The Joint Macroeconomic Declaration

I’m a bit puzzled about the new Joint Declaration of the Macroeconomic Policy Authorities of the Trans-Pacific Partnership Countries, that dropped into my inbox just after midday, courtesy of the RBNZ and the RBA.  This was, apparently  (and according to the RBNZ/Treasury press release)

“one of a number of issues that the US Congress has required the US Executive to demonstrate progress on, before it will consider passing the legislation necessary to implement TPP”.

The Declaration itself does not state who these “macroeconomic policy authorities” actually are, but I presume that the Reserve Bank of New Zealand and the Reserve Bank of Australia are directly parties to the declaration, even though both have operational independence in respect of monetary policy.  In the New Zealand case, the Minister of Finance has extensive powers to direct exchange rate policy, implemented by the Reserve Bank, but I’m not aware that there are comparable provisions in the RBA Act.

I’m partly curious about who is party to this declaration because I went to the Federal Reserve website, and found no press release or mention of the declaration (while the US Treasury Secretary –  a politician – has put out a release).

The joint Wheeler/Makhlouf statement is an odd affair.  The RBA’s statement is terse, and really just provides a link to the Declaration text.  But the New Zealand statement is substantial (longer than an OCR announcement release) and rather defensive –  perhaps reflecting an awareness of the public unease around TPP itself.  They are at pains to point out that it is all non-binding.  But non-binding statements can still come back to create difficulties in future.

From the Declaration itself, I was struck by the opening sentence:

We, the macroeconomic policy authorities for countries that are party to the Trans-Pacific Partnership…welcome the ambitious, comprehensive, and high-standard agreement reached by our respective governments in Atlanta.

Is that really the sort of political puffery that the Governor of an independent central bank should be signing up to about highly-contentious policies?  One might even ask whether the non-political head of the New Zealand Treasury should be making such statements, rather than (perhaps) leaving them to the Minister –  who could, quite reasonably, congratulate his colleagues.    I was curious what analysis either agency had undertaken to enable them to conclude that the 6000 page agreement was “comprehensive and high-standard”, and have lodged an OIA request with both agencies.

I also noticed the observation that “we further recognize that excessive volatility in capital flows can create policy challenges that may require a policy response”.    But perhaps there are enough qualifiers in that statement to render it meaningless (“excessive” volatility is like “unnecessary” variability –  different in the eye of each beholder).

The heart of the statement is a paragraph on exchange rate policies.

Each Authority confirms that its country is bound under the Articles of Agreement of the International Monetary Fund (IMF) to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. Each Authority is to take policy actions to foster an exchange rate system that reflects underlying economic fundamentals, and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.

Authorities commit to “not target its country’s exchange rate for competitive purposes”.  Perhaps this thought might discourage Graeme Wheeler from quite so many references to overvalued exchange rates in his monetary policy pronouncements.    But perhaps more importantly, transforming New Zealand’s economic prospects probably does require a strategy that focuses on a sustained lowering of the real exchange rate, to put New Zealand’s competitive position on a much stronger and more sustainable footing.  Sure, that doesn’t involve using monetary or fiscal policy directly to bring it about, but it really needs to be a key focus of economic policy taken together.  This declaration risks de-emphasising the real exchange rate as an adjustment mechanism.  As for “competitive devaluation”, it is worth remembering that the countries that devalued first came out of the Great Depression fastest –  oftten described as the “beggar thy neighbour” period.  “Competitive devaluation” is mostly an empty phrase in substance, but that won’t stop it being used – cited –  by critics (in the US Congress or other places) if some large TPP country or other (think Japan) actively seeks to depreciate its real exchange rate in ways that might help the country concerned and the wider world economy.

The Declaration also sets some provisions for (at least) annual Macroeconomic Policy Consultations, which will involve yet more travel for some unlucky Deputy Secretary/Deputy Governors.  I was amused at the line that “The Group is to conduct its meetings in a mutually respectful manner” –  the presence of which phrasing probably tells us a lot about the enthusiasm of some authorities to be part of this process.

