Trump going Nova

A nova is a spectacular astronomic phenomenon. Although I am no astronomer, I've been told it occurs when a star is about to deplete its nuclear fuel. The mass in its outer layers fall inwards, becomes superheated and supercharged, so that the entire star explodes. When the turn eventually comes to our sun, its nova is expected to engulf the earth. This does not last long, however. In a matter of days, the plasma will fall back to the center of the sun, which then will be reduced to a red dwarf.

I am starting to get the feeling that President Trump, or the U.S. economy under his rule, is about to go nova. One three levels.

First, in the very short run, we certainly have seen a lot of activity and a lot of noise, with far-reaching initiatives, such as the immigration ban, the pull-out of the TPP, the condemnation and renegotiation of the NAFTA, and the infamous phone conversations with the Mexican President and the Australian Prime Minister. Glowing plasma indeed. But the reaction has already come in the form of numerous legal challenges and loud protests from around the world. Mr. Trump had to backtrack, at least a little, to say that he didn't intend a total ban on Moslems (which he did, according to Rudy Giuliani), and that green card holders are exempt. Not much, perhaps, and certainly no red dwarf yet; but Mr. Trump already gets to see some of the limits to his power.

Second, in the slightly longer run, Trump is looking to stimulate the U.S. economy, to create jobs and double the growth rate. The main instruments seem to be protectionist measures and deregulation, although fiscal expansion remains a possibility, at least large tax cuts. It may work. The trouble is that the U.S. economy is already at full employment; and none of Mr. Trump's proposals seem likely to raise productivity growth very much. So, if he succeeds, the result will be overheating; and the Fed will have to step in with sharply higher interest rates to stem inflation.  I just hope that the overheating starts before the new financial deregulation gives us a new financial crisis.

Third, and most seriously, his protectionism risks sending the global economy into a bad, negative spiral. The first effect is the disruption of global value chains, which we are starting to see already as a result of his immigration ban. Then comes higher prices for U.S. consumers and significant job losses in other countries around the world. The final result may be a trade war, with retaliating tariffs and competing devaluations of a kind we have not seen since the 1930s. Unless Mr. Trump is stopped, which I still sincerely hope, the global economy may really start to resemble a red dwarf.

So, why has the stock market been so jubilant after the election? Well, for one thing, the stock market values earnings after tax, and he has promised steep tax cuts. Deregulation will also be good for many companies, although in many cases bad for the economy. The stock market does not reflect the entire economy, only the profits going to the owners. But I also fear the stock market has moved ahead of itself. A new sobriety already seems to have set in. I expect more.

Consumer credit and house prices in Norway

Consumer credit (credit card loans, sms loans etc.) are receiving a lot of attention in Norway these days, and rightly so. According to Finanstilsynet, Norway's FSA, it is not very large (about 3% of household debt), but growing very fast—at a 12-month rate of 13.2% at the end of 2016Q3, and accelerating. Overall household debt is growing at barely half rate, 6.2% as of the end of December. Although household borrowing has come down from the neck-breaking pace right before the global financial crisis (peaking at 13.5% in March of 2006), the accelerating growth in unsecured consumer credit is reason for concern.

So, where are these funds going? The popular answer seems to be that people spend more on consumption goods than they can afford. That does not fit with the data, however. As of December of last year, retail sales, at current prices (for compatibility with the credit data), were a measly 0.5% higher than a year earlier. Service trade grows a little more; however, nominal household consumption as of 2016Q3 was only 4.% higher than a year earlier.

Clearly, we have to look elsewhere. And I think the answer is staring us in the eye. People borrow on their credit cards to make down payments on houses and apartments. With the government demanding a 15% down payment and prices growing at a national average of 12.7% as of December and 23,4% in the city of Oslo, a lot of young people are obviously trying to hurry to get into the housing market before prices grow beyond their reach.

