Who speaks for the 35000 unnecessarily out of work?

Michael Reddell labour party, Monetary policy

The Labour Party’s finance spokesperson, Grant Robertson, yesterday took the opportunity of today’s OCR review to make another statement on monetary policy.  I was pretty critical of his previous effort, which seemed to involve trying to blame Bill English for Graeme Wheeler’s errors and misjudgements.

The latest statement is little more inspiring.  It was good to see him focus on the high and rising rate of unemployment, and to point out that inflation hasn’t been at the 2 per cent midpoint since that target was set three years ago.

But he wants to use this record as a basis for amending the Reserve Bank Act to “put employment up as a core objective“.  I presume he would really mean low unemployment, since the Reserve Bank would (reasonably) point out that employment growth and participation rates have done quite well over the last few years.  And unemployment is the measure of excess capacity in the labour market.

Robertson talks about a dilemma that the Governor apparently faces.  But there simply isn’t one.  Inflation (and more particularly core inflation measures) is well below where it should be, and unemployment is (rising and is) much higher than it needs to be (than any plausible NAIRU).  That is a classic case of a demand shortfall, and the standard prescription is looser monetary policy.  Lower interest rates and a lower exchange rate will tend to raise both activity and inflation, and lower unemployment.

There are times when monetary policy faces hard choices –  when keeping inflation near the target might involve measures that will temporarily raise unemployment.    Some of them are explicitly addressed in the Policy Targets Agreement (and have been ever since 1990), and others are captured in a more general way –  the PTA is quite clear, for example, that the focus of monetary policy is supposed to be on the medium-term trend in inflation, not the near-term wobbles.  And, for better or worse, for 15 years the PTA has explicitly enjoined the Bank to avoid unnecessary variability in output.

I’m not a diehard defender of the way the monetary policy bits of the Reserve Bank Act are worded, or even of inflation targeting itself.  There might even be some sensible ways of formulating section 8 of the Act to include references to unemployment.  But section 8 of the Reserve Bank Act has almost nothing to do with the combination (persistent low inflation and persistent high unemployment) that Robertson rightly worries about.   Rather those outcomes are about a persistent series of misjudgements by the Governor (and, apparently, most of his advisers).

I’ve pointed out previously that central banks in other countries have also been taken by surprise by the events of the last few years.   But most of them have reached the limits of conventional monetary policy.  Several – including the ECB and the Swedish Riksbank –  even started to tighten, only to have to fully reverse those tightenings.   But the Reserve Bank of New Zealand is the only advanced country central bank that has (a) never been constrained by the near-zero bound on nominal interest rates, and (b) has twice (repeat twice) started tightening only to have to reverse itself again.    Taken together with the outcomes (too-low inflation, and too-high unemployment) it is a pretty poor track record.  And the Bank –  the Governor, recalling that the system is one of personalised accountability – has not been seriously called to account for that failure.

Legal responsibility for calling the Governor to account rests with the Minister of Finance and the Reserve Bank’s Board.  As I’ve noted, the Board seems to see itself as champions and defenders of the Bank, rather than being there to provide serious scrutiny and challenge.  And it isn’t clear that the Minister does more than grumble privately, and occasionally make slightly cryptic public asides.

But where has the political Opposition been?  In both his last two statements, Robertson absolves the Governor of any responsibility –  in his view the problem is the mandate, or even the Minister, not the month to month choices the Governor has actually been making.

Perhaps it is easy to call for changes in the mandate. It isn’t going to happen any time soon..  It might be harder to actually have a go at the Governor.  And one shouldn’t do so lightly, but this is an episode of repeated failure, and a stubborn reluctance to acknowledge, or learn the lessons from, those failures.  Of course, lots of the great and good have agreed with the Governor’s stance –  as I’ve pointed out before the NZIER Shadow Board’s recommendation have tended to mirror what the Governor actually does.  But they have been wrong, not just once, but again and again.  And the Governor is the person who is paid to get it right more often than not.   Why isn’t Robertson taking more of a stand and saying so.