The sort of talk that will take place at these meetings is surely largely harmless, but not necessarily cheap.  At its annual meetings this Group is to consider the macro and exchange rate policies of each TPP country, including “the policy responses which address imbalances”.  Perhaps we will finally get the long looked-for answers to New Zealand’s persistent macroeconomic imbalances?  Even if the meeting is, say, tacked on in or around the IMF Annual or Spring Meetings, how much time is going to go into preparing background papers, reviewing them, as well the travel etc.  How much does the Reserve Bank of New Zealand really want to know (or do we want to spend on it knowing) about macro policy and imbalances in Vietnam, Brunei or Peru?    At the time of the Funding Agreement earlier in the year the Reserve Bank was keen to stress its austerity, and I had understood that the Treasury was also under funding pressure.  What will be sacrificed so that yet another pointless international meeting can become a regular part of the international schedule?

And what of the defensive RB/Treasury statement?

A few lines caught my eye.

More broadly these commitments could help support stronger trade between TPP countries and seek to avoid practices that are harmful to economic growth and financial stability.

I’m not sure how.  As the agencies keep noting, it is all non-binding, and if (as in the NZ case) it is the Treasury and the Reserve Bank who are the parties, they don’t even the power to commit governments as to how they will use, eg foreign exchange intervention powers.    But this really comes down to the point above: “competitive devaluation” is a meaningless phrase, but the ability to depreciate one’s currency, perhaps sharply, in the event of significant economic weakness is not a power that should be lightly traduced.  What behaviours do Gabs and Graeme have in mind, undertaken by the TPP member countries, that have previously been “harmful to economic growth and financial stability”?  This, after all, is their own commentary, not some international lowest-common-denominator text.

Would the Reserve Bank’s policy on currency intervention breach the Declaration?


No. The framework does not restrict the ability of the RBNZ to intervene.

The framework setting out the operating of currency intervention policy under Section 16 of the Reserve Bank of New Zealand Act provides for interventions when the exchange rate is exceptionally high or low and clearly unjustified by economic fundamentals.  This is consistent with the text of the Declaration.  


Will this restrict New Zealand’s ability to change its exchange rate regime or approach to monetary policy?


No. The text on exchange rates largely echoes New Zealand existing commitments under Article IV of the IM Articles of Agreement. 

The exchange rate elements of the Declaration – for example the avoidance of exchange rate manipulation – are helpful in supporting stronger trade. 

It would be helpful to hear how the Reserve Bank and Treasury regard this document as it affects not just the section 16 activities of the Reserve Bank, but those that could be initiated, at any time, by a Minister of Finance under sections 17 and 18.  Those clauses are much more far-reaching.  I presume this press release was very carefully drafted, and carefully avoided reference to those powers.  Personally, I hope those powers are never used, but they are the powers that would allow for much tighter management of the exchange rate should some future government choose to.  Would such a government be advised by the Reserve Bank and Treasury that such a choice was inconsistent with this declaration?  I hope not.

I also noted that “largely” in the response to the final question.  It would be helpful to have spelt out where this (non-binding) agreement goes beyond the IMF Articles.

And, to repeat the point, the final sentence involves a pretty strong assertion, that there are gains in the form of larger international trade, to be had from non-binding declarations to discourage behaviours that the signatories have not pointed to examples of.  If TPP countries have not been doing this stuff, pledging (in a non-binding way) to go on not doing so can offer no trade gains. If they have been doing this bad stuff, we should be made aware of the examples that the Governor and Secretary have in mind.    Which exchange rate management practices of TPP countries in the last 20 years raise concerns for the Governor and the Secretary?

One does wonder how much this Declaration is aimed at the US Congress (no doubt to a fairly large extent) and how much it is aimed as a pre-emptive shot at China?  Would the parties, for example, consider that a Chinese choice to devalue the yuan in the current environment would breach the provisions of this agreement if China were a party to it.  And would the words strengthen the hands of mercantilist critics, even if the high-minded macroeconomists were unbothered by such choices.?

