However, Gareth Morgan’s concern about Bank policy and the housing market IS actually a legitimate area to raise concerns about Bank policy.  His view boils down to this statement:

The problem with demand for property in New Zealand is one that has arisen as a legacy from a long history now of Reserve Bank prudential policy combining with selective tax policy to provide a toxic little no brainer for property investors.

Simply put, he feels that prudential policy overtly favours housing, thereby creating the equivalent of a “tax wedge”.

So it is NOT a criticism of monetary policy and the PTA per se – but of the institutional financial framework set up by the RBNZ, which in turn has led to some type of “inefficiency” or “misallocation of resources”.

I’m not convinced, but I’m leaving my mind open. I have had similar thoughts in the past, but have in the end ruled them out – it would just take some firm evidence to lead me to re-evaluate my priors .

Update:  As if by magic, the RBNZ has a speech up defending their framework here.  Given this speech has been booked in for some time, it isn’t a direct response.  However, I would note that they point out that risk-weighting in housing is higher here than in a number of other countries (so the capital requirement for a pool of loans on housing is higher in NZ ).

Risk-weighting are set for the capital adequacy ratio for a reason, and as a result we need to articulate why these are wrong or inappropriate.  Furthermore, it isn’t clear to me that prudential policy has had a “long history” of being pro-housing – instead it has always seemed that retail banks have been pro-housing due to the fact that they see these loans as relatively lower risk, which shows up in relative interest rates and the availability of credit.  As a result, for the argument to be made needs more analysis – the burden of proof is on the analysts making the claim that prudential policy is a “causing too much investment in housing”.  A little bit more analysis in terms of numbers and counterfactual models is in order – and if these show the result and the argument could persuade more people – including the RBNZ

Note:  His movement from excessive demand for investment in housing as an “investment vehicle” to a complaint about affordability is also tenuous at best – excessive investment demand lead to a larger stock of property (that is how we get the “misallocation of investment”) and lower rents.  The yield on property falls, and ownership becomes more expensive … but the cost of buying “housing services” actually falls.  So does this imply that Bank is making housing services more affordable?  We need to be a bit more careful not to mix up issues here!

I was utterly and totally wrong – a situation I have become accustomed to.  Mankiw’s first year textbook is clear, to the point, and is honest about what the economic method is and what it achieves.  He “wears his assumptions on his sleeve” which I have learnt is the distinction of the best type of economist.  His textbook, and his papers on macroeconomics and tax, have been insightful for me as a way of not just understanding economic ideas, but of understanding the economic method.

So I see he wrote a paper called “defending the one percent“.  Undeniably it was titled that way to irritate people.  And undeniably it succeeded. (Update:  I’d note Cochrane states it is mistitled – and I believe to an economics auidence it is.  I touch on why I think he gave it that title for his target audience below)

I was sent the paper by a reader on twitter (as I was reading it), and he was unhappy with it.  We discussed it, we didn’t agree (that is not the purpose of discussion on normative issues), and that was good.

What isn’t good was when I saw Noah Smith decided to go to twitter insulting it.  Noah is an insightful guy, with clear and consistent views on what economics is.  And if he had read the paper more charitably I find it hard to believe he would have made a lame crack about it being any good at all.

Mankiw comes in, with standard economic welfare analysis, and applies well established principles of equity to try and articulate the impact of his assumed “cause” of changes in inequality – and the way that policy would respond given the fundamental equity-efficiency trade-off.  This is basic “normative economics”.  Note it wasn’t written to set the world of welfare analysis on fire – from what I can tell it is written to clearly articulate economic concepts around redistribution to the lay reader.

Now an economist might say “what is the point” – to which I’d note again, this paper is obviously not written for economists.  The title is likely the way it is because there are people out there yelling “arg 1%” and he is saying, hey let’s think about this 1% a bit more and the idea of taxation.

