How well has Japan done since its asset markets crashed?

September 5, 2015September 5, 2015 Michael Reddell Japan

Gillian Tett’s column in the Financial Times yesterday was devoted to a cautionary note to the Chinese authorities to beware of following Japan’s example following the share market bust that took place after 1989.

There were many things the Japanese authorities could no doubt have done better after 1989, but I’ve long found it a bit surprising just how relatively well Japan has done over the last 25 years. It isn’t a spectacular performance by any means, and Japan isn’t one of the top tier of OECD countries in terms of either GDP per capita or GDP per hour worked. That shouldn’t be too surprising – on most measures of institutional quality/deregulation, Japan tends not to score that well. Microeconomic reform and liberalisation haven’t been a hallmark of Japanese economic management (see, for example, the TPP negotiations).

But looking at growth in GDP per hour worked for the OECD countries since 1989, Japan has been pretty much in the middle of the pack, with total growth (over 25 years) only about 2 per cent less than the median country. New Zealand is 4^th from the bottom on that measure.

Here is how Japan has done relative to the Anglo countries (and to Germany) since 1989, using OECD data.

This measure takes full account of the changing terms of trade. Over the full period, Japan has done worse than three of these countries (the US, Australia, and Germany), and rather better than the other three (New Zealand, Canada, and the UK). Over the last 15 years or so, Japan looks to have done a little less well, but that was well after the equity bubble burst. It may well have to do with the surge in the terms of trade in the commodity-exporting countries from around 2003/04, matched by a severe decline in Japan’s terms of trade.

Another way to look how Japan has done is to look at growth in total factor productivity since 1989. I’ve run this chart previously. Over 25 years, Japan has been in the middle of the pack, a quite unremarkable performance (but materially better than New Zealand, Australia, Canada).

Would, I trade New Zealand’s economic performance since 1989 for Japan’s? The large Japanese government debt counts against that, but income/productivity are what pay the debt, and Japan has managed more productivity growth than we have.

Out of interest, here is how OECD countries rank in 2014 on this measure of GDP per hour worked, in current prices, converted to USD at PPP exchange rates. For New Zealand, bear in mind that (a) 2014 saw the highest terms of trade for decades and (b) we were still ahead of Japan in 1989. Oh, and Japan hasn’t had the advantage of New Zealand’s “critical economic enabler”, the large scale skills-focused immigration programme.

Immigration: a “critical economic enabler” or a deeply-troubled programme?

September 4, 2015September 4, 2015 Michael Reddell Immigration

MBIE (and the Minister of Immigration) believe that immigration is “a critical economic enabler” and, for example, that “immigration has been a driving force in the development of the country’s economy”. Phrases like these, or that immigration is crucial for the success of the government’s Business Growth Agenda, pop up all the time in the papers MBIE released. It is like a mantra they chant, even in face of their own evidence.

The papers repeatedly tell ministers that immigration is a “good thing”, serving not just economic ends but a whole variety of other goals. And yet across all the papers there is hardly a shred of evidence advanced to support the belief – for belief is all it seems to be – that, in the specific circumstances of New Zealand, as the New Zealand immigration system has actually been run over the last 25 years, that there have been any real economic gains for New Zealanders.

And yet, in parallel with the beliefs that appear to drive the system, the papers are full of details and observations which suggest that even officials recognise that actually the immigration system isn’t really working that well. Officials explicitly recognise that large proportions of the people we give permanent residence approvals to (eg lots of family approvals) can’t really be expected to add anything much economically, and many represent a significant net fiscal cost. Officials note that a large proportion of skilled migrant category approvals are to former students in New Zealand, while observing that a large proportion of those have fairly low-level qualifications, and “we seem to have become less effective in retaining the skilled graduates we want”. MBIE notes that “we are seeing a higher proportion of recent migrants (temporary and permanent) employed in industries with overall low or declining productivity. In particular, we are seeing temporary migration increasingly becoming a structural feature of the workforce – with certain sectors (eg dairy) increasingly relying on a ‘permanent pool’ of temporary migrant labour”. I’ve noted previously the MBIE research suggesting that the investor visa approval show little sign of generating much investment in innovative or productivity-enhancing areas. At the other end of the spectrum, MBIE observes “nearly a quarter of recent migrants are working in retail trade and accommodation and food services. They are also likely to occupy a larger proportion of full time positions in these commonly part time industries.”

These issues have become increasingly more serious. The fairly unskilled positions I highlighted yesterday have become a much larger share of residence visa approvals approvals of the last few years (MBIE included a chart in one of the papers, but it won’t reproduce well), and the number of Working Holiday visa approvals has more than doubled in the last decade (to around 55000 per annum now). I had not previously paid much attention to these visas, granted under programmes that seem to have been more about foreign policy objectives (support for a Security Council seat?) than the economic interests of New Zealanders. But MBIE themselves point out that whereas previously most working holiday makers were from wealthier countries, and often didn’t work for much of their time in New Zealand, many more are now from poorer countries (eg Latin American ones), who are working (rather than holidaying) for a much larger proportion of their time.

Here is a paragraph from one of the MBIE papers.

“As noted above, our current immigration settings have resulted in a reducing proportion of labour market-tested work visas. In particular, we have seen a large growth in the number of people on Working Holidays. Many of these people are relatively highly-skilled but take up relatively low skilled jobs in the agriculture, retail trade, and hospitality industries. Given the ease with which these migrants can be employed and the skills they have, it would be unsurprising if employers preferred them to unskilled or otherwise less attractive local workers”.

Officials blithely talk of these visas serving “tourism and foreign policy objectives”, but at whose cost? Isn’t it rather likely that the influx of unskilled workers, or temporary workers doing unskilled jobs, is driving down the relative real wages that these unskilled positions in New Zealand can command? It is a controversial issue in the international immigration literature, but my reading of that literature suggests that in general the effect is real. In the specifics of New Zealand over the last decade, it seems quite likely that it is true here. The effect may well be concentrated in some particular industries. MBIE mention retail trade and hospitality/accommodation, but I suspect it also has real relevance in the aged-care sector. One of the unions has been pursuing a dubious pay-equity case (“dubious” in that I think all such cases are largely meaningless, and probably should be disallowed by statute) in that sector, but it seems much more plausible to me that the huge number of visas given to people working in relatively unskilled positions in that sector will explain part of why wage rates in the sector remain very low. As the government bears a huge proportion of the cost of aged care, this is a direct transfer from relatively unskilled New Zealand workers to the government.

