Donal Curtin

Donal Curtin is a macroeconomist (former chief economist for a big bank), writer (six years as a financial journalist with Euromoney, award-winning economics columnist, blogger), economic regulator (12 years on the Commerce Commission). He has an economics consultancy based in Auckland and blogs for The Dismal Science. Donal is on Twitter @donal_curtin

Lifestyles: our beliefs and behaviours - The Dismal Science

Aug 26, 2015

Bryce Edwards’ Twitter feed pointed me towards an interesting new piece of research from the Lifestyles Research Group at the University of Otago – ‘Change, Challenge and Choice: A New Zealand Consumer Lifestyles Study’. It’s an interesting insight into our collective beliefs and behaviours, and rings true, sometimes almost archetypically: I was amused to see that one of the statements New Zealanders most disagree with is “I keep my wardrobe up to date with fashion”. This is the sixth instalment of what is now becoming a pretty impressive longitudinal survey (dating back to 1979). The guts of it is a derivation of seven different consumer segments, based on cluster analysis of quite a large survey sample (2,036) and a large number of questions (almost 600). Here is the key result: there’s more detail on each segment in the … Read More

29th is not good enough – neither is 27th - The Dismal Science

Aug 07, 2015

I'd no sooner posted a piece on our relatively poor infrastructure than I discovered that Ireland's National Competitiveness Council had come out with its latest annual assessment (pdf) of Ireland's competitiveness.

It picked up on exactly the same point: as it happens, Ireland scores almost exactly the same as us (a global 27th for them, a global 29th for us) on the perceived quality of infrastructure. Here's how the Irish showed the picture from their perspective: they happened to include us in their graph.

It's interesting to see that the rating of Ireland's infrastructure has improved, for a mixture of good and unfortunate reasons: "Perceptions about the quality of Ireland’s infrastructure have improved since 2010, reflecting both the impact of a decade or more of investment, and the reduced capacity constraints as a result of the economic downturn" (all quotes are from p17 of the report). Ours is also better than five years ago, but only slightly. Despite the Irish improvement, "Ireland, however, still lags behind the OECD average and scores significantly less than leading performers", and the same is true for us.

The Irish policy conclusion, which I think applies with equal force to us, was
As the economy continues to improve, further investment growth is forecast for 2015. However,projected public investment levels are insufficient to address the emerging infrastructural needs of a growing economy and population, particularly as a significant proportion of public funds will be absorbed in maintaining the existing stock, leaving less funding available for new investment. While recognising the importance of maintaining sustainable public finances, further additional targeted investment is urgently required to address constraints which could undermine the economy’s growth prospects, dampening productivity growth, increasing costs, and weakening Ireland’s attractiveness as an investment location (for both foreign and indigenous investors). To achieve the improvements required, prioritisation will be required such that over the medium term, investment is directed to those areas of the economy which can have the greatest impact upon competitiveness. It is critically important to put in place the appropriate policy and regulatory frameworks to facilitate this targeted approach.
Speaking of those "appropriate policy and regulatory frameworks", I discovered from Joel Mokyr's history of the Industrial Revolution, The Enlightened Economy, that the Birmingham Canal was authorised by Act of Parliament in 1768 and completed in 1772. I looked it up here: it was some 22.5 miles (36 kilometres) long, and took only 13 months from the first public meeting to regulatory approval. The first 10 miles were built in only 18 months, and the whole thing from approval to completion took four and a half years.

I seriously doubt we could match that today.

Gini needs friends - The Dismal Science

Jul 10, 2015

I've been away at the NZ Association of Economists' annual shindig - full conference programme here, with links to abstracts and to quite a few of the full papers, including my own one on why our Commerce Commission should have the right, and obligatio...

Bernanke on economics - The Dismal Science

Jul 04, 2015

There's been quite a lot of coverage of former Fed chairman Ben Bernanke starting up a blog and a Twitter account. Someone - apologies, can't remember who - resurrected his 2013 speech, 'The Ten Suggestions', at the Baccalaureate Ceremony at Princeton,...

Policymaking when you don’t know where you are - The Dismal Science

Mar 11, 2015

Last week the Reserve Bank published the latest in its Analytical Note series, 'The Reserve Bank’s method of estimating “potential output”' (pdf here). If you're into macroeconomics in general or monetary policy in particular, you probably don't need your hand held about what potential output, and the output gap, are, but in case it's passed you by, the Note explains that

Potential output can be thought of as the level of activity that the economy can sustain without causing inflation to rise or fall, all else equal (for example, assuming no shock, such as big changes in oil prices). By implication, the difference between actual and potential output (the output gap) indicates the extent of excess demand, and therefore the direction and magnitude of this source of inflation pressure
This latest Note, like its predecessors, is a useful resource: I could see undergraduate economics courses using it, and maybe  the more with-it secondary school classes (yes, there are some equations, but they're no biggie). There's also a one-page 'non-technical summary' at the front, so if you're the proverbial intelligent lay person that's for you.