All the stuff in this paper should be standard knowledge to virtually anyone who has studied economics – and I don’t mean at a high level.  He is just trying to show the nature of the debate we can have around income inequality for non-economists – and illustrate that there are complicated issues, both in terms of getting the right “measurement” of things, and in terms of our normative assumptions around fairness. Any economist who has a modicum of modesty would be willing to accept just how danged hard this issue is – which is why it is something you don’t really see from bloggers (my fellow NZ blogging community excluded )

And his conclusion:

In the final analysis, we should not be surprised when opinions about income redistribution vary. Economists can turn to empirical methods to estimate key parameters, but no amount of applied econometrics can bridge this philosophical divide. I hope my ruminations in this essay have convinced some readers to see the situation from a new angle. But at the very least, I trust that these thoughts offer a vivid reminder that fundamentally normative conclusions cannot rest on positive economics alone.

He is writing to intelligent non-economists about tax and redistributive policy, and illustrating that there are trade-offs, and fundamental normative questions, that have to be faced before we can make a conclusion.  Simply concluding “soak the rich” based on a single graph without context and analysis is moronic.

Seeing otherwise wildly intelligent economists say “MY POLICY IS THE GOOD POLICY, DO MY POLICY AS I AM ECONOMIST” is embarrassing – I accept all these guys are a lot smarter than me, but even with this intelligence they do not have any miraculous insight into the values of others.  As a result, when it comes to these types of policy conclusions economists SHOULD (normative hat time) be making the trade-offs clear and concise, not grabbing hold of the economic levers and designing the society they want!

The counter to this is probably “but we do have the analysis, and we should make these changes based on it”.  To which I’d answer “where”?  Where the hell has someone actually done a god honest analysis of the fundamental trade-offs, then tried to determine the normative principles that society holds?  I’ve seen Saez talk about the revenue maximising level of tax (fairly irrelevant to this), and I’ve seen Stiglitz just assume that the 1% are rent seekers (fairly bold claim).  But where is the simulation work (eg behavioural microsimulation modeling), the work on implied labour demand responses, the estimates of where the tax burden actually falls (rather than where we place the tax)?

In fact, can you please tell me where this work is, as I would actually like to read it.  I’ve seen bits and pieces in my travel, but a full objective analysis – and a full discussion around the normative principles that would be satisfied by counterfactual policy changes, given an estimate of a social welfare function – are the things the US needs before we can even try to say one sides policy prescriptions are “right or wrong” in any intelligible way.  Even parts of that stuff – if you could just leave the papers in the comments I will send you a <3 .  And if you add how you are using this analysis to form your views around policy you’ll get an extra <3 .

Economists will tell their first year students how amazingly important these concepts are … and then a surprising number will talk around them, give (inadvertently) misleading analogies, and/or avoid measurement.  Mankiw comes out and lays his framework at people’s feet, and tries to articulate “why” the value judgments he’s applying lead to the policy … instead of just couching them in hidden terms, and demanding agreement.  Can’t we have a bit more of that?

“Yes I accept absolutely and endorse the view that the banks should be forced to use this (LVR limits) as a legitimate tool.

“I don’t think it should be a tool that is used to write high LVR ratios for a bunch of rich people, and lock out a whole lot of first-home buyers.”

“I’m not saying it’s going to be perfect or there won’t be some implications but for the most part we want those first-home buyers to get a chance to buy a home.”

“So you can’t tell me that the trading banks can’t work with the Reserve Bank and make sure that those people are better looked after.”

Let’s ignore the fact that “rich people” have equity, so can afford to actually put a deposit down, so aren’t going to be hit in the same way by LVR limits (all it does here is ensure these groups reduce leverage).  And let’s also ignore the fact that the riskiest speculators won’t get hit by this policy … as they won’t be able to get funding through banks in the first place.  Let’s also ignore the fact that banks are supposed to be competitive, and the RBNZ shouldn’t really be trying to “wheel and deal” them.