So, people—the buyers or their families—are taking huge risks to get into the housing market. Uh, oh. Can they manage it? Their preferred choice is probably to pay down this extremely expensive debt as soon as possible. With average nominal wage growth around 2.5%, that will require sacrifice. Perhaps that is one of the reasons why retail sales are performing so poorly. Then they are probably counting on house prices to continue rising, so that they, after two or three years, can qualify for a larger mortgage. Right. That's what many U.S. house buyers counted on in 2006. The trouble was, the house market, which had been rising madly, peaked, and then tanked.

That can happen here as well. Let's keep an eye on this.

Estate tax better than wealth tax

As one of a very few countries, Norway has a wealth tax. Since 2014, it does not have an estate tax, however. Apart from the usual economic and fairness arguments, the case for abolition was strengthened by the modesty of the its revenue—a mere NOK 2 billion per year. Obviously, it was not designed well. The wealth tax has been reduced, but not abolished; and the government seems to have given up its original plan to abolish it.

Politicians and economists on the left like the wealth tax for its distributional effects. It also helps collecting taxes from wealthy people whose current income is zero or negative, for example when their financial investments go badly.

However, although I believe in fighting inequality, I am no fan of the wealth tax. It is naturally a tax on saving and investment, over and above the taxation of capital income. Furthermore, as business proprietors have to pay this tax even when they lose money, it can mean real hardship in terms of liquidity. It furthermore encourages leverage because debt can be deducted from taxable wealth. Moreover, entrepreneurs are hit disproportionately if they successfully sell all or part of their enterprises. The 1% tax (the current Norwegian rate) may not seem much at first. But it is not a one-time tax; rather, it will have to be paid over and over every subsequent year regardless of the actual return the the money may earn. Last, but not least, as Norway is virtually alone maintaining this tax, it serves as an incentive for successful people to emigrate and move their business elsewhere.

The headline suggests that I prefer an estate tax instead. Why? First of all because this  is a tax on wealth that you get simply by being related to some recently dead. It is wealth you have not worked for. On fairness grounds alone, that makes it a good tax. It's also not bad in terms of incentives. True, the tax may encourage people to spend their money in their lifetimes rather than leaving it to their heirs; but for the heirs, the tax rather serves as an incentive to work rather than hanging around waiting for your parents to die.

But my argument goes deeper. I believe recent research has taught us that income inequality, while perhaps undesirable from a strictly moral point of view, may be justified if the cause is that some people work harder and make more sacrifices than others. What is really bad is when inequality is coupled with social immobility. Then you get a class society, where people are stuck in the social class where they are born. That is not only socially bad; it typically also dampens economic growth, partially by making the privileged classes lazy and partly by excluding the talents hidden among the middle and lower classes. I believe an estate tax can dampen such a development.

This is my main argument for the estate tax. The typical counterargument is that it hurts family businesses at times of generational change. True, it may make it challenging to keep the business within the family. But how important is it to keep it in the family? In terms of social fairness, I think not very. And in terms of economics, it is far from obvious that the best manager is the child or grandchild of the original founder. If it is, I have no doubt that outside investors would be interested in bying out the heirs so they can pay their taxes. A profitable business ought always to be able to find investors.

If the wealth tax is reintroduced, as I hope, it obviously needs to be designed better than the one we had. The bureaucrats in the Ministry of Finance ought to be able to accomplish that.

Bank headaches reminiscent of 2007

Banks are in focus again. In several parts of the world. Here I'll look at the banks in China, Italy, and Norway. The problems are different, but have things in common. They also have things in common with the U.S. shadow-banking system in the buildup to the Global Financial Crisis (GFC).

The Chinese banks are facing losses, mainly on business loans as the economy slows down. Official Non-Performing Loan (NPL) numbers, still below 2% of bank balances, are manageable. Banks have reportedly made provisions for more than 150% of this part of their portfolios. However, when Special Mention Loans, a greyer area, are added, the percentage rises to almost 6% of balances. Uh, oh.

