On my list of future things to post on I had this post – which was intended to be a “rant about rebalancing and targeting house prices for financial stability”.
Ever since the crisis erupted I have, especially privately, called the “rebalancing” argument one of the most pathetic quasi-economic arguments imaginable. I found it difficult when a large section of the New Zealand economics community started using it, because apart from being a close to meaningless metaphor it also has the disadvantage of misleading people – confusing macroeconomic policy ideas with “compositional” issues, leading to the typical “fallacy of composition arguments” which lead to bad bad policy.
It is with this in mind that a good friend of mine sent me this BERL report on rebalancing the macroeconomy. And it is with the recognition that it is not just BERL – but a large section of New Zealand’s economists – who make this argument that I aim to discuss why the focus on discussing rebalancing is bad economics.
Rebalancing is a term used to hide value judgments and sell a moral argument about the “right structure of the economy” – it is not an objective way of facing the trade-offs of policy choices, and as a result is it a bastardisation of what economists should be describing for the public.
“Rebalancing is a morality play about borrowing – nothing more”
When talking about rebalancing people throw out lots of statistics and ratios, making it sound like we can be better off in some way by changing what “NZ Inc” produces. This is popular with the left and right – with left wing and right wing think tanks both going on about this. We need to “improve tradable GDP” and do less “non-tradable GDP” and make NZ Inc more like China Inc.
But like political discussions on productivity, or the assumption that we can redistribute income without any efficiency cost, this is entirely missing the point.
See this line in the BERL report:
We conclude that the underlying factors driving New Zealand’s macroeconomic imbalances have deteriorated considerably since 2008
The reason the BERL report caught my ire is because it did this in a way that was worse than some of the recent examples I’ve seen (in terms of being misleading for policy). The comment about tradable vs non-tradable inflation in their piece is incredibly out of context – the tradable-non-tradable price level will change due to rising productivity in tradable industries, the Balassa Samuleson effect.
Furthermore, we have seen MASSIVE productivity improvements overseas. As NZ Inc (urg I hate that term) has stuck to making things that it has a comparative advantage in, the productivity improvements overseas have pushed up our terms of trade … part of the reason for this shift. Without asking why these shifts have taken place we CANNOT interpret the figures they have in the BERL report – and for that reason the conclusions they make rely on hidden assumptions about what is going on.
Also we can go a step further if we decide we want to “rebalance”. Did you know that suggesting that tradable sectors aren’t competitive is essentially the same as saying wages are too high in New Zealand – so if we want to “rebalance” we need to CUT the wages of New Zealand consumers and households through transfer policies. There is a fundamental equity efficiency trade-off – and economists should be mentioning this TRANSPARENTLY … I thought this was our actual job.
So what is the problem
Issue, let’s use the word issue.
We are concerned about the size of our net foreign liabilities as a country, as we realise that if people suddenly change their willingness to lend to us we are very vulnerable.
Furthermore, when we compare ourselves to other countries the REAL EXCHANGE RATE relative to productivity and the terms of trade, and REAL INTEREST RATES, are both high.
Armed with these stylized facts about New Zealand, we need to ask “why”.
Contrary to the inference in the BERL report – we are NOT targeting a certain “structure” for the economy. And we should not. Instead, we are asking why New Zealand is experiencing these factors, and trying to figure out if policy can help by checking two things:
- Is there a market or policy failure that can be corrected.
- Is there an issue of systemic risk somewhere in the economy, which we may want to insure against.
How is this even different from rebalancing
Rebalancing PRESUMES we need to shift a bunch of variables somewhere. Asking what a failure is and why tells us the TRADE-OFFS we face, so we can decide where to move forward as a society.
Even more perversely, rebalancing assumes that the structure of an economy is something that should be fixed – when anybody with a cellphone and anyone who has tried out a 3D printer will know that technology and the structure of transactions changes a lot.
Now I don’t want you to think I’m picking on BERL, they are smart guys who are just trying to make these issues “accessible” – just like other economists who use “rebalancing”. I was genuinely writing this article when the BERL report came out – so I was able to easily use it as an example!
The term rebalancing, and the way it is used, is completely and utterly misleading. It is the metaphor of lazy economists and analysts – hence its massive popularity around the world. Productivity is not a target, inequality is not a target, rebalancing is not a target – they are intermediate factors that change DUE TO actual causes, the welfare consequences of the real causes are what we care about. These three ideas give us an indication that this is an area that we should look at – not something we can “target” directly. This isn’t a small point, this is an incredible important point.
There are always trade-offs here, and going on about rebalancing does more to obfuscate them than to inform people and enlighten debate.