Comments on Yu Yongding "Can China beat deflation?" 23/07/2015
As this post suggested China may face an extended period of deflation with a negative impact on economic growth, amid its structural reforms.
It seems sensible to have expansionary of both monetary and fiscal policies to head off potentially very serious deflation and excessively slowing in the economic growth, as the author has called for, that "China must do whatever it takes to avoid falling into the debt-deflation trap".
Structural reforms should, in the short term, be done in the context of stimulating economic growth and combating deflation. There should be enough room in China for it to invest, given that China's capital stocks are still low in not only infrastructure in many locations with the need of continued urbanisation, but also in the short components of its structural imbalance. Understandably, China is still far from a high income country and it will take many years and decades to catch up with the levels of high income industrialised countries. Capital labour ratio in China is arguably still equally low as its per capita income. That indicates the needs for increasing its capital stocks not only in aggregate sense, nut particularly in the under balanced areas of its economy.
It is, however, important to channel the monetary and fiscal expansions into the right areas of the real economy and prevent any excessive flow to its stock market for speculative activities.
Although the housing market in China has seen very high property prices and the authorities have tried to dampen its further growth, the housing construction sector still have room to expand.
Furthermore, its services sector has plenty of room to expand and its growth can be combined with the Chinese leadership's push for innovation and promoting enterprenourship.
In summary, China needs expantionary fiscal and monetary policies to stimulate the growth of the economy and address deflationary pressures. Structural reforms and adjustments, in the short to medium terms, need to be done in that overarching context. In both the short and long terms, China should not loose sight that its income is low, so is its capital labour ratio. The main focus of structural adjustments, particularly in the short term, should be on expanding infrastructure (including housing in cities and towns where further urbanisation will see a rapid increase in resident population and the capacities of the services sector.
Showing posts with label macroeconomic policies. Show all posts
Showing posts with label macroeconomic policies. Show all posts
2015-06-21
A better regime for foreign investment and macroeconomic policies
Comments on John Denton and Peter Drysdale "Time to re-position Australia’s foreign investment regime", 14/06/2015
There are clear benefits to integrate policies toward and implementation of foreign investment into a seamless regime, such as a ministerial-level Foreign Investment Council as the author nicely proposed. Another approach may be a national economic management council which integrate economic policies and implementation at the national level and the tasks proposed for the foreign investment council forms a part of it.
At macro level, economic textbooks say there should be optimal combination of fiscal and monetary policies to achieve most desirable outcomes. But in reality, it does not seem such coordination of those two classical Macroeconomic policies really exists in many countries. So there is a gap between theory and practice there.
Now if we treat foreign investment as something similar to government spending but differing in degrees of the host country’s direct control in the GDP equation (as part of the investment - I component), the council proposed by this article’s authors may naturally fall into the macroeconomic policies area. As a result, a national economic council would be handy to include foreign investment coordination in its tasks.
2014-02-14
Treasurer needs to act on jobless rate
Comments on Mark Kenny “Joe Hockey feels sting of shock rise
in jobless figures”, 13/02/2014, http://www.canberratimes.com.au/federal-politics/political-news/joe-hockey-feels-sting-of-shock-rise-in-jobless-figures-20140213-32ndm.html
While his rhetoric is understandable, Joe Hockey needs to recalibrate
his approach to the coming budget in the wake of significant deterioration in
the jobless rate.
Government has a duty in keeping unemployment low and fiscal
policy is a major tool in achieving that. Monetary policy is another major
macroeconomic tool in managing jobless rate and economic growth and it has done
its fair share in regard. Now it is fiscal policy that must do its fair share which requires Hockey to act sensibly.Six per cent unemployment rate is not too bad in international comparison, but it is not good at all when compared historically within Australia, if the report that it is a 10 year high is correct.
It is understandable that it would not look good for him to suddenly change what he has been arguing in terms of repairing the budget. But it is the real action in the making a good budget that counts.
On that it is hoped that Joe Hockey will not disappoint as the Treasurer.
2013-05-08
Know what they say - economists may have positive and normative analyses
Comments and rejoinders on Phil Lewis "Howard’s End: how the coalition’s last budget created the ground for the current deficit", 8/05/2013, https://theconversation.com/howards-end-how-the-coalitions-last-budget-created-the-ground-for-the-current-deficits-13848
I probably don't need to read the article to point out the central argument is wrong and totally unconvincing to politically independent and competent analysts, economists and policy makers who are not mechanical and dogmatic in their thinking.
It has been nearly 6 years since the Howard and Costello government was voted out and the current ALP government came to power. SIX YEARS!
Budget policy can change every year and the current government has had FIVE YEARS and FIVE budgets to change the course.
What has happened?
We've got huge debts and every years there were budget deficits.
Yes, the government can use various excuses, but it is not right for economists to accept any of those.
In answer to Felix's question: "Lincoln, for a self-proclaimed 'economist' to speak of 'huge debts' is a bit unimpressive - tends to make me wonder about the objectivity of your entire post."
Felix, to answer your question, firstly, I am not a self-proclaimed 'economist', but with a PhD degree in economics from the ANU. So what is your definition of economists?
Secondly, my objective is to inject some sanity into the debate. If you understand basis macroeconomics you would know that government expenditure is a policy tool to get the economy to the most desirable state and can be changed to achieve that objective. The underlying assumption is to get the budget balanced over a economic cycle.
Now it has been 5 and a half years since the current government in being control, that is how many days that the course of G could have been changed to bring the budget into balance?
Neither Rudd or Gillard have been bound by Howard/Costello policies, have they? Then why blame Howard/Costello for the current deficits 5 and a half years later?
In terms of debts, they are huge, if you looked the rate of change and the magnitudes of yearly average, aren't they?
So let not be arguing according to whether one has benefited from either side of political side and be objective and independent. AND apply a little economics, if one can.
In answer to Ted's questions "Lincoln, can you elaborate on why debts denominated in the currency over which the government has sovereignty are ever an issue?
"And could you also please elaborate on why deficits are bad for an open economy with a current account deficit and a positive savings ratio?"