The good news is that the government is not standing idly by. The bad news is what the government is asking the banks to do about it. Via intricate processes involving debt-equity swaps, sales of this new equity to Special Purpose Vehicles (SPV), repackaging into Wealth Management Products (WMP), and further sales of these WMPs to other banks as well as to households, this is starting to look very much like the CDOs and the CLOs that were everywhere in the U.S. financial system before the crisis. Interestingly, many banks buy the WMPs in order to avoid regulatory limits on their loan-to-deposit (LTD) ratio. This not only amounts to regulatory arbitrage; it also means that idiosyncratic risk has been extensively pooled via this kind of diversification. Now, that should be good. It's just that, as pointed out by Gennaioli, Shleifer, and Vishny, it makes the system so much more vulnerable to aggregate risk. Securitisation raises the risk of system collapse. That is what happened in the United States in 2008; the question now is whether, or when, the same thing will happen in China.

Non-performing loans are perhaps an even greater challenge for some major Italian banks. Now, the European Union has established rules for the resolution of failing banks without the use of taxpayers' money and presumably without risk of system collapse. The remedy: Bail-in, meaning that the holders of bonds issued by the bank will have their debt converted to equity. That sounds great until you start looking at the debt structure of Italian banks. You see, in Italy, small savers have been persuaded to buy bank bonds rather keeping their savings on deposit accounts. So, a bail-in will be like a breach of the government-sponsored deposit guarantee—a guarantee that the bail-in was supposed to support. Not only that; many people who have applied for loans from these banks have been offered deals by which they can borrow more than they asked for, on the condition that they by shares in the bank for the balance. Such constructions prop up the banks' nominal capital adequacy, but undermines completely the intended effects of the capital adequacy requirements.

Strong, well designed government policies may yet manage to resolve these problems. Unfortunately, however, Italy risks getting thrown into political turmoil if the constitutional reform is rejected in the referendum on Dec 4. In that case,  the effects of an Italian bank collapse could very well set off a string of repercussions throughout Europe.

That brings me closer to home. The banks in Norway are mostly in decent shape despite the protracted problems in the oil and gas business. There is one exception, however, namely, the new undergrowth of consumer loan banks. They advertise everywhere for fast loans, often without mentioning interest rates or other conditions. For many of their clients, I believe that means they have been tempted to take up loans that they can't really afford. That is very much reminiscent of the U.S. subprime market. I call it immoral. But that's not all. These banks also seem to underestimate their own risk, so their books look better than they are. Now, these banks are held by investor groups with rather limited membership, which makes me wonder why they'd to this. Shouldn't they be concerned about their own risks? I fear the answer is that these investors have very short horizons. They want to start these things up, make a big show of how great a success this is, then sell their shares and get out. Sell to a greater fool.

That's not a pretty story. Fortunately, I don't believe these Norwegian consumer banks are in any way systemically important. However, the damage that they have caused for naïve borrowers may be bad enough. Furthermore, there is some evidence that much of this consumer credit has been used as down payments for houses and apartments that people try to hurry up and buy before prices rise even further. That raises a risk for the stability of the housing market, which is much closer to being systemically important.

Not even that may be important in a global perspective. But the Italian banks are indeed important in a European perspective. And the global importance of the Chinese banks should be beyond any doubt.

How Now, Brown Cow?

So, it wasn't a dream. A nightmare, OK, but a real one. There was no one to wake me up to a better world on that Wednesday morning, Nov. 9. I have to admit it depressed me. Badly. I just wanted it all to go away, but it didn't. So, life must go on. How will it? More specifically, what can we expect from the Trump administration?

