The Productivity Commission Strikes Back
Assistant Productivity Commissioner Dean Parham strikes back at those who claim there have been no gains in productivity associated with microeconomic reform:
The ABS estimates reveal that, during the productivity cycle between 1993-94 and 1998-99, Australia’s annual rate of productivity growth was about half a percentage point above any other rate recorded and was nearly one percentage point above the long-term average. Clearly that was a dramatic rise.
A second issue is whether the higher productivity growth has disappeared. The ABS estimates put the average rate of growth between the productivity peaks in 1998-99 and 2003-04 at just below the average for the past four decades. This indeed indicates that growth is down from the ‘90s highs.
But some further digging into the data provides grounds to believe that the momentum in productivity growth did not disappear entirely. The key point is that there were some once-only factors at work - the Olympics, the GST, concerns about the Y2K bug - that dragged down the average for the cycle. While not a never-to-be-repeated factor, drought also reduced the average.
Australia’s underlying productivity growth in the 2000s has come off the exceptional highs of the ‘90s. However, if the effects of the once-off factors (if not drought) are discounted, average productivity growth during the latest cycle would still have been above the long-term average.
It should also be recalled that the relevant counter-factual in which there were no reforms is not being considered. Even if Australia’s productivity performance were deemed to be poor, this does not preclude the possibility that this performance could have been even worse had no reform had taken place.
posted on 17 November 2005 by skirchner in Economics
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M3, the Fed and Inflation
David Altig weighs in on the Fed and M3, noting that:
From the point of view of a policy maker, why do we care about monetary measures in the first place? We care for the same reason everyone else does—because most of us still believe that, ultimately inflation, inflation is everywhere and always a monetary phenomenon.
There is robust cross-country empirical evidence for this proposition, but it is also easy to imagine situations in which tests for the long-run neutrality of money might fail due to permanent shocks to financial technology that disturb the velocity term in the quantity theory equation. If these shocks are not modelled explicitly, then they could show up as a unit root process in the residual from a cointegrating specification involving money and inflation.
An obvious example is Japan, where growth rates in base money in excess of 30% y/y have been observed alongside chronic deflation. Contrary to popular belief, monetarists have long recognised the potential for non-neutralities involving money. This does not mean that money is unimportant. But it highlights the fact that, even in the long-run, there may not be a straightforward relationship between money and inflation that would warrant the rather simplistic interpretation often given to growth rates in monetary aggregates.
posted on 16 November 2005 by skirchner in Economics
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Buttonwood Makes a Virtue of Necessity
The Economist’s outgoing Buttonwood columnist tells her readers that money doesn’t matter after all, welcome news for any readers who might have actually read Buttonwood for investment advice rather than for the pointless personal anecdotes.
posted on 16 November 2005 by skirchner in Economics
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An Irrelevance Proposition for Current Account Deficits?
Alan Wood points to Australian Treasury and BIS papers that highlight the extent to which the official community remain appropriately relaxed on the issue of external imbalances:
Based on a paper by Guy Debelle from the Reserve Bank and Gabriele Galati from the Bank for International Settlements, they also note that the historical record does not appear to contain any industrial-country examples of large current account deficits or stocks of net foreign liabilities having caused domestic economic downturns.
Markets treat countries such as Australia, with well developed financial markets and an ability to borrow in their own currency, very differently from developing countries in Asia or Latin America. There is no evidence rising foreign debt has forced Australia to pay any significant risk premium on its foreign borrowings.
To stop our foreign debt rising from around its present level of 60 per cent of GDP will require Australia to run future trade surpluses of between 0.5per cent and 0.75 per cent of GDP, which Gruen and Sayegh describe as not too onerous an adjustment task. Nor is it likely to matter much if it rises a bit further before it stabilises.
The national fear of large current account deficits and foreign debt of the ‘80s has little relevance in the 21st century, as long as we continue to run good economic policies - including labour market reform.
I would go further and argue that these phobias have not had any relevance since the end of Bretton Woods in the early 1970s.
posted on 16 November 2005 by skirchner in Economics
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The US Current Account, Private Saving and Future Income Growth
An RBA Discussion Paper by Charles Engel, which looks at the sustainability of the US current account deficit in the context of future income growth, with some implications for USD bears:
In this paper we explore the role of one other factor that also has been mentioned prominently: private saving in the US is low because income growth is expected to be strong.
We rework the standard neoclassical two-country model to show how a country will be a net borrower when its future share of world GDP is expected to increase above its current share.