Ted, firstly, government debts, like private debts, incur interest costs at least, irrespective which currency it is denominated in, not to mention situations may change in the future that even the principal of the government debts may be forced to pay or may need to pay. Currently due to very low interest rates due to the state of the international economies, the costs of interest payments for governments are relatively low compared to otherwise. Just think about the case where interest rates were as high as nearly 20% a year occurred before.
Secondly, there is an inter-generation fairness issue, not too different from leaving your children with debts or wealth. Current government debts if not paid, represent a liability for future generations, that is, our children and grand children.
Thirdly, there is a moral hazard issue here too. If everyone thinks and acts as if government debts don't matter, then what governments and politicians would do? And what are the limits to the levels of debts in that situation? And also, the current political arrangement, not only in Australia but in many countries, mean either one side of the main political streams or both have an incentive to spend beyond its means, because they don't face hard budget constraints and public debts are not their individual debts and often it is the case that a political party may get more votes if it spends more. That is not a good governing system, though there is little that we can do about it.
For the second question, it involves obviously more factors. However, the key situation in that case s the domestic savings are seems not to be enough for domestic investment needs in aggregate. Alternatively, there maybe international competitiveness issue involved, either shorter term or longer term.
In the former case, government deficits is a contributor to the imbalance between domestic savings and investment needs and competing with private investments for funds. While it is not always, but is generally the case that private investments are more efficient. Of course, there are some investments that are more suited for government to make their the private sector due to various equity considerations and administrative costs involved.
In answer to Peter's argument "Depends largely on what the debt is for surely, Lincoln.
"If we do what some European countries have done - like Greece - and use it to plug holes in the budget and to maintain unsustained living standards - then yeah Government debt puts you on the road to ruin - or the IMF which is essentially the same thing.
"But if the overwhelming bulk of debt is undertaken to invest in infrastructure - both human (schools) and physical (NBNs) and there is a reasonable prospect of these investments yielding a decent return in future then we are not simply saddling the future with our debts at all - we are providing the means of not only paying off those debts but also towards improving living standards.
"My point is that there are few absolutes in economics - few simple aphorisms or slogans - for example that surplusses are always good deficits always bad. Depends when and what for over the longer term. What the level of demand in the economy is doing. What the money is to be used for.
"And that's where governments have the inside running on the private sector - the long term. Private sector investors don't - can't - afford a long term view. Governments can and do if they have the courage. Sadly the Howard Governments didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."
Peter, you raised a good question, although the previous discussions have not gone to that far.
You are correct that there are different uses of government expenditures. However, even with your examples, one may find issues with governments debts in worthwhile causes.
For example, the school education revolution programs, one can argue that there were both design and implementation problems that some of the investments are not effective and productive, say even the state governments were trying to skip some fats out of those programs, not to mention some school halls and libraries are not necessarily what those school needed most.
From policy design the restriction of school halls and libraries was problematic. From implementation when it became clear that there were problems with those programs and that stimulus were no longer necessary, the government could have make some changes to increase the effectiveness of those spending.
For the NBN, leaving the politics aside, it is still open to debate to whether it is cost effective or not and whether it is the best course of action or not. Clearly, no CBA was done or publicly available.
Peter, for your last paragraph's mention of "the Howard government didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."
Although I am not a defender of either government, I think the future fund established by the Howard government may provide an example that does not support or is contrary to what is argued there.
I have to say that I don't know how many billions that was and whether that is significant as compared to the NBN amount, though.
I probably don't need to read the article to point out the central argument is wrong and totally unconvincing to politically independent and competent analysts, economists and policy makers who are not mechanical and dogmatic in their thinking.
It has been nearly 6 years since the Howard and Costello government was voted out and the current ALP government came to power. SIX YEARS!
Budget policy can change every year and the current government has had FIVE YEARS and FIVE budgets to change the course.
What has happened?
We've got huge debts and every years there were budget deficits.
Yes, the government can use various excuses, but it is not right for economists to accept any of those.
In answer to Felix's question: "Lincoln, for a self-proclaimed 'economist' to speak of 'huge debts' is a bit unimpressive - tends to make me wonder about the objectivity of your entire post."
Felix, to answer your question, firstly, I am not a self-proclaimed 'economist', but with a PhD degree in economics from the ANU. So what is your definition of economists?
Secondly, my objective is to inject some sanity into the debate. If you understand basis macroeconomics you would know that government expenditure is a policy tool to get the economy to the most desirable state and can be changed to achieve that objective. The underlying assumption is to get the budget balanced over a economic cycle.
Now it has been 5 and a half years since the current government in being control, that is how many days that the course of G could have been changed to bring the budget into balance?
Neither Rudd or Gillard have been bound by Howard/Costello policies, have they? Then why blame Howard/Costello for the current deficits 5 and a half years later?
In terms of debts, they are huge, if you looked the rate of change and the magnitudes of yearly average, aren't they?
So let not be arguing according to whether one has benefited from either side of political side and be objective and independent. AND apply a little economics, if one can.
In answer to Ted's questions "Lincoln, can you elaborate on why debts denominated in the currency over which the government has sovereignty are ever an issue?
"And could you also please elaborate on why deficits are bad for an open economy with a current account deficit and a positive savings ratio?"
Ted, firstly, government debts, like private debts, incur interest costs at least, irrespective which currency it is denominated in, not to mention situations may change in the future that even the principal of the government debts may be forced to pay or may need to pay. Currently due to very low interest rates due to the state of the international economies, the costs of interest payments for governments are relatively low compared to otherwise. Just think about the case where interest rates were as high as nearly 20% a year occurred before.
Secondly, there is an inter-generation fairness issue, not too different from leaving your children with debts or wealth. Current government debts if not paid, represent a liability for future generations, that is, our children and grand children.
Thirdly, there is a moral hazard issue here too. If everyone thinks and acts as if government debts don't matter, then what governments and politicians would do? And what are the limits to the levels of debts in that situation? And also, the current political arrangement, not only in Australia but in many countries, mean either one side of the main political streams or both have an incentive to spend beyond its means, because they don't face hard budget constraints and public debts are not their individual debts and often it is the case that a political party may get more votes if it spends more. That is not a good governing system, though there is little that we can do about it.
For the second question, it involves obviously more factors. However, the key situation in that case s the domestic savings are seems not to be enough for domestic investment needs in aggregate. Alternatively, there maybe international competitiveness issue involved, either shorter term or longer term.
