Patrick Honohan, Governor of the Central Bank of Ireland, gave a fascinating presentation earlier this week on Currency Choices in Ireland Past and Present.  There was even something for geeky history buffs ( I didn’t realise, for example, that for the first 25 years after the Act of Union, Ireland and Britain had had separate currencies, with a variable exchange rate between them).  But the more immediate interest was in Honohan’s attempt to put Ireland’s choice of, and experience with, the euro in historical context.  From 1826 to 1979 Ireland had either used sterling, or had an exchange rate firmly pegged to sterling.    Effective monetary independence lasted for less than 20 years.

Honohan’s goal is to hose down a narrative that says the entering the euro was a mistake for Ireland.    As he notes “poor economic choices and bad luck are more reliable determinants of episodes of poor economic performance than choice of exchange rate regime”.

Serving Governors can’t exactly go round publically bagging their own country’s exchange rate regime.  But the claim that adopting the euro is just another currency choice, of second order importance, seems a step too far.   The Irish Famine aside, the recent  post-crisis shakeout has been the worst sustained period of (no) economic growth in Ireland’s modern economic history.  Ireland actually got through the Great Depression relatively well.  And while Angus Maddison’s estimates don’t cover the few years  leading up to independence and the civil war following it, even if that period was worse economically the benchmark for good modern exchange rate regime choices has to be set a little higher than “well, out-turns weren’t quite as bad as those in the civil war”.

In fairness to Honohan, he isn’t indifferent to the dislocations and huge cost of the last few years.  But he argues that the fault “lies not so much in the system’s design as in the inadequacy of national economic and financial policies to take account of the risks that were still associated with the euro”.  Oh, and he notes that in non-euro countries there were crises too.

In principle, so it is argued, very stringent fiscal policies and very conservative bank supervision and regulation – neither of which featured in Ireland – might have made all the difference.  But this looks like some sort of counsel of perfection – and perfection isn’t a standard we can expect from our politicians and policymakers.  Would a central bank that tried to impose consistently very tough prudential standards have been allowed to get away with it?  Would the Governor of such a robust institution have been reappointed?  And while Ireland no doubt should have run bigger fiscal surpluses, and (in particular) made its tax system less dependent on sources that would dry up when property turnover did, large surpluses invite electoral auctions.  We saw it here in 2005.  Institutional choices –  including exchange rate regimes –  need to take account of how democracies actually work.

The Irish could, and no doubt should, have managed the boom years better.  But what they got  looks a lot like what one would expect if one takes an economy with a neutral interest rate that might have been similar to New Zealand’s and gives it an actual interest rate set mainly for Germany and France.   If New Zealand nominal interest rates had been set at German, or US, levels since the late 1990s we would have ended up with a pretty spectacular bust as well.    Honohan runs the Irish version of this chart in his speech.

Ireland will survive, and in time will prosper again.  Exchange rate regimes don’t shape long-term prosperity.  But with hindsight, it is difficult not to think that Ireland would have been a lot better off with a floating exchange rate, like New Zealand, with interest rates set for its own domestic economic conditions, than in the euro.  Floating exchange rates are no panacea –  and the last decade hasn’t seen great economic performance here either –  but it is hard to escape the point that the worst performing advanced countries since 2007 have almost all been members of the euro.

But read it yourself, and see how persuasive you find Honohan’s story.

While there are, typically, many more important aspects of public policy, in this blog I am going to talk quite a lot about matters that touch on the role and responsibilities of the Reserve Bank of New Zealand. It is a significant part of what I know, and have thought about over the decades.

Having been purged by Graeme Wheeler, I no longer work for the Reserve Bank.  That leaves me free to comment.  But I am conscious of the risk that any comments could be seen through a lens of “embittered ex-employee”, so this brief post is context and invitation.

Over several years I had voiced to many people a growing desire to spend a lot more time with our growing children.  I’d always been grateful that my mother was mostly around when I was growing up, and I wanted to do the same for my kids.  A wonderful long-term nanny just isn’t the same.  Making the change became financially feasible late last year and so my plan had been to leave the Bank anyway.  I’ve never been a person to carry grudges and, in any case, now feel only a sense of liberation and opportunity.  Emotion often clouds analysis, and impairs the ability to clearly identify what is going on.

Sometimes I’ll be critical of the Reserve Bank, and of choices governments (through Parliament) have made about the Reserve Bank.  (At other times, I expect I’ll stick up for them). And I will, for example, be using the provisions and presumptions of the Official Information Act to seek to improve (and argue for improving) the openness and transparency of the Bank.   But in almost all cases I can think of right now, I expect to be saying many of the same things I was saying within the Bank.  Free and frank internal debate and advice are critical to the successful long-term functioning of public (or private?) institutions   – indeed the Official Information Act explicitly recognises that.  External challenge and robust scrutiny of powerful public institutions is equally, or perhaps more, important.

