Cutting the cake not baking a bigger one

There has been a series of Tuesday events (“Tax on Tuesday”) held at Victoria Univerisity recently, jointly promoted by Tax Justice Aotearoa, the PSA, and the university’s own Institute for Governance and Policy Studies.  I wrote about one of the earlier events here.

The final event was held this week, marketed as “Where’s the party at?”   Political parties that is.   In an event moderated by the Herald’s Hamish Rutherford, speakers from four political parties (NZ First declined the invitation) each spoke about some aspect of tax policy for 8-10 minutes, with plenty of time for questions.   It wasn’t a hugely well-attended event, but it is pretty safe to assume that the overwhelming bulk of the audience was on the left of the political spectrum, and I guess the speakers recognised that in what they chose to say.

First up was ACT’s David Seymour.  He started well, talking about twin challenges for New Zealand around (lack of) competitiveness/productivity and about (insufficient) social mobility and the spectre of entrenched disadvantage.  He was bold enough to note that there is a large group, mostly Maori, who  – rightly and reasonably –  feel that the last 30 years has not done much for them, in economic terms.  I was still with him when he argued that the way to fix the housing market was at source –  around the RMA and associated land use restrictions –  not by trying to fiddle the tax system.

But his centrepiece was an attempt to make the case for a flat rate of income tax (I think set at 17.5 per cent), scrapping our current progressive system.   He attempted to support this with the suggestion that all the rest of our tax system was flat, but I couldn’t quite see the relevance of his point, since (a) personal income tax is almost half of government revenue, and (b) we’ve chosen to achieve the desired progressivity through the income tax rather than, say, the consumption tax.    Attempting to engage his (left wing) audience he attempted to argue that we should think of “fairness” as involving the same rate of tax on every dollar of income (with a half-hearted suggestion that a poll tax could be considered even fairer, but probably wouldn’t fly politically).  Progressivity, he argued, simply doesn’t fit with New Zealand’s culture and values as an “aspirational society” and sends the wrong message, wrong values.  It wasn’t a  description of New Zealand I could recognise, at least any time in the last 100 or more years.

Anyway, Seymour then proceeded to undermine his own argument by addressing the question of “but what about the low income people whose marginal and average tax rates would then rise?”  Consistent with his logic, I’d have thought he should have just said “well, tough –  this is what fairness is, all paying the same rate on every dollar” (while perhaps making the fair point that many people on the lowest marginal tax rates aren’t there for long).  Instead he suggested two possible responses.  The first was to use the tax/transfer system to offer a credit to these people to leave them no worse off (ie progressivity, at least at the bottom, by another name) or…..and this is where I had to check I was hearing correctly…..the minimum wage could be increased further (noting that employers could “afford it” because their own tax rates would be lowered).  In a country with one of the highest ratios of minimum wages to median wages, the MP for the libertarian party appeared to be seriously proposing increasing that impost further……

The Greens finance spokesman (and Associate Minister of Finance) James Shaw –  the calm and relatively sensible face of the Green Party – was up next.  I’d never ever vote for them –  the party that, among other things, whips its members to vote for abortion –  but there was something refreshing in hearing a serving minister frankly state (in answer to a later question) that he really didn’t think taxpayer money should be spent on subsidies for the America’s Cup.  Perhaps he could next offer some thoughts on (New Zealand) film subsidies to makers of propaganda films vetted and controlled by the Chinese Communist Party?   He also spoke highly of a recent NZ Initiative report.

Anyway, on tax, Shaw was clear about where his priors were (and, of course, most of the audience weren’t minded to object).  He is keen on Northern Europe and Scandinavia.  He characterises those countries are starting by identifying what they want to achieve (desired outcomes) and then work from there to an appropriate tax system.    In all cases, that means much higher tax/GDP (and, of course, spending/GDP) ratios than in New Zealand.   From his perspective, he’d be keen on more environmental taxes and –  the Elizabeth Warren side in him coming out – on taxing wealth relatively more.

Perhaps somewhat at odds with the environmental point, he made the interesting argument –  with which I’d sympathise –  that we should hypothecate (ring fence, not into general government revenue) revenue from Pigovian taxes, lest government forget why the taxes were imposed (to deter the behaviour) and become reliant on the revenue (eg tobacco taxes).   That sounds fine –  and he went on to note, in the same vein, that his ideal carbon price in 2050 would be zero (carbon emissions would have been successfully eliminated or out-competed) – but it would leave the pot of general revenue not looking any much larger than it is today.   Despite his evident preference for a much larger government, he didn’t dwell on where the credible sources of much higher long-term revenue were in the Green Party’s view of the world.

Deborah Russell, chair of the Finance and Expenditure Committee, and a former tax academic and official, represented the Labour Party.   As she noted, she came along –  rather than the Minister of Finance or Minister of Revenue –  because people would pay less attention to her.  As she noted, Labour doesn’t have much to say because –  having junked a capital gains tax –  they are in “pretty intense” debate as to what their tax policy next year should be.

Russell –  who people seem to regard quite highly –  was an odd mix of the conventional and aspirational.   She ran a very similar line to Shaw in suggesting that we should first identify what we want to spend money on –  while noting that Labour hadn’t done those conversations that well – and only then identify how best to pluck the goose.  Since she went on to answer a question about inequality later, claiming that she wanted New Zealand to be “the most equal” country in the world, wanted “real radical equality” and supported more support for children, including a return to a universal family benefit, it seemed pretty clear that she too wanted a bigger government and thus materially more tax.

But at the same time she was talking about broad agreement on the “broad base low rate” mantra that has (mis)guided New Zealand tax policy for decades –  even though the high tax countries (eg Scandanavia) she seems to admire don’t have BBLR because they can’t (they recognise a need not to overburden business investment).   And she noted that when her Labour people talk about taxing the rich she often reminds them to think harder about “who are the rich?” and how many (few) there might be to pluck.   The Stuff article on this event played up talk that Labour is looking at campaigning on a higher maximum marginal tax rate, although it is hard to imagine there is really much money in such a proposal (and while it is one thing to campaign for higher taxes from Opposition at the end of a tired old’s government’s term –  as in 1999 –  it might be another thing now, campaigning for re-election, with Budget surpluses).

National’s Paul Goldsmith –  who has actually written a fascinating history of New Zealand tax policy –  spoke last.  He was pretty underwhelming on this occasion, perhaps concluding his audience wasn’t likely to be sympathetic anyway. He repeated the BBLR mantra, talked briefly of National’s (sensible) policy of indexing income tax thresholds, and repeated the promise of no new taxes in the first term of a National government.  He sounded quite pessimistic about fiscal prospects –  talking about the risk any new government could inherit material deficits –  which would act as a constraint on any desire National might have to do something more about lowering taxes.  As for growth/productivity/competitivess, all we heard was the short-term stuff about current low business confidence etc.

Question time followed.  James Shaw was challenged on his line, from earlier in the year, that the government wouldn’t deserve to be re-elected if it didn’t introduce a Capital Gains Tax. To his credit I guess, he looked abashed, mumbled a bit, and didn’t really pretend to have an adequate answer.

Herald columnist Brian Fallow asked about low household savings and low business investment/ “capital shallowness” (including the alleged ”overinvestment in housing” and asked what parties were proposing to do.  Here, my view of Russell started heading downhill.   There isn’t a low savings rate, she claimed, just the wrong measures of savings, and as for business investment, why 1 per cent interest rates might bring about desired change –  as if rates aren’t low for a reason –  and repeated that (deeply flawed) Adrian Orr line that interest rates are now just returning to more normal long-term historical levels.   Goldsmith and Shaw at least both suggested that any housing issues were housing market problems and need to be fixed at source.  But not one of the three of them (Seymour had to leave early) even mentioned the company tax rate (or cognate issues).     All three –  Russell and Shaw more than Goldsmith – actually seemed keen on taxing multinationals more heavily.  None showed any sign of engaging with the literature that much of the burden of capital taxation falls on wage earners.