The Note has two graphs which I thought were interesting. The first is a straightforward graph of where the output gap has been, where it is currently, and where the Bank thinks it's headed over the next year or two. The implication would be that the Bank needs to be watchful about potential inflationary pressures down the track, though (a) how it would tighten policy without causing the Kiwi $ to head into the stratosphere isn't obvious and (b) it's possible that inflation, for some reason we don't yet fully appreciate, isn't picking up the way it used to when economies run hot (it's a major policy conundrum in the US at the moment)..

This second one, for me, was highly thought-provoking. It shows what the output gap in early 2012 was estimated to be at the time, and how that estimate later changed as revised GDP data came to hand. Originally, the economy was thought to be running well below capacity; as more complete data came available, it became apparent that the extent of spare capacity was nowhere near as large, and even that the economy might have been running on the hot side, a bit above capacity; and on the latest data we're back to an assessment that it was running slightly on the slow side. As it happens, no harm was done - policy in early 2012 was kept at its supportive post-earthquake level, which turned out to be an okay stance to have taken - but you can see the potential for policy mistakes.

What are some of the other implications?

I'd be more charitable when assessing the performance of central bank Governors. There are plenty of trigger-happy people out there with a Gotcha! mentality: the reality is that monetary policymakers are likely doing their best in an environment of very considerable uncertainty about where are are now, let alone where we are heading next. Ditto Finance Ministers, who face exactly the same issue of assessing where we are in the economic cycle.

The uncertainty also suggests (everything else being equal) that policy is better adjusted gradually rather than in big dollops. Somewhere around the internet in the past few days I saw the analogy of driving in the dark beside a cliff: if you're not sure where you are, it's probably best to drive slowly until you get a better idea. Even if you do become easy game for the Gotcha! brigade, who will be saying you've got "behind the curve".

You'd clearly want to be careful about how much reliance you place on measures like the output gap, and you'd want to be supplementing it with all the other evidence you can garner about how hot or cold the economy seems to be (which is why the RBNZ has all those meetings with companies and organisations in between its policy decisions). It's also why I think business opinion surveys and their ilk are so valuable.

And then there's that problem of the 'true' (or 'least untrue') data only becoming evident years after it's any good for cyclical policymaking (though the data will still be fine for many less time-dependent uses). I'd like to think this will become less of an issue, in particular as we become more adept at using 'administrative' data (things like GST returns, or spending at the supermarket checkouts, that are being collected for non-statistical reasons of their own). That's the way Stats is headed, and they're right: it's likely to be cheaper,  more accurate - and faster.

When overzealous job “protection” makes matters worse - The Dismal Science

Mar 09, 2015

I've gone on a bit in some recent posts about the necessity of efficient, flexible labour markets - noting (here, here and here) that the labour market tends to have huge gross flows with small net outcomes, and that it's easy, with good intentions but bad policy, to stuff up the flexible working of hiring and firing. I also found some evidence that our own labour market stacks up pretty well, when considered in long-run international perspective, in keeping unemployment down.

I'd said in that last post that "if you're concerned about unemployment, you're likely to be better off if you come up with some form of social protection that doesn't impede the flexible working of the labour market, rather than reaching for some "job protection" measure that makes it harder for employers to lay people off. Making it harder to fire, for example, makes it less attractive to hire in the first place". I didn't include anything concrete to back that up, but over at his blog Jim Rose happened to be writing about some recent local court decisions which appeared to be re-regulating employers' ability to lay off staff (his two articles are here and here), and as part of his argument he'd found this.

Isn't that neat? There's a clear link between how tightly protected existing jobs are, and how long people are stuck in unemployment before they get their next one - with the best of intentions, policymakers trying to make the labour market more secure from an employee's perspective have produced a completely counterproductive outcome. It's good to know that again our own labour market shows up to international advantage, with relatively low long-term unemployment and indeed even lower long-term unemployment than you'd expect from a country with our level of job protection. Australia scrubs up pretty well, too.

I asked Jim where the chart came from, and he pointed me to the source, a June '14 article in the IMF's Finance & Development publication profiling the career of Christopher Pissarides, who won the Nobel prize in economics for his work on labour markets and unemployment. It's a good read. From a policy point of view, the bottom line is
“protect workers, not jobs.” Trying too hard to protect existing jobs through excessive restriction of dismissals can stop the churning of jobs that is necessary in a dynamic economy. It is better to protect workers from the consequences of joblessness through unemployment benefits and other income support—accompanied by active policies to get the unemployed back to suitable jobs before their skills and confidence deteriorate
Incidentally, if Jim is right that our Employment Court "stands apart from the modern labour economics of human capital and job search and matching as well as the modern theory of entrepreneurial alertness, and the market as a discovery procedure and an error correction mechanism", maybe there's a case for it to sit with a lay member who knows something about labour economics. The High Court sits with an experienced economist, when there are major competition or regulation cases, and it's a system that works well.