Here are a couple of statistics. Over the last decade (to 2013/14), there has been an average of 44900 residence visa approvals each year (just a touch under the target level of 45000 to 50000 per annum). Of those, only an average of 11600 (or 26 per cent) have been for primary applicants for a visa under the Skilled Migrant or Investor categories. In other words, only a quarter of the permanent migrants we’ve allowed in have been subject to a labour market test at all. That doesn’t sound particularly high, but it gets worse. Recall that, as we saw yesterday, at least 20 per cent of such approvals are for jobs that don’t seem particularly skilled at all, and many of the former students who get residence visas have quite low level qualifications. There is no sign that New Zealand is short of people with certificates/diplomas or even bachelors’ degree (indeed, the empirical evidence is pretty clear that the returns to education here are among the lowest in the advanced world, suggesting a relative glut rather than a shortage that we need to remedy by immigration). Of the primary applicants who were former New Zealand students, over the last decade an average of 318 per annum had honours, masters, or doctoral degrees. Probably no one would quibble too much with allowing these people residence if they wish to stay, but that is a pretty small proportion of the overall permanent migrant inflow.

It isn’t very plausible that such a small group of genuinely highly-skilled migrants – perhaps not many more than 5000 per annum – will have the sort of transformative capacity that officials and governments appear to have been hoping for. And in that sense therefore it isn’t very surprising that we’ve seen no hard evidence of the economic gains to New Zealanders from immigration that keep being touted. Even if the theoretical model of potential gains from immigration were valid for highly-skilled workers, it is hard to expect to see much real empirical gain when 80 per cent or more of the permanent migrants actually simply aren’t that skilled (and in many cases, aren’t even in the workforce), and when there has been a rapidly growing revolving stock of temporary workers mostly doing pretty unskilled jobs.

And, actually, the Minister and MBIE appear to recognise a problem. There is a review of the residence programme taking place at present, which is due to report to Cabinet in November. It is surprising that the media has not paid more attention to this review. On the papers released to me, much of the material is withheld (and it wasn’t what I was after anyway, as when I lodged the request I hadn’t even been aware the review was going on), but the material that was released – in papers only a few months old – is full of talk about reorienting the programme to better maximise the potential economic contribution from the immigration programme. Here are some extracts from a May 2015 paper from Michael Woodhouse to Cabinet’s Economic Growth and Infrastructure Committee.

We already apply a strong focus on the contribution migration can make to economic growth but I believe more can be done. I propose a programme of work to improve:

The contribution of migration to the labour market

…..

The attraction, selection and integration of the investors and entrepreneurs who will help our economy to grow, and to become more innovative and productive

…..

The openness of the immigration system to better facilitate the entry of people that contribute to economic growth, whilst more efficiently managing risk.

To maximise the economic contribution of immigration a more strategic approach is needed.

I propose a more strategic approach on when, where, and how to use the immigration system, focusing more deliberately on its contribution to the Government’s wider long-run economic growth agenda.

We have already started using this approach to respond to immediate pressures and opportunities, such as demand for labour in the tourism industry in Queenstown, ICT skills shortages, and the targeting of high-value investor and entrepreneur networks.

Adopting a more strategic approach does not mean that we will place less emphasis on objectives such as family reunification or refugee settlement, but it will mean that policies designed to achieve these objectives will be considered with a more deliberate focus on long-term economic growth.

I intend to also instruct officials to consider the extent to which our immigration settings should target certain industries and regions. For example, we provide some incentives to encourage migrants to settle outside of Auckland…but we can investigate other ways to encourage migrants to settle more evenly across New Zealand.

At one level it sounds good. If immigration is to be a key economic lever or “critical enabler” it would be good to actually maximise the chances of that happening. But the signs are not particularly promising. We’ve already seen the new policy giving many more points to people with job offers outside Auckland. As I’ve noted previously, to the extent that it works at all it must, almost by definition, actually lower the average quality of the “skilled” migrants we allow in. One other aspect of that same package was providing a pathway to residence for people in low-skilled occupations who had been here for several years on work visas. It might be charitable to think about doing so, but it doesn’t have the ring of a ruthlessly skills-focused policy.

But perhaps my bigger concern is the tone that pervades these documents, and Cabinet papers for a minister in a centre-right government, that officials and ministers think they can pick which sectors, firms and regions to favour. The central planning tone is strong, and there is no sign of any evidence that officials and ministers know what they are doing, and can expect to produce the right outcomes. Much of MBIE’s focus appears to be on meeting specific skill shortages – a flavour redolent of the 1960s. Never (I’m pretty sure) in any of the papers do ministers and officials stand back and ask how the market deals with shortages. The usual response is higher prices, not quantitative government interventions.

And never once do the papers recognise that in the short-term the demand effects of increased immigration outweigh the supply effects. That is not just some weird Reddell proposition, it is the standard result that all macro forecasters and analysts (and economic historians) in New Zealand have recognised for decades. Outfits like the Reserve Bank don’t have a dog in the fight about whether immigration is good or bad in the longer-term, but their research has consistently found, and their forecasts have consistently assumed, that when immigration increases, all else equal, inflationary pressures increase. The most recent piece of published research in this area is only a couple of years old.

What that means is that increased immigration does not ease overall labour shortages. In a particular sector immigrants might ease stresses and keep pressures off relative wages for jobs in that sector (aged care workers etc), but in aggregate, immigrants add more to demand than they do to supply in the short-term (a short-term that lasts several years, and each year we have a new large wave or permanent or temporary migrants) and so increased immigration actually exacerbates any net shortages of labour (which is why, all else equal, increased immigration is typically followed by increases in the OCR).

As I said, these issues have been discussed in the New Zealand literature for a long time. Sir Frank Holmes was, in his day, one of the New Zealand’s most eminent economists, straddling the boundaries between academe and public policy (and the private sector) in ways rarely seen today. In 1966 and 1967, when he was Macarthy Professor of Economics at Victoria, he wrote a series of substantial articles for the NZIER on immigration. In some respects they are specific to their time, but they still repay reading. Since coming across them a few years ago, perhaps my favourite quote from them is this

“Give me control of the Government and the Reserve Bank and I can create a labour shortage for you very easily…The resultant boost in demand for goods and services would soon have employers competing vigorously with one another for more workers to help them meet it. If we had started with full employment, we should soon have plenty of vacancies, money wages and prices would rise, and there would be a splendid rise in demand for imports. I think that you might agree that the best cure for that problem might be not more immigration but my replacement by a politician with less generous impulses towards the community. I hope that you will also agree with me that our experience in New Zealand indicates that a big increase in the supply of labour does not necessarily cure labour shortages and certainly does not cure balance of payments problems”.

