“Ethical” investment

There has been a new upsurge recently in coverage of so-called “ethical” investment, and some mix of genuine and confected “outrage” over the investment of money in the shares of companies that may be involved in the production of various disapproved goods and services.  The main focus of attention has been on the government’s own investments – particularly those in ACC and NZSF –  and those of the government-promoted Kiwisaver funds, especially the default funds in which many people passively find some portion of their savings invested.  There even seems to be the possibility that some of these holdings may be illegal, and knowing/intentional breaches of the statutory ban on financing the production of cluster bombs carry very heavy criminal penalties.

In the Dominion-Post on Monday, Rob Stock had an article pointing out that moral concerns might not be limited to companies making cluster bombs, tobacco products, or whatever other product is particularly shunned right now.  I wasn’t entirely sure whether he was serious, or simply trying to highlight the absurdity of the whole business, but as he noted one could raise similar objections to holding the sovereign bonds of many countries based on the policies those governments run –  on his reckoning such a list could readily include Qatar, Israel, China, the US, Japan, Turkey, Russia, the Philippines.

Choices people make about what to do with their money are a moral matter.  Passively or actively, a person’s choices reveals what matters to them.  I’m a Christian, and so a believer in absolute truth.  But I doubt that would even lead to a unanimous view on what investments were appropriate, even among members of a single small local congregation.  How much greater is the difficulty in reaching a common view among much larger pools of investors, in an age when all faiths and none compete in the marketplace for ideas?

That is one reason why I remain staunchly opposed to the New Zealand Superannuation Fund.   In that fund, the government has taken money, by force, from citizens and invested it according to the moral precepts of those running the fund.  Actually, it is probably worse than that.  They’ll invest in anything (lawful), but will pull back if particular vocal lobbies succeed in creating too much perceived reputational risk for them.  It simply rewards the vocal, and the modern rent-seekers (pursuing a “cause” rather than personal profit) and forces minorities into investment holdings they may be quite uncomfortable with  (and in some cases probably keeps even majorities out of investments they might be quite comfortable with).

Some might be unhappy with investments in firms making weapons, tobacco products, involved in whale hunting, or in funding governments that apply the death penalty. Others probably have problems with coal or oil producers.  I don’t have a particular problem with any of those investments, but I do object to investing in (or having my taxes invested in), for example, firms associated with the Chinese government, or (US-listed) hospital chains providing abortions, or casino companies and so on.  My point is not to argue the merits of my particular concerns, but to highlight the near-impossibility of reconciling the range of individual concerns, individual freedom, and investments through large scale collective (particularly compulsory) entities.

In the genuinely private sector, and for schemes that are open to new money, there is a bit of a market test: funds won’t keep on investing in particular companies/products if investors are withdrawing their funds or new investors are going elsewhere.  But that doesn’t grapple with the moral point.   Personally, it leaves me uncomfortable with collective investment vehicles, unless they are very clear in advance of what sorts of companies, or governments, they’ll invest with.  You make your choices and I’ll make mine.  And all  but the most scrupulous –  or most morally indifferent –  will almost inevitably have to make trade-offs: what matters enough to adjust one’s investment (or consumer custom) in response to.

As it happens, I’m a trustee of a superannuation scheme –  the Reserve Bank Staff Superannuation and Provident Fund.   Our scheme is not a public body, isn’t subject to the Official Information Act,  and is not subject to any directions from either the Reserve Bank itself or the Minister of Finance. Neither the Crown nor the Bank gets any direct financial benefit from our investment choices.  We aim to ensure that we obey the law, and as the law requires, we seek to act in the best interests of members.  So the investments of our scheme are really only a matter for our members.  Probably the only thing the members have in common is that they work, or once worked (most are now retired) for the Reserve Bank.   Some will be smokers, some won’t.  Some will favour coal mining, others won’t.  Some will support Israel, others won’t.  And so on. Quite how the trustees of such a fund should invest, or avoid investing, is quite a challenge.  Since we have fiduciary responsibilities, it can’t just be on the basis of the personal preferences –  likes and dislikes –  of individual trustees –  let alone, some prevailing public “mood”.  In an age where one can no longer count on much common ground in values, morality etc, it is probably another reason to welcome the demise of old-fashioned workplace savings schemes.