In the former case, government deficits is a contributor to the imbalance between domestic savings and investment needs and competing with private investments for funds. While it is not always, but is generally the case that private investments are more efficient. Of course, there are some investments that are more suited for government to make their the private sector due to various equity considerations and administrative costs involved.
In answer to Peter's argument "Depends largely on what the debt is for surely, Lincoln.
"If we do what some European countries have done - like Greece - and use it to plug holes in the budget and to maintain unsustained living standards - then yeah Government debt puts you on the road to ruin - or the IMF which is essentially the same thing.
"But if the overwhelming bulk of debt is undertaken to invest in infrastructure - both human (schools) and physical (NBNs) and there is a reasonable prospect of these investments yielding a decent return in future then we are not simply saddling the future with our debts at all - we are providing the means of not only paying off those debts but also towards improving living standards.
"My point is that there are few absolutes in economics - few simple aphorisms or slogans - for example that surplusses are always good deficits always bad. Depends when and what for over the longer term. What the level of demand in the economy is doing. What the money is to be used for.
"And that's where governments have the inside running on the private sector - the long term. Private sector investors don't - can't - afford a long term view. Governments can and do if they have the courage. Sadly the Howard Governments didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."
Peter, you raised a good question, although the previous discussions have not gone to that far.
You are correct that there are different uses of government expenditures. However, even with your examples, one may find issues with governments debts in worthwhile causes.
For example, the school education revolution programs, one can argue that there were both design and implementation problems that some of the investments are not effective and productive, say even the state governments were trying to skip some fats out of those programs, not to mention some school halls and libraries are not necessarily what those school needed most.
From policy design the restriction of school halls and libraries was problematic. From implementation when it became clear that there were problems with those programs and that stimulus were no longer necessary, the government could have make some changes to increase the effectiveness of those spending.
For the NBN, leaving the politics aside, it is still open to debate to whether it is cost effective or not and whether it is the best course of action or not. Clearly, no CBA was done or publicly available.
Peter, for your last paragraph's mention of "the Howard government didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."
Although I am not a defender of either government, I think the future fund established by the Howard government may provide an example that does not support or is contrary to what is argued there.
I have to say that I don't know how many billions that was and whether that is significant as compared to the NBN amount, though.
In answer to Henry "Lincoln, please illustrate these huge debts by quoting figures and percentages of GNP etc rather than making unsubstantiated, emphatic comments. Comparative figures also are needed.
"My position is that of most economists: our debt is relatively small as a proportion of GNP."
Henry, yes you are correct if that is compared to other high debts countries in the current levels and that is clearly one way to argue it. But there are other aspects, such as rate of increase and the increased amount in a year.
Perhaps you can calculate that to substantiate I am "making unsubstantiated, emphatic comments" and to see for yourself?
In answer to Ngoc's second part "Lincoln
There are three issues in fiscal management; (i) the revenue constraint; (ii) economic efficiency of gov spending; and (iii) distributive efficiency of gov spending.
I think Prof Lewis' article focused on (ii) and (iii), that is, squandering excessive revenue in time of economic (mining) booms without paying much attention on how and where to spend, leaving bad budgetary problems in the long run, especially in downturns of the business cycle shows lack of vision. May I add here that if gov of the time reform the tax system at the beginning of the mining boom to keep a share of the excessive profits generated from minerals export sales for the people. Part of this additional revenue can be saved in income generating assets for future generations. Another part can be used to help non-mining industries where competitiveness and productivity are severely disadvantaged by the mining boom via its impacts on terms of trade, labour markets etc and to finance long awaited reforms of the education and health care systems as well as the protection of environment. The rest can be saved in gov coffer to help balance the budget when the economic downturn comes without incurring excessive debts. (That said, I think the debts you mentioned is a by-product of past budgeting practice the current gov has to bear.)
For your information, just go to ABARES statistics, get data on minerals export sales in the last 10 years and sum them up, use price elasticity also available from ABARES' various model adjust this sum, take a percentage of the adjusted sum, say between 5 and 10 per cent, then you can see how much opportunity has been missed in the last boom boom and how much harder to manage the economy in the coming years due to a faux pas in the past.
BTW, if you only use your posting name then innocent people (including me) can mistakenly say you are a 'self proclaimed economist', can't they? Anyhow, forget this and accept my thousand apologies if it is not true."
Ngoc
I really don't understand your logic and you really lost me in your arguments.
As I have mentioned earlier, I am not a defender of either government.
However, your arguments seem inconsistent and appear saying one thing is good but ignore the history. E.g. save for the future and save for downturns. Didn't the Howard government paid the debts and established the future fund with billions of dollars of money in it? Those are not save for the future and not save for the downturns? And those were done with no the new mining tax. And dare I say that money in the funds is better than money squandered in some government investments.
Those who argue that the Howard government should have far greater foresight and forecasting power than others so they could foresee things that others even couldn't see later than their time?
Is that a reasonable expectation? Isn't it saying we are not super rich because our ancestors didn't invent the computer thousands of years ago?
"My position is that of most economists: our debt is relatively small as a proportion of GNP."
Henry, yes you are correct if that is compared to other high debts countries in the current levels and that is clearly one way to argue it. But there are other aspects, such as rate of increase and the increased amount in a year.
Perhaps you can calculate that to substantiate I am "making unsubstantiated, emphatic comments" and to see for yourself?
In answer to Ngoc's second part "Lincoln
There are three issues in fiscal management; (i) the revenue constraint; (ii) economic efficiency of gov spending; and (iii) distributive efficiency of gov spending.
I think Prof Lewis' article focused on (ii) and (iii), that is, squandering excessive revenue in time of economic (mining) booms without paying much attention on how and where to spend, leaving bad budgetary problems in the long run, especially in downturns of the business cycle shows lack of vision. May I add here that if gov of the time reform the tax system at the beginning of the mining boom to keep a share of the excessive profits generated from minerals export sales for the people. Part of this additional revenue can be saved in income generating assets for future generations. Another part can be used to help non-mining industries where competitiveness and productivity are severely disadvantaged by the mining boom via its impacts on terms of trade, labour markets etc and to finance long awaited reforms of the education and health care systems as well as the protection of environment. The rest can be saved in gov coffer to help balance the budget when the economic downturn comes without incurring excessive debts. (That said, I think the debts you mentioned is a by-product of past budgeting practice the current gov has to bear.)
