Month: July 2015

The zero lower bound and Miles Kimball’s visit

Michael Reddell Monetary policy, zero lower bound

One of my persistent messages on this blog has been that central banks and finance ministries need to be much more pro-active in dealing with the technological and regulatory issues that make the near-zero lower bound a binding constraint on how low policy interest rates can go, and hence on how much support monetary policy can provide in periods of excess capacity (and insufficient demand).

I’ve found it surprising that the central banks and governments of other advanced economies have not done more in this area. In most of these countries, policy interest rates have been at or near what they had treated as lower bounds since 2008/09. A few have been plumbing new depths in the last year or so, but half-heartedly (the negative rates have not applied to all balances at the central bank), and no one is confident that policy interest rates could be taken much below -50bps (or perhaps -75bps) without policy starting to become much less effective. The ability to convert to physical currency without limit is the constraint. There are holding costs to doing so, but for all except day-to-day transactions, the holding costs would be less than the cost of continuing to hold deposits once interest rates get materially negative. For asset managers and pension funds, for example, that shift would look attractive.  I would certainly recommend that the Reserve Bank pension fund (of which I’m an elected trustee) transferred much of its short-term fixed income holdings into cash if the New Zealand OCR looked likely to be negative for any length of time.

I’ve been surprised by the lack of much urgency in grappling with this issue in other countries. I suspect there must have been a sentiment along the lines of “well, getting to zero was a surprise, and inconvenient, but we got through that recession, it is too late to do anything now, and before too long policy rates will be heading back up to more normal levels”.     But they haven’t, despite false starts from several central banks. And each of these countries is exposed to the risk of a new recession, with little or no macroeconomic policy ammunition left in the arsenal. Interest rates can’t be cut, and the political limits to further fiscal stimulus are severe in most advanced countries.

If the rather sluggish reaction of other advanced country central banks (and finance ministries) is a surprise, the lack of any initiative by the New Zealand and Australian authorities is harder to excuse. Neither country hit the zero bound in 2008/09, or in the more recent slowdown (Australian policy rates are now at their lows, and commentators increasingly expect that New Zealand’s soon will be).  The period since 2008/09 should have shown authorities that the zero lower bound is much more of a threat that most of us previously realised (not just, for example, a Japanese oddity). It should have suggested some serious contingency planning – as, for example, the Reserve Bank of New Zealand had done as part of whole of government preparedness for the possibility of a flu pandemic. Both countries have had years to get ready for the possibility of the zero lower bound. It is not as if the experience of the countries who have hit zero is exactly encouraging – slow and weak recoveries and lingering high unemployment.

But neither New Zealand nor Australia appears to have done anything about it. Indeed, in the most recent Reserve Bank of New Zealand Statement of Intent these issues don’t even rate a mention. I’m not suggesting it is the single most urgent or important issue the central banks face. Contingency planning never is, but that does not make doing it any less important. I’m also not suggesting that New Zealand is as badly placed as some – if we were to get to a zero OCR, our yield advantage would disappear and the exchange rate would probably be revisiting the lows last seen in 2000. And we have some more room for fiscal stimulus than some other countries. But no central bank or finance ministry should contemplate with equanimity the exhaustion of monetary policy ammunition.  Nasty shocks are often worse than we allow for.

My prompt for this post is the visit to New Zealand this week of Miles Kimball, Professor of Economics at the University of Michigan (and an interesting blogger across a range of topics). Kimball has probably been the most active figure in exploring and promoting practical ways to deal with the regulatory constraints and administrative practices that make the ZLB a problem. They are all government choices. I’ve linked to some of his work previously. I noticed Kimball’s visit through a flyer for a guest lecture he is giving at Treasury on Friday, on a quite unrelated topic. I presume he will also be spending time at the Reserve Bank, addressing some of the monetary issues. This would seem like a good opportunity for some serious and enterprising journalist to get in touch with Kimball – whether directly, or via the Reserve Bank or Treasury – for an interview on some of his work in this area, and the reaction he is getting as he promotes his ideas, and practical solutions, around the world.

I’ve suggested previously that if our authorities are not willing to start on serious preparations to overcome the ZLB then the Minister should think much more seriously about raising the inflation target. I’d prefer to avoid a higher inflation target – indeed, in the long-run a target centred nearer zero would be good – but current inflation targets (here and abroad) were set before people really appreciated just how much of a constraint the zero lower bound could be. Better to act now so that in any future severe recession there is no question as to ability of the Reserve Bank to cut the OCR just as much as macroeconomic conditions warrant.

Here are some other previous posts where I have touched on ZLB issues:

On the physical currency monopoly, and thus block to innovation, held by central banks.

On a sceptical speech on these issues by a senior Federal Reserve official

How not to have a “reasoned and deliberate discussion” of housing and immigration

Michael Reddell Housing

I noted in my post yesterday that I was a little surprised at how NBR had characterised differences between Shamubeel Eaqub and me around how to think about the contribution of immigration policy to housing demand. The description was “war of words”, something I didn’t recognise. But I hadn’t seen the article then.