New dwellings and population growth

I hadn’t really intended to write anything today –  tempted as I was by the topic of so-called “ethical investing” – but yesterday’s post on how best to look at new building consents relative to population (growth) sparked a surprising number of comments so I thought some brief follow-up comments and charts might be in order.

My single main point yesterday was that new building permits per capita, whether compared across time or across TLAs, is not a particularly useful indicator of anything.  There are substantial differences in population growth rates –  both across time and across TLAs – so that simple comparisons of consents for new dwellings relative to the current stock of population won’t tell observers anything useful about how supply/demand balances are unfolding in particular markets, or how responsive land use and building regulation allow markets to be in particular times and places.

For either purpose –  and perhaps particularly for the latter – one really probably needs a more formal empirical model that can capture more of the idiosyncracies of particular times and places, and some of the two-way causation that can be at work (eg population growth generates demand for housing, but a readily responsive housing supply might also make such a locality more attractive to more people).  Fortunately, in comparing across TLAs in a single country we can treat a lot of things as constant (applying similarly across all TLAs) –  eg the same tax system, the same interest rates, the same banking system, the same trends in divorce rates, or childbirth rates (the latter two have clear implications for the number of houses demanded per capita).  But there are still local idiosyncratic features that need to be taken into account at times.  The most obvious of these in recent New Zealand history is the impact of the Canterbury earthquakes, which led to the loss of a lot of existing houses, especially in Christchurch city and Waimakariri (Kaiapoi).    Even if the population of those places didn’t change much at all, one would expect a lot of new dwelling consents in the years following such destruction simply to re-establish the previously desired volume of housing.  Seeing a lot of new dwelling permits in those (and neighbouring) localities might not tell one much about the responsiveness of the regulatory systems in those council areas, but simply about the specific nature of the shock.  And –  fortunately –  we don’t know how other localities (and their regulatory systems) would have responded to a natural disaster of that sort.

Building permits per capita don’t tell us much at all.  Building permits for new dwellings per person increase in population tells us more, but it is still a far from perfect measure –  especially when, as around Christchurch, there is a sudden need to replace existing lost houses.  So in my post yesterday I used the SNZ national data on housing stocks, and compared the (estimated) change in the housing stock to the (estimated) change in population.  This was the resulting chart.

housing stock

At a national level, the net increase in the number of houses has been very weak relative to (estimated) population growth, and there is no sign of any improvement.   It isn’t a perfect indicator –  changing birth rates or divorce rates might affect the desired number of people per house – but it is less bad than anything else we have.

What about at the TLA level?  We don’t have annual housing stock estimates (that I’m aware of) and the latest annual subnational population estimates are for June 2015.  So we are pushed back to using new dwelling consents.  Comparing consents with population growth produces silly answers in places with falling populations –  where there is usually some new building just to slowly replace the existing stock –  or even places with very low population growth rates.  So in what follows I’m just going to focus on places that are

  • relatively large, and/or
  • have had reasonable population growth

but with a particular focus on Auckland, greater Wellington, greater Christchurch, Hamilton and Tauranga.  The readily accessible data go back to 1996.

Here is an easy-to-read chart comparing the experiences of Auckland and Hamilton.  Both cities have had around a 40 per cent increase in population over the period.

akld and hamilton

But in only one year of these nineteen were more new houses being built per each new resident in Auckland than in Hamilton.  There might be some underlying demographic differences  –  as I said, ideally one needs a fuller empirical model –  but on the face of things it doesn’t reflect very favourably on the land use and building restriction of the Auckland council(s).  At least up to June 2015, there was no sign of the gap closing.

Tauranga has actually had faster population growth than either Auckland or Hamilton over the 20 years.  Here is what the chart looks like when we add Tauranga.

akld hamilton tuaranga

Pretty consistently higher (apparently more responsive to changes in demand) than Auckland in particular.  But what really stands out is the final four or five years on the chart.  Auckland and Hamilton are seeing less new building (relative to population growth) than they used to, while activity in Tauranga has held up at around the average for the previous 15 years.

What about Wellington and Christchurch?  The population of greater Wellington (Wellington, Upper and Lower Hutt, Porirua, and Kapiti) has grown by only 17 per cent over this period.  I never voluntarily defend Wellington local authorities.  Perhaps –  quite probably –  in a climate of heavy land and building regulation it is easier for building to keep pace with more modest population growth.  But for the full period, here is the number of new dwelling consents per person increase in population.