The chair of the Tax Justice Aotearoa group noted that on OECD measures New Zealand is around the middle of the pack on inequality and asked the speakers whether they were happy with that, and if not which country they would aspire to be like.  I’ve already mentioned Russell’s response, although shouldn’t omit her suggestion that as a result we need to look a lot more seriously at what we don’t tax: wealth.  The CGT had been rejected but she argued we need to relook at options that tax wealth.

Paul Goldsmith responded that he wanted to emphasise equality of opportunity, while noting that the state –  rightly in his view –  does lots of redistribution as it is.  James Shaw, while rejecting the idea of a single country to aspire to, was quite open about aligning more with the Nordics –  in his view they had the best outcomes and were the best run.  By contrast we had “emaciated social support over several decades”, and he went on to note that we couldn’t, in his view, have equality of opportunity without much more government spending (“investment”).

It was interesting to hear both Shaw and Russell suggest that there should be more focus on desired outcomes, which should then lead us to design a tax system that would raise the (more) money.    Arguments on that sort of point are part of what politics is about.  But it was also interesting to hear both of them talk about how politicians end up disguising revenue increases in various not-very-transparent guises (levies etc) and how hard it is to make the case for higher taxes (although as Paul Goldsmith noted, one of the striking things of the CGT debate was the way Robertson/Ardern simply didn’t engage in making the case).  Perhaps the left really can make the case for much more spending, much more tax, but their own words suggest they have something of an uphill battle.

As for me, I probably came away still disinclined to vote at all next year.

But, for what it is worth, two final points.  First, it is easy to admire the Nordics.   But they’ve built really strong economic foundations, which we simply no longer have.  Here are the latest OECD real GDP per hour worked numbers

Denmark 65.4
Finland 55.3
Iceland 56.9
Norway 80.5
Sweden 61.9
New Zealand 37.3

And not one of the speakers showed any real emphasis on getting the conditions right for markedly lifting productivity (not even Seymour, despite the opening reference).    Parties just don’t seem to take the failing seriously, and continued failure to do so will increasingly constrain both public and private consumption/service options.

And, as for wealth taxes, I happened to see this table in a Cato Institute piece the other day.


You might end up favouring a wealth tax for some principled purpose, or just as an “envy tax”, but it isn’t likely to be the sort of option that is going to dramatically transform the size of government, in New Zealand or anywhere else.

Effective communications and consistent messaging (not)

One can debate whether or not the Reserve Bank should have cut or not.  Reasonable people can differ on that.  But their communications quite clearly needs (a lot of) work.   This post is just one illustrative example of the sort of problem there is: the role of inflation expectations in their thinking and public commentary.

Back in the August Monetary Policy Statement – the one where they announced the rather panicked 50 basis point cut, not really consistent with either the rest of the document or their own numbers – there wasn’t much mention of inflation expectations.  To be specific:

  • they are not mentioned at all in chapter 1, the main policy assessment/OCR announcement,
  • they are mentioned more or less in passing in the minutes, viz

Some members noted that survey measures of short-term inflation expectations in New Zealand had declined recently. Others were encouraged that longer-term expectations remained anchored at close to 2 percent.

with no suggestion that it was a significant part of the story

  • of the seven other references in the document, five are simply labels of charts, and one was in the standard descriptive framework section (“how we do monetary policy”).  The only other substantive reference was pretty unbothered.

Although survey measures suggest inflation expectations remain anchored at around 2 percent, firms and households continue to reflect past low inflation in
their pricing decisions.

If that had been all, a reasonable reader might have assumed expectations measures were something they were keeping an eye on, but weren’t much of a concern, or playing much of a role in the OCR decision.

But in his press conference, we got the first hint of a quite different line.  Perhaps the Governor genuinely felt differently than the majority of the MPC –  which frankly seems unlikely, given that he chairs the committee and he and has staff have a majority on it –  or perhaps he was simply casting around, more or less on the spur of the moment, for reasons to justify cutting by 50 basis points rather than the 25 points everyone had expected (50 point moves not having been used since the height of the 08/09 recession).

But whatever the reason, in answer to a question (just after the 10 minute mark here) he made the following points:

  • they’d tossed and turned between going 50 points then, or 25 points then and 25 later and,
  • over recent days they had become increasingly convinced that doing more sooner was a safer strategy to achieve their targets than a strategy of going more slowly over a longer period. He went on to note that
  • it was all about the least regrets analysis and stated that in a year’s time he would much prefer to have the quality problem of inflation expectations getting away on us, and possibly having to think about “other activity” [ tightening?]
  • that was preferable (better/nicer) than finding a year hence that they had done too little too late.

I was quite taken with those comments at the time, and commented positively on them in my own review of that MPS.  It seemed exactly the right way to think about things, especially as in the same press conference he was highlighting the risks of the OCR having to go negative (the more that could be done now to boost expectations, the less likely the exhaustion of conventional monetary policy capacity).

But do note that none of that “least regrets” perspective was reflected in the MPC minutes.

The Governor obviously took something of a fancy to this line.  In a interview with Bernard Hickey a few days later, of which we have the full transcript, he is quoted thus

“Doing the 50 points cut was interesting: whilst you get closer to zero, you also shift the probability of going below zero further away,” Orr said.


We’ve spent a lot of time around, I suppose, regret analysis, and I spoke about – you know, in a year’s time looking back, thinking ‘well, I wish I had done what?’ And I thought it’s – I would far prefer – and the committee agreed – far prefer to have the quality problem of inflation expectations starting to rise and us having to start thinking about re-normalizing interest rates back to, you know, something far more positive than where they are now. And that would be, you know, it would be a wonderful place to have regret relative to the alternative: which would be where inflation expectations keep grinding down.

and a few days later, in a speech given in Japan, the Assistant Governor was also now running this message (emphasis added)

A key part of the final consensus decision to cut the OCR by 50 basis points to 1.0 percent was that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives. In particular, it would demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target. This commitment would support a lift in inflation expectations and thus an eventual impact on actual inflation.

On balance, we judged that it would be better to do too much too early, than do too little too late. The alternative approach risked inflation remaining stubbornly below target, with little room to lift inflation expectations later with conventional tools in the face of a downside shock. By contrast, a more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.

I commented positively on that too.  It was good orthodox stuff.

And it kept coming.  In an interview with the Australian Financial Review, at Jackson Hole, a few days later, here was Orr

Q Was this [falling world rates][ front of mind when you did your recent interest rate cut?

A. It was front of mind. Without doubt the single biggest….one [factor] was domestic.  We saw our inflation expectations starting to decline and we didn’t want to be behind the curve.  We want to keep inflation expectations positive-  near the centre of the band.

And it was also referred to in passing in the folksy piece the Governor put out back here that week, noting “lower inflation expectations” as second in the list of influences on the OCR decision.

And here it was again in the Governor’s 26 September speech

We also judged that it would be better to move early and large, rather than risk doing too little too late. A more tentative easing of monetary policy risked inflation expectations remaining stubbornly below our inflation target, making our work that much more difficult in the future.

By this point – less than two months ago – any reasonable observer would have been taking note.

So what had actually happened to inflation expectations by this point?  At the time of the August MPS the Bank already knew that the 2 year ahead expectations had fallen quite a bit  –  from 2.01 per cent to 1.86 per cent in a single quarter.  That’s not huge, but it is not nothing either, and with core inflation still below 2 per cent it wasn’t something the Bank should have been that comfortable with.  The year ahead measure (noisier) had dropped by more.

As it happens, the other main inflation expectations survey –  the ANZ’s year ahead measure –  hadn’t dropped at all by the time the Bank acted in August: from May to July year ahead expectations were in a 1.8 to 1.9 per cent range.   In August – but not published until 29 August –  they fell to 1.7 per cent, and over the last couple of months they’ve fallen a bit further, the latest observation being 1.62 per cent.

As for the RB survey, there was also a slight further drop in mean expectations in the latest survey that was released on Tuesday (but which the Bank had in hand throughout its November MPS deliberations).