What’s happening at the petrol pump? - The Dismal Science

Mar 06, 2015

Petrol prices, and petrol profit margins, have been in the news. Labour, for example, wants an inquiry; ACT doesn't; and apparently the AA hasn't been happy about 'miserly' falls in local petrol prices as the world oil price has dropped sharply.

Much of the attention has been based on MBIE's weekly monitoring of 'importer margins', the 'importer margin' being "the margin available to the retailers to cover domestic transportation, distribution and retailing costs, and profit margins". Here's the latest picture, for regular petrol.

As you can see, the importer margin looks to have been climbing over the past two years, from an average of around 24 cents a litre to about 32.5 cents/litre, and on the face of it the rise looks rather dubious: it's doubtful that domestic transportation, distribution and retailing costs have increased much in our low inflation economy, which means the only moving part left is wider profit margins.

I don't know that I'm personally quite there yet with the wider profit margin story, though. For one thing the prices at the pump as measured by MBIE don't reflect the discount you get at the supermarket, and I strongly suspect that those discounts have been rising. For ages our standard supermarket discount used to be 4 cents; then 6, 10 and even 20 cent discounts started popping up (tied to spend); and every other day my phone beeps at me with offers from the petrol companies themselves (the latest was a Caltex Black Caps 10 cents promo on Saturday, which I used). If everyone uses discounts - and they must have become pretty extensive by now - and the typical discount has gone from 4 to 10 cents as (perhaps for valid strategic or tactical marketing reasons) petrol companies have elected to pass on lower costs via coupons and discounts rather than as outright cuts to the pump price you see at the side of the road, then you could arguably explain away a good chunk of the apparent 8.5 cent rise in margins. It's possible too that currency hedging might have produced a higher landed cost for oil than the unhedged estimated price MBIE uses.

If, however, subsequent inquiry shows that the higher importer margin is real, and does not have an arguably competitive explanation, what if anything should be done?

One thing you might be tempted to reach for is some sort of control on the size of retail markups. As a recent paper*, 'The Impact of Maximum Markup Regulation on Prices' (here as a pdf) has said, they have a clear logic: a maximum markup will catch the most egregious profiteers, who will be forced to lower prices, but won't affect those who were able to get by on a lower one.

Or that's the theory, in any event. But when the researchers looked at what had actually happened in Greece when the Greeks did away with the maximum markups wholesalers and retailers could charge on fruit and vegetables, they found that retail fruit and veg prices went down - the opposite of what you'd have expected when the constraints were removed. And by sizeable amounts: the authors found that retail prices dropped by 6-9%. Using the 6% number, the decline "corresponds to a 1 percent decrease in the price of food of a typical Greek household, and a 0.16 percent decrease in the consumer price index. This in turn corresponds to a decrease of €23 in expenditure per capita per year, amounting to €256 million [NZ$380 million] per year in aggregate (about 0.12 percent of GDP)".

Retail prices went down because wholesale prices had gone down, and wholesale prices had gone down because the regulated markups took away "focal points for coordination". You can imagine the discussion in the taverna around the corner from the Athens Central Wholesale Market: "So. Any of us could add on 12%, eh?" "Yup". Thoughtful silence. "Another retsina, anyone?" "Don't mind if I do. Cheers, lads".

There are wider lessons here beyond the price of artichokes in Athens. The big one is that the first best solution to excessive profits is likely to be more competition: in Greece, the wholesale market was "a closed market in which only licensed sellers can operate" and one that had "several features... that make it more prone to collusion (centralized physical arrangement, barriers to entry, limited number of large competitors, daily interaction)". Deal to that, and you're well on your way. And secondly, and relatedly, don't be too quick to reach for a big knobbly stick if you do go the regulation route: the authors say that their work fits with a lot of other work showing that "heavy regulation is generally associated with greater inefficiency and poor economic outcomes". If you're going to regulate, be as smart and light-handed about it as you can.

*It's in an excellent series of discussion papers published by the Centre for Economic Performance at the LSE. The Centre takes an interdisciplinary approach to "the determinants of economic performance at the level of the company, the nation and the global economy", and their output is always interesting. I know, another source of discussion papers will be overload for some - you can already spend too much time at SSRN or at the IZA - but if you've got the time, have a look. Well worthwhile.