’ in asset prices as a normal part of the functioning of a market economy:

Let’s go back to the dot-com example. What’s remarkable is just how quickly the Internet economy was established during that so-called era of fictitious value. “The conventional wisdom is that the period of exuberance during the boom period—especially 1999 and 2000—was a bubble,” writes BusinessWeek Chief Economist Michael Mandel in his book Rational Exuberance. “It carries connotations of something fragile, which was never quite real in the first place.”

But rather than a bubble, argues Mandel, the second half of the 1990s could just as easily be called an “age of exploration.” “The low cost of capital enabled risk-taking people and companies to try out lots of new ideas simultaneously, and on a large enough scale that they got a fair test,” he writes…

Bubble moralizers greatly underestimate the vital role of speculators and speculative markets in allocating resources toward an economy’s fast-growing sectors and away from stagnant industries.

posted on 13 June 2008 by skirchner in Economics, Financial Markets

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The Future Fund as Lender of Last Resort? Your Taxes at Work

Sources being quoted by Reuters suggest that Australian banks are raising term funding from the Future Fund. ANZ has supposedly raised about A$500 million this way. A Commonwealth Bank spokesman is quoted as saying that it looked at all funding options and “the Future Fund is clearly emerging as a future source of funding.”

From a capital raising and portfolio management perspective, this lending would make good commercial sense and is fairly low risk. However, it does raise some interesting issues as to whether the Future Fund may come to be seen as a de facto lender of last resort. This also may not play well politically if the perception is that taxpayers are involved in subsiding bank capital. It should make for some interesting questions at Senate estimates (hint for Coalition staff!). Future Fund Chairman David Murray has previously argued that the Future Fund would serve to lower the cost of capital for Australian business, which effectively concedes the point that the Fund is providing a more or less explicit subsidy through such lending.

posted on 12 June 2008 by skirchner in Economics, Financial Markets

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Labor’s Manufacturing Fetish

The ALP’s manufacturing fetish was evident when it was in opposition. Kevin Rudd said back in 2006 that he wanted Australia to be ‘more than a mine for China and a beach for the Japanese.’ The subsequent appointment of the left’s Kim ‘Il’ Carr as industry minister in the new government was also a bad sign. Australians will now start paying the price for this manufacturing fetish through local production of hybrid cars, one of the worst industry policy decisions in 20 years. As Henry Ergas notes:

In an economy that is pushing over-full employment, increased subsidies to assembling cars only diverts resources from more productive uses. In addition, according to recent estimates from the Productivity Commission, “more than $1 billion is redistributed each year to the automotive industry (a majority of which is foreign owned)”. The consequence is that these subsidies will attract further inputs to an industry that is already far from making productive use of scarce resources, magnifying the waste. It would have been better had Rudd and Brumby scattered the dollars on the streets of Melbourne.

posted on 12 June 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

posted on 07 June 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

posted on 31 May 2008 by skirchner in Economics, Financial Markets

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The Collapse of the Development Expert Paradigm

Bill Easterly on the World Bank’s Growth Commission:

The report of the World Bank Growth Commission, led by Nobel laureate Michael Spence, was published last week. After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.

This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m.

Why should we care about the debacle of a World Bank report? Because this report represents the final collapse of the “development expert” paradigm that has governed the west’s approach to poor countries since the second world war. All this time, we have hoped a small group of elite thinkers can figure out how to raise the growth rate of a whole economy. If there was something for “development experts” to say about attaining high growth, this talented group would have said it.

posted on 30 May 2008 by skirchner in Economics

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KiwiDisSaver

New Zealand Institute of Economic Research economist Trinh Le on the KiwiSaver scheme (HT: Matt Nolan):

KiwiSaver is merely a money-go-round. Over half of the savings are funded by taxpayers, in the form of the $1000 kick-start subsidy, matching contributions of up to $1040 per year and foregone tax revenue from ESCT (employer superannuation contribution tax) exemption. Most of the remaining savings are employers’ contributions and money that members would have saved in other forms.

Only 9-19 per cent of KiwiSaver balances are estimated to be from reduction in consumption.

That much “new” saving is hardly enough to cover the administration and compliance costs of implementing the scheme, and the deadweight loss due to taxation…

More on KiwiSaver from Phil Rennie at CIS.

posted on 26 May 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

posted on 24 May 2008 by skirchner in Economics

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Australia & the EBRD: A Little Known Victory for Taxpayers

Looks like budget cuts may have finally ended Australia’s role in the European Bank for Reconstruction and Development:

A reality check comes from Down Under. Speaking at the Kiev meeting, Peter Reith, EBRD director for Australia and New Zealand, said that “the EBRD has achieved a great deal in its 17 years.” “It is in this context of a job well done,” he announced, “that the Australian government intends to withdraw from the bank by 2010.”