My aim is to highlight issues, and provide alternative ways of thinking about some things.  It is about issues and institutions that matter to New Zealand, and about good quality detached analysis and argument.  If you think that I’m losing perspective at any point, do let me know –  either comment or email me (mhreddell at gmail.com).

As the euro crisis has begun to re-intensify, as stresses around Greece’s position increased, I pulled off my bookshelves and read several recent books on the crisis.

Jean Pisani-Ferry is adviser to the Prime Minister of France, and is a former adviser at the European Commission and former director of the Brussels-based think tank Bruugel.  His book The Euro Crisis and its Aftermath comes with blurbs from the great and good of the social democratic economics elite –  Olivier Blanchard, Charles Goodhart, Dani Rodrik, and Larry Summers.  For those without much background in the euro, it is a worthwhile and pretty succinct account of how things came to be, and has some suggestions on the way forward.  But they are all quite technocratic perspectives, that don’t seem to really engage with the political stresses, which reflect the fact –  captured in opinion polls – that most people in euro-area countries see their primary identity as national rather than European.  The elites might wish it was otherwise, but if there is any movement in the data  in the last decade it has been more towards national than supranational identity.  In a mild form, that is what Martin Feldstein warned about long ago.

Vito Tanzi has written Dollars, Euros, and Debt: How We Got into the Fiscal Crisis, and How We Get Out of It, ostensibly about fiscal stresses across the advanced world, but really focused on the euro crisis.  Tanzi was director of the IMF’s Fiscal Affairs Department for almost 20 years, and has(among many other things)  co-authored two fascinating books on the long-term evolution of public spending in advanced economies.   The old joke was that IMF stood for “it’s mostly fiscal”, and that is certainly how Tanzi interprets the euro crisis.  He makes some useful points about how the differences between the euro area and the US, as monetary unions, can be overstated (in particular there is no “transfer union” in the US).  The biggest single difference is that the US Federal government (but was not in, say, the 1930s) while any European central spending is small.  That makes a lot of difference, and Tanzi reasonably notes that no one has ever set up a strong central government to do macro-stabilisation.  I suspect Tanzi overstates the significance of the fiscal institutional issues, and understates the importance of bringing together countries with quite different neutral interest rates.

The last of the three books was The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs, by Hans-Werner Sinn, a leading German academic and economic advisor.  For my money, it is the best of books (and the longest and most richly detailed), but that partly reflects my Eurosceptic biases.  Sinn has been a key contributor to the German debate and played a leading role in highlighting the role of the clearing and settlement system, TARGET. He argues that through it, capital flight from the periphery has been accommodated by the ECB, both delaying adjustment and incurring considerable risk for taxpayers in creditor countries.  A pan-European centralist might, of course, argue that that is exactly what it was supposed to do.   I can’t do justice to the book in a singe paragraph, but if you want to learn more about the crisis –  from an author who wanted (and I think still wants) the euro to succeed – this is the one to read.  As ever, whether one agrees with the author in the end should be incidental.

A conversation yesterday about markets in the 1890s prompted me to dig out some data on government bond yields in the period.  The chart below shows a not-entirely-consistent (different maturity dates, period averages vs ends of periods) selection of data on bond yields for the UK, New Zealand, and New South Wales (Australia not existing as a political entity until 1901).  There are spreads between these yields, but recall that they were, on the one hand, the securities of the most powerful country (and a major net lender) and those of two small highly-indebted colonies.   The Australian colonies and NZ both went through episodes of financial crisis in the early 1890s (with severe and long-lasting effects in Australia’s case), and that presumably accounts for the spreads in the chart below widening temporarily in the early 1890s.

Rather more recent yield differentials will feature in a post probably next week (school holiday obligations permitting).

“Very.”

That was the Executive Summary to a discussion note I put together one Saturday a few months ago.

productivity just how badly has nz done

In one sense, there is nothing new  (the data have always been there) but there was a certain relentless bleakness about putting it together, and rereading it now.  If only the New Zealand political and economic elites treated the failure as seriously as it deserves.  But then countries fail mostly because of the choices of their elites –  sometimes including the well-intentioned ones.

The paper mentions another note of mine, which I included with one of the first entries on this blog.

Much of the debate around housing in New Zealand seems to involve “urban planners”, and people with similar inclinations, trying to tell people how they should live, and what sort of houses (and what sized sections) they should live in.  In particular, the planners seem to have quite strong preferences for higher rates of urban density.  Some of this seems to be about their own lifestyle preferences, and some the alleged agglomeration benefits.  We’ll come back to agglomeration over the coming months.  But here I thought I would just highlight some fascinating data I stumbled on a while ago on the Demographia website on urban historical densities.    Here is some of the data on historical urban densities.