Our research ultimately is motivated by the question of whether the US current account is ‘sustainable’. The way we approach the question is to see whether the high level of US spending currently is compatible with an optimal path of borrowing. In particular, what assumptions about expected future growth of the US’s share of world output could justify its current account deficit? We show that if the deficit can be explained by higher future income shares, then the size of the real depreciation, that may otherwise be required to reduce the deficit, may be quite small.
posted on 15 November 2005 by skirchner in Economics
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What Do Money and Credit Aggregates Really Tell Us?
Barry Ritholtz is on the case in relation to the Fed’s decision to discontinue publication of the M3 aggregate. As Barry notes, this is the sort of thing that excites the tin foil hat brigade and fever-swamp Austrians, but I would suggest that there is a rather innocent explanation. Growth rates in broad money and credit aggregates tend to be dominated by trends in financial intermediation and thus have only a very tenuous relationship with monetary policy and even a somewhat loose relationship with economic activity. There is in fact no necessary connection between a central bank’s targeting of an official interest rate and changes in the money supply, although there is often a link in practice under current central bank operating procedures. Even under a system of free banking in which the money supply was market-determined, a central bank could still independently target an official interest rate (see Michael Woodford’s Interest and Prices for a more formal argument in this regard).
I’m much more sympathetic than most economists to the idea that money matters. Base money arguably has a neglected role in monetary policy transmission that is independent of the official interest rate and some of that role may also be reflected in broad money aggregates. However, it is mistake to interpret broad money and credit aggregates as being predominantly a function of exogenous monetary policy decisions. They have a much stronger relationship with individual portfolio choices and innovations in financial technology, in other words, capitalist acts between consenting adults. When the fever-swamp Austrians point to growth in these aggregates as being symptomatic of the supposed monetary depredations of the Fed, they are inadvertently condemning what are largely market-determined outcomes in relation to financial intermediation.
posted on 14 November 2005 by skirchner in Economics
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How Many Unemployed Kiwis Would It Take to Fill Telstra Stadium?
New Zealand’s unemployment rate has fallen to its lowest on record at 3.4% and also the lowest among 27 OECD countries that report standardised unemployment rates. Labour force participation is also at record levels. The number of unemployed in New Zealand is now so low, they would leave more than 10,000 empty seats at Telstra Stadium for a Wallabies-All Blacks game.
By contrast, Australia’s unemployment rate in October was 5.2%. While still close to 27 year lows, the differential with NZ highlights Australia’s failure to tackle labour market reform. The Australian government’s proposed IR reforms are decidedly inferior to the NZ model. While they may still assist in lowering Australia’s unemployment rate, the differential with NZ shows the extent to which unemployment in Australia is a deliberate policy choice, wilfully ignoring a superior reform model across the Tasman.
posted on 10 November 2005 by skirchner in Economics
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Seasonal Influences on US House Prices
Before getting too excited about the reported moderation in US house prices, it is worth considering what Action Economics chief economist Mike Englund has to say about seasonal influences on US house prices:
U.S. housing industry reports of moderating prices imply little about annual trends. Prices decline sharply in nearly every Q4 in this highly seasonal industry, and declines are particularly big in years with large Q2 and Q3 gains…
to those that believe they take these seasonal patterns into account by using y/y growth rates to effectively “cancel out” existing seasonal patterns, note the exacerbating trend in seasonal patterns through the thirty-six year existing home sales dataset for prices. Price data for Q4 and Q1 are becoming weaker with time relative to trend, while price data for Q2 and Q3 are becoming stronger with time, hence allowing the data to increasingly “beat the seasonals” with swings that impact y/y calculations with seasonal effects…
the declines thus far are small compared to the out-sized advances reported in the first three quarters of the year, and seem to be paralleling the powerful and widening seasonal swings that are typical for the industry. It is hardly clear that recent reported price drops are significant in the context of seasonal patterns. The jury will remain out for this sector until we enter the next big “price discovery” session for this sector—in Q2 of 2006.
posted on 09 November 2005 by skirchner in Economics
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The Doomsday Cult Capitulation Trade
‘Buffett’s Berkshire Yanks Billions In Forex Bets:’
Buffett’s Berkshire said on Friday that it had reduced its foreign currency holdings to $16.5 billion, from $21.5 billion three months earlier.
posted on 08 November 2005 by skirchner in Economics
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Schadenfreude, Sex and House Prices
David Smith has been doing for the UK what this blog has been doing in the Australian context, drawing attention to the perverse demand for predictions of housing-related economic ruin. Predictions of this kind have been about as successful in the UK context as they have been in Australia. As Smith notes, they have also become something of an industry in themselves:
Many parts of the media have been itching for the crash to happen. From a crowded field, my nomination for most ridiculous housing headline this year goes to the Daily Express. “House prices slump”, its banner front-page headline screamed on September 30. The story was that the Nationwide building society had reported a 0.2% drop in house prices for the month. Some slump.