Ok then, given this LVR limits are still being looked at because of concerns about systemic risk in the banking system – first home buyers do indeed take larger loans, and will be at greater risk of defaulting, trying to “exclude” them is just entirely missing the point of the policy.  Yes LVR limits, or increasing the costs for high risk loans, are not a particularly good tools – but turning around and making them completely useless and not dealing with financial stability at all is ridiculous.

But you may say “Key is just concerned about affordability and wants the RBNZ to solve it”.  This is ‘disingenious’ at best.  It is the GOVERNMENTS job to work on equity and redistributionary type policy – not the frikken central bank.  If the government is concerned about affordability for first home buyers, then focus on government policies for this – don’t lean on the independent central bank.

COULD YOU PEOPLE STOP BLAMING THE RBNZ FOR EVERYTHING – IT DOESN’T MAKE ANY SENSE (yes I’m shouting – but in a slow loud manner, instead of an angry one.  Maybe this will get people to actually “think about why” they keep saying these things, I’m experimenting here).

Ya know if we are thinking about affordability then we can look at issues that increase the supply of housing, or income transfers (although a lot of this would be capitalised in house prices), as “solutions”.  Stop trying to blame the central bank for the fact that trade-offs exist and work with the trade-offs at hand.

Observed facts are necessarily finite in number; possible hypotheses, infinite. If there is one hypothesis that is consistent with the available evidence, there are always an infinite number that are.

As a result, I thought I should probably translate what their report actually suggests in title of this post though.  This is not a blueprint for higher wages and “better jobs”.  This is a blue print for:

1. Cutting the real purchasing power of households,
2. Getting the government (therefore the taxpayer) to take on risk for businesses
3. Therefore, subsidising an industry that the rest of the world is subsidising because of mystical “spillovers” we think may occur – ignoring the fact that having firms currently focus on their comparative advantage is making NZ into a very wealthy country …

This is our “left wing” parties talking – essentially about NZ Inc.  What happened to actually thinking about poverty and equity, issues that I know I might actually vote for them about if they ever bothered to be actual left wing parties, instead of an accidental vested interest group for firms.

Update:  Brennan McDonald discusses here.  I like the focus on specific biases between economists and (what I would term) folk economists.  IMO, economists need to be clear on their communication around these issues when discussing policy debates – as they are the principles that tend to “defy common-sense” for folk economists the burden of proof falls on us .  Also Groping to Bethleham discusses this here and here.

It is this sort of recognition that makes economists get so wound up about global income inequality rather than income inequality within a country.  This is why it came up in the second part of my “careful with occupy” plea in NZ back in 2011 – because I guess that is the sort of way we’ve been trained to view these equity issues.  When economists talk about equality of opportunity (which is a value judgment – so we are wandering out of our strict specialty here) we are viewing all people as equal, irrespective of the country – and this is why development economics is such a massively popular field, and I can fully understand and appreciate that.

Let us take someone working every week of the year, 40 hours a week, on the current minimum wage ($13.75 per hour).  Assume they have no kids and the such, so we are just talking about an individual.  That gives us gross income of $28,600pa.  Now go here, and we get tax of $3,710pa.  Take off the ACC levies, that is $486.20.  Add on the independent earner tax credit, so $520pa.  Ignore any other payments.  This gives us net income of $24,923.80pa.

This result would put you in the top 6.53% of the income distribution over the world.  You would be among the 6.53% of worlds richest people, if you work in NZ on the minimum wage full time.

This in term does ignore two things:

1. The fact that goods prices tend to be higher in wealthier countries – so this factor will be exaggerating how wealthy the NZer is (as we actually care about goods and services)!
2. It also ignores that the tax that is paid is used to fund health care, education, etc etc.  These are “goods and services” that are provided which people is much poorer countries do not have access to.  As a result, this factor will be making you look less relatively wealthy than you actually are!

Perspective, it’s interesting.

But the Council, who seem to think the scenes in Courtenay Place late on Fridays and Saturdays represent “vibrancy”, and the Hospitality Association, led by individuals who, I believe, own businesses in Courtenay Place, are planning a regime that will penalise anyone trying to establish a business anywhere else – businesses that might give discerning consumers an alternative to the chaos on Courtenay Place. It may not be what the Council intended, but it’s what’s called an unintended consequence. It’s what happens when you draw lines on a map and create differences between the two sides.