Persistent shortages across the economy as a whole are usually a sign of too loose a monetary policy (the story in New Zealand in the 00s – and in the much of the 1960s for that matter). Persistent “shortages” in particular sectors are usually a sign that real wages for jobs in that sector should be rising. The central planners at MBIE seem to have a problem with that, or to have barely considered it as a solution.

There is an old line about the definition of insanity being doing the same thing over and over again and expecting a different result. We’ve had one of the advanced world’s largest immigration programmes – almost entirely under government control, since we have total control of our borders – for 25 years, and have little or nothing positive to show for it. We’ve had among the worst productivity growth of any advanced economy in that period, and persistent excess demand pressures reflected in the highest real interest rates in the advanced world, and a persistently overvalued real exchange rate. What gives people any confidence that things are likely to be any better in future?

If the Cabinet is serious about a strategic review, and about maximising New Zealanders’ long-term prosperity by capturing any long-term economic benefits from immigration, I think they need to put a lot more material into the mix, including asking hard questions about why we haven’t seen obvious gains from the large and longrunning programme to date. I’d suggest going back to the drawing board. A helpful input in that context would be a Productivity Commission review, as they are (again) doing in Australia at present.

Occupations of residence approvals under the Skilled Migrant Category

September 3, 2015September 3, 2015 Michael Reddell Immigration

I’ve started working my way slowly through the hundreds of pages of papers MBIE released to me last week about the economic impact of immigration and the permanent residence approvals programme. I’ll write more on the substance of that material and advice later, but for now I thought I’d highlight one table from one of the 2013 papers.

Readers will recall that I highlighted a few weeks ago the rather less-than-highly-skilled nature of many of those given temporary work visas under the Essential Skills category. I wasn’t aware of any similar data on those being granted residence visas and used a rough proxy, from the PLT data, in a post earlier this week. Those data appeared to raise similar concerns.

But this table goes to the issue directly, and shows the top 20 occupations of the primary applicants who were granted residence visas under the Skilled Migrant category in 2011/12 and 2012/13.

If New Zealand’s immigration really is “a critical economic enabler” (from the first line of the first of the MBIE papers I received), this should be where one expects to see the real quality and skills of the people who are let in permanently. Presumably any spouses/partners of these people are less well-qualified on average (otherwise the spouse would, rationally, have been the primary applicant), there are dependent children, and of course all those other family, parental and humanitarian entrants.

As I said a while ago, I’m a bit of a naïve optimist at times. So even having previously shown the work visa data, I was quite stunned by this table. The top 4 occupations in both years were chef, aged care nurse, retail manager, and café or restaurant manager. Those four occupations alone make up around 20 per cent of the total successful skilled migrant primary applicants – the minority of those whom we allow in permanently who face any skills test at all. Even MBIE laconically observe that, while “chef” and “café and restaurant manager” are classified in ANZCO as relatively highly skilled occupations, there are some signs/reports that many of those coming to New Zealand in such numbers under these headings may be towards the lower-skilled end of the spectrum.

Some snippets from the annual trade data, with a China tinge

September 3, 2015September 3, 2015 Michael Reddell China, Current New Zealand data, Exchange rate

Statistics New Zealand released yesterday the annual data on New Zealand’s overall foreign trade (goods and services) by country. It is a nice summary set of tables for people who don’t spend lots of time looking at trade data, and the services data are only available annually.

Since the end of last year, these have also been the data the Reserve Bank now uses to calculate the weights in its trade-weighted index measure of the exchange rate. Those weights are calculated on a total trade basis (imports and exports, goods and services) for 17 currencies, covering countries that currently account for a bit over 80 per cent of New Zealand’s foreign trade. The weights are updated annually, and when they are updated in December there will be a few changes. After much noise about China becoming our largest trading partner (which it has not yet been on a total trade, or even total exports, basis), China’s share in New Zealand’s foreign trade dropped back quite a bit over the last year. By contrast, the United States’ share rose. Whereas this year, the weight on the Australian dollar was only 2 percentage points more than that on the Chinese yuan, both well ahead of the US dollar, next year the weight on the yuan will be around halfway between those on the Australian and US dollars.

There is no easy right answer as to how to weight an exchange rate index. My own sense is that the current weighting structures overstates the importance of Australia, and understates the importance of the United States and the euro area (or the EU more broadly). These latter two economies/regions are a huge share of total world production/consumption, and are major competitors in our largest (net) export products, particularly dairy. Neither element is captured in the current weighting scheme. And while Australia is our largest export market, those numbers are flattered by the fact that still more than 12 per cent of our exports to Australia are crude oil and precious metals (presumably mostly newly-mined gold), which have nothing to do with wider economic conditions in Australia, or movements in the Australian dollar.

It is interesting how much of our trade with Australia is now dominated by travel. Excluding oil and precious metals, 28 per cent of our exports to Australia are travel and transport. No other single category exceeded 7 per cent of our exports to Australia last year. The picture is similar on the import side, where travel and transportation account for 27 per cent of our Australian imports.

And, finally, I was interested in the dairy export data. The media has been full of discussions around dairy exports to China, which had surged in 2013/14.

Here are our milk powder, butter and cheese exports for the last five years to China on the one hand, and the ASEAN countries on the other.

It highlights both how unusual last year was, but also how important those other countries are in New Zealand’s dairy trade. In a typical year, New Zealand firms export as much milk powder, butter and cheese to these countries as to China, and yet these countries in total have annual GDP not much more than 20 per cent of China’s. Actually, the data also illustrate just how diversified dairy exports are in a typical year.

By contrast, in the 1950s almost all our dairy exports went to the United Kingdom, and there were few other export markets anywhere for dairy products.

None of this is to suggest that China is unimportant. China is now the world’s second largest economy, with a very large foreign trade for a country of its size. And is a badly-managed, highly non-transparent, economy, at the tail end of one of the bigger, least-disciplined, credit booms in history. What happens in China matters a great deal to most countries, but there is no reason to think it matters abnormally more to New Zealand.

(As one perspective on the lack of transparency – and, worse, outright misrepresentation – that plagues the rest of world making sense of China, I’d recommend the latest from Christopher Balding, who takes on those who want to defend China’s data as providing a broadly accurate and representative picture of what has been going on).

“Financial literacy”, schools, and governments

September 2, 2015June 8, 2016 Michael Reddell Financial literacy/capability, Uncategorized

According to a new poll out this week, 93 per cent of New Zealanders want “financial literacy” to be a compulsory subject taught in all schools. The details of the poll don’t seem to be available, but we can probably assume that the questions were phrased in such a way as to encourage a positive answer. No doubt even a more balanced question might have drawn a positive response. To many it sounds like a “good thing”. I’m sceptical.