And what about the governance arrangements?  Robertson notes that the Act was passed in the 1980s and is ‘out of date and out of touch with changes in the global economy’.  But if he looks at central banking legislation around the world what he will really find is that it is the governance aspects of the Bank –  the single decision-maker –  that look odd.  As the Reserve Bank’s survey showed, there is a wide variety of ways of expressing the statutory objectives for monetary policy, but there has been no trend away from something like a medium-term focus on price stability.  Our Governor simply has too much power.  Treasury reports that the Minister likes the current model because it provides better accountability, but where is the evidence of the accountability in the failures of the last few years?  The Minister can’t be blamed for who was appointed as Governor –  he had to appoint someone the Board nominated –  but he and the Board can, and should, be blamed for how little effective accountability there has been.

The unemployment rate is currently 5.9 per cent (and expected to rise further).  A reasonable estimate of the NAIRU might be 4.5 per cent.  If so, that is about 35000 people who are unemployed now who might not be unemployed if the Governor had run monetary policy, within his current mandate, rather better.  Even if the NAIRU, is nearer 5 per cent, it is still more than 20000 people unnecessarily out of work.   Does he get out and meet any of these people?  If so, I wonder how he explains his failure, and excuses the way his choices have blighted the lives of these people?

I suspect the answer to my question is “no”.  In fact, I just had a quick look through the list of audiences the Governor has given on-the-record speeches to since he took office.   There are various official forums and conferences, but not one of the remaining nine speeches was to groups representing workers, beneficiaries, or the wider community.  Most are to top-end business audiences (the “Admiral’s Breakfast Club” in Auckland, the Institute of Directors, INFINZ, Chambers of Commerce etc), and speeches given by the Deputy Governors seem to be to equally select audiences.  Perhaps the Governor gets no invitations from other sorts of groups, although in my experience that is unlikely.  Perhaps he gives lots of off-the-record speeches to such groups, and just by coincidence it is only the on-the-record speeches that were to upper-end business groups?

I’m not suggesting that the Governor is exercising anything other than his best judgement in making OCR decisions.   And his business audiences would also typically have been better off if the Bank had not been persistently and unnecessarily holding back the recovery, but his choices typically hit hardest on those at the bottom.  And it isn’t apparent that he is even listening to their plight, simply taking comfort from the echo chamber of the elite.

Traditionally, one might have expected an Opposition Labour Party to be their loud and clear voice.  Robertson’s is currently anything but that.

16 thoughts on “Who speaks for the 35000 unnecessarily out of work?”

  1. Monetary policy does not work for NZ because NZ Household Debt almost equates to NZ Household cash deposits. The purpose of higher interest rates is to dampen consumption demand as production capacity starts to hit a limit is a silly premise in NZ because where one sector gains the other suffers a loss. So higher interest rates do not reduce consumption overall. Simple mathematics.

    The reason why higher and higher interest rates start to hurt is because businesses that rely on debt(most businesses rely on debt for liquidity) start to have liquidity problems and start retrenching staff. It is the job losses that reduces consumption overall because people that have cash savings would not spend since they are out of work.

    Therefore higher interest rates in monetary policy directly damages NZ industry and NZ businesses in order to control inflation and vice versa with lower interest rates have a direct effect on NZ businesses.

    It is strange that our NZ economists and RBNZ cannot get their heads around this simple fact.

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  2. Without getting into the numbers, your first paragraph is just about what economists call income effects. But even if NZers’ deposits and loans were roughly equal, so that private sector net income did not change as a direct result of a change in interest rate, interest rates still work by at least two other channels. The first is the exchange rate, and the second is the “substitution effect” – whether you are a net borrower or a net lender, low interest rates make it more attractive to spend now (consumption or investment) all else equal, rather than waiting for later. Of course, interest rates are typically only cut because other stuff is changing (eg terms of trade and expected investment returns falling), but they provide something of an offset. In my view, the exchange rate effect is typically the most powerful channel in NZ.