For your information, just go to ABARES statistics, get data on minerals export sales in the last 10 years and sum them up, use price elasticity also available from ABARES' various model adjust this sum, take a percentage of the adjusted sum, say between 5 and 10 per cent, then you can see how much opportunity has been missed in the last boom boom and how much harder to manage the economy in the coming years due to a faux pas in the past.
BTW, if you only use your posting name then innocent people (including me) can mistakenly say you are a 'self proclaimed economist', can't they? Anyhow, forget this and accept my thousand apologies if it is not true."
Ngoc
I really don't understand your logic and you really lost me in your arguments.
As I have mentioned earlier, I am not a defender of either government.
However, your arguments seem inconsistent and appear saying one thing is good but ignore the history. E.g. save for the future and save for downturns. Didn't the Howard government paid the debts and established the future fund with billions of dollars of money in it? Those are not save for the future and not save for the downturns? And those were done with no the new mining tax. And dare I say that money in the funds is better than money squandered in some government investments.
Those who argue that the Howard government should have far greater foresight and forecasting power than others so they could foresee things that others even couldn't see later than their time?
Is that a reasonable expectation? Isn't it saying we are not super rich because our ancestors didn't invent the computer thousands of years ago?
2013-05-03
What is the basis for 'global macroeconomic balance'?
Comments on Hiro Ito, PSU, and Ulrich Volz “Correcting
China’s macroeconomic imbalances”, 3/05/2013, http://www.eastasiaforum.org/2013/05/02/correcting-chinas-macroeconomic-imbalances-2/
As an economist, I may ask some questions in this area as
follows.
First, how global macroeconomic imbalance and rebalancing
are and should be defined? What is the theoretic foundation of global
macroeconomic balancing?
Second, isn't or is it the case that imbalance and
rebalancing has been used as some trade protection and an excuse of some
countries poor macro and micro economic management that had laid the foundation
for the GFC?
Third, the authors state the following: "China is one
country with a long-standing current account surplus, and this surplus derives
from microeconomic or sectorial distortions that have led to excessive saving.
In particular, underdeveloped public social safety-net systems and a repressed
financial sector are commonly blamed for excessive saving."
Many countries have even poor and more underdeveloped public
social safety-net systems and a repressed financial sector than China has had
and they don't necessarily have trade surplus. So why should China, a
developing country, have the same gold plated social security as some developed
countries have? Further, even developed countries have different standards of
social security, and some countries with higher standard may have seen either some budgetary or economic growth/competitive issues that they will have to
deal with sooner not later. Aren't current euro zone woes a lesson in too high social security? So why should China simply fall into those high
social security traps that burdens economic growth, efficiency and
productivity?
Fourth, while it is true that China's interest rate control
depress deposit rate and is an effective tax on savings, liberalising financial
market is likely to actually lead even more savings and how that can contribute
to address the high savings that some people are attributing to a cause of
global macroeconomic imbalance?
I think economists need to stand back from political debates
and think rationally rather than simply follow some politicians' arguments.
Economists should recognise that people have different
savings and consumption preferences and those may change cross countries,
regions and families and vary according stages of economic development.
We need a “global model “ to show the benefits and costs of
balance and imbalance. Without a transparent model, all the arguments can be
very confusing and many arguments may sound ‘right’ but actually be wrong.
As long as there are those differences and people are
divided into countries, it is irrational and wrong to demand every country
should have current account balance.
Imbalance is normal and balance is and should be rare.
But globally, there is no imbalance - it is all balanced
out.
2013-01-10
Effect of globalisation on the supply side
Comments on Stephen Grenville “Why forecasting has broken down”, 10/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/Global-economy-fiscal-policy-forecasting-models-ec-pd20130108-3R4MS?OpenDocument
I think the reasons why those international forecasters consistently got their forecasts wrong you mentioned are correct ones, though there might be more than those.
I think there might be a different effect of globalisation on the aggregate demand and supply of an economy.
The conventional frameworks for macroeconomics may suffer from lacking a closer look at the effect of globalisation on the supply side in the context of a serious supply side shock in the wake of the GFC and the ensuing various other related government debts and fiscal problems.
Let's say various macro policies do have an effect on increasing the aggregate demand of an economy, but that may not necessarily restore the domestic supply side when international supply can substitute domestic supply due to their advantages in being unaffected by the supply side forces that exist in the more advanced economies such as the US and EU.
This increased effect of globalisation and trade substitution on the side supply may suggest that the full recovery of the advanced economies to their normal growths may take longer time even though the macroeconomic policy particularly the monetary policy is much more accommodating now as compared to the 1930s.
Unless the governments can come up with new ways to restore the domestic supply side of an economy, the road to recovery will be long and hard for those economies.
I think the reasons why those international forecasters consistently got their forecasts wrong you mentioned are correct ones, though there might be more than those.
I think there might be a different effect of globalisation on the aggregate demand and supply of an economy.
The conventional frameworks for macroeconomics may suffer from lacking a closer look at the effect of globalisation on the supply side in the context of a serious supply side shock in the wake of the GFC and the ensuing various other related government debts and fiscal problems.
Let's say various macro policies do have an effect on increasing the aggregate demand of an economy, but that may not necessarily restore the domestic supply side when international supply can substitute domestic supply due to their advantages in being unaffected by the supply side forces that exist in the more advanced economies such as the US and EU.
This increased effect of globalisation and trade substitution on the side supply may suggest that the full recovery of the advanced economies to their normal growths may take longer time even though the macroeconomic policy particularly the monetary policy is much more accommodating now as compared to the 1930s.
Unless the governments can come up with new ways to restore the domestic supply side of an economy, the road to recovery will be long and hard for those economies.
2012-12-04
Theories and practices of economics with innovation in between
Comments on Shaun Vahey "Academics v practitioners: split views within the Shadow Board", 4/12/2012, https://theconversation.edu.au/academics-v-practitioners-split-views-within-the-shadow-board-11110
The views of both practioning and academic economists are "should be", though they may have different perspectives in their thinking.