• First point: It's hard to tell. No candidate has ever acted and spoken as unpredictably as has Donald Trump. And although his acceptance speech seemed to herald a new spirit of reconciliation, subsequent events have made that less credible. The transition team is already in disarray. Trump's "You're fired!" has been applied already, to important people. And personal agendas are apparent, as in the son-in-law's ditching of Chris Christie, who reportedly had done bad things to the son-in-law's dad.
• Second point: There is every reason to expect more bigotry. Mr. Trump's choice for Chief Strategist makes that abundantly clear.
• Third Point: Obamacare will be dismantled. So, Trump wants to keep the prohibition against insurance companies refusing to insure people with pre-existing conditions. But they will be free to raise prices for those in that situation. So, millions of Americans would likely lose their health insurance.
• Fourth point: The bond market is bleeding because of the expected "Trumpflation," specifically, new fiscal spending on infrastructure investment. Now, infrastructure investment would be highly welcome. However, I have a hard time seeing Republicans in Congress going along with spending increases for anything but defence. And if Larry Summers is right, Trump's approach, relying mainly on tax benefits for private entrepreneurs, won't go very far.
• Fifth point: We may still see some short-run stimulation, although not necessarily of the good kind. The dismantling of (most) environmental and financial regulations should work that way, as should tax cuts, although tax cuts for the superrich probably would have modest effects on activity even though it should help the stock market. On the other hand, the Republicans in Congress might insist on spending cuts as well. Although Trump wants to keep Medicare, it can be privatised; and Social Security can be cut. That would hardly help the working class that he promised to help.
• Sixth point: The long-term economic consequences could be very negative, even for those policies that may give short-term stimulus. That would definitely be true of environmental deregulation. Financial deregulation could have similar, though different effects, by making the financial system once again highly vulnerable to a new crisis. Along the same line, I am worried about the fate of the Federal Reserve under Trump. Its independence is already under pressure. Janet Yellen's term expires in a little over a year, and she is unlikely to be reappointed. Who or what would follow is anybody's guess. My personal fear is to get some kind of gold-standard nut. Who knows? Then there is trade policy, of course. Globalisation probably has hurt quite a few people; but rebuilding tariff walls would probably hurt just those people.
• Finally, of course, I see serious risks to world peace and global stability. Trump's flirtation with Putin and other "strong leaders" looks ominous. And I fear that right-wing populists in Europe have been reenergised by Trump as well as Brexit. Who knows what will remain of the European Union after the French Presidential election or, for that matter, after Italy's Dec 4 referendum? I have for some time held a hope that the many EU crises could provide an impetus for the core EU countries to "form a more perfect union" (to borrow a phrase from the U.S. constitution), but I'm finding it hard to be very pessimistic.

Yet, the election of Trump is not the end of the world. The world will definitely go on. And we will all do our best to avoid the worst. Or even, to actually make the world a better place. How about that?

The Big Thrill(er)

So it's less than a week away. I mean the big election, of course. The day when registered U.S. voters, those who actually show up to vote, that is, will choose the leader of the so-called free world, of which I am a citizen, but have no vote. And, oh, by the way, the choice won't actually be made by the U.S. voters either, but by the ones they choose to represent them in the Electoral College.

Well, anyway, considering the recent polls, I'm getting nervous. And I have started to fathom what a Trump presidency might mean. I find it scary. A lot of people talk about an end to free trade. They are probably right. At least, he'll probably waste no time in closing the borders to Chinese goods.

However, as important as this is, it's not my only concern. I'm just as concerned, or more so, about the independence and performance of the Federal Reserve. If Trump is elected he'll most certainly not reappoint Janet Yellen for a second term two years from now. In fact, he would most likely ask her to resign right away. Then he'd appoint someone who shares his ideas about monetary policy. I'm not quite sure what that is, but I fear that he'll appoint someone who wants to return to the gold standard. And, of course, a halt to the stimulation of recent years, which Trump calls Democratic politics. Interestingly, he also claims that the Democrats have been kissing up to Wall Street. I don't know what he wants to do in that regard. But I fear that if a new crisis should arrive--and he could very well set one off--he would not lift a finger to keep the systemically important institutions afloat. The result would not be pretty. Not at all. We could see a rerun of the 1930s.