Of course not all the results will penalise businesses outside the strip. If you’re a Courtenay Place property owner learning that your tenants have privileges with respect to liquor licensing, you’re going to put their rent up. I look forward to hearing the Hospitality Association complaining about sky-rocketing rents in the street in about a year’s time.

Now they may be doing this for good reasons. But to put an economics slant on what Dom says, this sounds a lot like what economists call “Raising Rivals Costs” (RRC). i.e., people who already have bars in Courtney/Cuba want to limit the ability of people to operate bars in other ares, thus hindering competition from other ares of the city.

While it may raise the rent of existing tenants, from memory (I live in Auckland now….) the bars on Courtney place at least are all quite big so may be able absorb the higher fixed costs. So in a way this could be seen as shutting out competition by smaller fringe operators (i.e. most craft beer bars) who won’t have the scale to pay high rents. I for one will not be happy to see a reduction in pub innovation!

The ideal RBNZ governor?

Assume a bubble, so lets start with one!  I have a list of problems with this type of article even given that :

1. I am nervous about giving non-democratically elected officials too much scope to do “distributional policy”.  This is the purpose of fiscal policy, and there is a thin line as soon as we start moving into alternative tools.  The Bank recognises this, but the rest of us have to as well!  (eg If we are sad about affordability, this is a fiscal policy issue – it has nothing to do with the RBNZ.)
2. In terms of financial stability – which is in the Bank’s mandate – they only care about a bubble insofar as it risks bank failure.  So the solution is to try to get banks to hold enough capital.  Given that, who gives a proverbial about a bubble!  If people are willing to overpay in this context, and there are no broad macro ramifications, there is no role for central bank action at all.
3. In terms of monetary policy, this matters only if it leads to an excessive increase in demand … in which case they lift rates due to their inflation mandate, there is no need to change anything in that regard.
4. And now given you’ve ignored those three points, dear reader, let me throw in something you might not have thought about.  How in the name of frik itself do you pop a bubble?

This last point is important, how do you pop a bubble.  Lifting interest rates doesn’t usually do it – in fact if it is a “rational bubble” higher interest rates will lead to a larger bubble!

And if it is an “irrational bubble” why the hell will it care about a small shift in interest rates – if people are making magical capital gains, a marginal change in interest rates will be irrelevant to them.  Irrational bubbles are likely to be “interest insensitive”.  So interest rates miss the point.  And if the bubble is driven by “profit hungry leveraged investors” (so incredibly risk loving people), then LVR limits have no impact – as they would never be borrowing off banks in the first place!

We are talking about expectations here, and we are assuming (as we have a bubble that is against the Bank’s forecasts) that the Bank can’t control expectations.  Then we are saying “wave a wand and fix it somehow.

All four of these points tell me that having the Reserve Bank “deal with a bubble” is ridiculous.  In fact, I find the entire discussion about bubbles so amazingly ad hoc and inconsistent that I cannot believe I haven’t written this post before!  What have I been writing for the past six years?  (Here is a partial bubble history:  I see James wrote this on experiment economics.  I talk about Stiglitz and call him orthodox?.  I chat about the idea of using the CFR to control inflation – say no, it is more a “structural tool”.  I point to Marginal Revolution talking bubbles.  Bubbles and transfers from overseas.  Complaining new tools aren’t about stopping bubbles.  So yea, nothing actually talking about “what a bubble is and how it fits into policy”, opps).

And why aren’t more people making this point apparent.  This moves the entire debate to the issue of “are banks stable enough given systemic risk from an asset price realignment” and “is monetary policy appropriate given inflation and the output gap” … which is where everyone involved in policy would actually want it to be right?