I’m sceptical at a variety of levels. First, and perhaps most practically, these surveys (and the reported views of advocates) never ask what people would prefer schools to stop teaching. There are only so many hours in the day/year. I’d face the same question as what should the schools stop teaching, but given a choice, personally I’d rather that schools were required to teach a sustained course in New Zealand and British/European history than that they teach so-called financial literacy. Kids are exposed every day to their parents’ attitudes to, and practices with, money and things. They aren’t directly exposed, to anything like the same extent, to maths, science, history, or foreign languages.

Second, as far as I can see, the evidence is pretty mixed as to whether teaching “financial literacy” makes any difference to anything that matters. Are countries with higher “financial literacy” scores richer as a result, more stable, happier? And a recent report (page 32) for our own government agency that deals with this stuff actually showed that, for what it is worth, the “financial literacy” of New Zealanders scored quite well in international comparisons. What is the nature of the problem?

Third, why would we expect that the government, and its representatives, would be good people to teach children about money? Perhaps we should judge people by their track record. The current Retirement Commissioner, as captured in this profile, does not exactly inspire confidence on that front (unless perhaps “do as she doesn’t kids”). And at a bigger picture level, in one way or another governments are the source of most financial crises – Spain, Ireland, Argentina, the United States, China. Governments are more prone than most to undertaking projects that they know provide low or negative economic rates of return. Governments face fewer market disciplines than citizens. And governments don’t have to live with the consequences of their mistakes. So perhaps I could support a civics programme that included a section on critically evaluating election promises and government policy announcements.

Fourth, much of the discussion in this area is quite strongly value-laden. And no doubt it has always been so. I recall the day when our 6^th form economics class was visited by a banker, to try to promote savings etc. He brought along a hundred dollar note – this was 1978, and it was probably the first time any of us had seen one. Trying to set up a discussion about the merits of bank deposits (probably with negative real interest rates at the time), he asked us all what we’d do with the $100 if we had it. Various class mates rattled off their spending wishes, but the banker was totally flummoxed when one of my friends, a strong Christian, told him that what she’d do was to give it away. .

And where, for example, in all the discussion of financial literacy is there any reference to the findings that one of the best routes to financial security is to get married and to stay married? Finding the right spouse, and learning what is required to make a lifelong commitment work, is almost certainly a more (financially) valuable lesson that knowing that when interest rates fall bond prices rise. But it is not one we are likely to hear from the powers that be.

And fourth, this becomes an excuse for yet more bureaucratic/political bumf, reinforcing a sense that governments should have “strategies” about everything and anything. I was somewhat surprised to learn that our government has a financial capability strategy. Why?

Building the financial capability of New Zealanders is a priority for the Government. It will help us improve the wellbeing of our families and communities, reduce hardship, increase investment, and grow the economy.

The National Strategy for Financial Capability led by the Commission for Financial Capability provides a framework for building financial capability. It has five key streams:

Talk: a cultural shift where it’s easy to talk about money

Learn: effective financial learning throughout life

Plan: everyone has a current financial plan and is prepared for the unexpected

Debt-smart: people make smart use of debt

Save and invest: everyone saving and investing

On this measure, might we assume that “debt-smart” would mean taking as much interest-free student debt as possible and paying it off as slowly as possible? Not an approach I will be encouraging in my children.

More generally, I’m not sure that any of these items represent areas where we should expect governments to bring much of value to the table. One might marvel that human beings had got to our current state of material prosperity and security without the aid of government financial literacy/capability strategies. And since when has a traditional Anglo reticence about matters of money been something for governments to try to change? Better perhaps might be a focus on improving the financial capability of governments.

The Commission’s own research (p 26) shows what one might expect, people develop more “financial literacy” as they need it. So-called “literacy” is low among young people (18% of 18-24 year old males are “high knowledge”), who don’t need it much. It rises strongly during the working (child-rearing, mortgage etc) years (53% of 55-64 males are “high knowledge”), and then looks to tail off a little in retirement. All of which is unsurprising, and (to me) unconcerning.

I know the so-called Commission for Financial Capability doesn’t cost that much money, but as I’m sure they would point out, every little counts. The money they fritter away on national strategies and capabilities is money that New Zealanders don’t have to spend, or save, for themselves. In fact, this graphic, from the government’s policy statement, might suggest a few other government agencies that could be a trimmed back. Governments need to do well what only governments can do. So-called “financial literacy” isn’t obviously one of those things.

As an easy way into this, consider this US-government funded online quiz, a shop window for a US project on better understanding financial literacy. I imagine that most readers of this blog will score 5/5, while the average American scores 2.9. But then stand back and ask yourself why the average American (or New Zealander) needs to know the answers to these questions, phrased rather in the manner of a school economics exam. People who read blogs like this take for granted a knowledge of the answers, but in what way has that knowledge made your life, or mine, better?

The Treasury on the government’s plans to reward migrants to the regions

September 1, 2015September 1, 2015 Michael Reddell Immigration, Treasury

The sadly inadequate quality of New Zealand’s immigration policy, and official advice around it, is on display again today.

In late July, as the headline announcement in the Prime Minister’s National Party conference address, the government announced a number of immigration policy changes. One of those changes was to offer materially more points to people applying for entry as skilled migrants if they had a job offer outside Auckland. The relevant Cabinet paper hasn’t been released, and nor has there been any regulatory impact assessment published.

But the Herald asked for a copy of Treasury’s advice on these changes. The Treasury’s view on the proposal to grant permanent residence to certain low-skilled workers was withheld (we might reasonably assume the comments were quite sceptical), but the Herald reported what they got here. My thanks to Kim Fulton at NZME who passed on a copy of what was released.

Here is what Treasury had to say about the proposed scheme.

Cabinet must have agreed with them to some extent, since the final announced version of the policy was twice as generous as the version of the proposal Treasury was commenting on.

I entirely agree with them that the proposed changes – and even the amped-up approved version – is unlikely to do anything useful for regional development. It is just another “subsidy”, and subsidies are both costly and aren’t what the regions need. A sustainably lower real exchange rate – and perhaps some comprehensive reform of capital income taxation – is much closer to the heart of what would make a difference.

But what I found surprising and disappointing was how blasé Treasury seemed to be about the whole proposal: “won’t do much good, but not many risks either”, which is pretty much a message from the government’s chief economic adviser that Cabinet might as well go ahead.