Both the latest ANZ and latest RB surveys were completed exclusively in the period well after the Bank’s surprise 50 point cut in August.  If the Governor (and Hawkesby) were serious about that rhetoric they’d surely have hoped to have seen at least some bounce in the latest survey –  after all, that was the logic of preferring a big cut early.   Instead, those survey measures fell a bit further (not to perilous levels of course –  in fact, current levels are just consistent with where core inflation has been for some time, a bit below the target midpoint).

During the Wheeler/McDermott years the Reserve Bank rarely if ever mentioned the market implied inflation expectations, calculated as the breakeven rate between indexed and nominal government bond yields. I used to bore readers pointing out this curious omission –  they never even explained why they felt safe totally discarding this indicator.

Inflation breakevens have been below 1.5 per cent now consistently for four years now and fell further this year.  In recent months, those implied expectations –  average inflation expectations for the coming 10 years –  were just on 1 per cent.  In monthly average terms, the low point wasn’t even July/August (ie just prior to the MPC’s bold action) but October.

Here is the chart, monthly averages but with the last observation being today’s.

breakevens nov 19

As the Governor was very keen to point out yesterday, there has been a small lift in this measure……but he was less keen to mention the level; the small lift only takes the breakeven rate back to aroud 1.13 per cent.  This time last year it was 1.41 per cent, still miles below the target midpoint.  Perhaps the recent lift will be sustained –  we should hope so –  but on any reasonable balancing of survey and market measures you could really only say things hadn’t got worse over the period since August.  On the clear words of the Governor and Assistant Governor, it was quite reasonable for analysts/markets to look at the inflation expectations data and expect it to feature prominently in this week’s MPS – after all the merits of the Governor’s August/September arguments (agree with them or not) hadn’t changed, expectations hadn’t lifted, and the Bank had given no hint they’d changed their way of thinking, yet again.

But what did the MPC have to say about inflation expectations on Wednesday?  Again there was nothing at all in the chapter 1 policy assessment/announcement, and there was just this in the minutes

The Committee also noted the slight decline in one- and two-year ahead survey measures of inflation expectations. Nevertheless, long-term inflation expectations remain anchored at close to the 2 percent target mid-point and market measures of inflation expectations have increased from their recent lows.

They were pretty half-hearted, even about those market breakevens.  No mention at all of the arguments the Governor and Assistant Governor were running only a couple of months ago, and although the minutes do now mention the idea of least regrets this was all they said

In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.

The Governor’s comments in August certainly suggested he’d have thought it better then to run the risk of being a bit above 2 per cent (after a decade below).  But this time, the Bank as a whole has reverted back to the cautious approach the Governor was looking unfavourably on, in public, only three months ago.   We are back to “oh well, never mind”, or so it seems, and all that pre-emptive talk,  doing what they can to minimise the risk of needing to go below zero, is supposed to disappear down the memory hole?

It seems all too symptomatic of what is wrong with the way the Bank is conducting monetary policy at present.    There are few/no substantive speeches, the minutes capture little of the flavour of thinking, half the MPC members are simply never heard from (and no one knows if they have any clout or not), there is no personalised accountability (as a market commenter here noted, it is incredible that no one on the Committee was willing to record a dissent yesterday, all hiding behind the Governor)….and then we get the Governor just making up policy rationales (quite sensible ones in this case) on the fly, only to then jettison them, without explanation or a chain of articulated thought, when for some reason (still unknown) they no longer support his instincts.

Was it ever an approved MPC line?  If not, why was the Governor just making up stuff  –  and then repeating it several times in open fora?  Under the rules he is supposed to be the spokesman for the whole committee.   And if it was an approved line why (a) did it never make it into the MPS, and (b) why has the MPC now changed its thinking when there is no sign of significant rebound in expectations, the effective lower bound is still in view, and the domestic measures have actually been drifting lower?

There is little basis for observers and markets to make any reliable sense of the MPC.  We know little, that is in any way consistent, about their reaction functions, their loss functions, their models, or even their stories about what is going on locally and internationally.  Big surprises, of the sort we’ve had in New Zealand at the last two MPSs, have become quite uncommon internationally, and that is generally a good thing.  Where are we now –  18 months into the Orr governorship, 7 months into the new MPC –  simply isn’t good enough  The reforms the government initiated last year could have been the opportunity for something genuinely much better.  Instead all we seem to get is a bit more expense –  all those high fees for the silent, invisible, and unaccountable externals.

Monetary policy isn’t being handled well, and neither is bank supervision (bank capital and all that).   Together, these twin failings in the Bank’s two main functions paint the Bank and the Governor –  and those responsibe for holding them to account in a pretty poor light.    There are hints that, under pressure, the Governor may have recently toned down his act and started to operate a bit more professionally.  If so, it would not be before time, but if this week was anything to go by the tone may be a bit better but the substance of the messaging and communications still leaves a lot to be desired.  At present, the best guess (sadly) would be on another lurch, in an unpredictable direction, relying on new arguments plucked fresh from the air, with no one certain quite who they represent or how long they will last.

Good in a few parts….pretty poor otherwise

There were some good aspects to yesterday’s Reserve Bank Monetary Policy Statement:

  • the Bank has abandoned its long-running over-optimism about future productivity growth and has thus revised down its estimates of potential (GDP) growth to more reasonable rates.  Nothing in the economic strategy –  this government or its predecessor –  seemed set to deliver better, and it is good that the central bank has stopped spinning candy floss numbers (at least on that count),
  • the Governor also seemed less effervescent, and perhaps consistent with the previous point there was little or no spin about just how well the economy was doing,
  • in the document there weren’t even further direct calls for more government spending/borrowing.  This change was defended on the grounds that the message had already been given, but I doubt that was all there is to explain the change (having said something once, even loudly, rarely discourages central banks from saying them again),
  • oh, and the folksy Maori salutations at the start of the main statement –  beloved by the tree-god Governor when it was his statement alone –  seem to have quietly disappeared.  Perhaps we might hope for the eventual quiet discontinuance of the cartoon version of the statement too?

But that was about all that could be said for it.

The document itself was weak on substance, building on consistently poor (largely non-existent) communications from the Bank.

You can tell that there are problems with communications when the Governor is reduced to repeating (numerous time in the parts of the press conference I saw) “we are trying to be as transparent as possible”.  He isn’t seriously trying, and certainly isn’t succeeding.  We’ve not yet had a serious speech on the economy and monetary policy from the Governor, after seven months we’ve heard not a word from four of the MPC members (including all the externals), background papers aren’t released even with a long lag, the MPS documents themselves offer ever-less insight or sense of how (or even whether) the MPC thinks in depth about the economy, and the Bank holds data close to its chest when it could release it more promptly (asked about this latter point yesterday the Governor did undertake to review their practice).

When two successive MPS OCR wrongfoot those paying closest attention to the data and to the Bank, it suggests the problem is with the Bank, not the observers.      It would be interesting to know what advice the Bank’s financial markets staff gave the MPC about the market movements that were likely to occur as a result of yesterday’s decision.

It was only a few weeks ago that the Assistant Governor, Christian Hawkesby, gave a speech on central bank communications, probably mostly trying to fend off criticism of how they’d done in August.    In that speech he highlighted –  and overstated, at least in practical terms –  the risks if central banks do what markets expect them to do

In this scenario there is a danger that markets end up paying too much attention to our communications for what we have said ‘we will do’, leaving no one left to analyse the incoming economic data for what ‘we should do’. As a central banker, I am far more interested in listening to what ‘we should do’.