The academic economists there may have a too theoretic focused and may be a little too rigid and inflexible. In their mind, it is all theories that matter. If it is not in accordance to the theories, they cannot be. But the Fed has operated on a non conventional basis for quite sometime and that points out the potential shortcomings with the academic macroeconomists (their thinking).
Practitioning economists may be too affected by the markets.
The views of both practioning and academic economists are "should be", though they may have different perspectives in their thinking.
The academic economists there may have a too theoretic focused and may be a little too rigid and inflexible. In their mind, it is all theories that matter. If it is not in accordance to the theories, they cannot be. But the Fed has operated on a non conventional basis for quite sometime and that points out the potential shortcomings with the academic macroeconomists (their thinking).
Practitioning economists may be too affected by the markets.
2012-07-16
No cause for pessimism for the Australian economy
Comments on Henry Ergas “Policies
standing in the way of management can do great damage”, 16/07/2012,
http://www.theaustralian.com.au/news/opinion/policies-standing-in-the-way-of-management-can-do-great-damage/story-fn7078da-1226426636726
Ergas has made an important
contribution to the current debates on the multi-speed economy
associated with the mining boom and on productivity.
The latter first. I have made a comment
on the shortcomings of the viewpoint by Gruen et al that poor manager
performance was the main reasons for the latest productivity slow
down, by referring the charts consisting of one cross section
international data with a time seires of Australia's productivity.
That mix is problematic, because it says little how the international
comparison has changed over time. Further, it is doubtful that
international productivity would have performed better in recent
years over the pre-GFC period.
For Henry's viewpoint on the Dutch
Disease in the Australian economy, although it is correct to say that
adjustments are inevitable when mining booms as a result of increases
in international demand for mineral and a consequential rise of the
Australian dollar, the view that no policies can offset or lessen the
adverse impact of the mining boom on other trade exposed sectors is
likely to be false.
For one thing, his mining tax design
was one of policies that could just do that if the policy was
designed and implemented properly.
Further, monetary policies could be
designed in such a way that lowers both the demand of Australia for
international capitals and the Australian dollar.
A fine combination of fiscal and
monetary policies together would make the adjustments much less
painful than they have been.
2012-07-04
What is the criterion for economic balance or not?
Comments on Ligang Song and Huw McKay "Rebalancing the Chinese economy to sustain long-term growth", July 3rd, 2012, http://www.eastasiaforum.org/2012/07/03/rebalancing-the-chinese-economy-to-sustain-long-term-growth/
While it popular to say that the Chinese economy is unbalanced, it seems not convincing and rational basis has been presented to put it beyond dispute or doubt, except to use the facts of China has surplus in trade and its investment/consumption shares are high/low.
What economic models would demonstrate that balanced trade is always optimal and that a lower/higher investment/consumption are always optimal over the course of economic development and when people and nations clearly can have different preferences?
Further, investment is absolutely necessary for economic growth, especially for developing countries which have relatively low physical capitals and inadequate infrastructure and low urbanisation. Besides, better technologies are embedded in investment
Let’s look at some of the arguments in this article. It argues “Although the non-state sector accounted for the majority of industrial output in 2007, the SOEs accounted for more than 53 per cent of non-agricultural fixed investment while employing only 13 per cent of the total workforce. These discrepancies reflect the fact that SOEs operate in capital-intensive heavy industries. But they also suggest an inefficient allocation of capital across sectors and underline that there are still large distortions in China’s factor markets.”
While it popular to say that the Chinese economy is unbalanced, it seems not convincing and rational basis has been presented to put it beyond dispute or doubt, except to use the facts of China has surplus in trade and its investment/consumption shares are high/low.
What economic models would demonstrate that balanced trade is always optimal and that a lower/higher investment/consumption are always optimal over the course of economic development and when people and nations clearly can have different preferences?
Further, investment is absolutely necessary for economic growth, especially for developing countries which have relatively low physical capitals and inadequate infrastructure and low urbanisation. Besides, better technologies are embedded in investment
Let’s look at some of the arguments in this article. It argues “Although the non-state sector accounted for the majority of industrial output in 2007, the SOEs accounted for more than 53 per cent of non-agricultural fixed investment while employing only 13 per cent of the total workforce. These discrepancies reflect the fact that SOEs operate in capital-intensive heavy industries. But they also suggest an inefficient allocation of capital across sectors and underline that there are still large distortions in China’s factor markets.”
2012-07-02
Hope for a reduction in rates by RBA on 3 July 2012
Comments on Shaun Vahey ", Keep rates on hold, says CAMA shadow board", 2/07/2012, https://theconversation.edu.au/keep-rates-on-hold-says-cama-shadow-board-8031
From aggregate GDP point of view and the housing market, rates should be held unchanged.
However, there will not be too large risks should rates go down a bit, given that mining investments are unlikely to be affected by RBA overnight rates and a lower rate should provide a boost to the other sluggish sectors and states that have struggled.
The difficulty is asset markets, especially housing market which is clearly still high as compared to other advanced countries. Stock market in Australia is probably undervalued as opposed to overvalued, and should not be a problem.
But it is difficult for the RBA to influence the housing market without significantly hurting the real economy.
Australia's interest rates are relatively high as compared to other advanced economies and we are having a multi-speed economy.
I'd hope there will be a 25 base points reduction on Tuesday.
2011-12-30
Economic ideology and reality
Comments on TONY MAKIN “Fiscal stimulus, not Europe, to blame for economy”, 30/12/2011, http://www.theaustralian.com.au/national-affairs/opinion/fiscal-stimulus-not-europe-to-blame-for-economy/story-e6frgd0x-1226232857308
While it is ideally good that governments run balanced budgets, is there a point of process optimisation that may give rise to budget deficits and surplus in some years?
While monetary policy has been argued by many economists to be used as the macroeconomic policy tool to regulate the economy, haven't we already seen that monetary policy has its limitation as well, especially during the GFC 1, where interest rates were at or near 0 and economies were still struggling even with strong fiscal stimulus in the US and Europe?
Why do some economists only think along a particular line of thought with little regard to the reality and to whether it is working or not?