It also tells me that political parties saying that will get the RBNZ to do more are really showing two things:

1. They don’t want to take any responsibility for actual fiscal policy issues when in government (understandable, who would ever actually want to be in government!)
2. They genuinely don’t understand monetary policy or what a “bubble” is – and just walk around talking like they do.  Hey, I can’t see a bubble when its floating around either – which is why I just try to think how it influences monetary policy and financial stability rules “before” passing judgment or opinion on what the Bank should do

Honestly, the four point above are so incredibly fundamental, and so CONSTANTLY ignored, that I’ve had a lot of fun writing this post .  Now to get back to reading about solar power.

Matt hasn’t read it yet – that would be cheating.  He’ll read it when it is on the internet.

I have no doubt Matt will respond to this saying why he fundamentally disagrees or agrees with points – from the bits he has spotted he already wants to respond.  But he will have to wait until July as he has too many urgent deadlines and planned posts between now and then

Feel free to discuss in the comments.

Matt

Thank you for your response above to my housing article. Much of my work is available from the Sustento.org.nz website. The latest versions of all that work is available from my brother’s website www.integrateddevelopment.org 

 Those files are presented in html so they can easily be read by anyone around the world with basic computer technology.

I’d first like to address the most basic point you raise (issue 3.5), that of causality, before briefly touching on the other matters.

 My simple debt model derived from the Fisher Equation of Exchange satisfies the basic accounting equation. Perhaps the best of my theoretical papers to start with are “The DNA -f the Debt-Based Economy” and “Capital is Debt”.  I think the double helix of the financial DNA will surprise you and maybe shock you.

 The present interest-based debt system grows endogenously. The debt “monster” has to be fed before any economic “growth” can take place. No new debt, no new growth. Insufficient debt to feed the beast, the economy will go into recession. Too much debt to both feed the beast and growth within economic resource constraints will produce a debt bubble leading to debt default and collapse. Having been through the US housing bubble, the world is being forced to the other extreme euphemistically called “austerity” with obvious outcomes. 

This happens because current orthodox economics depends on rationalising the irrational. It is based on faulty assumptions instead of working from first principles.

I try to work from first principles. I will just provide one example here. ORTHODOX ECONOMICS DOES NOT SATISFY THE BASIC ACCOUNTING EQUATION.

  Economic policy in recent decades has been founded on the Friedman Money Rule (monetarism) and Taylor type inflation targeting rules (neo-liberalism). Neither of these satisfies the basic accounting equation. (I have almost finished an article concentrating on this point – though I have discussed it exhaustively in the theoretical material, including my response to the recent IMF working paper by Benes and Kumhof on “The Chicago Plan Revisited”). 

The world economy has been wrecked for decades because orthodox economics has failed to add simple numbers and has overlooked the endogenous nature of interest-bearing debt growth. 

So, yes, of course there must be willing lenders and willing borrowers. If they are not willing they have to be enticed literally by hook, or as we have seen in recent years, by crook. Demand must be created (advertising and the like) but demand can only be created when incomes are sufficient to purchase the goods and services the economy creates. Hence Keynesianism/neo-Keynesianism styled economic stimulation. Incomes have not risen in real terms for the vast bulk of the population because of the endogenous transfer of income and wealth from income earners to deposit holders in the debt system.

It used to be that income redistribution “levelled” the playing field, but in recent decades the “trickle down” myth has intensified income and wealth inequality instead of reversing it. 

 My work demonstrates the underlying mechanisms at work in this process and quantifies their effects through a debt model that satisfies basic accounting rules. Steve Keen, in a recent post, seems to now realise how critical basic accounting is to macroeconomic modelling. Hopefully others will follow quickly.

 The present system is amoral (probably immoral) because it “force fits” economic decision making to arbitrary assumptions. To do so it requires all the concepts we read so much about …..profit, economic “growth” at all cost, self-interest, greed, “externalities”, enclosure of the commons, and all the rest. In respect of the housing article I am saying the present debt system is incompatible with affordable housing.

Here are a few very brief notes on the other points.