What are the risks? Well, first and foremost, as I noted here, any person who just gets across the points threshold and secures permanent residence will beat out some other potential migrant who was objectively better qualified (whether on age. education, employment or capital investment – Treasury’s own list). And contrary to what Treasury suggests, this proposal isn’t just affecting a small number of people. On Treasury’s own numbers around half of migrants go somewhere other than Auckland, so the potential for debasing the average (and marginal) quality of New Zealand’s migrants is quite real. As I’ve been highlighting in the last few weeks, a large proportion of our migrants (and temporary workers) are already not that skilled at all. As Treasury has struggled to produce any convincing evidence of the gains from the large scale immigration programme, we might have hoped that they would be rather harder-nosed in pushing back against changes that worsen the chances of real and tangible gains to New Zealanders ever showing up.

And then Treasury observes that there isn’t much risk of competition with people at the lower end of the New Zealand labour market because the skilled migrant category rewards high-skilled people. Yes, and very high-skilled people will easily cross the threshold already, and won’t represent competition for people at the bottom end of the market. But this change is about making things easier for people who just aren’t that highly-skilled – they are the marginal cases, and they get in only because they manage to get the extra points that will come from securing a job offer outside Auckland. At the margin, it is those people – the ones who directly benefit from this policy – who are most likely to be competing with people at the lower end of the New Zealand labour market. I’m not suggesting they’ll be competing with shelf-fillers and checkout operators, but there are plenty of immigrants who don’t appear to rank very high up the spectrum of skills. There will be more under this policy.

As I read the advice I wondered why Treasury was not rather harder-nosed in its advice. As we saw in previously released papers, they seem much less sanguine about the economic benefits of immigration to New Zealanders than their chief executive has been. Perhaps they just didn’t have much time to look at the proposal and the weaknesses in the proposal just slipped through? Perhaps they just knew it was all about politics, and the headlines in the media after the Prime Minister’s speech?

The permanent residence approvals programme, and especially the skilled migrant category, is seen by the government as an “economic lever”. It operates on a very large scale, and has significant effects across the country. We should expect a rather more rigorous critique – and some of that rare free and frank advice – when ministers want to debase the currency (points), in ways that must, if the policy works at all, debase the average quality of the new migrants. Productivity growth isn’t so abundant in New Zealand that we can afford a cavalier Treasury when proposals turn up that will, if they do anything, worsen our productivity prospects.

What economic gains are New Zealanders getting from older immigrants?

September 1, 2015September 1, 2015 Michael Reddell Immigration

The New Zealand government’s permanent residence approvals target is 45000 to 50000 per annum. The target hasn’t changed for quite a long time, although actual approvals fluctuate from year to year.

As I’ve noted previously, even though the immigration programme is explicitly described as an “economic lever” only around half the permanent residence approvals have been under the skills (or business) stream, and even that total includes the immediate family of the primary applicant.

It is well-known that it takes many immigrants years to reach the earnings that a New Zealander with similar qualifications would achieve. Here is how Julie Fry summarised the evidence in her 2014 Treasury working paper.

However, they also face language and adjustment barriers, at times including discrimination, which on average take 10-20 years to overcome. In common with overseas patterns, recent New Zealand immigrants have poorer outcomes than others in the labour market, although those outcomes improve over time. Immigrants who are from culturally similar source countries (such as Australia and the United Kingdom) adjust more quickly. On average, migrants from Asia take longer to adjust, and migrants from the Pacific Islands never reach parity with the New Zealand-born, reflecting the fact that they enter mainly on family reunification grounds and non-skills-based quotas. University-qualified migrants also adjust more quickly.

Ten to twenty years is a large chunk of a working life, and if the New Zealand immigration programme is really going to boost productivity and per capita incomes of New Zealanders that adjustment period is a significant hurdle to get over (as for much of their working lives here many of the migrants can’t even match the earnings New Zealanders reach). That probably wasn’t the experience of migrants to New Zealand in the mid to late 19^th century.

The issue is even more acute in respect of older immigrants, and is likely to be particular so for those from countries that are not (in Fry’s words), “culturally similar”. A migrant arriving at age 55 has only perhaps 10-15 years left in the workforce, and that expected time in the workforce drops as the arrival age increases.

Unfortunately, although the permanent residence approvals target has not changed, the proportion of it being used up by older immigrants has been steadily increasing. Unsurprisingly, not many people 55 and over come on work visas (around 275 in the latest year, not much changed over the previous decade). By contrast, 3279 people aged 55 and over arrived on residence visas in the year to June 2015, just over double the number who came in the year to June 2004 (the first year the data are reported). The chances of many of these people making any material contribution to boosting productivity and incomes of New Zealanders seem small. And yet they now make up 7 per cent of our total (skills-focused) permanent residence approvals target.

If there is little obvious economic reason to allow in most of these older arrivals – and, in fairness, the arguments made for doing are not typically economics ones – there are fiscal reasons to be quite uneasy about doing so. As I’ve highlighted previously, someone who moves to New Zealand need only live here for 10 years before becoming eligible for full New Zealand Superannuation entitlements, and once granted residence they are eligible for our public health system (and time spent in Australia counts as time spent in New Zealand for NZS eligibility purposes).

The New Zealand Superannuation issue is less severe in respect of those coming from advanced economies. Pensions earned in those countries are set off against NZS entitlements, so that New Zealand pays only a portion of the total retirement income cost. But for people from poorer countries where there is no public pension entitlement, or nothing that can be claimed abroad, the full cost falls on New Zealand once the ten year residence period has passed. Considered from a fiscal perspective, it is perhaps unfortunate that most of the increase in the number of older arrivals has been of people from India and China (numbers from the UK are significant, but have not increased materially).

Of course, there is a much larger fiscal risk in the possibility of large numbers of older New Zealanders returning from Australia (in particular) at around retirement age, having paid few New Zealand taxes and now claiming full NZS and health entitlements. The number of older New Zealanders returning from Australia has been increasing (around 2700 of those 55 and over in the last year, about 800 of whom are 65 and over), but are still modest compared to the total number of New Zealanders living in Australia.

The average migrant to New Zealand probably makes a net positive fiscal contribution over the course of their time in New Zealand. But that average is dragged materially downwards by these older arrivals. It tends to reinforce the argument that any real economic gains from the immigration programme could be obtained with a much lower permanent residence approvals target.

