Friday's Top 10: Shamubeel Eaqub on ending corporate welfare, repay or repent, preventing the next GFC, fancy modelling vs common sense, Dilbert and more

Today's Top 10 is a guest post from Shamubeel Eaqub who is the Principal Economist at NZIER, occasional blogger at www.tvhe.co.nz and an author. 

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Ending corporate welfare
Sam Morgan created a mini-storm by attacking government grants for tech companies.

Tech investors love free subsidies, so nobody tells the government that the grant programmes are stupid.

— Sam Morgan (@samfromwgtn) October 2, 2014

Aditya Chakraborrty writes in The Guardian that the extent and effectiveness of corporate welfare is unknown. I wonder if anyone has done that work in New Zealand?

The bill for corporate welfare is huge – and largely hidden. We know a lot about the people who claim social welfare: we know how much each benefit costs the public, the government sets strict rules for eligibility – and we even have detailed estimates for how much cheating goes on. Between them, Whitehall, academia and NGOs have churned out enough surveys on social welfare claimants to fill a wing of the Bodleian library. But corporate welfare? The government has itself acknowledged: “There is no definitive source of data about spending on subsidies to businesses in the UK.” The numbers are scattered across government publications and there is not even any agreement on what counts as a corporate handout.

2. The Vol strikes back
Sober Look writes about a return of volatility in currency markets.

While a lot of NAZI commentary was around the BENZ’s intervention, a rise in volatility and risk aversion is likely to be the main cause of NZD weakness.

The RBNZ’s intervention capacity is a mere drop in the NZD trading ocean.

Questions about the ECB's programs' effectiveness have introduced increased uncertainty into the euro's trajectory, causing volatility to rise.

Similarly the uncertainty is increasing around the Fed's liftoff as well. Expectations of timing vary dramatically between as early as Q1 of next year and as late as a year from now. With rate uncertainty comes increased currency volatility.

3. Lower currency = higher exports?
The NZD has fallen sharply (see chart from ANZ below) in recent weeks, although the level is historically high. Will a lower NZD spur exports?

Historically that has certainly been the case. But the recent Japanese experience suggests caution.

The parallel with New Zealand is that our exports have become less diversified over time. Its unclear if the decline in exports has led to permanent closure of some firms or sapped the capacity for product development.

The Economist writes:

The most worrying explanation of all is that Japanese products appear to have lost competitiveness, claiming an ever-dwindling share of rich-country exports since 1986. That is partly due to the sheer energy of rising stars like China and the Asian tigers. But it is also down to poor product development, especially in consumer electronics, along with cars, the driver of Japan’s earlier export miracle.

4. Milk pain
Dairy prices have fallen sharply in recent months. Unless prices lift soon the dairy payout will be south of $5.

NZ isn’t the only country affected by this - farmers in the UK are in an uproar.

A good clip from the BBC shows the impact of excess supply on farmers. The BBC reports that UK dairy farming is no longer profitability:

The average cost of production of a litre of milk is just over 30p. The typical price paid is now around 28p, down from around 35p in April.

5. Economic reforms and ‘Proclamationitis’
The GFC was painful for Europe and particularly countries like Italy. Italy’s problems are well known – high sovereign debt, bankruptcies and high unemployment.

There is talk about fiscal stimulus, but without fundamental reform, the hardened arteries of the economy cannot function. The new president started off with a hiss and a roar, but already his 100 day plan is at least a 1000 day plan, if not more.

The recovery in Europe wont be sustainable until fundamental reforms make their economies more nimble and agile. That won't happen in a hurry.

The Der Spiegel article on Italy is informative and it ends on how slow making change is:

The Italians are used to it: About 250 bylaws of the Mario Monti government (November 2011 to April 2013) still haven't come into effect. But Renzi wanted to do everything differently, quickly and immediately. That's why he replaced his lame predecessor and fellow party member, Letta.

But he has begun talking about needing "one thousand days" for his work. The majority of Italians still support him, but his approval rating is rapidly crumbling from 69 percent in June to 54 in September. The philosopher and former mayor of Venice, Massimo Cacciari, is already talking about a disease that has afflicted Renzi: "Proclamationitis."

6. Preventing the next GFC
Paul Krugman’s review of Martin Wolf’s book “The Shifts and the Shocks: What We’ve Learned - and Have Still to Learn - from the Financial Crisis” is worth a read.

Krugman makes three key points:

1.      The experts didn’t really see the GFC coming

2.      The GFC was caused by excessive debt; no one couldn’t be sure how it would play out, but debt busts tend to be long and painful

3.      Orthodox economics didn’t have politically palatable solutions – the void was filled by woolly and wrong policies:

It’s true that conventional economic analysis fell short in the face of crisis. But when policymakers rejected orthodox economics, what they did by and large was to reject it in favor of doctrines like “expansionary austerity”—the unsupported claim that slashing government spending actually creates jobs—that made the situation worse rather than better.

Martin Wolf

7. Economists have transformed the world
Economics and economists are "often unnoticed or scorned by the public, are actually the plumbers of modern society."

The Economist’s review of "Trillion Dollar Economists: How Economists and Their Ideas have Transformed Business" by Robert Litan is now on my reading list:

Mr Litan’s book is perfect for those who are puzzled about why economics is still so in vogue, despite the field’s anni horribiles following the financial crisis. He demonstrates how every aspect of modern society has been touched by economic thought. Those with no training in economics will benefit from a work that not only introduces abstract economic theories but also shows where they came from. Even the geeks could learn a thing or two from it.

8. Fancy modelling vs common sense
Better computers and sophisticated software mean that financial and predictive models are becoming more complex. But are they any better? Not really.

The HBR blogs about the use of complex models in predicting if a retail customer will make a repeat purchase. Complex models are at best a little better.

In complex situations, common sense may in fact be better:

Financial markets are rife with uncertainty and correlation — and the correlations are strongest when the uncertainty is greatest (think of the parallel downward trajectories of lots of different asset classes during the financial crisis of 2008). Sure enough, while sophisticated financial models performed poorly during the recent financial crisis, simple market heuristics (buying stocks with low price-to-book-value ratios, for example) have withstood the test of time.

9. Will robots take your job?
The inexorable rise of technology is rendering some industries, occupations and skills obsolete.

The ravages are clear in the hollowing out of manufacturing in NZ.

The new stars, like software programming, typically employ fewer people but with high incomes. This creates an urgency for swift economic reforms.

Yet although governments can mitigate the problem, they cannot solve it. As technology progresses and disrupts more jobs, more workers will be employable only at lower wages. The modest earnings of the generation that technology leaves behind will need to be topped up with tax credits or wage subsidies. That need not mean imposing higher tax rates on the affluent, but it does mean closing the loopholes and cutting the giveaways from which they benefit.

10. Repay or repent
The world hasn’t really deleveraged since the GFC, according a fascinating new report by CEPR.  While parts of world repaid debt, others took it on. The risk from excessive borrowing has been a game of musical chairs, without a fundamental fix.

The authors suggest that:

…the policy path to less volatile debt dynamics is a narrow one, and it is already clear that developed economies at least must expect prolonged low growth or another crisis along the way.

They propose low interest rates for longer alongside fundamental reforms:

…successful exit from a leverage trap also includes appropriate fiscal and macro-prudential policies, together with the restructuring of private-sector (bank, household, corporate) debt and sovereign debt where required.