Auckland 0.32
Hamilton 0.38
Tauranga 0.45
Wellington 0.49

Greater Wellington has actually seen more building, relative to population growth, than even the least bad of those northern cities.

Christchurch is a story complicated by the loss of houses as a result of the earthquakes.  One would simply expect to see a lot more permits in that region following the earthquakes even if the population changed little.  Greater Christchurch encompasses three TLAs –  Christchurch city, Waimakariri and Selwyn.  The Selwyn council has a reputation for having facilitated growth –  including the otherwise improbable meteoric post-quake growth of Rolleston.

If we split the sample and look at the years up to June 2010 (ie before the first earthquake), the number of new dwelling permits in greater Christchurch relative to the (quite strong) growth in population had been higher than in Auckland, Hamilton or Tauranga over the same period –  but still a little behind Wellington.

The loss of existing houses muddies the post-2010 data.  If we take the full period (1996 to 2015) in the table above greater Christchurch comes out at 0.66 –  far above the other large cities.  But, of course, greater Christchurch lost lots of existing houses –  so the high numbers tell one nothing about supply/demand balances, or responsiveness of councils.

But one interesting angle is to look just at Selwyn.  Queenstown apart, Selwyn has had the highest population growth rate of any TLA in New Zealand over the last 20 years (107 per cent).  And Selwyn had few houses destroyed in the quakes. This is the chart of new dwelling consents per person increase in population in Selwyn.

selwyn

It is certainly a better experience than Auckland’s, but nothing to write home about.  In fact, in the sub-period prior to the quakes, the rate of new dwelling consents per increase in population was a little lower in Selwyn than it had been in Christchurch city itself. Of course, an open question is to what extent people moved to Selwyn because of a responsive regulatory system –  in turn pushed to its limits –  and to what extent because the land itself was more stable, and the new motorway made places like Rolleston very easy to get to and from.

And what if we add fast-growing Queenstown into the mix?

New dwelling consents per person increase in population (June years 1997 to 2015)

Auckland 0.32
Hamilton 0.38
Tauranga 0.45
Wellington (greater) 0.49
Christchurch (greater) to 2010 0.50
Queenstown 0.53

Of course, much of Queenstown’s construction is likely to be holiday homes, but nonetheless the contrast –  in a town with very rapid population growth – with Auckland (and even Hamilton) is striking.

As a final caution, do note that the sub-national population numbers for the period since the 2013 census are estimates, themselves derived from national population estimates.  In a couple of years’ time, after the next census, some of the recent population data could look quite different, affecting the interpretation of some of these recent construction numbers.  But in most cases, the patterns were well in place before even the 2013 census.

 

The badly dysfunctional New Zealand housing supply market

This chart has had a bit of coverage in the last few days.  It was produced by Statistics New Zealand, and was included in a useful release last week bringing together dwelling consent and population data over the last 50 years or so.

snz picture

As SNZ noted, there is a bit in the chart for everyone.

The number of new homes consented per capita has doubled over the past five years, but is only half the level seen at the peak of the 1970s building boom, Statistics New Zealand said today.

One sees these sorts of per capita charts from time to time, but I’ve never been sure they were very enlightening.  After all, the existing population typically doesn’t need many new houses built –  it is already housed, and the modest associated flow of new building permits will result mostly from changes in tastes, changes in occupancy patterns (eg more marriage breakups will probably increase the number of dwellings required for any given total population) or perhaps even the age composition of the population.  Even quite big differences in  the number of new dwelling permits per capita don’t, in isolation, tell you much: Marlborough and Gisborne have very similar populations, but over the 21 years for which SNZ provides the data, there were almost three times as many houses built in Marlborough as in Gisborne.

Mostly (at least in countries like this one), new houses are needed for increases in the population.  Marlborough’s population was growing over that period, and Gisborne’s wasn’t.

So we might be more interested in the growth of the housing stock relative to the growth of the population.   Growth in the housing stock is typically more interesting than building permits, because if two old villas are demolished to build six townhouses, it is the net addition to the number of dwellings that is typically more interesting, than the number of new units consented.  In recent New Zealand context, if lots of houses are destroyed by an earthquake, the gross number of new consents won’t offer much insight on the supply/demand balance.