Without even touching the refugee component of the target (perhaps even increasing it), restricting permanent residence approvals to the sorts of high skilled positions illustrated in yesterday’s post, and prohibiting any permanent residence approvals for people aged over 55[1], would enable us to capture most of the putative gains with a permanent residence approvals target of perhaps 10000 to 15000 per annum. Reducing the permanent residence approvals target by two-thirds would materially reduce the demand pressures associated with a fast-growing population. Doing that would materially ease pressures on real interest and real exchange rates, which would allow New Zealanders and the remaining highly-skilled immigrants to take advantage of the new tradables sector business investment opportunities that would become much more attractive as a result.

As a comparative benchmark, the average annual net inflow of non-New Zealand citizens was 8500 in the 1980s. If we are serious about lifting economic performance, and using a skills-focused immigration programme as part of that we need to get much more hard-headed about the sort of people we allow in (refugee issues aside). In fact, over the last decade or more we’ve been going in the wrong direction, as the highly skilled have made up a decreasing share of migrants. Many of our business migrants seem to be attracted more by the lifestyle than by the prospect of building high productivity businesses here. And the immigration programme was diluted against just recently with the decision to award more points to people moving to places other than Auckland, which will squeeze out other better-qualified applicants.

[1] With an exception perhaps for a small number of people who are entirely self-funded for their lifetime.

School choice and the ACT Party

August 31, 2015August 31, 2015 Michael Reddell Education, Regulation

Reading the Herald over lunch, I found an article about potential future heightened pressures on the rolls of Auckland Grammar and Epsom Girls’ Grammar.

But what struck me was the stance of the local MP, and leader of the ACT Party, David Seymour. In addition to these roles, Seymour is also

Parliamentary Under-Secretary to the Minister of Education
Parliamentary Under-Secretary to the Minister of Regulatory Reform

The ACT website says of ACT’s policy on schools and pre-schools

ACT believes that education at this level is an investment in human capital that the government rightly makes. However, the delivery of the service has been captured, at the primary, intermediate, and secondary levels at least, by a providing bureaucracy that limits choice and innovation for the purpose of self-preservation.

ACT believes that state education funding should be seen primarily as an asset of the parent and child, to be used at a school, public or private, of their choice. ACT would diminish the role of the Ministry of Education in allocating resources, separate the property ownership role of the Ministry from the operations role, make Boards of Trustees more autonomous in their governorship of schools, introduce better mechanisms for State and Integrated schools to expand and contract according to demand, and increase the subsidy to private schools to the extent that it is expenditure neutral.

To be sure, ACT has only a single seat, in effect gifted to it by the National Party, but where is the evidence of this sort of approach in the stance adopted by Mr Seymour? ACT has pursued the cause of so-called Partnership Schools, but these are not really a vehicle for parental choice, since the only people who can set up these schools are those targeting “underachieving children”. That is one worthy goal, but it is quite different from a framework that facilitates widespread parental choice on schooling. Reasonable academic achievement isn’t the only thing parents value.

What does Seymour have to say about the pressures in the Grammar zones? Is he suggesting abolishing the zones? Is he suggesting establishing new excellent state schools? Is he suggesting allowing new integrated schools to be established easily? Is he suggesting practical ways to treat “state education funding…primarily as an asset of the parent and child”. The answer, of course, is none of the above. And it gets worse, as he is reported as toying with an idea that students in new houses would not be included in the zone? And this from a party allegedly favouring more responsive housing supply.

Seymour’s response seems to be primarily about protecting the choice, and the property values, of one small group of among the highest income New Zealanders, in Mount Eden, Parnell, Newmarket, Remuera, and Epsom. And it is not as if this stance is new. As the Herald reports, he has previously come out opposed to intensification in his own area, and opposed efforts of neighbouring schools to extend their zones in ways that overlap with the Grammar zones. ACT rightly criticises corporate welfare, and has also been fairly critical of the growth of the welfare benefit system, but there is gaping inconsistency right at the heart of their home territory. It looks a lot like protecting elite privilege. Many people would like to send their kids to one of the Grammars – or schools like them. But a rapidly decreasing number can afford the house prices in those suburbs and the dominant state provider doesn’t build any more. Why would one take Seymour seriously on any proposed policy when he is not willing for his policies to start at home?

I think he is right about the education bureaucracy, but it isn’t only the provider bureaucracy that seems driven by self-preservation. The Under-Secretary for Education and MP for Epsom seems to have gone the same way. ACT is likely to be at its best when it is attacking, not defending, established advantage, and when it is campaigning to democratise access to excellence and strongly advocating competition, even if it means some transitional costs fall on some of their own supporters. Thank goodness that governments that abolished import licensing – which had provided many very comfortable livings – did not take the ACT approach. I’m sure Seymour (and his party colleagues), knows that his position is untenable when put up alongside party policy. And so I wonder what he really stands for? Allowing bars to open more easily on the mornings of a few rugby games is all well and good, but beginning to make progress on allowing real school choice for the mass of middle New Zealand is a rather more important, and more enduring, issue for the longer-term.

These issues don’t just arise in Auckland. In the weird world on education bureaucracy, my son is zoned out of the closest state boys’ school (which we don’t particularly want him to attend) because for decades the Ministry of Education has failed to build even a single state school in what is generally regarded as New Zealand’s largest suburb.

New Zealand already has a limited quasi-voucher system in the integrated schools system. For some parents, there is an effective choice, between a neighbourhood state school and a (slightly more expensive) integrated school. But in practice the choice is limited: most of the schools are Catholic, and Catholics are supposed to attend Catholic schools and (reasonably enough) there aren’t many places for those from other traditions. And rolls are capped. The integrated schools model was a far-reaching reform of the Third Labour Government in the 1970s, in response to a funding crisis in the Catholic system. More than 10 per cent of New Zealand children are educated at such schools, and (unlike the so-called Partnership Schools) there seems to be little debate around their performance – it is just recognised that some parents will prefer one sort of school, and others will prefer different types. But why not use the integrated schools model as a basis for a real extension of choice? Allow proprietors – existing, new, for-profit, and non-profit – to set up new schools, as they like, and provide per capita funding accordingly if they can attracts parents and students. For most parents – especially with more than one child – private schools aren’t a real choice – the financial burden is just too heavy. And perhaps there will never be much effective choice in most small towns. But most of our population lives in our larger cities – half in Auckland, Wellington and Christchurch alone – and in those places (and no doubt most of our larger provincial centres) effective and genuine affordable choice could be made to work.

Yes, no doubt there would be some duds set up. There are some disastrous schools now. No doubt there would be some excess capacity built. But that is akin to an argument that we’d be better off with one supermarket in a suburb than two, to avoid the wasted extra physical capital, or the old days of licensing when a new entrant might have to prove there was insufficient capacity, rather than simply being allowed to take a risk and open up.