As I noted yesterday, the difference is simply about how to interpret net PLT migration figures. Shamubeel uses them to conclude that immigration policy has not been a major influence on housing demand over 50 years. I pointed out, in response, that immigration policy is about how many non-New Zealanders we let in, and how long we let them stay. It does not affect the movement of New Zealanders at all. Accordingly, if we want to understand the role of immigration policy, we should focus mainly on data on the movement of non-New Zealand citizens. I have used the net inflow of non-New Zealand citizens as a proxy, while noting that it is not a perfect proxy.  On that measure, most of the trend increase in household numbers is now down to immigration policy choices.

So far I thought we just had the sort of difference that crops up all the time in analysing data. Someone proposes a hypothesis, with some numbers, and others respond questioning whether, for example, the data cited are showing quite what the first analyst thought they were. That sort of debate is how we advance our understanding. I didn’t (and don’t) challenge the accuracy of Shamubeel’s numbers (and I’m sure he isn’t challenging mine). The only issue should be what light each set of numbers sheds on the issue (and which issues they each shed light on). As I put it yesterday, if people prefer I’m quite happy to say that (given land use and housing supply restrictions) the large net outflow of New Zealanders has greatly eased pressure on house and urban land prices, and the (even larger) policy-facilitated net inflow of non-New Zealanders has greatly exacerbated pressures.    But only one is a immigration policy matter.

To the extent I had given it any thought, I assumed Shamubeel was approaching the discussion in the same dispassionate way.   In his book (page 129) he notes:

Economist Paul Collier, in his book Exodus argues that we need to talk openly about immigration. Not through the lenses of envy and racism, but in the context of a reasoned and deliberate discussion of why we want immigration, how many people we want, and what kind of people we want.

I nodded, largely agreeing, when I read that passage. Collier’s book is also worth reading.

But this morning I picked up a copy of the print edition of NBR and understood immediately Jenny Ruth’s “war of words” description. Instead of “reasoned and deliberate discussion” my argument is simply dismissed by Shamubeel as “That’s racist”, and “he’s always had this thing about non-New Zealanders. That’s pretty much been the tenor of his work over the last three years”, and “he’s taken a biased approach”.

And there is nothing more than that. There is no sense as to why, as a descriptive exercise, he disagrees with my interpretation of the role of immigration policy in explaining medium-term demand for housing.

Perhaps he provided a more substantive response to the journalist and she didn’t report it, preferring only to report the slurs?  (With apologies to Jenny Ruth) I rather hope so, because Shamubeel is someone whose contributions to economic analysis I have had some time for (indeed on this blog, I encouraged people to read his book) . I think he is much better than is suggested by simply falling back on labels like “racist”, or even “he has this thing about non-New Zealanders”, when someone challenges his framing of the numbers.

I’ve been posing some questions around New Zealand’s immigration policy and the implications for understanding economic performance for five years now. When one is discussing, or researching, the implications of immigration policy, inevitably one is focusing on non-New Zealanders. That is who immigration policy affects. As Shamubeel notes, we (and every country probably) need “reasoned and deliberate discussion of why we want migration, how many people we want, and what kind of people we want”.

In that time I’ve debated the issues and analysis with many people- here and abroad, New Zealand born and foreign born – and I’m pretty sure no one has ever previously accused me of racism.  These are important analytical and policy questions, and the prospects for reasoned and deliberate discussion recede further when people contributing to it the discussion are simply labelled “racist”, rather than engaging on the substance of the issues and analysis.

I hope that Shamubeel will, on reflection, withdraw his slur. As ever, I would be very happy to engage him (or anyone) on the substantive issues (whether interpretative, analytical or policy). And I still think people will benefit from reading his book.

Welfare numbers

Michael Reddell Welfare

I noticed a piece in the newspaper this morning reporting the latest quarterly welfare benefit numbers, including enthusiastic comments from Anne Tolley, the Minister of Social Development.

The report highlighted that the number of working age benefit recipients had reached the lowest June level since June 2008 – the lowest level in the last couple of decades (even though by June 2008 New Zealand was already two quarters into a recession).

These numbers do look like mildly good news, but need to be kept in context.

First, the Minister encourages us to look at annual changes because “quarterly data was subject to seasonal influences”. So perhaps she could ask MSD to resume the practice of publishing seasonally adjusted data. Other agencies do it.