And yet, yesterday’s MPS suggested that Hawkesby and his colleagues actually had no interest in that perspective either.   As I noted in yesterday’s post, the MPC has had available to it throughout its deliberations the results of the Bank’s survey of expectations, the macro views of several dozen informed observers of the New Zealand economy. I wrote about the results yesterday.  Those respondents expected the Bank to cut yesterday (and again next year) and even so they didn’t expect two-year ahead inflation to get above 1.8 per cent and expected no rebound in GDP growth either.    Implicit in those numbers (and consistent with the mandate given to the MPC by the government) is a pretty clear view that the Bank should have cut the OCR, and should probably do so again next year.  The Bank, apparently uninterested, chooses to ignore this weight of opinion and runs with its own idiosyncratic view that even with higher interest rates they were still get the growth rebound the outside observers couldn’t see (either three weeks ago when they completed the survey or –  judging by comments from market economists in the last day –  now).  In the end, the MPC is charged with making decisions, but having got things wrong –  below target inflation –  for the last decade, the onus is surely on them to explain why they (mostly non-experts themselves) are so willing to back an away-from-consensus call.   But they made no effort to.

In fact, if you started into the document without knowing the bottom line you’d think the case for easing yesterday was pretty unambiguous.  They told us that the economy had slowed and risk were to the downside, the world economy was slowing, inflation expectations were very low and/or falling and, of course, core inflation was below target.  And all that without even so much as a single mention –  in the entire document, includung the minutes –  of the apparently significant tightening in credit conditions respondents to their own credit conditions survey were foreshadowing, those same respondents having highlighted regulatory changes (ie most likely the coming big increases in minimum capital requirements) as a big issue.

credit 4 Or perhaps the MPC is back to thinking that credit conditions really don’t matter at all?  Surely, either way it would be reasonable to explain their perspective.  Instead they seem to have simply ignored the issue (or tried to pretend the Governor’s whim wasn’t an issue –  I heard Hawkesby on the radio this morning saying they had in fact taken account of credit conditions issues, in which case the OCR decision is still more mystifying, and the absence of any reference in the official documents looks even worse).

One of the disappointing features of yesterday was that there were signs of the Wheeler Reserve Bank returning.   Under the former, not widely lamented, Governor we heard endlessly from the Bank about how stimulatory monetary conditions really were –  even as inflation just kept on falling below their forecasts.  There was a lot of that line yesterday.    As then, so now, the Bank does not have a good read on where the neutral interest rates are, and the best guide is really something like the rear-view mirror: all else equal, look at what is happening to demand (and early indicators like business activity measures) and inflation.   In the Wheeler years, there was also a strong tendency to constantly be focusing on the merest hint that something might be picking up, because of the strong belief (see above) that conditions were “highly stimulatory”.  It was all rather circular –  we think we are right because we think we are right.     There was quite a bit of that sort of flavour in yesterday’s statement too: both the forecast pick-up in growth (that few other observers appear to believe) and the repeated mysterious suggestions that inflation itself was picking up now.

In the MPS the Bank shows five core inflation measures, and also highlights as a preferred measure the (highly persistent and stable) sectoral core factor model measure

core infl nov 19

Across the wider suite of measures, there has been no lift since 2016.   And the sectoral core factor measure has been flat at 1.7 per cent for more than a year.  And core inflation is a lagging indicator in a climate where (to quote the Bank) the New Zealand economy has been slowing and the world economy has been slowing).

What about core non-tradables inflation?  The headline non-tradables inflation rate did rise recently.

core infl NT.png

The blue line is an official SNZ series, while the orange line in an RB series.  Again, no sense of any pick-up in core domestic inflation pressures –  and nor, really, would one expect there to be in an economy where activity growth has slowed, unemployment has levelled out, confidence is low, policy uncertainty is quite high, and inflation expectations (remember them) are low.

In short, there was a (welcome and overdue) pick-up in inflation a couple of years ago, but there is no sign it is continuing.  And –  since the OCR cuts this year were against the backdrop of materially deteriorating fundamentals –  there isn’t much reason to expect further increases in inflation from here on current policy (perhaps especially not when credit conditions are tightening, and RB announcements are pushing up interest and exchange rates).

Incidentally, one line –  used several times yesterday – that you shouldn’t be fooled by was the one that “the projections were consistent with either choice –  a cut or leaving the OCR unchanged”.  Well, of course…….    Unless practice has changed very very markedly from the way things were when I was closely involved in these processes, the final projections track –  especially the interest rate track –  is tailored to be consistent with the policy options and messages the decisionmakers (in my day the Governor, these days –  at least on paper –  the MPC) want to send. If the MPC wasn’t clear in its own mind last week what it was finally going to do, they’d prudently have ensured that the final track was consistent with either option.  If they’d been clear but wanted to send a message that they’d been open to a possible cut, they have done the same thing.  There is no independent evidence or perspective in (the first few quarters) of that track.

I want to circle back to the claims around the (asserted) high degree of transparency.  One of the innovations in the new monetary policy governance model is the publication of the summary record of the meeting (aka “minutes).    These are typically a bit longer than the initial policy announcement statement itself, and do provide the opportunity to note a few issues there wouldn’t otherwise be room for.  But they are proving even less enlightening than one might have feared (given the way the Governor and the Minister got together to oppose a more genuinely open model, of the sort seen in central banks in places like the US, the UK, Japan, or Sweden).

Here are four examples from yesterday’s minutes.  First, fiscal policy

The Committee discussed the impact of fiscal stimulus on the economy. The members noted that fiscal stimulus could be greater than assumed. The members also discussed the potential delays in implementing approved spending and investment programmes.

So far, so banal.  As I noted earlier, in the official documents the Bank was back to staying in its line re fiscal policy (as the Governor said, “we take fiscal policy as announced and run on that basis” –  which is how things are supposed to work).   And yet this morning on Radio New Zealand Christian Hawkesby was heard stating that “we think more fiscal spending would be helpful in stimulating the economy”.     If that is the Committee view, why isn’t it in the MPS or the minutes, if it was substantively discussed why isn’t it in the minutes, and if it is true then – given that the, as the Governor said, the Bank takes fiscal policy as given – isn’t Hawkesby’s statement further evidence that they should in fact have cut the OCR yesterday (if they think the economy needs more stimlus, and they are responsible for deploying the primary counter-cyclical tool)?

Then, the work programme on how the Bank might handle reaching the limits of conventional monetary policy

The Committee noted the Bank’s work programme assessing alternative monetary policy tools in the New Zealand environment, as part of contingency planning for an unlikely scenario where additional monetary instruments are required.

A statement which tells readers precisely nothing (especially as it is now three months since the Governor told a press conference that the work then was “well-advanced”).  As it happens, reality seems a bit better than the minutes imply because when he was asked about this work programme yesterday and bringing it to light, the Governor revealed  that they will release a document on frameworks and principles in the new year, and will (he says) be keen on feedback and discussion.  That sounds more promising, but then where does the MPC fit into all this given the unrevealing comment from the minutes (and there are longstanding doubts about just who has power over any unconventional instruments –  whether the MPC will get much say at all)?

Then we are told they had a discussion on an important immediate policy issue

In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.

But that’s it.  We are given no insight into the arguments deployed, the competing cases made, or the conclusion.  Given their OCR decision we are left to deduce that the Committee would be quite worried indeed about (core) inflation getting above 2 per cent.  But we are given no hint of why –  despite 10 years now below that midpoint.   And this is what the Governor calls being as transparent as possible?

And finally, the OCR decision itself

The Committee debated the costs and benefits of keeping the OCR at 1.0 percent versus reducing it to 0.75 percent. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.

And, again, that is it.  No hint of the competing arguments –  which could readily be done without identifying individuals –  and no hint of why they chose to come down where they did?  What were the key costs the Committee saw to cutting the OCR (especially when both market expectations and observer implict recommendations were to cut).  There is no insight into the current decision or, importantly given the absence of speeches etc, no insight into the reaction functions/loss functions members (individually or collectively are using).  It simply isn’t very transparent at all.    The mantra overnight “just watch the data, just watch the data” isn’t really much use at all –  especially when the MPC is going to run with such a non-consensus view of the data (and/or the risks around policy reactions).