Yes, there are lots of other details to work out The state has some legitimate interest in ensuring a minimum standard of schools, but it has much less interest in that than parents have. The state, its bureaucrats and ministers, gets to make mistakes over and over again. But each child only goes through school once: the stakes are that much higher for parents and kids than they are for the education bureaucrats and politicians.

None of that necessarily helps with what should happen in Auckland right now. Someone is going to miss out, and political choices will (openly or not) decide who. That is a problem for Mr Seymour, and perhaps one he should have thought harder about before campaigning for school choice and reduced land use restrictions in suburbs like Epsom. Real choice rarely comes from the elites – they aren’t, generally, the ones with most to gain from it.

What occupations did our permanent and long-term migrants have?

August 31, 2015August 31, 2015 Michael Reddell Immigration

Governments have purported to run New Zealand’s immigration programme primarily as an “economic lever”, intended to help lift the productivity and performance of the New Zealand economy, presumably with the aim of lifting not just average per capita incomes of those living in New Zealand, but of lifting the average incomes of New Zealanders. Public policy, especially in matters economic, should be made primarily with the interests of New Zealanders in view.

As I’ve noted previously, even among those gaining permanent residence approvals only around half (including the immediate family of the primary applicants) come under a skills heading, and in some cases they don’t seem overly highly skilled.

I highlighted a couple of weeks ago how relatively unskilled many, perhaps even most, of those coming to New Zealand on work visas are, even under a so-called Essential Skills category. That programme increasingly looks like another example of corporate welfare. But the standards are somewhat more demanding to gain a permanent residence approval. I used the work visa data because it was available at the right, disaggregated, level of detail. I haven’t been able to find anything comparable for permanent residence approvals (if any readers know of such data I’d happily be pointed to it).

But Statistics New Zealand does have data on Infoshare about the occupations of permanent and long-term arrivals. These data have their limitations including:

They aren’t published by citizenship, and PLT arrivals include lots of returning New Zealanders, who of course aren’t subject to our immigration policy
Intentions (about whether one is coming for the long-term or not) are self-reported, and subject to change.
Occupations are self-reported (as distinct from the work visa data, where the approval is for a specific position).

Many arrivals don’t have an occupation either – they might be students, children, the aged, or non-employed spouses caring for children. Oh, and SNZ report that around 5 per cent of all stated occupations (on arrivals cards) are illegible, or otherwise unable to be fitted into ANZSCO occupational classifications.

There isn’t anything that can be done about the second and third points, but most of the flow of New Zealanders is to and from Australia, and most of the flow between New Zealand and Australia is New Zealand citizens. So the charts below shows PLT arrivals, for the last five years, from places other than Australia, where the person arriving wrote down a clearly identifiable occupation. There were around 135000 of these people.

First, the positive story. This chart showed the occupations that looked like the sort of positions people (including me) have in mind when they hear that New Zealand has a skills-focused immigration programme, designed to lift overall economic performance over the medium-term. There were about 38000 arrivals in these occupational groupings. Jokes about, say, lawyers aside, I doubt anyone is going to quarrel much with people like these, if we are going to run a large scale immigration programme.

Second, the not-so-positive side. There were 51000 arrivals (38 per cent) in occupations that few people think of when they think of a skills-focused immigration programme. People will no doubt differ a little on what roles to put in this list, but as a whole it makes quite sobering reading. And remember that SNZ are only capturing here the people who actually report an occupation.

There is a middle group of occupations that I won’t show in detail. In deference to the Christchurch repair and rebuild process, I’ve put most building and construction-related positions in that category. But the largest single group in that middle category, somewhat to my surprise, was school teachers. No doubt there are many able immigrant school teachers, but again they aren’t usually the sort of grouping most people have in mind thinking about skills-based immigration programme (and I doubt many of them are teaching advanced high school science courses).

So most of our migrant arrivals aren’t actually here for their skills at all, even on the government’s rather generous interpretation of skills. And of those who are, a huge proportion look to be people, or occupations, that aren’t overly skilled at all. The Treasury papers I discussed a few weeks ago provided little or no basis (or reference to other material) showing how our skills-based immigration, as actually run, was boosting the productivity and future incomes of New Zealanders, despite the rhetoric of ministers and of the Secretary to the Treasury. I now have the papers MBIE has released, but have not yet had time to work through them. I’m hoping there is something more substantial there. At the moment, however, the large scale active immigration programme has the feel of something just focused on driving up New Zealand’s population, with little or no robust analysis or evidence to support a belief that New Zealanders are benefiting from the programme. If there are benefits to New Zealanders from the skills migrants are bringing, they are likely to be concentrated in the sort of occupations/skills captured in the first chart above. We could tap those gains with a much smaller permanent residence approvals programme – perhaps 10000 to 15000 per annum, rather than the current (very large by international standards) 45000 to 50000 per annum.

A tale of two regulators

August 29, 2015August 29, 2015 Michael Reddell APRA, Financial stability, Reserve Bank

Earlier this week two banking regulators gave speeches about housing. Both began the same way – one noting that housing is a “hot topic of dinner conversation” and the other that it is “not unusual…for the topic of conversation over a meal – be it a dinner table with friends, or a barbeque in the backyard – to turn to the subject of real estate”.

The first speech was by Grant Spencer, Deputy Governor (with responsibility for financial stability functions) of the Reserve Bank of New Zealand. The second was by Wayne Byres, Chairman of the Australia Prudential Regulatory Authority (APRA). The speeches are really like chalk and cheese – very different and the differences largely reflect positively on APRA.

I’ve already touched on a few points from Spencer’s speech, mainly around the tension between the encouraging results of last year’s demanding stress tests and the Reserve Bank’s increasingly intrusive and expensive lending restrictions. In that post, I also passed on an observation someone had made to me that Spencer’s speech had a very strong macroeconomist’s flavour to it, with little sense that he, or the Bank, had much feel for the credit standards being applied by the banks. At one level, that isn’t surprising: Spencer (and most of his senior colleagues) has a background in macroeconomics. But Grant Spencer has now been responsible for financial stability and regulatory functions for eight years, and spent the best part of a decade in fairly senior positions in the ANZ.

