The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, November 23, 2010

Dr Stephen Kirchner on the RBA's contorted supply-side logic

Who would seriously argue that folks were more concerned about house price bubbles in 2003 than they are today (really!), and that supply-side rigidities--think frictions such as anti-density and zoning limitations, long building approval processes, and local and state government taxes and charges than make it non-economic to produce new supply--were a good thing in 2003 because, god forbid, had we removed them housing supply would have risen, but a bad thing in 2010 when this supply-side elasticity is to be embraced because we are short housing. Never mind that most estimates of our structural housing shortage have this emerging from 2000 onwards. This is the logic used by those who would engage in ex post rationalisation of why they got it wrong. It is okay to change your mind. And even better to acknowledge it--I did as much on asset prices and monetary policy. The Libertarian economist Dr Stephen Kirchner puts it this way:

Another fishing expedition from the FOI desk at The Australian turned up this, with the following sub-editorial spin:

THE Reserve Bank deliberately intervened in the political debate over the property boom to stop governments releasing more land.

While I’m certainly not above using the FOI process to get a headline, a little more context would have been appropriate for this story. Luci Ellis wrote an RBA RDP in 2006 that argued that it was the combination of a demand-side shock from increased household sector leverage in a low inflation-low interest rate environment and an inflexible supply-side that gave rise to the early 2000s house price boom.

I agree with Chris Joye that the RBA had it wrong in the early 2000s and has now changed its tune. The RBA’s fingering of negative gearing in its 2004 submission to the Productivity Commission inquiry was possibly an attempt to set the government up as a scapegoat in case the early 2000s housing boom had ended badly in the context of a monetary policy tightening cycle. The RBA’s then jaw-boning of a supposedly over-heated market now looks rather quaint.

There has been a change in leadership at the RBA since then. Glenn Stevens’ more recent comments about ‘serious supply-side constraints’ in housing are pretty brave by the standards of an Australian central banker (imagine the reaction to Stevens making an even vaguely critical remark about the NBN and you will see what I mean). They are a damning criticism of policy at all levels of government. The only reason it hasn’t been written up that way is that many in the media simply don’t believe that housing affordability is a supply-side problem requiring supply-side solutions.