But even focusing on the annual data, these numbers suggest that the best is behind us. Here is a chart of the annual change in the number of working age people on main benefits. At best, a couple of years ago, numbers on benefits were not dropping quite as rapidly as they had been in 2007 (by which time, GDP growth rates were unspectacular). And for the last 18 months or so, the rate of decline in benefit numbers has itself been dropping away. That would be not inconsistent with signs that the unemployment rate has levelled out and, more recently, that the pace of economic growth is slowing.  A more robust recovery – not something the Minister of Social Development can do much about – could have made deeper inroads to the beneficiary numbers.

benefits

But standing further back, the MSD release notes that 10.3 per cent of the working age population is on one of these main benefits.  Repeat slowly: one in ten working age adults is primarily dependent on state welfare benefits for their income. And 74 per cent of those people have been on a main benefit for more than a year.

And how about the ethnicity of recipients. 120000 benefit recipients identified as NZ European and 99000 as Maori. 2013 Census numbers suggests there were just over 300000 people (ages 20-64) self-identifying as Maori.   How people self-identify in the Census might be different to how they identify themselves in MSD, but it looks as though almost one in three adult working age Maori are primarily dependent on state welfare benefits.  And that in an economy with an unemployment rate of under 6 per cent.  It is shameful.  I’m not suggesting it is primarily the current government’s fault. But it is not clear how seriously they, or previous governments, take it. Or whether they are really willing to ask hard questions about how this welfare dependence came to be.

Finally, while it is encouraging to see the numbers on working age benefits dropping, and the government has taken some steps that have assisted that process (which is generally dominated by the economic cycle), don’t forget that total welfare benefit numbers are rising each and every year. MSD don’t make it easy to find quarterly data on the numbers receiving New Zealand Superannuation, but they look to be rising by 20000 a year.  Working age benefit numbers are now dropping by 8000 a year.   That rise in NZS numbers is something that the government could have done something about, by gradually raising the age of eligibility, but has resolutely determined not to do so.

So, yes, there are some mildly encouraging points.  But there is, surely, so much more to do.  Can any of us be content, longer-term, with a society in which such large proportions of the population rely on state grants for their income?

Two comments on housing

Michael Reddell Housing

This morning I updated my chart of mortgage approvals per capita. I’ve shown it previously and I like it because it is very timely data.  As you can see, the number of mortgage approvals per capita is running just slightly ahead of last year’s level. But the number of approvals is running below the average, for the time of year, in the 12 year history of the series. In fact, in only three years (2010, 2011, and 2014) have approvals been lower than they are this year.

mortgage approvals 2

What do I take from this? First, it reiterates the point that across the country as a whole the housing markets are not particularly buoyant. House sales per capita are far below the peak in the previous boom. Most places have real house prices below previous (2007) peaks, and in most places nominal house prices are pretty flat.

Auckland is a (big) exception. If we had mortgage approvals data on a regional basis, perhaps we’d find that Auckland’s were nearer to or even above the historical median, while the rest of the country might be tracing the lows. But the non-resident demand for houses in Auckland may also be relevant here. We don’t know how large the contribution of that demand to rising house prices is, but much of those purchases (however large or small they are) are probably either cash purchases, or perhaps financed with credit from abroad (not captured in New Zealand data).

I think these data also tend – not conclusively, but suggestively – to confirm the line I ran in my submission last week on proposed investor finance controls. There is simply no evidence that rising house prices in Auckland are to any material extent the result a credit-driven process. If they were, not only should the Reserve Bank be able to point to concrete evidence of deteriorating lending standards, but we would also expect to see lots of mortgages being approved. In fact, only three years have been weaker.

Changing tack, I see that print edition of the NBR has an article about what is described as a “war of words” between Shamubeel Eaqub and me, about the contribution of immigration policy to the house prices pressures in Auckland over time.  I didn’t recognise the description (“war of words”)  and the print edition of NBR isn’t sold this far out in the suburbs so I haven’t yet seen the article, but I just wanted to explain again the difference in how Shamubeel and I are interpreting the same data. I set it out here a few weeks ago.

Shamubeel notes (correctly) that net migration has accounted for only 9 per cent of household formation in New Zealand over the last 50 years. My point is quite simply that net PLT migration (which is probably understated on average over time) is not a description of the contribution of immigration policy. Immigration policy affects the arrival (and duration of stay) of non-citizens. Using the net flow of non-citizens as a proxy for the policy-controlled bit, I concluded that immigration policy accounts for most of the household formation in New Zealand in the last couple of decades. Since 2006, on this proxy, it accounted for 106 per cent of household formation.

I think it would be entirely reasonable to say that, on the one hand, the large net migration outflow of New Zealand citizens over decades has greatly eased pressure on the housing market (taking as given land use restrictions), and, on the other hand, the large net inflow of non-NZ citizens, which is over time a policy-controlled variable, has (even more) greatly exacerbated those pressures. The net effect of the two independent forces might have been modest over 50 years, but one limb is the endogenous behaviour of private NZ citizens, and the other is the direct outcome of policy choices. I might comment further later when I’ve seen the NBR piece.

A severe commentary

Michael Reddell Monetary policy, Reserve Bank

Plenty of commentaries have remarked on the very low inflation numbers out this morning.