It is all pretty underwhelming and confidence-draining.   The point isn’t that a huge amount macroeconomically hung on any specific OCR decision. Nor for now is the economy in cyclical crisis –  we aren’t in recession, inflation isn’t falling away sharply.   The concern is that we have a central bank led by pygmies (no offence to the central Africans).  Not one of the MPC members –  all of whom are probably pleasant people (even the Governor if people aren’t challenging him) –  command any great respect for their insight into the economy, their judgement or intellectual leadership, or for their willingness/ability to communicate a persuasive story or a sense that they themselves have a good and robust framework for thinking about the economy.   In the case of the Treasury observer – who gets to participate not vote – it might have been her first ever significant meeting on advanced economy macro issues, but in the end responsibility rests with the voting members.  They are failing us, corralled by the unconvincing Governor.    Having substantially surprised the market (deliberately and consciously so) two MPSin a row, and chosen to ignore consensus opinion on likely economic developments, you’d have thought we’d be hearing a lot from the MPC members –  minutes that clearly outlined the issues and judgements, speeches articulating mental models and perspectives on the New Zealand economy, wide-ranging interviews (of the sort senior Fed officials give).  Instead, we have weak official stories (the MPS), unrevealing minutes and –  seven months into the new model –  not a word in public from any of the external members nor from the Bank’s chief economist.

It isn’t good enough.  The Bank’s Board should be demanding better, as should the Minister of Finance (including when he comes to appoint new Board members and the Board chair in the next couple of months).   Transparency and communications aren’t about publishing forward tracks –  one of the Bank’s own recently-departed researchers published research last year suggesting they make little difference – but about open and honest engagement, laying out the uncertainties and (inevitable) differences of possible perspective in a business characterised by so much uncertainty.  How decisionmakers demonstrate that they handle uncertainty, competing narratives and even disagreement, is the sort of thing that helps build confidence, not rote publications (let alone poor, surprising, decisions) or Soviet-style phalanxes of grey bureaucrats all lined up with the Governor.


You might think I sometimes put things fairly strongly (if often at considerable length).  I wouldn’t have wanted people to miss this comment on my post left by a banker. It was both strident and succinct.




No big improvements expected

This afternoon brings the release of the Monetary Policy Committee’s latest Monetary Policy Statement and OCR decision.  Most commentators expect the Bank to cut the OCR by another 25 points.  I’m more focused on what they should do than on what they will do – the two can diverge for quite a while at times –  and I’ve been consistently clear that the OCR should be cut further.  If the MPC was wavering though, you’d have to suppose that they would want to avoid a second successive big surprise for markets which would –  rightly –  renew the focus on how poor their communications have been this year.

The last piece of data relevant to the decision was finally released by the Bank yesterday afternoon: their survey of the macroeconomic expectations of a few dozen supposedly somewhat-expert observers (of whom I’m one).   As I’ve noted already, this release once again gives the lie to the repeated Bank claims of how open and transparent they are: survey responses were due on 22 October, the Bank could easily have had them a couple of days later at most, and yet they held the information to themselves –  to no public benefit at all – until 12 November.  As for private benefits/costs, having the information in public on a timely basis might have spared poor Westpac from going out on a limb calling no change in the OCR, only to reverse themselves yesterday.   Market whipsawing, in the absence of data the Bank already had, serves no public benefit.

The expectations survey has been running, in one form or another (changing questions, big reductions in numbers surveyed) for more than 30 years now and provides a fairly rich array of data (although there are some important gaps –  eg immigration, the terms of trade – the Bank refuses to remedy).    We know that the surveyed expectations (mostly a quarter ahead, a year ahead, or two years ahead) aren’t in any sense accurate predictions about what actually happens in future.  But neither are the Reserve Bank’s forecasts (and that isn’t a criticism of anyone: forecasting is hard, shocks happen).   What they do provide is a useful read on how the somewhat-expert observer community sees things, in a reasonably internally consistent manner –  eg answers about GDP or unemployment are presumably done simultaneously with (recognising two-way influences) views on the future OCR or the future exchange rate.

The headline news –  well, only media coverage –  in yesterday’s release was the further fall in (mean) inflation expectations.  Two-year ahead expectations had fallen quite a lot in the previous survey, and there was no bounceback, just a further fall from 1.86 per cent to 1.81 per cent.   You wouldn’t want to make much of it –  dig just a little deeper and the median expectation didn’t change at all – but the absence of any bounce, especially coming on the back of the 50 point cut, explicitly linked to inflation expectations and a desire to keep them close to 2 per cent –  should still have disconcerted MPC members.

And these weren’t inflation expectations conditional on the OCR remaining at the current 1 per cent.  Instead respondents expect a 25 basis point cut today (median OCR expectation for the end of the year is 0.75 per cent) and a further cut next year.    And they still expect no recovery in medium-term inflation (and in financial markets themselves, the implied 10 year average inflation expectations –  the breakeven rate between indexed and nominal bonds – are still pretty close to 1 per cent, when the Bank’s target is 2 per cent).

Consistent with this, there is no rebound expected in economic growth either, whether as a result of things already in train or of those further expected OCR cuts.

expecs 19.png

No respondents expected a recession, although the lowest individual expected 2 year ahead growth rate was as low as 0.6 per cent.

There wasn’t much sign of an expected strengthening in the labour market either (although those series have been volatile and the survey was taken before last week’s labour market data were published).

What about overall monetary conditions?  The survey asks about assessments –  on a seven step scale – as of now, and expectations for (on this occasion) the end of March and the end of September 2020 (the latter roughly a year ahead),   “Monetary conditions” isn’t defined –  it is up to each respondent to factor in things considered relevant.   What was striking this time was the sharp increase in the proportion of respondents expecting monetary conditions to become “very relaxed”

mon con nov 19.png

I was left wondering what weight respondents were giving to tightening credit conditions (this chart from the Bank’s credit conditions survey, also released after the expectations survey was done)

credit 2.png

But whatever went into those “monetary conditions” answers, they weren’t producing an expected rebound in either growth or inflation.

In a speech a couple of weeks ago the Bank’s Assistant Governor ran one of his boss’s frequent lines bemoaning the risks central banks face if they simply follow short-term market prices (since those prices themselves include market implicit expectations of what central banks will do).  It was  –  and is – a real but overstated point.   But it is also where surveys of macroeconomic expectations are relevant and useful, not subject to the same critique.   This pool of respondents –  with no better or worse information on average than the MPC – expressed not just expectations for the OCR but for overall monetary conditions, and for economic activity and inflation.  So they factored in what they expect the Reserve Bank to do, and are (in effect) feeding back a collective assessment that it really looks, at best, like barely enough.  Who knows why: perhaps expected adverse world developments, perhaps more initial weakness here, perhaps a weaker transmission mechanism, but the data (expectations) are there for all to see.

Against that backdrop the MPC would really have to produce a quite compelling alternative narrative to justify not cutting the OCR further now, perhaps especially when there isn’t another review until February.

(As I’ve noted before, there is a rich amount of data in this survey not open to the public.  For example, on the OCR expectations question at least one respondent expected the OCR to be zero by September and another for it to be 1.25 per cent. It would be fascinating to see the –  one hopes consistent –  forecasts of each of those respondents and the stories that underpin them.  Reminding ourselves of the sheer uncertainty of the future, and the possible stories that might underpin such alternative outcomes, can be a useful discipline.)

Participation rates for older people: kudos to SNZ

In my post yesterday on labour force participation rates I included this chart

p rates old

There has been some increase in participation rates for those aged 70 and over, but the really striking movement has been in the 65-69 age group.   More than half of men, and almost 40 per cent of women, in this first NZS recipient age group, are still in the labour force. (Interestingly, the gap between male and female participation rates for this age group hasn’t materially changed over the 30+ years of the chart.)

I went on to observe, relevant to NZS policy, that (emphasis added)

If you are able to work and are financially able not to, that is almost entirely a matter of individual/family choice, but you (generally) shouldn’t be eligible for long-term state income support.  New Zealand’s experience suggests that the overwhelming bulk of those aged, say, 65-67 are well able to work (we don’t have the data, but presumably –  given what happens from 70 on (see above) –  participation rates of those 68 and 69 are materially lower than those for people 65-67).   Against that backdrop, there is something just wrong about having a universal pension paid to them –  well, me not that many years hence on current policy –  simply on the basis of having got to that age.