In the end declarations of this sort are about politics, including the price of getting TPP across the line (if it manages to).  If the agreement really is (quite) good as our government claims   –  or as gung-ho as the US Trade Representative would have one believe, extending more regulation further across the world –   then perhaps it is worthwhile.  Of course, without a proper independent assessement –  eg by the Productivity Commission –  it will be hard to know.     But if it is mainly about politics, it would be been much preferable for gushy statements and commitments (non-binding) to have come from Ministers of Finance –  the true “macroeconomic authority” at least in New Zealand –  and not from non-political and/or independent officials like the Secretary and the Governor.

Thinking further about employment and unemployment

Just when I’d been writing yesterday that I was puzzled that so many of New Zealand’s elite seem to think that New Zealand has done quite well in recent years, and seemed quite indifferent to the number of people unemployed, along comes another example.

In his column (not apparently online) in this morning’s Dominion-Post, Pattrick Smellie leads with this line

“On any rational analysis, New Zealand’s employment statistics are among the strongest in the developed world”

How could one “rationally” disagree?  Well, it is certainly true that the ratio of employment to population in New Zealand is quite high by international standards (though any table in which, as with Smellie’s, New Zealand is bracketed between Colombia and Russia should probably be a bit of a warning), but by what criteria is Smellie judging this to be “a good thing?  There is no real hint in the article, except perhaps a Stakhanovite sense that more paid labour must somehow be a good thing, for someone.  For“the national interest” perhaps?

But labour is a costly input –  costly not just to the employer who has to write the cheque to pay for it, but for the employee who gives up the time and opportunities he or she would otherwise have.  Some people have a real passion for the paid employment they do, but for most they work because they have to, to provide the basics for themselves and their families, and because the value to them of the things they get to consume (or risks they get to allay) as a result of working outweighs the cost of giving up free time.

I’m disgruntled that our governments have continued to run policies that mean that 10 per cent of working age adults are on welfare benefits (and did I really hear that, despite this, the ACT Party last night voted to raise real welfare benefits?).  I’d prefer that most of those people were providing for themselves –  which for many/most would involve paid employment  A move in that direction would tend to raise our labour force participation and employment rates.

But equally I’m glad that my elderly mother does not (have to) work  A larger share of the population in much older age groups will, quite reasonably, tend to lower labour force participation and employment rates, even if we could get the NZS eligibility age raised somewhat.   And polling data shows that many parents would prefer that one of them was able (financially) to stay home full-time  at least when they had young children –  but our scandalously expensive house prices, especially in Auckland, make that very difficult for most.  Reforming land and housing markets to make housing more affordable might lower participation and employment rates –  and that would seem likely to be a good thing, (given private preferences).

There are reasons to be concerned if public policy measures are unreasonably discouraging people from participating in the labour force.  But a measure of a country’s success is not the proportion of its adult population that is in the paid labour force (or the hours they work – see, eg, Korea). Personally, I counted it as a measure of our family’s modest success that I’m not in the labour force any longer, and have no intention of being regularly in it again.    I get to do for my kids what my mother did for me.  That is gain not a loss.

And that is, of course, why most attention in the labour market data goes on the unemployment rate, because it is a measure of the people who want to work, are actively looking for work, are available for work now, but don’t have a job[1].  As a general proposition, the lower that number is the better.    These people would prefer to be working –  not necessarily in just any job, but in a job  – and are taking active steps to find one.

One can take the economist’s tack and (somewhat queasily) compare people unemployed to goods on the shelf of a supermarket.  I can always buy butter when I want it only because the supermarket stock enough to cope with fluctuations in demand.  Those stocks serve a valuable purpose (which is why the supermarket owners willingly pays the cost). The unemployment story is a bit different; a pound of butter is a fairly homogeneous commodity, and people are not.  The search and matching process –  matchng the “right” job to the “right” worker –  takes time and effort.   Mostly, workers would probably prefer to do that matching while they are still in another job (whereas a pound of butter can’t be in my fridge and simultaneously available for another casual customer wandering into the supermarket), but sometimes unemployment actually allows the time for a more intensive search (or search in a different city).  At the margin, unemployment benefits make that a more feasible option than it would otherwise be (as, of course, do private savings, and the pooling of multiple incomes within a household).