None (that I have seen) has highlighted what a severe commentary these numbers are on the Reserve Bank’s conduct of monetary policy over the last few years.

Reciting the history in numbers gets a little repetitive, but:
• December 2009 was the last time the sectoral factor model measure of core inflation was at or above the target midpoint (2 per cent)
• Annual non-tradables inflation has been lower than at present only briefly, in 2001, when the inflation target itself was 0.5 percentage points lower than it is now.
• Non-tradables inflation is only as high as it is because of the large contribution being made by tobacco tax increases (which aren’t “inflation” in any meaningful sense).
• Even with the rebound in petrol prices, CPI inflation ex tobacco was -0.1 over the last year – this at the peak of a building boom.
• CPI ex petrol inflation has never been lower (than the current 0.7 per cent) in the 15 years for which SNZ report the data.
• Both trimmed mean and weighted median measures of inflation have reached new lows, and appear to be as low as they’ve ever been.

This wasn’t the way the Bank told us it was going to be. And more importantly, it wasn’t the basis on which they held interest rates up through 2012 and 2013, and then raised them last year. As late as December last year, they were still talking of raising the OCR further. Real interest rates never needed to rise, and as a result of the misjudgement they rose even further than the Bank intended (inflation expectations fell away).

It has been a sequence of cumulatively severe misjudgements. The word “mistake” keeps springing to mind, although of course the Governor rejected that characterisation at the time of last month’s MPS. Perhaps he is rethinking now? As I’ve pointed out previously, inflation outcomes so far weren’t mostly the result of unforeseeable external economic shocks. And if core inflation measures are this weak now, we have to start worrying what will happen to them as economic growth slows further, construction pressures ease, and the deepening loss of income from the declining terms of trade bites. Wage inflation has been very low, and more recently wage inflation expectations have been falling.

The Reserve Bank has belatedly recognised the need to modestly change direction. The Governor cut the OCR by 25 basis points last month, and foreshadowed that at least one more cut was likely. But the problem is that they are still well behind the game. The data are weakening faster than they are cutting, and the OCR was already too high right through last year. Difficult as it might be to make a large move at an intra-quarter review next week, the substantive case for a 50 point move is certainly strong. If not next week, then at the latest it should happen at the September MPS. There also needs to be a recognition that there is nothing wrong or inappropriate even if the OCR goes to new lows. The OCR simply needs to be set consistent with a realistic appraisal of the inflation outlook (not the upwardly biased one that has guided too many central banks in recent years). An apology, and a heartfelt mea culpa, from the (single decision-maker) Governor would also be appropriate.

As inflation expectations measures are likely to keep falling, this mistake is also increasing the risk that the zero lower bound will end up being binding in New Zealand. But, if we take the Reserve Bank’s Statement of Intent seriously, this is not something they worry about. They should.

But questions also need to be asked about the role of the Bank’s Board as agent for the public and the Minister of Finance. Inflation outcomes now are reflecting policy choices made last year. But here is all the Reserve Bank Board has to say about monetary policy in their latest Annual Report, published only nine months or so ago. In introducing the document, they note that:

Our formal review of the Bank’s performance is included in the Bank’s Annual Report.

And when they get to monetary policy

In the last year, we have considered the Bank’s decisions to hold the OCR at a record low of 2.5 percent for an unprecedented three-year period, and to increase the OCR four times from March to July 2014.

The level of disclosure in monetary policy was very high. We considered that the Bank’s policy decisions were appropriate, initially taking into account the need to provide support for the economic recovery after the disruptions of recession and earthquakes, and lately the need to ensure that the recovery is sustainable, by restraining emerging inflationary pressure.

This was a “formal review”? I still find it astounding that, less than a year ago, the Bank’s Board – the independent agency responsible for scrutinising the Bank – made no mention at all of the continued undershooting of the inflation target. I’m not suggesting they should have read the data better than the Governor – they are paid as ex-post monitors, not as monetary policy decision makers – but there is little sign of any serious scrutiny at all. It reinforces my view that the governance model is inappropriate in a wide variety of dimensions, and that the Board in particular plays little useful or effective role as agent for either the Minister or the public. By construction, it is simply too close to the Bank, and thus is more prone to act as defensive cover for the Governor, than as a source of serious scrutiny and challenge in the public interest. At very least, we should expect something much more substantive from the Board in its next Annual Report.

The Minister of Finance has commented a couple of times recently about the Bank undershooting the inflation target midpoint (which was added explicitly to the PTA by him in 2012). Such “shots across the bow” seem both understandable, and quite appropriate. The Minister initiates the inflation target, but has no say in individual OCR decisions. But he is responsible to the public (and Parliament) for having the target met by the Governor. Whether with hindsight or foresight, monetary policy has been too tight for probably five years. Partly as a result, New Zealand’s economic recovery has been anaemic – much more muted than in a usual recovery, despite the huge boost to demand provided by the Canterbury repair and rebuild process. The unemployed pay a particularly severe price for that, but they aren’t the only ones.