Besides, how can the traditional monetary policy along to deal with the two speed or patch work economy as Australia has witnessed with mining booms?
2011-10-29
Better mix of macroeconomic policies needed
Comments on Bill Evans “WEEKEND ECONOMIST: Racing to a rate cut”, 29/10/2011, http://www.businessspectator.com.au/bs.nsf/Article/Reserve-Bank-November-Meeting-rate-cut-25-bps-pd20111028-N39US?OpenDocument&src=rot
It is interesting that both official and market interest rates in Australia are much much higher than in most advanced economies.
While one might argue that our economy is also much better than theirs, simply doing it masks a difficult policy questions. That question is: how can monetary and fiscal policies be more closely coordinated, as generally implied in economics textbooks, to achieve better and most desirable results.
I think fiscal policy should do much more to encourage people to work in regions and areas where labour shortage are the most severe, such as the fast lane areas of the so called 2 speed economy.
Taxation policy should be adjusted to do the job to give people more incentives to work in those region and areas.
Fiscal policy can be more flexible to target regions and industries sectors, while leaving the monetary policy to accommodate the whole economy.
I think there is a need to establish a national economic policy commission, so it can recommend to the government and the RBA on the best mix of the monetary and fiscal policies to achieve the best national outcomes and to benefit the consumers more, such as lower interest burdens on mortgages and other borrowings.
2011-04-21
Time to rethink exchange rate regime
Comments on “Aust dollar clears 107 US cents”, see NEWS – Currencies, http://www.businessspectator.com.au/bs.nsf/Article/Australian-dollar-clears-107-US-cents-record-high-pd20110421-G4SRZ?OpenDocument&src=hp2
Two points: 1. the $A has entered uncharted territory and no one knows how high it will go in the next year or so. It may go as high as $US1.10, 1.20 or even 1.50, though few people would dare to say the last figure. The point is no one is sure about it.
2. Given the pervasive effects of the high $A, is there a case for some RBA intervention to keep it lower? Why does the RBA continue its conventional operations and stay away from intervention while the US Fed has been doing unconventional quantitative easing? Isn't time for the RBA to catch up with the changed international finance and monetary politics?
I think those are legitimate questions to ask and the RBA needs to have a serious review of what is best for Australia, getting out of its comfort zone of conventional thinking and conventional operating.
While free exchange rate has been the norm and dominate economic theory, excessive movements and fluctuations of a currency against others, especially the ones that are having a big effect on the country such as the $US for Australia given that many commodities are priced in $US, may not be optimal or desirable.
If the GFC has promoted a rethink of macroeconomic theories, a thorough review of international exchange rate regimes is also overdue and equally important.
Two points: 1. the $A has entered uncharted territory and no one knows how high it will go in the next year or so. It may go as high as $US1.10, 1.20 or even 1.50, though few people would dare to say the last figure. The point is no one is sure about it.
2. Given the pervasive effects of the high $A, is there a case for some RBA intervention to keep it lower? Why does the RBA continue its conventional operations and stay away from intervention while the US Fed has been doing unconventional quantitative easing? Isn't time for the RBA to catch up with the changed international finance and monetary politics?
I think those are legitimate questions to ask and the RBA needs to have a serious review of what is best for Australia, getting out of its comfort zone of conventional thinking and conventional operating.
While free exchange rate has been the norm and dominate economic theory, excessive movements and fluctuations of a currency against others, especially the ones that are having a big effect on the country such as the $US for Australia given that many commodities are priced in $US, may not be optimal or desirable.
If the GFC has promoted a rethink of macroeconomic theories, a thorough review of international exchange rate regimes is also overdue and equally important.
2010-09-23
Issues of conventional macroeconomic policy
Comments on Andrew Sheng “US, Japan and EU monetary policy: Monkeying with interest rates”, 22/09/2010, http://www.eastasiaforum.org/2010/09/22/us-japan-and-eu-monetary-policy-monkeying-with-interest-rates/
While Hoenig's frank and realistic assessment of the current dilemma of excessive low interest rates is nice, it is not clear his prescription is a credible and better alternative within the current set of policy tools.
Any monetary policy by changing interest rate will have an effect on inter-temporary allocative efficiency and equity.
However, the current more pressing issue in the US is how to solve the contemporary issue of resources allocation when there is high unemployment as well as under-used capital capacity.
It seems there is virtually no explicit framework to deal with these issues concurrently, in a way that can show what overall the best trade off is.
Leaving that aside, the Japanese experience of lost decade or decades is more terrifying if that were to be repeated in the US.
If one cannot survive now, what is the use to consider tomorrow? Just as Keynes said, in the long run we are all dead.
Economists may need to come up with more credible and effective solutions. This is an efficiency issue for economists!
PS: The Japanese experience, if it becomes more wide spread, indicates the ineffectiveness of current macroeconomic policies in dealing with such a “balance sheet recession” when it occurs and the consequences of conventional macroeconomic policy in preventing it from occurring in the first place.
While Hoenig's frank and realistic assessment of the current dilemma of excessive low interest rates is nice, it is not clear his prescription is a credible and better alternative within the current set of policy tools.
Any monetary policy by changing interest rate will have an effect on inter-temporary allocative efficiency and equity.
However, the current more pressing issue in the US is how to solve the contemporary issue of resources allocation when there is high unemployment as well as under-used capital capacity.
It seems there is virtually no explicit framework to deal with these issues concurrently, in a way that can show what overall the best trade off is.
Leaving that aside, the Japanese experience of lost decade or decades is more terrifying if that were to be repeated in the US.
If one cannot survive now, what is the use to consider tomorrow? Just as Keynes said, in the long run we are all dead.
Economists may need to come up with more credible and effective solutions. This is an efficiency issue for economists!
PS: The Japanese experience, if it becomes more wide spread, indicates the ineffectiveness of current macroeconomic policies in dealing with such a “balance sheet recession” when it occurs and the consequences of conventional macroeconomic policy in preventing it from occurring in the first place.