First, a newer city; New York since 1800

And then two older European cities.

London since 1680

And Paris since 1650

I haven’t looked at how the data were put together, and I’m sure there must be considerable margins of error around any of the older estimates.

But….they paint a pretty clear time series picture for each of three of the rich world’s great cities: as cities get richer, their citizens seem to demand more space, not less.  This shouldn’t be a surprise –  think of the tenements that the poor lived in in earlier stages of urban development, and of the congestion and squalor of much-poorer developing cities today.

Of course, governments and “urban planners” can stymie these trends –  by applying land use restrictions.  But in whose interests are such restrictions applied, and who is positioned to make those judgements?    Shouldn’t policy facilitate private preferences, whether for more density or more “sprawl”?

And none of this bears on questions of why some rich cities (eg in US or Australia) are much less dense than comparable size cities in other places.  And it has nothing to do with the point that in any country the biggest population centres are likely to be more dense than smaller places.

But…to repeat…history suggests that, all else equal, as cities and countries get richer then. all else equal, their inhabitants prefer more space not less.

I spent Saturday in Christchurch visiting family. I haven’t lived in Christchurch since I was six, but in some respects it is still “home”.  People close to me lost a lot.   I get down every few months and have followed progress since the earthquakes with both professional and personal interest.  Among the (not original) observations was the striking contrast between the quick private sector action on the periphery, and the mostly glacial pace of activity in the central city government-controlled zone (where, not coincidentally, owners’ property rights had been quite severely impaired).

Saturday’s Press had an interesting feature on “the growing number of rebuild-related firms going bust despite a building boom in Christchurch” –  presumably not a reflection of lack of work, but of the dislocations and opportunities that major economic shocks bring.  Some will have prospered enormously over the last few years, and others –  a minority – just won’t have coped with the challenges of, say, going out on their own and running their own business.

On this visit, even the government-controlled zone was finally starting to look more like a building site than a bomb site  (and I noticed that the Sunday Star Times had a big article yesterday on the scale of the central city developments).  And it is good to see an increasing number of new buildings up and open.  But I noticed on my previous visit, and again this time, that the new buildings often still have “for lease” signs up, and several vacant floors.  Wandering around the city it was not hard to imagine that Christchurch might already have passed “peak starts”, not just for commercial buildings, but for houses as well. Of course, there is years of work still to go –  and some of the questionable vanity projects (convention centre and sports stadium) are not even near commencement –  but it is difficult to envisage that the level of activity goes higher than it has been over the last year or so.  Four to five years on, presumably everyone has a roof over their head, and fewer firms are operating from very unsatisfactory temporary premises.  Housing market pressures look to be easing, and if the early commercial buildings aren’t quickly filled, what prospect for many more starts in the next five years beyond the projects that are already underway?  At an aggregate level, construction sector activity as a share of production GDP ran up very sharply (and much of that was Christchurch), but it has gone sideways or backwards for the last few quarters.

Once again, the Australian resources investment boom, and its aftermath, spring to mind.  With the difference that, vital as it was, the diversion of resources into repairing Christchurch doesn’t leave us with a new large productive sector at the end of it all.

Morning Report this morning gave considerable coverage to a new research report from the investment bank Morgan Stanley, Sustainable Economics: The Bitter Taste of Sugar.  The authors argue that rising obesity levels will act as a major drag on economic growth and productivity across the advanced world over the next 20 years, lowering growth rates by around 0.5 percentage points per annum (roughly 18 per cent of GDP cumulatively over 20 years).

Reports like this are like a gift to those who loudly insist governments have to “do something” about the voluntary private consumption of sugar.  But there is almost nothing solid to back up the Morgan Stanley assumptions.  And not many things change annual growth rates semi-permanently by 0.5 percentage points. There is some discussion  in the report of the way in which obese people may be less productive than otherwise, but nothing to indicate whether people are more likely to become obese if they are already less productive for other reasons, or to back up the estimates/assumptions at an aggregate level.  And there is no attempt to back-test the numbers they use –  for example, does the changes in each country’s obesity rates in recent decades correlate, even loosely,  with changes in the respective country’s growth rate?

Of course, even if the estimates were accurate, it is hard to believe there is a policy problem.  These are private choices.

But if they were accurate  – and we were happy to ride roughshod over private preferences – it would suggest any easy way of closing the New Zealand productivity gap: reduce our per capita sugar consumption to, say, Japanese levels and in 20 years we would well on our way up the OECD league tables.     But, most likely, it just isn’t so.

A commenter –  my son –  asked how the countries which were finalists at the last football World Cup have done.

The chart is below, done using the Conference Board’s annual database.  Curiously the two finalists have done the best, but the productivity performance (in favour of Brazil) reverses the crushing victory Germany secured in that memorable final.

Of these four countries, the Netherlands has the highest level of real GDP per hour worked