Of course, I don't know this for sure. However, the problem with Trump is that he's completely unpredictable and apparently acts from an urge to get back at his opponents. This predictability is a real threat to global stability, economic as well as political.

One of the things he has threatened is to renege on the U.S. government's commitments to service and repay its sovereign debt. A U.S. default would be really scary. I do hope someone can explain to him the pivotal worldwide role played by U.S. Treasuries as the universally accepted collateral for all sorts of debt and obligations.

Most of all, though, I cling to the hope that Hillary's "firewall" will hold. However, Trump is not the only new force threatening to upend the world economic order that we all have gotten oh-so-used to. Brexit is another one. Although I do sympathise with those who had voted for it out of disappointment with the EU and the globalised economy, I see a big risk that it will spell the beginning of the end of the interconnected world of globalisation that we've gotten used to. The remaining EU member states are still reeling from the refugee crisis; and the Middle East is a terrible mess.

That may serve Russia's and China's political interests. But at the same time I'm worried about the Chinese economy. Growth keeps holding up between 6.5% and 7%, but only because of a steadily growing bubble of real estate, credit an zombie companies. It may burst. The effects would spill over into the global economy.

That is the kind of situation where we would need the institutions we have learned to rely on. The leading central banks, first of all. But their hands are tied even if Clinton wins the election. At today's interest levels, big rate cuts are out of the question all over the advanced world. What we still call unconventional policies have become the new norm. Perhaps we should not call it conventional. It is not without effects, but the effects are pretty weak. Then we are used to relying on the IMF. But there the Chinese are wielding greater power, which they probably want to use in their own political interest rather than that of the world as a whole. And if Trump is elected U.S. president, the IMF will turn into a big battle ground.

Fiscal policy, then? Give me a break. In Frau Merkel's eyes it's the original sin (as the daughter of a Lutheran pastor, she should know). And her Republican counterparts in the U.S. agree with her. Here, I'm not talking about the Trump people--Trump might actually be willing to do some good in this regard. But if the mainstream Republicans retain their control of the House of Representatives, as seems extremely likely, the only change possible in U.S. fiscal policy is tax cuts for the rich.

So, I'm hoping for miracle. Actually, I'd like to pretend that all this isn't happening and go soundly to sleep. Then you could wake me on Wednesday morning and tell me it was all a bad dream.

Is it? I sure hope so.

Risk taking in the Sovereign Wealth Fund

It's been almost two weeks since I formally presented to the Minister of Finance the report of the Commission on the equity share of the Norwegian Wealth Fund (the Government Pension Fund Global). The reason I haven't mentioned this in this blog yet is partly that I've been busy (lame excuse), but partly also because I'm so sick of the work in that Commission I want to put it behind me. As is by now well known, I was the only member of the Commission recommending a reduction in the equity share from 60% to 50%. For the Commission chair to be the lone dissenting voice may not be usual. But then I guess I've never strived to be a usual person.

Although I now want to put this stage of my work behind me, I feel like clarifying a couple of points that, judging from media reports, may have been misunderstood. Some people seem to think that I recommended less risk taking because I didn't believe the politicians can be trusted to handle greater risk, in particular, that they would be unable to cut spending should the fund make big losses. That was not my point at all. Rather, it was that I find it undesirable for government spending to move up and down in tandem with the movements in global equity markets. There is plenty of research emphasising the desirability of stability and predictabililty in government services as well as tax rates. Thus, my stance is not question of politicians' "stamina" (if I may borrow a term from a certain presidential candidate), but of what serves people best.

The other point is that it is rather difficult to discuss investment strategies without also discussing how the fund should be used. Once you start thinking about it, it should be rather obvious that strategies for risk taking and draws on the fund should be determined simultaneously based on the owners' preferences and the financial and economic environment. Before I received the question to head this Commission I started to work on the analytical issues involved in such decisions. So far, it has resulted in a joint paper with Snorre Lindset at NTNU, available upon request. I hope to continue this work as I now can turn to other tasks.