The real question is whether the Minister is willing to do more than talk. My impression is that his instincts are often in the right direction, but there is often a reluctance to follow through (one could think of housing supply issues as a prime example).

I’ve touched previously on some of the options the Minister has to show that he takes these issues seriously. In May I noted:

The Minister could seek a report from The Treasury on their view of how well the Governor was doing consistent with the Policy Targets Agreement, could let it be known such work was underway, and could arrange for such a report to be published. The New Zealand Treasury offers independent professional advice to the Minister of Finance and would have to take seriously such an exercise. It might be expected to consult externally (but confidentially) to canvass opinion. At present, for example, most financial market economists – not the only relevant observers but not unimportant either – in New Zealand seem quite comfortable with the Governor’s handling of monetary policy.
The Minister could also seek formal advice from the Bank’s Board, and let it be known that he was doing so. This would be a totally orthodox approach – the Board exists as a monitoring agent for the Minister – and it was, for example, the approach taken in the mid-1990s when inflation first went outside the target range. The Board has a number of able people on it, but as an effective agent for accountability risks being too close to management. The Governor sits on the Board, the Board meets on Bank premises, it has no independent resources, and it has been chaired exclusively by former senior managers of the Reserve Bank. It was striking that last year’s Board Annual Report (which is just embedded in the Bank’s Annual Report document) had nothing substantive on the deviation of inflation from the policy target.

Those are both still serious options. I suspect that it might be timely to exercise both of them.

Longer-term, it is now only just over two years until the Governor’s term expires. There must be real questions as to whether Graeme Wheeler could credibly be reappointed (recommended by the Board or accepted by the Minister) after his succession of overconfident monetary policy misjudgements, and in light of the poor quality analysis he has used to support his over-reaching policy initiatives in the regulatory areas. Perhaps Graeme will make it easy and conclude that, at his age, one term is enough?

The mistakes of the last few years don’t result primarily from the governance model, but the governance model – with too few checks on the Governor, as decision-maker and chief executive responsible for all the supporting analysis – is likely to have contributed. The mistakes –  an exaggerated version of those made in various other countries – highlight the material weaknesses in our most unusual system. The start of a new gubernatorial term is a good opportunity for the Minister to take the lead in reforming the Reserve Bank Act to bring governance of this powerful agency more into line with international practice and with governance standards in the rest of the New Zealand public sector. Treasury recommended doing something in 2012, and the Minister refused. He should take the lead this time. If he did, I suspect he would find pretty widespread support – from other political parties and from market economists. Perhaps even from the Reserve Bank itself.

PS.  Following on from earlier commentary, SNZ has altered how it is doing seasonal adjustment of the non-tradables inflation series.  The cost of doing so, is quite a short series, but for what it is worth, seasonally adjusted quarterly non-tradables inflation last quarter (0.3 per cent) was about half what it had been each quarter for the last 2-3 years.

Considering the veracity of Chinese GDP – Christopher Balding

Michael Reddell Uncategorized

One of my favourite sites for making sense of what is, and isn’t, going on in China is Balding’s World, written by Christopher Balding, a professor of economics of Peking University.

He has had a succession of useful posts over the last few weeks, and here is the link to his piece on yesterday’s somewhat implausible GDP data.  The summary of Balding’s take is captured in his title.  As he notes, the problems with Chinese data have been deep-seated, extensive, and long-running.  In conclusion he tellingly observes:

Only last month, an initiative was announced to improve labor market data as the official unemployment rate has been nearly unchanged for more than a decade.  If Chinese leaders are telling the world how poor the statistical agencies in China are, imagine the reality.

Wouldn’t it be preferable if these issues were getting serious treatment in the media rather than the hyper-ventilation about the gyrations of the Chinese stock markets? When stock prices rise 100% in less than a year, in an economy that appears to have been slowing sharply, sharp falls are hardly a surprise. And they mean no more for economic performance than falls in stock prices in the US in 1929 did – while media continue to run a cheap, incorrect, line that a collapse in share prices somehow caused the great depression. Stock prices move for a reason, and it is much more useful to try and get behind what is going on in the underlying economies than to focus too much on share prices themselves. That was true in New Zealand around 1987, and is probably true of China today.

The Productivity Commission looks into immigration

Michael Reddell Australia, Immigration, New Zealand economic performance

The Australian Productivity Commission that is.

The Australian Productivity Commission has underway an interesting inquiry, initiated by the Federal Treasurer, into immigration to Australia. Here is the scope of the inquiry, taken from the Treasurer’s Terms of Reference.

aus pc1
aus pc2

It is interesting that the Australian government has chosen to initiate another Productivity Commission inquiry only 9 years after the previous large report into the economic impact of immigration. That bulky report concluded that in Australia, the gains from immigration mostly accrued to the immigrants, with little evidence of any material gains to native Australians. Despite the size of that earlier report, there was some aspects of the economic issues (possible benefits, as well as possible costs) that were not covered at all, and the modelling work that was done looked at the medium-term rather than the long term.