SNZ produces some housing stock estimates.  I’m not sure quite how they do them, but they suggest that each year typically about 2000 existing dwellings are destroyed, a tiny proportion of the (current) stock of around 1.8 million dwellings.  If New Zealand’s overall population was static, there would still be a small amount of replacement activity and –  if the Gisborne numbers are roughly indicative –  perhaps 11000 new dwelling consents a year for the country as a whole would be fine.   Gisborne house prices, for anyone interested, are still lower than they were a decade ago.

Here is the nationwide picture since 1991.  This shows the increase in the number of dwellings per increase in the population  (thus, 0.4 means one new dwelling added for each additional 2.5 people).

housing stock

So, far from  the situation improving in the last few years –  as the SNZ chart above might have suggested (and as SNZ themselves suggested) –  things were worse than ever in the year to June 2016.  The population is estimated to have increased by 97300, and yet the housing stock is estimated to have increased by only 23800.  Talk about dysfunction, and no wonder house prices have been rising strongly.  In 1999, 2000 and 2001, by contrast, the population increased by only around 21000 per annum.

SNZ doesn’t have (or not that I can find) annual housing stock estimates back to the 1960s, but we can still look at the new building permit numbers relative to the change in the population.   Here is the chart showing new dwelling permits per person increase in the population.

housing 60sWhat happened?   Well, in the late 1970s the large scale outflow of New Zealanders got underway, and the number of non-citizen immigrants had also been scaled right back.  In the years to June 1979 and June 1980, the population is actually estimated to have fallen slightly, and yet 18000 and 15000 new dwelling consents were granted in each of those two years.  For the three June years from 1978 to  1980 there was no population growth at all, and yet there were more than 50000 new dwellings consented.  No wonder that over the late 1970s and through to around early 1981, New Zealand experienced the largest fall in real house prices (around 40 per cent) in modern history.

Nothing in the data suggests that the New Zealand housing and land supply market is now even remotely capable of coping with population increases of 2 per cent per annum.  Of course in some sense it should, and could, be fixed.  But there is little or no sign of it happening –  are there any reports of peripheral land prices in Auckland collapsing since the Unitary Plan was adopted? – which makes the continued active pursuit of rapid population growth look even more irresponsible (than it would already be, given the absence of evidence of other real economic gains to New Zealanders from such a, now decades-old, strategy)

Still abusing the Official Information Act

I still don’t have much energy back and posting next week is also likely to be light, but I didn’t want to let pass another shameless abuse of the Official Information Act.

Several weeks ago I lodged a submission with the Reserve Bank on their (long and slow) consultation on the publication of submissions to consultations.  I made the case for a default approach of full publication –  bringing the Bank into line with a widespread practice now in the rest of the public sector.  If necessary, I argued, the Bank should promote a minor legislative change that, for the avoidance of doubt, might ensure that they were fully able to release submissions on matters relating to the exercise of the Bank’s regulatory powers.

The consultation on publication of submissions was not about the exercise of regulatory powers, so there was no question that submissions to that consultation were covered by the Official Information Act.  So I lodged a request asking for copies of the submissions.

I don’t suppose they will have received that many submissions to this consultation.  Few of the submissions are likely to have been long.  The issues covered by the consultation concern the Reserve Bank only, not any other agencies, so there shouldn’t be any need for inter-agency consultation.  And of course the Act requires official information to be released “as soon as reasonably practicable”.  So my request should, quite easily, have been able to be dealt with within, say, 10 days.

But this afternoon I received this letter

Dear Mr Reddell

On 3 August 2016 you made a request  under the provisions of the Official Information Act (OIA), seeking:

“copies of all submissions received by the Reserve Bank on this consultation up to and including the close of the consultation period on 5 August 2016,” where the consultation you are referring to is the consultation on the default option for publication of submissions.

The Reserve Bank is extending by 20 working days the time limit for a decision on your request, to Friday 23 September 2016, as permitted under section 15A(1)(b) of the Official Information Act, because consultations necessary to make a decision on the request are such that a proper response to the request cannot reasonably be made within the original time limit.

You have the right, under section 28(3) of the Official Information Act, to make a complaint to an Ombudsman about the Reserve Bank’s decisions relating to your request.

Yours sincerely

Angus Barclay

External Communications Advisor | Reserve Bank of New Zealand 2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140   +64 4 471 3698 | M. +64 27 337 1102

It isn’t the most time-sensitive request ever, and there have been more egregious Reserve Bank obstructions, but the law is the law.