Trouble brewing in the global financial sector

It's been eight years since my dear wife had to physically drag me away from the TV set at the hotel we were staying at for a short vacation in Paris. I'm glad she was there because the TV acted as too strong a magnet with all the gory news about the Lehman bankruptcy.

Things aren't as bad today. But the news of the past couple of weeks have not been encouraging. I'm thinking, in part, of the events brewing at Deutsche Bank. That institution does not seem to have learnt the hard lessons of the financial crisis, namely, that risks are real, that leverage is risky, and that it may take less to disturb  of a balance sheet than you may think. Equally worrisome is the apparent fact that European banking regulators haven't seen this either, but keep complaining that uniform global regulations would put European banks at a competitive disadvantage vis-à-vis their U.S. competitors. What about the stability of the European financial system? Does that come second to the competitive position? In the middle of all of this I am happy to see that the German government at least hesitates to bail out Deutsche. They may still have to do that to stabilize the system; but if so, I sincerely hope they will do all they can to limit the side effects in terms of moral hazard.

However, Europe is not the only region I'm concern about. I'm also worried about China. The history of the Chinese banking system is well known. The government did a good job of unloading legacy NPLs in the late 1990s, and risk management has improved. However, the situation deteriorated again in the aftermath of the Global Financial Crisis and is now raising new, serious concerns. A number of factors are at play:

• As banks have kept ailing manufacturing plants alive, NPL portfolios have risen, even the official numbers.
• To solve this problem, the government has asked the banks to swap debt for equity. This process has now started, but risks doing little more for the banks than a swap of bad equity for bad debt.
• The housing markets in the big cities seem out of control even as housing inventories remain piled up in the Tier 3 and 4 cities. Although household leveraging may not be a big problem, developer leveraging is.
• Finally, borrowing by Local Government  Financial Vehicles (LGFV) is again accelerating. This debt, which was the main financing source for the 2009 - 10 RMB 4 tr. investment program, was supposed to be cleaned up after the central government ordered about half of this debt to be converted into state-guaranteed bonds and further borrowing curtailed. A new Brookings Paper by my friends BAI Chong-En of Tsinghua University in Beijing and SONG Zheng (Michael) of the Chinese University of Hong Kong, along with HSIEH Chang-Tai of the University of Chicago, documents how these conduits increasingly are being exploited by essentially private companies. In a financial system dominated by state-owned institutions, access to financing continues to depend on political connections. These connections don't have to go to Beijing; quite often the trick is to have the right connection with local and regional officials, who in turn control the LGFVs. This way, the LGFVs formally obey the prohibition against borrowing for local governments, but serve instead as a quasi-government funding source for politically connected businesses.

This does not mean that a Chinese financial crisis is clear and present danger. But it does make me uneasy, especially as it happens at the same time as some of the European financial giants seem to risk losing their footing. The good news is that the mutual exposure between Asian and European banks seems more limited now than eight years ago. Yet, I feel the crisis risk has risen above the trivial level.

The Oslo housing bubble—and the proposed remedies

For years, I have taken great pains to avoid taking a stand on whether the Norwegian housing market is in a bubble or not. My comment has constantly been that there is no shortage of fundamental explanations; but that this has been the case also for all the housing booms that in hindsight have proved to be bubbly. Now, however, I increasingly feel that the housing market in and around Oslo show clear signs of bubbliness. The clearest one is the widening contrast between the rental market and the asset market. True, the Norwegian rental market is small and the price statistics sketchy; but the tendency seems clear enough. People who want to rent our apartments have a hard time finding takers, whereas houses and apartments for sale are picked up at ever rising prices at the blink of an eye.