The new inquiry has two areas of focus. The first is helping to answer the questions about the costs and benefits of immigration, both to Australian citizens more generally and to the fiscal position of Australian governments more specifically. The second is around the intriguing idea of charging for entry. The idea of rationing entry by price turns up in immigration debates from time to time. “Intriguing” here is my code word for something like “this idea appeals to the economist in me, but yet there is something about it – which I can’t quite put my finger on – that is distasteful, and it seems unlikely to fly”. I can’t see it happening, and yet I’m not entirely sure why it shouldn’t. If we set aside the refugee quota, countries like New Zealand and Australia allow and promote immigration largely for economic reasons, and a price should tell something useful about who could get most value out of permission to live in our country. Perhaps willingness to pay is not overly well aligned to ability to help generate domestic productivity benefits?   But is there good reason not to use price to ration demand for places among those who meet certain basic criteria (age, English language, lack of criminal history etc)? It will be interesting to see what the Commission comes up with in this area.

To their credit, the team working on this immigration inquiry sent a couple of senior people to Wellington this week. New Zealand has quite similar immigration policies to Australia, and for Australia in particular, the largely-free trans-Tasman immigration area also complicates things (as it does for us, in the possibility of people returning home late in life to claim New Zealand welfare benefits). I was among the various groups of public and private sector people they met while they were here, and we had a good wide-ranging discussion.

I noted that I had increasingly come to think that good immigration policy – in countries like ours, with no treaty obligations to allow open access, and (unlike Israel) no national identity/security reasons to promote immigration – is best thought of as an optional complement to economic success. The alternative, which seems to be at the heart of the arguments of immigration advocates in New Zealand, is to see immigration policy as an engine (perhaps large, perhaps small) helping generate economic success.  I can’t think of a country – going back centuries – where immigration has materially improved the economic fortunes of the recipient country. In the last great age of immigration – the decades prior to World War One – migrants flowed to countries that were already economically successful (be it New Zealand, Australia, Canada, Argentina, the United States or even within Europe itself). Economic success allows a country, if it chooses, to support more people at high incomes. And emigration eases the pressures in the source country, lifting living standards among those who remain.

There is, of course, an exception to my story. Immigration has transformed the economic prospects of some physical territories, but only by totally taking over and largely replacing the indigenous population, and the economic institutions of that culture.   New Zealand – like each of the colonies of settlement – is an example of that. And it is an uncomfortable example. My assessment (backed, for example, by the work of people like Easterly, looking at long-term global economic performance) is that Maori average incomes are higher now than they would have been without extensive European settlement, but was the trade worthwhile – across all its dimensions – for the indigenous population? There are huge discontinuities between 21st century New Zealand and 18th century “New Zealand” that don’t exist for, say, the United Kingdom or France.

By advanced economy standards, New Zealand is a classic example of an underperforming country that people should be leaving. And, of course, for decades New Zealanders have been doing so, mostly to more successful Australia.   Of course, we can always attract plenty of people from other (even poorer) countries if we want to. But why would we?     There is no obvious area of the world where the culture and economic institutions are so obviously superior to our own Northern European-sourced ones that we can get the sort of transformative gains (at whatever costs) that Maori may have achieved by allowing extensive European settlement in the 19th century. There is no sign in the data that slightly larger countries grow faster (per capita) than slightly smaller ones.  And there is no reason to think we can somehow attract the very best of possible migrants to a small, remote, underperforming, but pleasant, country.   And if current migration patterns were repeated at scale, or for long enough, we would face the risk of factor price equalisation occurring, but not in the way we want – the typical migrant to New Zealand comes from countries, and economic cultures, that generate materially lower living standards and levels of productivity than New Zealand (or Australia) does.

The draft report of the Australian inquiry is due out in mid-November. I’ll be keeping an eye out for it. Perhaps it might be time for a similar inquiry in New Zealand. I think I’ve mentioned that when I first started raising my arguments about the possible link between immigration policy and New Zealand economic underperformance, there was a lot of discomfort at Treasury. Senior people then talked of the new Productivity Commission as a good place for such issues to be explored. That remains true today, and Treasury has a key role in advising ministers which inquiries to request from our Productivity Commission.

I have had Official Information Act requests in for some time with Treasury and MBIE for copies of advice to ministers on the economic impacts of immigration, and on the target level of permanent residence approvals. As is customary with government agencies, the responses to the requests have both been extended/delayed.   These aren’t particularly time-sensitive requests, but I will be interested to see what the departments have had to say. MBIE is well-known to be strongly pro-immigration, and I have heard reported that current Secretary to the Treasury (himself a temporary migrant) recently reiterated in private a view that “immigration is good; it is as simple as that” (repeating the tenor of comments in a speech earlier this year). Perhaps, but let’s see the argumentation, in the specific context of New Zealand, and in the light of cross-country economic history and experience.