Actually, I suspect they are delaying not because any “consultations” are necessary, but simply because it doesn’t suit them to release anything until they have released their own final decision.    But that isn’t a legitimate grounds for extending a request, and nor should it be.  The Bank is, of course, free to make its decision on the substance of the policy on its own timetable, but the submissions are public information.  A public institution committed to open government, transparent policymaking etc etc, would already have released the submissions.    But not the Reserve Bank.

The Ombudsman promised a few months ago to start reporting on how agencies did in responding to OIA requests.  It will be interesting to see how the Reserve Bank –  which actually does make much of its alleged openness and transparency (about stuff it doesn’t know –  the future –  rather than stuff it does know –  official information)  – scores.

The Governor has form

If one had simply been handed the Governor’s speech this morning, with no other knowledge of the New Zealand data, or of the Governor’s stewardship of monetary policy in his four years in office, it might have seemed quite reasonable.  And a person who had a good track record in making sense of inflation pressures and adjusting the OCR to keep inflation fluctuating around the target would have built a store of reputation and credibility.  Backed by all the analytical resources at his command, one might be inclined to be influenced by such a person’s analysis and storytelling.

But Graeme Wheeler is not that sort of person. Instead, he –  and his advisers –  badly misread inflation pressures, and after champing at the bit to raise interest rates, he launched an ill-judged, unnecessary, and ill-fated tightening cycle.  He set out on his quest talking up a coming 200 basis points of OCR increases, before finally bowing to reality after 100 basis points, and has only, and mostly very grudgingly, lowered the OCR since then.  In real terms, the OCR today is no lower than it was before that tightening cycle began.    And so core inflation lingers well below the midpoint of the target –  a focus he and the Minister had explicitly added to the PTA in 2012 –  and the unemployment rate is now into an eighth year materially above anyone’s estimates of the NAIRU.

Of course, forecasting and policy mistakes are, to an extent, inevitable.  No one is granted the gift of perfect foresight –  and if anyone had, they’d be better employed somewhere other than a central bank.  But what has compounded the problem –  the reasons not to take too seriously what the Governor says –  is his continued failure to even acknowledge mistakes, let alone express any contrition.  It is hard to have any confidence that someone has learned from their mistakes if they won’t even own up to having made obvious ones.  And while no individual speech can cover everything, it is striking how totally absent any treatment of the Bank’s conduct of monetary policy over the last four years was from this one.

Since my wife will be ticking me off for overdoing it and not resting if I write too much, I wanted to pick up on just two points in the speech.

The first was the Governor’s apparent model of inflation.

low inflation in some countries is linked to demographic change, especially in countries with a declining workforce and rapidly ageing population. Low inflation is also due to technological change around information flows and energy production, and to the global over-supply of commodities and manufactured goods;

Which sounded depressingly like the excuses and alternative explanations that were touted, in reverse, in the 1960s and 1970s.  At that stage people talked about the role of union power, occasionally even about demographics, about oil prices and resource scarcity and so on.  Each of those phenomena were real –  as those in the Governor’s list are –  but to cite them as explanations for persistently high, or persistently low, inflation is some mix of cop-out and analytical failure.

Persistent inflation –  or the absence of persistent inflation – is always and everywhere a monetary phenomenon.  By that, I don’t mean printing banknotes, and I don’t mean particular levels or growth rates for things central banks call “monetary aggregates”.   I mean simply that monetary policy can, if it chooses (or is permitted to) counter the impact of the sorts of factors the Governor listed and deliver an inflation rate that averages around target.  If they no longer believe that, the Reserve Bank should hand back its remit.

Sometimes, the job of monetary policy is harder than normal, and sometimes easier.  In the 1960s and 70s, with overfull employment in many countries, lots of union power, and lots of demand pressure associated with a rapidly growing workforce, it took a lot of effort to get and keep inflation under control.  Some countries did pretty well.  Others –  and New Zealand and the UK were two prime examples –  did poorly.  In the current climate, there seem to be a variety of ill-understood factors dampening inflation pressures globally.  Some countries have done well in countering them –  Norway is an example, and on Stan Fischer’s reckoning the US might be too.  Others less so.  But last year, on IMF numbers, around 90 countries had inflation in excess of 2 per cent, and almost 70 had inflation in excess of 4 per cent

Of course, the current effective lower bound on nominal interest rates, a bit below zero, does constrain many countries’ freedom of action.  But it doesn’t change the fact that inflation is a monetary phenomenon –  it is just that regulatory and administrative practices hamstring the ability to use monetary policy to the full in those countries.  Low inflation in other countries doesn’t make the Reserve Bank of New Zealand’s job harder. although common global factors –  affecting us as much as other countries –  may do.