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    • The exchange rate has little effect on the average household(other than the overseas holiday) as inflation is close to zero. When we refer to market price, practically, the market will price product and services to maximise profits or to gain market share. This means that there is a ceiling that prices can reach before people stop buying and swap brands. Therefore importers trading margins are reduced when the NZD rises and exporters margins improve when NZD falls. There is no overall effect on prices if there is a cheaper alternative product that can be imported cheaper since the advent of internet purchasing power.

      I am comforted that Wheeler does finally point out that if the NZD continues to rise then interest rates would fall. That association is a big change from his earlier speeches when he warned that the NZD was too high and then went on to raise interest rates 4 times and in each raising, sort of wondered why the NZD kept rising.

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  3. Grant Robertson is clearly struggling within a Finance portfolio. He studied political studies at the University of Otago, graduating with a Bachelor of Arts. Since then he has been pretty much a career politician. Gift of the gab and and a great handshake would be his main attributes.

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  4. I’m not going to have a long debate about the numbers, but your household debt number excludes household debt in respect of investment properties. It is the approach the RB prefers for some purposes, but the household still has to service all the debt.

    Perhaps more to the point, overall NZers’ NZD deposits don’t match NZers’ NZD debt – a big part of the difference is our huge negative NIIP position, almost all of which (net) is debt.

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    • ah, but the trick is the inputs – the neutral interest rate and the output gap – which someone (a panel of experts?) has to provide. Given the RB view of the neutral rate (4.5%) and of the output gap (fairly near zero) a Taylor rule might well deliver an OCR even higher than we have now.

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  6. Total Residential Mortgage debt including investment property debt = $205 billion. Therefore the investment property debt($205-$142) = $63 billion. This is business debt and should be excluded as the tenant income is not included in NZ Household Disposable income.

    http://www.rbnz.govt.nz/statistics/tables/c35/

    The interest on investment property debt is mostly serviced by tenants for 10 years to 30 years plus veterans). Note that NZ household disposable income excludes tenant income. If there is a shortfall then IRD funds up to a maximum of 33%(wage dependent) of the shortfall.

    Property investors have different levels of debt serviced by tenants income.

    30 year plus veterans – debt extremely low and tenant income well exceeds the interest obligation
    20 year plus veteran – roughly 30% debt makes a livable wage from tenant rents that exceed the costs
    10 year veteran – breakeven position around 50% debt
    Newbies – 100% finance and the highest risk group when interest rate rises

    You would have to add tenants income(and tax refunds) to NZ household disposable income if you want to add investment property debt.

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    • only true if you want to look at debt to disposable income, but this was a discussion about the impact of interest rates. On income effects alone, a rise in interest rates makes the household sector (broadly defined) worse off, and also makes the whole of nZ worse off (see negative NIIP position).

      But as I noted earlier, I think substitution effects and the exchange rate are more important for the economywde real activity impact of a change in interest rates,

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      • It is amazing how distorted the RBNZ numbers are because NZ economists were so worried that our NZ Household debt to Household Disposable income was 160% for years(and no one picked it up) and then oooops sorry RBNZ has made a tiny $63 billion error in that they did not include tenants income in Household Disposable income(therefore correcting for property investment loans) and now that error has been corrected and the ratio is now 100%.

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      • it is more complex than that. we always knew that there was a misalignment, but actually have “corrected” the numbers has made them slightly less internationally comparable, for a variety of reasons – some of which are in the RB’s release for the new series. As a Bulletin article by Chris Hunt pointed out there are no easy cross-country comparisons – and no benchmark level that one can say is, or is not, appropriate/comfortable.

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  8. In the US case – and perhaps here – there is uncertainty as to whether “the NAIRU” is moving lower. It is plausible, but clearly a much more pressing issue in the US, with U at 5.1% than for us with unemployment at 5.9 (and rising).

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