My post caught the eye of someone at Statistics New Zealand who dug out the data by each year in the 65-69 age range, and sent me the following chart.

alex snz 2

The standard errors on some of these estimates are quite large, so don’t pay much attention to the year to year changes in each series. But it was good to see a consistent monotonic pattern in which –  beyond the NZS eligibility age –  the older you are the less likely you are to be working.

Using the data she sent me, here are what the participation rates look like for men and women separately at ages 65 and 69 (also for September years).

65 and 69

So almost 70 per cent of men aged 65 –  almost all of whom will be recipients of NZS –  were still working (or, in small numbers, actively seeking work).  In some cases, of course, that work will be part-time only (being employed, in HLFS terms, means a minimum of an hour’s paid work in the reference week), but even a half-time minimum wage job would pay as much or more as a single rate of NZS.

As interesting perhaps is that even at 69 40 per cent of men were still active participants in the labour force.   Since women have a longer life expectancy than men, presumably the materially lower female number is a reflection of past cultural practices and expectations –  or perhaps even a  stronger preference to spend time with grandchildren or in community activities –  rather than physical incapacity.

I don’t often praise SNZ but today I offer only unmitigated kudos

(Well, perhaps mitigated only in this sense that if the annual data are readily available, and they are happy for people to use them –  as they told me they were –  why not make them routinely available on Infoshare?)


Central bankers and climate change

Thirty or so years ago I was having a conversation with a fellow manager in the Reserve Bank’s Economics Department.  I’d learned that he was working on a submission on superannuation policy issues.  I was interested in the topic and so was he, but it wasn’t at all clear to me why we should be devoting scarce Bank resources to a topic that seemed well outside our mandate.  Ah, he responded, “but savings behaviour might affect the natural rate of interest and anything that affects the natural rate of interest must be something that matters to the Reserve Bank”.

I used the story, off and on, for decades in making the point that while, in principle, almost anything that affected the economy might be something the Bank should be aware of, it didn’t justify us weighing in on, or spending scarce research resources, on matters so far from our core responsibilities no matter how interesting we, as individuals, might find the topic or how important the policy issue itself might (be thought to) be.   “Stick to your knitting remains” sage counsel, perhaps especially for central banks who (rightly or wrongly) exercise significant discretionary policy power and need to build and maintain broad public confidence in their competence and impartiality in discharging those specific responsibilities.  Get very involved in other areas and people will reasonably begin to suspect you are using a public platform for private political ends.

The recent enthusiasm of senior central bankers all over the world for opining on climate change issues seems to fit that bill.     Whether it is about pushing personal political agendas or some desperate quest for relevance (as if macro stabilisation and financial stability weren’t quite significant enough challenges, especially as the world converges on the effective lower bound constructed by central bankers and their legislators) or (more probably, more commonly) some mix of the two isn’t clear.   What is clear is the generally tenuous nature of the case being made.

There was a conference on such issues held last week, hosted by the Federal Reserve Bank of San Francisco. Perhaps our Reserve Bank had someone attending.  I don’t really want to encourage this stuff, but if you are interested there are links to the papers here.   As just one example of the tenuous nature of the connections, I clicked on a paper –  forthcoming in a journal – with the promising title of “Climate Change: Macroeconomic Impact and Implications for Monetary Policy” by some Bank of England staff.    I haven’t read the whole paper but the Abstract told me as much as I needed to know

Climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary stability objectives. Climate change can affect the macroeconomy both through gradual warming and the associated climate changes (e.g. total seasonal rainfall and sea level increased) and through increased frequency, severity and correlation of extreme weather events (physical risks). Inflationary pressures might arise from a decline in the national and international supply of commodities or from productivity shocks caused by weather-related events such as droughts, floods, storms and sea level rises. These events can potentially result in large financial losses, lower wealth and lower GDP. An abrupt tightening of carbon emission policies could also lead to a negative macroeconomic supply shock (transition risks). This chapter reviews the channels through which climate risks can affect central banks’ monetary policy objectives, and possible policy responses. Approaches to incorporate climate change in central bank modelling are also discussed.

Note all the uses of “could”, “might”, “may” and not a mention that inflation – the key target for monetary policy –  is primarily a monetary phenomenon.   It all seems to boil down to something along the lines of “productivity shocks can affect potential output, and potential output is one of the inputs central banks often using in trying to gauge appropriate monetary policy.  Oh, and policy uncertainty –  in whatever areas –  can act to hold back demand”.   All that is true but (a) not obviously more true in respect of climate change than of numerous other innovations, positive and negative, and (b) shocks –  surprises –  are typically what creates problems for central banks and financial regulators, and yet a key theme of much of the rhetoric around climate change is the long-term, inexorable for some considerable time, nature of what is at work.   Markets tend to be better able to take such structural trends into account than for genuine “shocks” –  be they wars, financial crises or whatever.  It is also striking that nothing in this vein that I’ve yet read illustrates any of the argument by reference to the climate change we’ve already experienced over decades.

But the contribution to last week’s FRBSF conference that really interested me was the speech by Lael Brainard, a member of the Federal Reserve’s Board of Governors. She is a policymaker, not just a researcher.  Being the United States –  unlike secretive New Zealand where monetary policy decisionmakers are hidden away from scrutiny behind the Governor’s apron strings –  we get thoughtful speeches like this, even with the standard disclaimer that the views expressed are hers, not those of the Board of Governors collectively.  One doesn’t need to agree with her to appreciate the openness.

Brainard is a centre-left economist.  She was a senior political appointee in the Obama Administration (and slightly less senior in the Clinton years) and, as I gather it, pretty well regarded in those roles.  She has now been a Fed governor for five years or so.   And her topic was very much to the point: “Why Climate Change Matters for Monetary Policy and Financial Stability”.  So one might think she would make as good a case as anyone could for central bank involvement in climate change issues (smart, rigorous, policy-focused, not really the ivory-tower type).

But if it was as good a case as could be made, I didn’t find it convincing – or even challenging –  at all.  Perhaps it is what happens when you speak to the converted, but whatever the explanation, it only reinforced my sense that central bankers are typically getting well out of their lane when they start weighing in on climate change.  With the superfluity of researchers and senior officials the Federal Reserve system has, perhaps casting the net widely has fewer direct opportunity costs than it does for other, much smaller, central banks, but the reputational issues are just as real.  You might like the central bank weighing in on your pet topic, but you really won’t when they weigh in on some other issue or cause you don’t like.  Cumulatively it corrodes confidence in the system and in the operational independence of the central bank.

Brainerd steps through the possible implications for the Federal Reserve under various headings.  The first is monetary policy.  Here is the gist of her case.

To the extent that climate change and the associated policy responses affect
productivity and long-run economic growth, there may be implications for the long-run neutral level of the real interest rate, which is a key consideration in monetary policy.  As the frequency of heat waves increases, research indicates there could be important effects
on output and labor productivity.  A shifting energy landscape, rising insurance premiums, and increasing spending on climate change adaptations—such as air conditioning and elevating homes out of floodplains—will have implications for economic activity and inflation.  

As policies are implemented to mitigate climate change, they will affect prices,
productivity, employment, and output in ways that could have implications for monetary policy.  Just on its own, the large amount of uncertainty regarding climate-related events and policies could hold back investment and economic activity.

All of which really boils down to only two points:

  • relative prices change, neutral interest rates change and potential output changes,
  • policy uncertainty tends to be bad for economic activity.

And that, really, is it.    As it was, is now, and (no doubt) ever more shall be.  There is (rightly) no suggestion that climate change (or measures in responses) will impair the Fed’s ability to achieve its inflation target or even any suggestion that the target might need to change.  There is no sense in which she suggests the Fed’s instruments will be impaired.   All that is there is really economic forecasting –  and disentangling actual data to make sense of what is happening and why.  In that sense, climate change issues are no more (or less) relevant to the central bank than a myriad of other sources of policy or market change and uncertainty.  None of which is to suggest that climate change issues aren’t important, just that they aren’t something of particular relevance to a monetary policy central bank.