Australia has given the EBRD €52.5 million since the bank’s founding, about a quarter of the €200 million it originally committed. The EBRD’s biggest shareholder, the U.S., committed €2 billion and has so far paid in €525 million. David McCormick, Treasury Undersecretary for International Affairs, says the bank is at a “crossroads,” but that the U.S. “remains a strong supporter.” Australia looks smarter.

Australia was none too smart to sign-up for the EBRD in the first place, especially given its focus on a region far removed from Australia’s interests. I recall researching the institution when the capitalisation bill came before parliament in the early 1990s and was appalled at what I found. It was apparent even then that this would be another scandal-ridden multilateral development bank.

As the WSJ article notes, the EBRD suffers from the same problem as all the other multilateral development banks. Redundancy has bred mission creep:

At its annual meeting in Kiev this week, the European Bank for Reconstruction and Development—founded in 1991 to assist the former Soviet bloc states—confirmed that, among other things, it wants to explore projects in Turkey.

That’s an odd idea for a bank whose mission is to “foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the Central and Eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics.” Turkey is a democracy, has an open market, and isn’t in Central or Eastern Europe…

In recent years, the bank has moved south and east as Soviet bloc countries have grown richer. Fully 42% of its investments last year went to Russia. Never mind that Russia is rolling in oil revenues and also receives subsidized capital from the International Finance Corporation, an arm of the World Bank. EBRD President Thomas Mirow, who took office on Monday, says he supports Turkey’s request to have the EBRD invest there.

posted on 23 May 2008 by skirchner in Economics

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Bilby Pork

The government’s budget cuts may not amount to much, but they certainly range widely:

Plans for a $5 million national bilby centre in south-western Queensland have been shelved, after the Federal Government pulled out of a funding deal.

However, the bilby lobby seem to understand the political economy of government spending all too well:

Manager Jane Morgan says that money was to be used to build a new observatory, but those plans have also now been shelved with the funding cut.

“Yes we are a little bit disappointed, but it’s not as if they’ve said ‘forever and a day there will be no more grant programs in this area’,” she said.

“This is the looking at Government expenditure that they went through and it is disappointing because we had some great plans, but we’re not going to put those plans away.

“We’re just going to put them on a shelf which is easily reached and pull them out again.”

CORRECTION: The quote is actually not from the bilby people, but from those involved with another project that got cut. Same point applies, however.

posted on 21 May 2008 by skirchner in Economics

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Where Budget Surpluses Come From

Treasury Secretary Ken Henry, in his traditional post-Budget address to ABE, points to the correct interpretation of the role of the budget in demand management:

activist counter-cyclical fiscal policy might be frustrated by lags of recognition, implementation and transmission. And its effectiveness might be compromised by Ricardian equivalence, the permanent income hypothesis or import leakages. I noted that these lags and questions of effectiveness pose real challenges for the use of counter-cyclical fiscal policy. But I also noted that they do not rule out such use.

And, obviously, they do not rule out allowing the so-called automatic stabilisers to work. That’s probably how the fiscal stance contained in this budget should be interpreted. With respect to the current year, 2007-08, the Pre-Election Economic and Fiscal Outlook (PEFO) published in the November 2007 election period estimated an underlying cash surplus of 1.3 per cent of GDP. Last week’s budget reveals parameter and other variations since PEFO that would have added $5.2 billion, or about 0.5 per cent of GDP, to the underlying cash balance. Of this, more than 0.3 per cent of GDP is additional tax revenue. Most of that upward revision to tax revenue has been ‘saved’, to achieve a 2007-08 surplus estimated now to be 1.5 per cent of GDP. For the budget year, 2008-09, the government has targeted an underlying cash balance excluding tax revenue revisions of the same proportion of GDP – that is, 1.5 per cent. Adding the revisions to tax revenue since PEFO, the estimated surplus for 2008-09 is 1.8 per cent of GDP.

See the end of Henry’s remarks for a swipe at opposition Senators.

posted on 20 May 2008 by skirchner in Economics, Financial Markets

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Sovereign Wealth Funds Summit

I will be speaking at the Sovereign Wealth Funds Summit on 26 June on the subject of ‘Sovereign Wealth Funds and Financial Markets: A Stabilising Force?’ Summit details and registration can be found here.

posted on 19 May 2008 by skirchner in Economics, Financial Markets

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