2010-08-13
Inconsistent macroeconomics
Comments on Yiping Huang “Focus upon the Chinese yuan on both sides of the Atlantic”, 12/08/2010, http://www.eastasiaforum.org/2010/08/12/focus-upon-the-chinese-yuan-on-both-sides-of-the-atlantic/
The point that PBOC should shift focus on to the basket of currencies from the $US is excellent. In fact, China should be much more transparent on the basket of currencies the yuan is managed to be pegged to.
It should publish the weight of each currency in the basket the yuan pegs to, at least the framework how it works or the central bank manage it. It is hard to understand why that can't or shouldn't be done.
While official statistics shows inflation has been low in China, has that been consistent with the reality and people's experiences? It is highly doubtful probably. It is likely that the real story about the Chinese real exchange may be different from the official statistics tells, with significant real appreciation than its nominal appreciation has suggested.
I would be very cautious in using deliberately higher inflation as a tool for exchange rate adjustment, because that is very dangerous with playing of expectations on inflation.
Of course, 1% annual inflation would be low, especially in the context of high economic growth. If that was true, it would mean there could be room to allow a modest inflation target.
An inherent inconsistency in macroeconomics is the policy for domestic price stability and the wild swings shown in international exchange rate market under the flexible exchange regime. Economists do not seem to have a consistent framework to deal with both domestic and international macroeconomic stabilities.
It is the same issue of market and the management of aggregate demand and supply, albeit with international borders involved.
Why is that difficult to do for managing international issues?
That is question economists have to realise, ask and answer.
Further, they need to come up with a satisfactory solution.
It should not be too difficult task for the economic profession.
The point that PBOC should shift focus on to the basket of currencies from the $US is excellent. In fact, China should be much more transparent on the basket of currencies the yuan is managed to be pegged to.
It should publish the weight of each currency in the basket the yuan pegs to, at least the framework how it works or the central bank manage it. It is hard to understand why that can't or shouldn't be done.
While official statistics shows inflation has been low in China, has that been consistent with the reality and people's experiences? It is highly doubtful probably. It is likely that the real story about the Chinese real exchange may be different from the official statistics tells, with significant real appreciation than its nominal appreciation has suggested.
I would be very cautious in using deliberately higher inflation as a tool for exchange rate adjustment, because that is very dangerous with playing of expectations on inflation.
Of course, 1% annual inflation would be low, especially in the context of high economic growth. If that was true, it would mean there could be room to allow a modest inflation target.
An inherent inconsistency in macroeconomics is the policy for domestic price stability and the wild swings shown in international exchange rate market under the flexible exchange regime. Economists do not seem to have a consistent framework to deal with both domestic and international macroeconomic stabilities.
It is the same issue of market and the management of aggregate demand and supply, albeit with international borders involved.
Why is that difficult to do for managing international issues?
That is question economists have to realise, ask and answer.
Further, they need to come up with a satisfactory solution.
It should not be too difficult task for the economic profession.
2010-05-23
Why do economists prefer monetary to fiscal policy?
I was always puzzled by the fact that many economists prefer using monetary policy to manage the economy to using fiscal policy to counter cyclic activities when I was learning economics. I had thought that fiscal policy could be tailed much more flexibly to suit different situations and needs, while monetary policy applies to all business, industries and households indiscriminately.
Over the last two and half years, I gradually realised the main reasons why many economists prefer that.
Governments are not as pure as people think and are politically affected in decision making. In that process, political considerations as opposed to national interests and influences of different interests groups can compromise the quality of fiscal policy to such a degree that it is ineffective and inefficient.
Incompetency by governments also plays a role, especially when they try to do different things for which they have little expertise.
Wastes can occur at an alarming scale, such as the home insulation program and the building the education revolution program in Australia over the last two years.
The end results can be the costs of fiscal policy may outweigh its benefits.
On the other hand, monetary policy has a simple objective, less politically affected and easier to implement.
Over the last two and half years, I gradually realised the main reasons why many economists prefer that.
Governments are not as pure as people think and are politically affected in decision making. In that process, political considerations as opposed to national interests and influences of different interests groups can compromise the quality of fiscal policy to such a degree that it is ineffective and inefficient.
Incompetency by governments also plays a role, especially when they try to do different things for which they have little expertise.
Wastes can occur at an alarming scale, such as the home insulation program and the building the education revolution program in Australia over the last two years.
The end results can be the costs of fiscal policy may outweigh its benefits.
On the other hand, monetary policy has a simple objective, less politically affected and easier to implement.
2010-02-15
Responsding IMF reviews of macro policy framework
Comments on “IMF Draws Lessons from the Crisis, Reviews Macro Policy Framework”, 12/02/2010, by iMFdirect, http://blog-imfdirect.imf.org/2010/02/12/imf-draws-lessons-from-the-crisis-reviews-macro-policy-framework/
IMF has got its policy recommendations wrong so many times, especially in relation to crises, re the Asian financial crisis and the recent financial and economic ones.
Now IMF is talking nonsense again in that paper!
For one thing, countries are different in so many ways and as a result, different macroeconomic settings are required for different circumstances. Why is IMF advocating an approach of one-size-fits-all to inflation targets? It just lacks common sense!
Second, there are other macro policy instruments that can be used in case of the so-called liquidity trap or zero or near zero official interest rate. Why introducing additional costs unnecessarily as a means to deal with a situation that can be better dealt with using other means?
Has IMF considered any cost-benefit effects of the costs of permanently higher inflation and the potential benefits in the context that there are other policy tools available?
IMF has been out of touch with reality and is now even more out of touch.
It appears to be a panic response to its past failures in policy recommendations.
That will not improve but further harm its standing.
One has to wonder what is the use for such an ineffectual and harmful international organisation that is funded by world taxpayers.
IMF has got its policy recommendations wrong so many times, especially in relation to crises, re the Asian financial crisis and the recent financial and economic ones.
Now IMF is talking nonsense again in that paper!
For one thing, countries are different in so many ways and as a result, different macroeconomic settings are required for different circumstances. Why is IMF advocating an approach of one-size-fits-all to inflation targets? It just lacks common sense!
Second, there are other macro policy instruments that can be used in case of the so-called liquidity trap or zero or near zero official interest rate. Why introducing additional costs unnecessarily as a means to deal with a situation that can be better dealt with using other means?
Has IMF considered any cost-benefit effects of the costs of permanently higher inflation and the potential benefits in the context that there are other policy tools available?