But what about the Fed’s financial stability role?

She starts this way

Similar to other significant risks, such as cyberattacks, we want our financial system to be resilient to the effects of climate change.

Which, at one level, is reasonable enough. We want our financial systems to be resilient, to all sorts of things, but there is no real attempt to demonstrate/illustrate that there is a significant systemic risk from climate change issues, or the associated policy responses.

She goes on

Although there is substantial uncertainty surrounding how or when shifts in asset
valuations might occur, we can begin to identify the factors that could propagate losses from natural disasters, energy disruptions, and sudden shifts in the value of climate exposed properties.  As was the case with mortgages before the financial crisis, correlated risks from these kinds of trends could have an effect that reaches beyond individual banks and borrowers to the broader financial system and economy.  As with other financial stability vulnerabilities arising from macroeconomic risks, feedback loops could develop between the effects on the real economy and those on financial markets.  For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy.  The associated declines in wealth could amplify the effects on economic activity, which could have further knock-on effects on financial markets.  Beyond these physical risks, policymakers in some jurisdictions are assessing the resilience of the financial system to so-called transition risks:  the risks associated with the transition to a policy framework that curtails emissions.

All while offering no evidence at all that market pricing will not adjust –  never perfectly but more or less okay over time – to the changes associated with climate (as to all manner of other changes over the years).    One can always advance hypotheticals but (for example) serious stress tests need to be grounded in the real-world range of possibilities. In this case, as she goes on to note, it is hardly as if the private sector has been slower to get to these issues than central banks.

The private sector is focused on climate risks.  Private-sector businesses—
including insurance companies, ratings agencies, data companies, and actuaries—are actively working to understand climate-related risks and make this information accessible to investors, policymakers, and financial institutions.  Although this work is at an early  stage, thousands of companies around the world are now reporting climate-related financial exposures to the Carbon Disclosure Project (CDP) under the guidelines of the Financial Stability Board (FSB) Task Force on Climate-Related Financial Disclosures (TCFD).12  Based on these disclosures, the CDP estimates that the 500 largest companies by market capitalization are exposed to nearly $1 trillion in risk, half of which is expected to materialize in the next five years. 

That sounds like quite a large number, at least until one realises that the market capitalisation of (say) the S&P500 index is about US$26 trillion.

She ends her treatment of this topic thus

An essential element of our bank supervision and regulation duties is assessing
banks’ risk-management systems.  We expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks.  These risks may include severe weather events that can disrupt standard clearing and settlement activity and increase the demand for cash.  Banks also need to manage risks surrounding potential loan losses resulting from business interruptions and bankruptcies associated with natural disasters, including risks associated with loans to properties that are likely to become uninsurable or activities that are highly exposed to climate risks.  

Well, no doubt.  But where is the evidence of systematic problems –  ie ones large enough to actually matter for the health of the financial system?    We’ve seen no such evidence advanced in New Zealand –  for all the talk of a modest number of potentially uninsurable properties –  and Brainard advances none in the US.  Sure, you want your central bank to be alert to potential risks and posing probing questions, but given (a) the extent of structural change that occurs in any economy over several decades, and (b) the lack of any (apparent) severe adverse economic/financial effects from decades of climate change to date, the case for treating this as a high priority area for central banks seems weak, at least if they are doing their jobs, rather than advancing the personal agendas of their management.  Where perhaps there is a little more reason for concern might be around ill-considered or uncertain (in application) government policy responses –  a significant part of the cause of the last US financial crisis –  but even then the primary responsibility for advice, analysis, and policy choices around climate change rests squarely with other parts of government. 

I deliberately picked a US speech to write about, precisely because it wasn’t about New Zealand but also because it is calmly and moderately expressed.  But our own central bank has been out again more recently.  Perhaps reflecting the character of our Governor, their statements tend to be less calm and nuanced, and rather more crusading in nature.  All this from a central bank that (a) constantly tells us it is seriously resource-constrained and (b) which hasn’t been doing a great job in recent years in commanding confidence in handling things that are squarely its responsibility (whether monetary policy or financial stability).

I wrote last week about the seriously-flawed, highly ideological, report of the Sustainable Finance Forum.  The Governor, by contrast, put out a statement “commending” the report and, regardless of his own limited statutory mandate, burbling on about

enhanc[ing] our role in the greening of the financial system, and the managing of environment and climate related risks.

and seemingly uninterested in the fact that any mandate he has around economic performance is around short-term and cyclical issues, not long-term structural ones.

He then had one of his deputies –  one with no known expertise in economics, monetary policy, or financial stability –  publish a Herald op-ed (text also here) channelling the Governor and simply ignoring the specifics of the Bank’s mandate.  For example

Sometimes, we are asked why we are placing such an emphasis on climate change, and that’s easy for us to answer. In our assessment, climate change could lead to material economic and financial stability impacts. Managing major risks to the economy, such as climate change, sits squarely within our core responsibilities and like all of our functions, we do this with a long term view for generations to come.

On this view, every bit of economic and social policy, strategic defence policy for that matter, or the potential future eruption of Lake Taupo is a matter for the Reserve Bank (“sits squarely within our core responsibilities”).  It is simply nonsense and rather “imperial” in its overreach.   And if the Bank thinks it has the funds to do such things –  with no statutory mandate at all –  it is simply overfunded and should have its budget cut.

She goes on

Globally, there is growing recognition of the role central banks and regulators have in understanding, managing and quantifying climate-related risks. By being more visible in this space we hope to encourage the financial sector to focus on not only managing risks, but opportunities, such as responsible, sustainable investment with long-term benefits.

Is any evidence banks and insurers aren’t focused on the material risks that matter (two important qualifications, as no one has yet managed to identify major issues here).  Beyond, risk management the Bank veers very close to rank fiscal policy. It is not the responsibility – and should not be – of an independent central bank and prudential regulator to be trying to steer the direction of credit.  What matters is that there is a good prospect of the bulk of debts being repaid, whatever the purposes they were taken on for.

The op-ed burbles on through the Bank’s own carbon emissions to a new role of counsellor-in-chief

Climate change can feel overwhelming at times and leave people confused about what they should or shouldn’t do to help the situation, but that does not mean inaction, quite the opposite.

Perhaps (or perhaps not, since uncertainty is real) but what has any of this to do with the Reserve Bank.

All ending with this extraordinary paragraph

As financial system participants we all need to actively look for opportunities to ‘finance the green’ and help New Zealand firms as well as our own organisations transition to lower emissions practices, and ensure we are well placed for a net zero world. It’s heartening to see that there are many businesses who are already well advanced on this journey. We now have a ‘road map’ from the work of the Sustainable Finance forum to help us all navigate and focus our collective efforts and we look forward to playing our role.

The sort of thing one might expect from a politician or a lobby group, but not from a senior public servant, charged (quite narrowly) with managing short-term economic fluctuations consistent with price stability and the soundness of the financial system.  If is Ms Robbers and her boss think that Sustainable Finance paper is any sort “road map” we (and the Bank) are a lot more lost than most would think.

In that same  Herald  climate change supplement (31 October) another senior central banker was quoted, this time Christian Hawkesby, the Assistant Governor responsible for monetary policy and markets.    He also was championing the idea that it is the Reserve Bank’s business to try to steer business strategies in particular directions

‘Again, just using an analogy from the asset management industry, when I started in asset management eight years ago, ESG investing (environmental, social and governance investing) was seen as a real niche and — if anything — was seen as potentially a marketing tool to use for niche investors. That’s moved now from being absolutely and completely mainstream in the sense that fund managers know that why would you invest in a company that doesn’t have a long-term future over the next 20 to 30 years.