This doesn't mean that the purchase market is dominated by speculative investors. By speculators I mean people who buy apartments mainly for the profit of reselling them at higher prices. Although I do believe their numbers are rising, I also believe that the large majority of buyers intend to live in the house or apartment that they buy. It's just that they are not desperate to find a roof over their heads, only eager to buy before prices rise further. Young people, especially, seem anxious to "get into the housing market" before it's too late. In other words, they want to buy rather than rent because they fear that the price of buying will have risen too much before they actually get around to buying. To me, that is dangerously close to speculative behavior.

If this is a bubble, it is likely to burst some time. I plan to get back to that issue in a later blog. For now, I want to focus on the measures that the FSA (Finanstilsynet) has proposed to cool the frenzy. In short, they want to tighten the already fairly tight restrictions on banks' mortgage lending, in terms of loan to value, loan to income, and amortization. I share their concern. And I agree that macroprudential instruments are much better suited than monetary tightening (higher interest rates) at protecting financial stability.

However, I doubt that the proposed measured will work. They remind me of a catchy line that Ronald Reagan once used against the Democrats, "It didn't work, so let's do more of the same." Although I didn't agree with him on the issues he discussed at the time, but I do feel his phrase fits now. Essentially, the FSA proposes to curtail further bank's opportunity to do the things that they find profitable. The proposed measures will not make mortgage lending less profitable for the banks, only make it harder for them to do it within the rules. Experience from at home as well as abroad tells us that banks and other financial institutions then invariable find ways to circumvent such rules.

Why not raise bank's cost of mortgage lending instead? A simle way to do that would be to raise the risk weight of mortgage lending for banks' capital requirements. That way, banks will need to use a larger share of equity in their funding for each mortgage loan. And equity funding is significantly more expensive, at least at current prices. Such a requirement would be much more difficult to circumvent. I know, of course, that many banks base their risk weights on internal models; but the government could still raise the floor for how low the model-based risk weights can be.

Another advantage to such a regulation is that it does not interfere with the banks' own risk evaluations. Banks should be better at micro managing their own decisions than government agencies. And relieving them of this responsibility could spell the loss of important banking expertise.

To some extent, the FSA can be excused for not having mentioned risk weights. Their letter to the ministry was in response to a request to evaluate the current set of regulations that does not include this instrument. Furthermore, the Norwegian government cannot regulate the risk weights of Norwegian branches of foreign banks. A further risk would be that prospective buyers would seek alternative funding sources, such as credit cards and short-term consumer loans. I still think it would be worth trying.

Unemployment, Norges Bank, and politics

With only a year to go until the next Norwegian Parliamentary election, Statistics Norway's monthly releases of labor market data are becoming political events. If unemployment falls, the government brags about the successes of its economic policies; if it rises, the oppositions criticizes the government for not doing enough.

I find this quaint. For one thing, these monthly data are highly volatile, even though they are centered moving averages of the underlying, actually monthly, data. For another, the political debate is based on the implicit premise that fiscal and other economic policy is the main determinant of unemployment. It is not. Not only do external factors matter, in Norway's case, especially the state of the oil market. But the debate completely ignores the role of monetary policy. Norges Bank's charge is to be the first line of defense against weakening tendencies. Rising unemployment is thus a sign that the sentries at the gate have not done their job. Why does no politician mention this?

A third reason why I find this debate quaint is that the opposition's demands to "do more" invariably involves increased government spending. But, God forbid, that spending must not come from the sovereign wealth fund. Yet, with bond issuance prohibited by statute, that is the only marginal source of revenue for any Norwegian government, regardless of political color. So, the opposition must implicitly be arguing for tax increases or cuts in other spending. They don't mention which. How convenient!

Lastly, a dangerous though about the political role of Norges Bank. If it does ease further even if unemployment stays high, it will be making a case for the opposition, whether it intends to or not. I don't want to accuse the Bank of intending to go political errands. Yet, I wonder if they can avoid it in practice.