1. My work, unlike orthodox economics, gives the “why”.

Unfortunately that was a bit much to cover in a short article. I agree the “why” is not a balance sheet, but the explanations must satisfy the accounting equation (it’s even implied in the reconciliation at RBNZ Table C3 current as the paper I am working clearly demonstrates)

2. I agree with you about relationships, but I do invite you to reconsider the whole issue of causation.

3. Yes, agreed

4. The way I see it, orthodox economics has created unimaginable world-wide misery. It is incompatible with human happiness and wellbeing and even with the survival of the planet! It worked for a while when debt levels were small, productivity increases large and when economic activity could be easily monetised. But you can’t “take lower output to meet some social needs” in the present system. You can only redistribute output, and we as well as others are spectacularly failing to do that …. think education, health, housing, child poverty and the like.

Next note: Foreigners must invest here if we have a negative NIIP even if, in the limit, it is just lending to our banks on an arbitrage basis. Foreign debt = foreign ownership, pure and simple. You are asking too much of my article to cover all of the issues relating to foreign debt and “the prices of non-housing goods” but I can offer simple responses to the issues you raise.

Issue one Relative Price

Figure 1 and the text below it very briefly acknowledges the point you are making. Most of M3 makes up the investment pool. There are several ways to invest that money. The largest single segment is (I think) passive hoarding in interest-bearing bank accounts. The next largest is the property sector.  One reason the property sector is so large is that NZ has (no thanks too recent governments that have all failed to tackle the persistent exchange rate/current account problem)  a very low industrial base and therefore a relatively small equities sector.  There is always a balance among investment options that varies somewhat according to the financial settings and regulatory provisions. Figure 1 in the article reflects that clearly.

Issue two Building Costs.

Of course we agree building costs have changed but they are not driving property “values”.  Your point about “real terms” is stretching the point, though, because most property transactions occur in the TA’s where prices have risen. Naturally there are resource constraints affecting building prices … perhaps you might like to consider why  it is that all existing property prices rise in sympathy?  That’s all about “expectations” and ability to service loans, isn’t it? The bottom line is the available investment pool choices. People choose to invest in property when they think they can get more “profit” there than from other forms of investment.

Issue three  M3

The main drivers of M3 are the CA and the systemic inflation of the debt system.  The productive sector itself uses only a small part of M3 (about 5.5% of GDP in NZ on my preliminary figures).  Of course some of that M3 growth is represented by net capital investment in the first instance.  The shocks to the system arise largely from misdirected monetary policy … like a 1% increase in interest rates will collapse nominal GDP growth by around 1.5% in NZ.  So interest rates are no longer a useful tool for monetary policy as can easily be seen in US, Japan and Germany where the central bank rates are already zero.   I’ve touched on inflation targeting above.

Issue 3.5   is already dealt with above.

Issue 4 regression

Yes, one has to be careful with the regressions, but I chose to use the scatter diagram (figure 2) to demonstrate the correlation. Then I have used Figure 3 to show how the correlation arises and why the exponentials are different.  I think that’s fair enough.

Issue 5  Non-productive is not a nice term

The stream of “housing services” are like heaps of other things. They are not measured in GDP.  I agree that GDP is a terrible measure of economic performance because it lumps in heaps of “bads” as goods, while leaving out (apparently more than half of all) goods and services like unpaid work, use of the commons, non-monetised resource consumption and a host of other items).  Orthodox economics forces us to watch just the cash register ticking over and I don’t think it is appropriate to say housing provides uncounted goods and services unless you also consider the much broader perspective as well.

So let’s change the change the measurement methodology and the financial system so it serves us instead of enslaving us?