Byres, by contrast, appears to have been a bank supervisor/regulator for most of his career. And it shows. He knows that banks get into trouble when they make bad loans (and banking systems get into trouble when enough banks make enough bad loans). At one level that is a truism, but it seems to drive Byres, at least on the evidence of this speech, is to focus on the quality of the loans banks are making, and the standards banks (management and Boards) are applying in advancing credit

Byres articulates APRA’s goal as “to preserve the resilience of the banking system”, rather similar to the Reserve Bank’s statutory goal to “promote the maintenance of a sound and efficient financial system”. And that seems to be his focus: to ensure that banks have enough good quality capital to withstand shocks when they come, and focus on monitoring the quality of banks’ lending behaviour to help (a) ensure those capital buffers are large enough, and (b) reduce the risk of a large number of loans turning very bad.

Rightly, in my view, he does not seem to see it as APRA’s role to stabilise house prices, nationally or in any particular city/region. Other stuff happens, and it is the responsibility of the banking supervisor/regulator to ensure that the banking system can cope if things go wrong. Stress tests are one component of that – and Byres gave a good speech on them late last year.

Here is Byres on what drives the housing market

Any discussion on housing market conditions these days typically starts – and sometimes ends – with housing prices. It’s clear that Australian housing prices are high. On common metrics such as pricesto-incomes or prices-to-rents Australian housing prices are at the higher end of the spectrum, measured either historically or internationally. There are many reasons proffered for why this is: a strongly growing population, geographic and regulatory constraints on supply, the impact of lower inflationary expectations and financial deregulation, and taxation arrangements all feature prominently in explanations of the level of Australian housing prices.

He doesn’t seem to see it as APRA’s role to praise (or damn) aspects of government policy, or to lecture others (based on no underlying research or analysis) on what needs to be done. He just accepts that there are active debates on many of these issues and, whatever the cause, Australian house prices are high. That might become an issue for a banking regulator, and to know that one needs to understand the quality of the loan books (individually, and across the system as a whole) and the capital banks have.

Contrast that with Grant Spencer’s speech, written as if the Reserve Bank were a pre-eminent source of wisdom on wider housing market issues, impatient that mere politicians have been slow to get with the Bank’s preferred programme. Tax changes are “essential”, “much more rapid progress” is needed in improving housing supply, and so on. And all the time, other areas of policy, which might be inconvenient to the current government (eg the role of new first home buyer subsidies, active immigration programmes) are passed over in silence. The issue is not whether Spencer is correct in any of his individual observations – on some I think he is right, and in others probably not – but that he cites no evidence or research for his views, and that such advocacy on highly controversial political issues, is just not the role of a banking regulator (or a central bank). “Tax” appears a lot more often in Spencer’s speech than phrases such as “lending standards”, “loan quality”, “origination standards” or the like (as far I can see, those phrases don’t appear at all).

Byres appears to know better. He concentrates on banking; on what banks do, and on the regulatory role of APRA. Doing banking regulation well is not always easy. No doubt plenty of supervisors in the United States, Ireland and the United Kingdom thought they were doing a fine job in the years running up to 2008. It turned out not to be so. Lending standards will, of course, often look rather better before a crisis, or even a recession, than they do in the wake of such events. But if we are going to have official prudential supervisors – and for better or worse we do – we need people with enough knowledge of the industry to ask the hard questions, and sceptically sift and weigh the evidence. As Byers notes (if only we heard this line more often from our Reserve Bank).

“lower credit quality portfolios may not necessarily be worrisome if the strategy is a conscious one, the additional risk is appropriately priced and managed, and adequate capital is held. That is really what much of our work has been designed to test”

And much of the rest of his speech is devoting to talking through what evidence there is on these points. It is what one might expect from a bank supervisor.

He observes that there is no evidence in Australia that investor loans have been riskier than owner-occupier mortgage loans, while noting the need to be cautious about extrapolating that experience into a more stressful scenario. Our Reserve Bank does not even seem to have gathered the data on the New Zealand experience, including in the last few years in which some regions have had material falls in nominal house prices.

Byers steps through data on third-party originated loans, interest-only loans, high LVR loans (interestingly, he focuses on loans with LVRs greater than 90 per cent, not (say) the above 70 per cent loans the Reserve Bank is about to control in Auckland), and loans approved outside standard loan parameters. I’m not sure I saw anything specific about pricing. But I came away from the speech with a sense of better understanding the market, but also with a sense of a supervisory agency that knew, and could talk judiciously, about what was going on.

The impression I took from Grant Spencer’s speech was rather different. There was very little about indicators of risk arising from the behavioural choices of banks. We’ve seen no evidence advanced that credit standards have been deteriorating (eg specifically in the Auckland investor property finance market), let alone that any such deterioration was not appropriately matched by pricing, and capital, that covers the risks. There might be problems looming, but the Reserve Bank just does not set out the evidence, even though it has rushed in with a succession of heavy-handed policy interventions. There is a sense of an institution flailing around, citing this statistic and that, but without a coherent and well-grounded analysis of the issues and risks to the banking system.

There are limitations to Byres’s brief speech. He is no more inclined that the Reserve Bank to acknowledge that supervisors and regulators get things wrong. And perhaps he is light on the sort of big- picture macro-oriented, internationally-informed analysis of systemic risks. But when the Reserve Bank tries to offer this latter perspective it does not do it well. As far as I’m aware no country has ever run into a systemic banking crisis when credit has been rising no faster the nominal GDP (and perhaps especially when nominal GDP itself has been growing slowly by historical standards). But you won’t learn that from any Reserve Bank document, even though that is the current New Zealand (and Australian) situation. You also won’t get any sort of systematic analysis, or even a summary distillation of such analysis, on the similarities and differences between what has been going on in New Zealand in recent years and, on the one hand, what happened in the crisis countries, and on the other hand, what happened in countries that avoided crises. Grant Spencer and Graeme Wheeler repeatedly invoke Ireland and the United States, but no serious observer thinks developments in New Zealand remotely parallel the specifics of those two (quite different) country experiences.

There has been a tendency in some quarters to lionise APRA – I’ve been in meetings where it has been lauded as the world’s best bank supervisor. I’m not in that camp. Apart from anything else, the minimum risk weights the Reserve Bank has insisted on for housing loans have been more conservative than those required in Australia, and APRA is only now catching up. And I’m also not convinced by arguments that we should out-source our bank supervision and regulation to APRA – ultimately much about bank supervision is about crisis management, and in crises managing national interests matters a lot. But for the time being, APRA presents a much more credible and convincing face to the world, conveying a calm and balanced sense that they understand banking and banking risk, than does the regulatory/supervisory side of the Reserve Bank of New Zealand. New Zealand deserves better than that.

Perhaps it is another dimension for the Reserve Bank Board to assess in its forthcoming Annual Report?

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Year: 2015