A whole industry has built up around the crash story, with websites, weblogs (blogs) and newsletters. I can only think this is driven by schadenfreude - pleasure in the (potential) misfortune of others.
Rather than simple schadenfreude, there is probably a more complex story of cognitive bias at work here. The main problem is the willingness of people to adhere to an asymmetric view of the future distribution of economic shocks, a bias which is then exploited by publicity-seeking forecasting firms and the media. As Smith notes, predictions of stagnation are not nearly as sexy as forecasts of a crash.
The perverse element in all this is when forecasters go looking for possible adverse shocks to rationalise their house price forecast. Nouriel Roubini did the same thing at the Cato monetary policy conference in relation to the USD (see previous post), rattling off every conceivable thing that could go wrong for the USD to justify his essentially pre-determined view that it must fall.
posted on 07 November 2005 by skirchner in Economics
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Industrial Relations Reform
The real problem with the government’s IR reforms:
The Government’s laws, introduced into parliament this week, are much more complicated than the Fightback! industrial relations package that Mr Howard, then a Coalition frontbencher, launched in 1992 with former Liberal leader John Hewson.
New Zealand’s Employment Contracts Act runs to 100 pages, with the core legislation in just 20. By contrast, the Howard Government’s WorkChoices legislation is almost 700 pages long and is accompanied by an explanatory memorandum of 560 pages.
In 1990, New Zealand’s Bolger government took the radical approach of abolishing the country’s highly prescriptive award system and regulating tribunal.
In their place, it imposed a minimum wage and basic employment conditions. All workers were employed under individual contracts, with conditions left to the market.
Despite disputed figures on productivity, New Zealand now boasts an unemployment rate of 3.5 per cent while Australia’s official rate hovers at about 5per cent - still the lowest here for more than two decades.
posted on 04 November 2005 by skirchner in Economics
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Institutional Economics Now Available via Newstex
Institutional Economics is no longer being aggregated at Nouriel Roubini’s $600 a year doomsday cult site (can’t think why!) However, it is now available via Newstex, where you can choose your own content from among numerous financial and other blogs:
Newstex offers Content On Demand, including tailored, real-time news and commentary from thousands of branded newswires, newspapers, magazines, financial and business sources, official government feeds and weblogs. Newstex collects full-text digital news and commentary feeds, standardizes the content format, adds stock ticker symbols, people tickers and categories, and instantly delivers the result as easy-to-integrate XML or RSS newsfeeds.
posted on 02 November 2005 by skirchner in Economics
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Inflation Targeting Works
Kevin Hassett makes part of the case for the Fed to adopt inflation targeting:
Would a target matter? One recent study found some significant differences between countries that practice inflation targeting, and those that don’t.
For example, private-sector inflation forecasts tend to show more agreement with one another in inflation-targeting countries than in the U.S. Such disagreement about future inflation is a good measure of the extra risk added to the economy because the Fed isn’t transparent
enough.
For three years now, I have been conducting an experiment in which I ask my students what they think Australia’s inflation rate will be in five years time. I have yet to have a class in which students did not volunteer something like “2-3%” or “2.5%,” the RBA’s inflation target range. Students quickly get the point that to forecast a number outside the target range is to implicitly forecast either a future monetary policy mistake or an inflation shock. Had I asked students this question 10 years ago, I would have got either blank stares or random numbers.
Of course, economics students are more likely to get this right than others, but these students are also likely to be the ones who will be making future decisions where inflation expectations will be particularly important. I would suggest any US readers who are doubtful about the merits of inflation targeting try this exercise with others and see what results they get.
posted on 01 November 2005 by skirchner in Economics
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More Housing ‘Bubble’ Myth Busting
IMF research points to the role of mortgage securitisation in reducing deviations in house prices from fundamentals:
With funding conditions now determined in a national market, trends in real activity and prices have become less cyclical and converged across all regions of the United States. As a result, a model of housing prices based on economic fundamentals finds that pricing errors—the deviations of actual prices from those estimated in the model—have fallen by half. Moreover, a change in homebuilders’ behavior—in particular, a move away from speculative starts and a reduction of levels of inventories of new homes—has reduced the risk of a sharp decline in housing prices, although some indicators suggest speculative pressures in a number of metropolitan areas. This stabilization of housing activity may have made an important contribution to the reduction of the volatility of GDP growth over the same period.
posted on 31 October 2005 by skirchner in Economics
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True Confessions of Bill Gross
PIMCO boss Bill Gross tells it like it is:
I am no expert…all I know is what I read in the newspapers.
posted on 31 October 2005 by skirchner in Economics
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