Offshore demand for houses – some further thoughts

Michael Reddell China, Housing

Rodney Jones has a nice piece on the Herald website about the non-resident property issue, perhaps slightly oversold by the sub-editors as “How he’d solve the property crisis”.  Before non-resident purchases were a material issue, house prices (especially in Auckland) were still hugely distorted by poor domestic policy.

Rodney’s approach to understanding the issue is very similar to that in my post yesterday, emphasising how historically unusual the situation is in which a large economic power has such weak domestic institutions that its citizens are looking to buy individual houses in other countries.  As he notes “to express concern about the potential impact of these flows is not racism”.

Rodney goes further than I would yet do.  He proposes a 20 per cent stamp duty on non-resident purchases of Auckland [residential?] property.  Turnover taxes generally make me feel queasy, and I’m always reluctant to endorse a regional approach to tax policy in a unitary state – which creates its own new distortions.  Since there is probably relatively little offshore demand for property outside Auckland there would be no harm in extending such a tax, if it were adopted, to the entire country.   But I suspect that the terms of our various free trade agreements might be more of a constraint.  Some FTAs might allow such restrictions, and some might not, but the China agreement for example does not allow us to adopt measures that discriminate against China relative to other countries (and we have a strong commitment to an open market between New Zealand and Australia).  And I doubt that such a tax could credibly be sold as a “macro-prudential” measure.  But Treasury and MFAT should be carefully exploring the legal options,  and the implications of our interacting web of FTAs, if they have not already done so.   It is not impossible that there is nothing that could legally be done that would not cause more distortions and costs than they would be worth

Rodney’s is a much more substantive contribution to the debate than the lofty op-ed penned by former Foreign Minister (and head of something called the New Zealand China Council) Don McKinnon.  In this surveillance age, the article is somewhat ominously titled “China listening to our housing debate”.  Then again, perhaps we should celebrate the fact.  We are open society, and have our debates openly.  China doesn’t, and its people are the poorer for that.

Or what of the reported comments of Pat English, executive director of the New Zealand China Council.  He claims that “New Zealand has a superb relationship with China. But Labour has done immeasurable damage to that relationship, due to where the debate has ended up”.   Really?  Where is the evidence?  Of course, he may be literally correct – since any damage is unable to be measured.  But any relationship that can’t stand the strain of open public debate is one of rather questionable value.   And these issues are being debated in many other countries too.

In open societies sometimes mixed messages might be heard.  And actually sometimes ambivalence is real and appropriate.  I suspect we’d be happier, and China’s citizens would be happier and better off, if they had the ability to, for example, buy secure freehold title to property in China. Or a system with the sort of economic governance, and rule of law, that the US or the UK had as they rose to dominant positions in the world economy, that made “capital flight” simply unnecessary.  China would probably be better off if, as an emerging economy, it were running current account deficits (drawing capital in from the rest of the world) rather than current account surpluses.  Of course, China’s brutal authoritarian leaders might be less happy and less secure, but that is scarcely a priority for New Zealanders.

Richer than Australia by 2025? Really……

Michael Reddell New Zealand economic performance

I opened the Dominion-Post this morning to find this story, reporting the aspiration of the new Wellington Regional Economic Development Agency (WREDA, mostly a Wellington City Council agency) that Wellington should be, by 2025, “the most prosperous, liveable and vibrant region in Australasia”.

Memories of an earlier 2025 goal flooded back.  I helped the government’s 2025 Taskforce with their reports, which outlined policy proposals for how New Zealand might catch up with Australia economically by 2025.  But that was 2008/09, and for a whole country.  At the time, the Taskforce concluded that New Zealand could catch up with Australia over 16 years, with the right set of policies, but it required a fairly major reorientation of policy, across numerous fronts, pretty quickly.

But now there is only 10 years until 2025, and the Wellington City Council (with a bit of help from the Regional Council) wants to make Wellington not just as prosperous as the average Australian city, but more prosperous than any of them.  The Tui billboards spring to mind.  Even one of the more sensible regional councillors agrees the timeframe is unachievable.

In search of any substance behind this ambition, I dug out WREDA’s Statement of Intent.  But there was no substance.  There was:

  • No quantification of any of these goals, or any attempt to illustrate how large the gaps are now.
  • No analysis of the economics of cities.
  • No analysis of the sorts of policy tools that are, and are not, available to local councils, and how much difference they have ever made to regional per capita growth.
  • No analysis (or links to other analysis) of the costs and benefits of the grab-bag of policy ideas they do list.
  • No analysis of what has been done in the past, and what has worked and what has not.