Issue 6  Foreign Ownership is not the source of the bubble

Yes it is in substantial measure.  Every dollar of money used to fund the accumulated current account deficit (use NIIP if you like) must be created domestically. It is included in domestic credit. It is then “spent” to buy trinkets from China and fund foreign interest and profit repatriation.  Since nobody wants to hold NZ dollars (Stephen Hulme is right of course in his comments on my article, but I was  trying  there to keep the issue easily understandable)  that flow offshore is offset by “return capital flows”, that is, (mainly) foreign ownership of NZ productive capacity and resources.  A little is invested in new production and a little in land. Having given away our productive capacity for trinkets the foreign owners get their pound of flesh by repatriating interest and profits offshore. It’s a self reinforcing nightmare. As others like Preston have said, the bulk of today’s CA deficit is the funding cost of  foreign ownership.  If we do not deal with this immediately we will be approaching financial collapse within the next decade or two …. owned by the foreign company store, as it were.

When foreign investors buy up NZ inc, the sellers are left holding NZ$.  Those dollars are part of the investment pool and therefore available to purchase existing assets in NZ, pushing up their prices.  I think you are very seriously underestimating the impact of the CA and find that a little strange given the compassion and concern you express elsewhere for community and the public good. That foreign ownership has to be satisfied in terms of profit … it’s a first mortgage over our economic output!

Issue seven  Conclusion

Just a little on the Foreign Transactions Surcharge (FTS) that you seem to have misunderstood.  The FTS paper is available at both the websites I listed at the start of this post.  It is unidirectional. It applies to ALL outward transactions across the Forex interface, not incoming ones.  The revenue collected from the levy is ring-fenced to reduce domestic taxation (so it is tax neutral) other than for any amount set aside to repurchase alienated assets.

Yes, there will be some losers (mainly importers) but nearly everyone else will be a winner because the current subsidy of foreign exchange users by foreign exchange savers (read largely lower income groups) will be corrected.   There is far too much to the proposal to go into here… I suggest we take the matter up again after you have found time to read the paper.  The FTS will change the SHAPE of the NZ economy as well as correcting the CA and the exchange rate.

Lowell Manning

The phrase NZ Inc is so nauseating. Please stop using it. New Zealand is a collection of individuals, firms, government agencies, councils, charities, families, iwi and a whole lot of other fluid groups that change their composition and goals frequently.

Update:  Paul Walker also discusses here.

This comes back to this post I popped up about something Mai Chen wrote.

The lack of discussion of trade-offs, or comparisons of counterfactuals, is a perplexing feature of this sort of writing [eg NZ Inc] for an economist – and makes the statement mentioned above absolutely useless for policy analysis.

The phrase “NZ Inc” is marketing for businesses who can benefit from the government taking on risk for them.  Given that the government is linked to the taxpayer, it is the taxpayer taking on risk for them.

Now, all political parties have fallen for this trap, and I’ve spent far too many long hours arguing the point with them.  They will say “isn’t being aspirational a good in itself” and I say yes.  Then they say “shouldn’t we make aspirational policy” and I say, no that is stupid.

Sometimes I’ll be told we need “measurable goals”.  And by sometimes I mean someone tells me that at least once a week.  There is only “one goal” for “society” – meeting the social contract and maximising the “social good”.  Can you measure that, can any of us measure that?

We have elections, and we have plenty of clear measures of other types of outcomes, but the only way we can figure if we are “meeting that” is to honestly describe trade-offs between things and then have society vote (even though this is not perfect, given Arrow’s Impossibility Theorem).

This NZ Inc and measurable goals business INVOLVES presuming what we want.  Which just means it is vested interest groups passing off what is in their interest as in the “national good”.

Discussing, measuring, and debating trade-offs is hard!  But if we actually care about people in society we would actually do this.  And we would use a relatively broad principle for understanding it – such as the long-term benefit of the consumer, rather than the maximisation of some random indicator (like GDP, or export volumes) which just happens to coincide with the interests of the individual selling it to us

Note:  People think I’m being pedantic with all this.  I am not, and if you think this point is a “pedantic point about policy” then I would suggest reading a bit more about normative economics – and how crazy complicated the “real world” actually is in terms of the trade-offs we face.  People that are trying to simplify it to sell their own policy aren’t always doing it out of the goodness of their heart … and even when they are, their experience blinds them to the impact these policies have on others.  True story.