But unemployment is not something we can, or should, be complacent about.  I think there was something profoundly right about the post-war emphasis on achieving full employment, even if it was carried too far, and pursued in ways that were probably detrimental to the longer-term economic performance of the country.  “Full employment” barely even figures in modern discussion, except perhaps when macroeconomists are tempted to treat a NAIRU as something akin.

New Zealand has had a mixed historical record on unemployment.  Here is how our unemployment rate has compared with the median OECD country’s unemployment rate, and that for the median of the other Anglo countries (Australia, Canada, Ireland, US and UK) since the HLFS was set up.

U nov 15

Mostly, we haven’t done too badly –  the big exception being, of course, the late 1980s and early 1990s, when inflation was being brought down and a good deal of structural reform was going on.  Things are not terribly bad compared to these other countries right now, but they aren’t that good either.  The United States and the United Kingdom, both of which went through nasty financial crises, have lower unemployment rates now than we do.  And both had long since more or less exhausted the room for conventional monetary and fiscal policy to do much about helping to deal with any cyclical components of unemployment.  We haven’t.

Even the US unemployment rate of 5.1 per cent is still, as I noted yesterday, consistent with every person spending two years, in a forty year working life, officially unemployed.  Markets look as though they should be able to work better than that.

That should disquiet our political leaders, but it is not clear that it does..  A local political blog the other day highlighted this exchange from the House on Wednesday:

Andrew Little: What responsibility, if any, does he take for unemployment rising to 6 percent?

Hon BILL ENGLISH: Of course, if unemployment was a direct choice of the Prime Minister of New Zealand, there would be none of it. You would just decide to have none. But, of course, it is not.

The flippancy is perhaps par for the course in the House (question time is partly about “gotcha”), but I looked at Hansard and nothing in the answers to the supplementaries gave me any greater confidence that the issue was being taken very seriously.

The question wasn’t about the absolute rate of unemployment, although there must be plenty of structural stuff governments could do to lower that over time, it was about the increase in unemployment that has now gone on for several quarters, and is apparently forecast to go further.

As I’ve noted previously, it is fair for the Minister of Finance to respond that he doesn’t directly control the principal lever of stabilisation policy, which is monetary policy.  But he hires, sets the goals for, and fires the person who does –  the Governor of the Reserve Bank.  We depend on the Minister of Finance to hold the Governor to account, both directly and through the sort of people he appoints to the Reserve Bank Board.  Judging by the Minister’s public silence, by the absence of any concern about the issue in his annual letter of expectation to the Governor, and by the “we look after the Governor’s back” approach taken by the Board in their Annual Reports, unfortunately he associates himself with the errors the Bank has made, and keeps on making.  The Governor’s errors are those of commission and the Minister’s might be those of passivity or omission, but they are choices nonetheless.  The increasingly large number of people unemployed suffer the consequence.

In closing, a final observation on the Smellie article.  He claims that our participation rate/employment rate are remarkable because they are coinciding with “unprecedented” [not actually, but rapid certainly] population growth, reflecting strong net inward migration.  I reckon he has that story the wrong way round.  For decades, every economic forecaster in New Zealand has worked on the basis that the short-term effects of immigration are such that the boost to demand that results exceeds the boost to supply.  Immigrants have to live somewhere, and need roads, schools, shops etc –  so they need day-to-day consumption, and a material addition to the physical capital stock.   That is why the Reserve Bank tends to tighten monetary policy, all else equal, when immigration picks up.  There is lots of debate about the long-term effects of immigration, but there has never been much doubt about the short-term effects.  Immigration to New Zealand doesn’t boost unemployment; all else equal it lowers it.  If we’d not had the impetus from immigration over the last couple of years, we’d be grappling with even weaker inflation pressures and more of a need for the Reserve Bank to have cut interest rates further.

[1] Simply noting here, but skipping over, the wider measures of unemployment and underemployment.