At one level it is just a bureaucractic/political feel-good document.  But these sorts of agendas, together with an ambitious new CEO, tend to become the basis for new council spending proposals –  the commitment of real resources that belong to citizens, with little effective accountability.

I’m all for ambition.  Sadly, I think many of New Zealand’s elites have been too willing to settle for the mediocre economic performance New Zealand has achieved over the last 25 years.  But to the extent that governments can change medium-term economic outcomes, it is mostly central government that matters.  If Wellington is ever the most prosperous city in Australasia, it will be because of choices central government has made, and how the private sector has responded to that improved environment.  Central government controls taxes, most regulation, immigration, education, and so on.  Relative to that list, the difference any council can make is very small – and the track record (sports stadia, street car races, application of land use restrictions, and so on) seems pretty poor.  Of course, central government does lots of crazy stuff too (in a Wellington context, film subsidies), but at least they have the potential to make a lot of difference for the good.

This story, small in itself, is just another reason to be wary of seeing local councils as the solution to problems.  In discussions around housing, for example, some, including the Productivity Commission, have argued that a big part of the problem is councils held back from doing “the right thing” by the lobbying and votes of citizens.  Personally, I reckon that the problem is more likely to be one in which councils pursue their own interests and ideologies with little effective check on those activities by citizens.  Strengthening the property rights of citizens, and reducing what damage councils can do, seems a more promising, and economically efficient, way forward.

In the meantime, perhaps the Wellington City Council could get on with stuff we must actually look to councils to do.  The seawall at Island Bay was badly damaged (photos here) in a storm more than two years ago.  Since then, we’ve had a long consultative process, but there has been no progress in actually fixing it up.  Simple really.  They can do it. It will make a material difference to people living here now.  But instead we get this pie-in-the-sky aspirational stuff, with little or nothing behind it.

A useful SNZ innovation, but a question

Michael Reddell Uncategorized

Statistics New Zealand, our under-resourced national statistics agency, has just taken another small but useful step forward.  As from the June quarter CPI this week they will be publishing additional series seasonally adjusting the CPI data.  Most other major SNZ series are published, and analysed, in seasonally adjusted terms and there is clearly significant seasonality in some of the components of the CPI.  Analysts could previously do their own seasonal adjustment but few did, and none of those estimates got any media coverage.  In time, we might hope that the seasonally adjusted series will become the ones analysts and media focus on.

Last week, SNZ released the seasonally adjusted historical data.  True to my hope that people would focus on the seasonally adjusted series, I went to the table which showed quarterly non-tradables inflation in seasonally adjusted terms.  As one who has been sceptical for a long time of the Reserve Bank’s story that core inflation is just about to turn up, I was somewhat taken aback to find SNZ reporting that seasonally adjusted non-tradables inflation had been 0.8 per cent for the March quarter, up from 0.5 per cent in each of the previous three quarters.

But then I looked at the rest of the series, and was disconcerted to find that in each of the previous three years, the March quarter inflation rate had been higher than the quarterly inflation rates for each of the other three quarters.  That looks a lot like some residual seasonality that hasn’t been picked up in the seasonal adjustment.  I took comfort from the fact that the March quarter increase was the (equal) lowest March quarter increase over 2011-2015.   But something about the seasonally adjusted series doesn’t look quite right.

cpi seas adj

(If anyone from SNZ has an explanation, I’ll happily report it.)

In terms of future innovations, backdating the tradables and non-tradables breakdown, as official (even if “experimental” or “analytical”) SNZ series, would be helpful.  The Reserve Bank has estimates going back to the early 1990s that we derived from detailed SNZ data (not initially very scientifically –  I and one of my staff went through the components with a pen, labelling each T or NT), but it would be useful to have semi-official series going further back than 2006.  Producing good linked estimates of trimmed mean and weighted median inflation further back would also be helpful.

And then, one day, perhaps we might dare to hope that SNZ might be funded to allow the publication of a monthly CPI, joining the rest of the advanced world (other than Australia, the only other country producing a quarterly CPI).

UPDATE: A commenter reminds me of the role of the tobacco tax increases.  Here is the SNZ comment

Non-tradables are goods and services that do not face foreign competition. They include rentals for housing, and services such as hairdressing. The non-tradables series is seasonally adjusted. The algorithm suggested the series probably wasn’t seasonal, but that there was emerging seasonality in the data over the past three years. Figure 5 below shows this, where the pattern from 2011 in the actual series appears to be more consistent than previously. We see the biggest peak occurs in the March quarters in the actual series, but this effect is lessened in the seasonally adjusted series.

The multiple-point method detects seasonality in the full time series when we include the more recent quarters. We investigated to see if any one contributing series was influencing the pattern and found that cigarettes and tobacco did increase the size of the peak in March quarters since 2011. Checking the diagnostics, we found it was a marginally seasonal series and decided to seasonally adjust.

Sadly, this suggests that the seasonally adjusted series is not very helpful.