IMF has been out of touch with reality and is now even more out of touch.
It appears to be a panic response to its past failures in policy recommendations.
That will not improve but further harm its standing.
One has to wonder what is the use for such an ineffectual and harmful international organisation that is funded by world taxpayers.
2009-11-06
Back to the future - manage prosperity
Comments on Glenn Stevens “Prosperity isn’t easy”, 6/11/2009, http://www.theaustralian.com.au/news/opinion/prosperity-isnt-easy/story-e6frg6zo-1225794833992
Glenn Stevens is the governor of the Reserve Bank of Australia. He starts with:
“THE issue before us is not how to get on to the road to recovery; we are already on it. The question, rather, is how to make sure that the road to recovery will connect to the road to prosperity.
Unless we are prepared to accept it has all been an incredible coincidence, we have to ask why things turned out that way.
It wasn't just that China returned quickly to growth. Equally important were other factors, including the relative strength of the financial sector, the economy's flexibility and the willingness and scope to change macro-economic policy.
Those things were not accidents. Financial resilience resulted from sensible management by financial institutions and careful regulation on the part of the prudential supervisor.”
This is by far the most objective and balanced economic analysis that I have seen in Australian "officials" and economic advisors.
I agree totally with Stevens' analysis.
The only thing that I would like to add is that beyond the normal macroeconomic policies needed to manage the next boom in our prosperity, Australia needs to pay attention to how to channel the proceeds from the prosperity to further enhance productivity and economic returns in other sectors beyond mining as well.
Only in that way, the boom in prosperity associated with mining will be long lasting and sustainable into the future.
By the way, what Stevens' first paragraph says just makes a mockery of the organisers of the meeting in Melbourne called "The road to recovery" where Stevens delivered his speech.
It is silly to think in terms of the road to recovery now in Australia. It simply ignores the reality.
Guess what? The Federal Treasurer also gave a speech at that meeting!
What a contrast!
Another high profile speaker is the chairman of the Productivity Commission. I might read his speech and might provide some comments on that too.
Glenn Stevens is the governor of the Reserve Bank of Australia. He starts with:
“THE issue before us is not how to get on to the road to recovery; we are already on it. The question, rather, is how to make sure that the road to recovery will connect to the road to prosperity.
Unless we are prepared to accept it has all been an incredible coincidence, we have to ask why things turned out that way.
It wasn't just that China returned quickly to growth. Equally important were other factors, including the relative strength of the financial sector, the economy's flexibility and the willingness and scope to change macro-economic policy.
Those things were not accidents. Financial resilience resulted from sensible management by financial institutions and careful regulation on the part of the prudential supervisor.”
This is by far the most objective and balanced economic analysis that I have seen in Australian "officials" and economic advisors.
I agree totally with Stevens' analysis.
The only thing that I would like to add is that beyond the normal macroeconomic policies needed to manage the next boom in our prosperity, Australia needs to pay attention to how to channel the proceeds from the prosperity to further enhance productivity and economic returns in other sectors beyond mining as well.
Only in that way, the boom in prosperity associated with mining will be long lasting and sustainable into the future.
By the way, what Stevens' first paragraph says just makes a mockery of the organisers of the meeting in Melbourne called "The road to recovery" where Stevens delivered his speech.
It is silly to think in terms of the road to recovery now in Australia. It simply ignores the reality.
Guess what? The Federal Treasurer also gave a speech at that meeting!
What a contrast!
Another high profile speaker is the chairman of the Productivity Commission. I might read his speech and might provide some comments on that too.
2009-09-15
Economists need to revisit the rational and efficient market assumption
Comments on Alan Kohler “The Lehman lesson is ongoing”, 14/09/2009, http://www.businessspectator.com.au/bs.nsf/Article/The-Lehman-lesson-is-ongoing-pd20090914-VUSXM?OpenDocument&src=sph
I totally agree with you on that "it’s imperative that economists do the same and come up with a new theory that accepts that economies are run by flawed humans and that they are buffeted by a financial system that is subject to the madness of crowds."
I also agree with you on that "Macroeconomists have suffered a terrible blow to their confidence", except some small handful exceptionally strong Keynesians.
The rational and efficient market assumption just blinded too many economists and diverted too much resource of economic research and policy research away from studying the real market and policies that could have avoided the financial and economic crises.
Economists need to correct that.
I totally agree with you on that "it’s imperative that economists do the same and come up with a new theory that accepts that economies are run by flawed humans and that they are buffeted by a financial system that is subject to the madness of crowds."
I also agree with you on that "Macroeconomists have suffered a terrible blow to their confidence", except some small handful exceptionally strong Keynesians.
The rational and efficient market assumption just blinded too many economists and diverted too much resource of economic research and policy research away from studying the real market and policies that could have avoided the financial and economic crises.
Economists need to correct that.
2009-09-05
Australia should continue its economic reforms
Comments on Michael Stutchbury “How we beat the recession”, 5/09/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/how_we_beat_the_recession/
Australia has benefited from the successful reforms from the previous successive governments, as well as China boom.
We have been able to weather the most severe world recession in many decades thanks to the past successes.
Macroeconomic policies, both monetary and fiscal, have played a useful role and contributed. Both the government and RBA should be congratulated, although the government should not over claim credits.
We should continue economic reforms to raise productivity and to stay in the front of world frontier.
Industrial relations changes are an unfinished business. The Rudd/Gillard government needs a strategy to move beyond its current rewriting of the IR laws after the next election if it retains the government, as it is expected now. There should be no complacency about that.
Relations with Asia especially with China also need to be attended closely.
Australia has benefited from the successful reforms from the previous successive governments, as well as China boom.
We have been able to weather the most severe world recession in many decades thanks to the past successes.
Macroeconomic policies, both monetary and fiscal, have played a useful role and contributed. Both the government and RBA should be congratulated, although the government should not over claim credits.
We should continue economic reforms to raise productivity and to stay in the front of world frontier.
Industrial relations changes are an unfinished business. The Rudd/Gillard government needs a strategy to move beyond its current rewriting of the IR laws after the next election if it retains the government, as it is expected now. There should be no complacency about that.
Relations with Asia especially with China also need to be attended closely.
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