“So our challenge at the Reserve Bank is to encourage banks and insurers to have that same approach to their lending and their relationships and take a commercial view that it’s actually going to be in the long run a benefit that they take those environmental and climate change factors into account.”

Whatever you think of ESG, it simply isn’t an appropriate role for the Reserve Bank to e trying to shape what factors banks should take into account when lending.  Apart from anything else –  not having the mandate, for example –  they simply don’t have the knowledge or incentive to get things right, and bear none of the costs or consequences if they get things wrong.  And it is a diversion from the day job –  the one Parliament actually charged them with  –  of managing monetary policy consistent with price stability and promoting the soundness (not the wokeness) of the financial system.

But the Hawkesby comment that took me more by surprise was his response to a question about bank capital

Asked if banks and borrowers would get capital relief for sustainable lending if the central bank is serious about climate change, Hawkesby responded: “That’s not in the plan at the moment. But that is very well something we could move to. At the moment, the onus is on really getting banks and insurers to focus on the issues and look at it from their own commercial incentives.

Glad to hear it isn’t “in the plan” at present, but it shouldn’t be now or ever.  We’ve just endured a year of the Governor and his acolytes trying to convince us that the financial system is in peril if he doesn’t hugely increase capital requirements, and one of his senior offsiders now won’t rule out capital requirement discount to advance the Governor’s environmental whims.

“Stick to your knitting” remains sage advice for central bankers –  and probably for all senior public officials with any sort of independent role.  There is a nice column along those lines in this morning’s Australian newspaper, citing RBA Governor Phil Lowe’s line from a recent speech

“I want to emphasise that the discretion we have and our broad mandate to promote the economic welfare of the Australian people do not constitute a licence for the Reserve Bank board to pursue or advocate economic policies outside our area.”

As Judith Sloan points out, Lowe isn’t very good at following his own advice, but wouldn’t it be nice to hear such words of restraint, actually practised, by our own Governor and his senior staff?

After all, those day jobs –  the ones we actually pay them to do –  haven’t done so well that they really command the sort of respect that might invite occasional restrained and judicious comments on other matters.

Instead, we are left only to presume they are using a public pulpit for private ideological ends, and for advancing causes favoured by their allies in the Beehive.  There should never be able to be such a suspicion of a central bank that actually values its independence.


Participation rates

A passing comment in a post the other day about the labour force participation rates of older people prompted me to pull down the fuller data and see what we could see about various participation rates over the decades since the HLFS began in 1986.   As it happens, the unemployment rate in 1986 averaged 4.2 per cent, exactly the same as the current unemployment rate, so cyclical factors shouldn’t materially mess up long-term comparisons.

Here are the quarterly participation rates (employed plus unemployed as a percentage of the working age (15+) population.

p rate q

From which I’d make only three quick observations:

  •  how stable the male participation rate has been since the end of the 1980s (even through a couple of very nasty recessions),
  • the strong upward trend in the female participation rate, and
  • while there is some modest cyclicality in the overall participation rate, it isn’t a stable or reliable cyclical indicator (eg the peak in the 00s was a year after the recession started, while the 90s peak was a year or so before the recession started).

But aggregates can mask a lot of interesting patterns, and around participation rates that has been particularly so for men (the female participation rates are just dominated by the strong upward underlying trend).   From here on, I’m using annual data (years to September), as there is less noise and more data reliability for some of the small age groupings.

Here is the data on participation rate for what you often see referred to as “prime age” people, those aged 25-54.

prime age total

Prime-age male participation isn’t back to where it was in the 1980s but over the last couple of years it has been higher than the 2000s peak.

What about the two youngest age bands?

partic youth

In the 1980s (until 1989), people could leave school at 15, but I was interested –  and a bit surprised –  in the further step down in the participation rates of the 15-19 year olds ver the last 15 years or so.  Presumably there is some mix of factors at work: kids being less likely these days to have after-school jobs that was once the case, minimum wage changes, and……  Given the cost of tertiary education now (relative to say the 1980s) it still surprises me though.

Perhaps the bigger surprise though (at least to me) is that only around 80 per cent of 20-24 year olds are in the labour force.  You only need to have done one hour’s paid work in the reference week, or to have actively looked for work, to be included in this measure.

What sparked the post initially was participation rates of those in the older age groups.  Here are those for the 55-64 age.

p rate 55-64 Participation rates for this age group are much higher than they were for both men and women.   When the data start, the full rate of New Zealand Superannuation was available at age 60 (at, if I recall correctly, a higher rate relative to wages than is the case now).  I was a little surprised to note the dip in participation rates in the last couple of years: for this group of women the latest observation was lower than in any year since 2013.

And what about the participation rates of those 65 and over, almost all of whom have been eligible for NZS throughout?

p rates old

There has been some increase in participarion rates for those aged 70 and over, but the really striking movement has been in the 65-69 age group.   More than half of men, and almost 40 per cent of women, in this first NZS recipient age group, are still in the labour force. (Interestingly, the gap between male and female participation rates for this age group hasn’t materially changed over the 30+ years of the chart.)

And here is the comparisons between those aged 60-64 and those aged 65-69.

p rates NZS transition

In my post last week, I noted that the participation rates of those now aged 65-69 were higher than those for people aged 60-64 when the survey started, at a time when the NZS eligibility age was still 60.    I see this as a fact buttressing the case for raising the NZS eligibility age now (to, say, 68, and life expectancy indexing beyond that).  By some mix of revealed preference to work, and of need, large proportions of the population went on working for some years after being eligible for a universal pension, suggesting not only that they were physically capable of doing so, but that many of their peers who chose not to work would also be physically capable of doing so.

However, the comparative story over time is complicated at least a little by changing norms and expectations around female participation.  In 1987 under 20 per cent of women aged 60-64 were in the labour force: these were women born in the 1920s, (mostly) mothers of the first baby boomers at a time when female prime-age employment wasn’t that common.  Now almost 40 per cent of women 65-69 are in the labour force, almost as high a share as for the 60-64 year old males in the late 80s.    The increase in participation rates among males – today’s 65-69 year old compared with 1987’s 60-64 year olds is real, but less dramatic  –  up from just over 40 per cent to just over 50 per cent.

And just to end, a couple of international comparisons charts re participation rates for those aged 65-69.

Here is the participation rate in 2018

partic rates OECD 65 to 69.png

It really is an astonishing range.   It isn’t correlated with prosperity (there are poor performers at either end of the chart) or, that I could see, with life expectancy or health status.  I suspect –  but haven’t checked –  it is pretty strongly correlated with the abatement regimes (if any) around state pension.   One of the best things about the New Zealand system is that although NZS provides an income effect encouraging people to think about stopping work, there is no relative price or substitution effect: as an older person you can work as much as you like and it doesn’t affect how much NZS you receive.  In many countries, the rules aren’t like that; it often isn’t economically attractive to go working.

And what about the change over time in the proportion of those 65-69 in the labour force?  The OECD has complete date only since 2002 so here is the change since then.

chg in partic rates 65 to 69

What I found interesting about that statistic for New Zealand is that that further large increase in the 65 to 69 participation rate has been exclusively in the years since the NZS eligibility age got to 65 (in 2002).  You can see in the chart above that our participation rates for those 60-64 also increased markedly over that period.

I’m not one of those inclined to celebrate (paid) labour for labour’s sake. I don’t think I was when I was in the paid workforce and I’m certainly not now.  But when the alternative is state income support then I do take a harder line view.  If you are able to work and are financially able not to, that is almost entirely a matter of individual/family choice, but you (generally) shouldn’t be eligible for long-term state income support.  New Zealand’s experience suggests that the overwhelming bulk of those aged, say, 65-67 are well able to work (we don’t have the data, but presumably –  given what happens from 70 on (see above) –  participation rates of those 68 and 69 are materially lower than those for people 65-67).   Against that backdrop, there is something just wrong about having a universal pension paid to them –  well, me not that many years hence on current policy –  simply on the basis of having got to that age.

Fans of a Universal Basic Income will, of course, not agree.  I am not a fan, having both practical and moral objections to a UBI.