Before turning to the second main aspect of the speech I wanted to comment on, I would note that there was plenty in the speech that I agreed with.  My differences with the Bank have never been about how the inflation target is specified and I agree that the government should not be considering lowering the target when the next PTA is signed next year. There might be a case for considering raising the target –  to minimize the risk that the near-zero bound becomes a problem –  but that is a topic for another day.   As the Governor notes, no other governments in other countries have changed the inflation targets their central banks work to, or abandoned inflation targeting.

The second area I wanted to focus on was the section devoted to explaining why the Governor disagrees with people like me, who think that interest rates should be cut further now.  Here is what the Governor has to say.

This view advocates bringing inflation quickly back to the mid-point of the inflation band by rapidly cutting the OCR. Driving interest rates down quickly would lower the exchange rate, contributing to increased traded goods inflation and stronger traded goods sector activity. The ensuing increase in house price inflation is not seen as a consideration for monetary policy, even though there would be an increased risk of a large correction in the housing market and associated deterioration in economic growth.

There would be considerable risks in this strategy. An aggressive monetary policy that is seen as exacerbating imbalances in the economy would not be regarded as sustainable and would not generate the exchange rate relief being sought.

With the economy currently growing at around 2½ – 3 percent and with annual growth projected to increase to around 3½ percent, rapid and ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottlenecks, and further inflame an already seriously overheating property market. It would use up much of the Bank’s capacity to respond to the likely boom/bust situation that would follow and would place the Reserve Bank in a situation similar to many other central banks of having limited room to respond to future economic or financial shocks.

Such consequences suggest that a strategy of rapid policy easing to extremely low rates would be counter to the provisions in the PTA that require the Bank to “seek to avoid unnecessary instability in output, interest rates and the exchange rate” and to “have regard to the soundness of the financial system”.

Do note the rather loaded language throughout this section.

Note too, as context, the chart of the real OCR

real ocr to aug 16

To this point, far from having seen “rapid” OCR cuts, the OCR in real terms hasn’t yet got back down to where it was before the ill-judged tightening cycle began.  Context matters: if the Governor were making these sorts of arguments when the real OCR was already 100 bps below previous record lows, with the labour market overheating and inflation rapidly heading back to 2 per cent, they might sound more plausible

As it is, I’m not  quite sure what to make of the comments.  On the one hand, in the first paragraph he accepts that such a strategy would work by lowering the exchange rate. But then in the next paragraph he appears to suggested that unexpectedly rapid OCR cuts would not in fact lower the exchange rate.  We all know that foreign exchange markets can be fickle things, but I’m pretty confident that if he’d come out this morning and said “you know, on reflection it does look as though interest rates will need to be quite a bit lower than we had thought.  We’ll do whatever it takes to get inflation fluctuating back around 2 per cent, and at present it looks as though that might mean the OCR has to head towards 1 per cent” that the exchange rate would be quite a lot lower.

And what of GDP growth?  Recall, that the Bank has persistently overestimated how rapidly spare capacity has been used up.  Their forecasts currently have GDP growth accelerating to 3.5 per cent. But the expectations survey they run  –  and apparently now want to gut – suggests informed observers don’t agree: latest expectations among that group were for growth of 2.5 per cent and 2.4 per cent in each of the next two years.   On that basis, those observers don’t expect the substantial excess capacity in the labour market to be absorbed any time soon.  And as a reminder to the Bank, to absorb an overhang of unemployed people the economy has to have a period of faster-than-sustainable growth.  To get core inflation back to target typically involves much the same sort of pressures.

In fact, most of this is –  as always with this Governor –  about house prices.  In his description of the “further cuts” view, the Governor notes that for those running this view

The ensuing increase in house price inflation is not seen as a consideration for monetary policy

That is because it is not, under the current Act and PTA, a relevant consideration for monetary policy.  The target is medium-term CPI inflation.  House prices don’t figure in that index and –  unless they have had a major recent change of view –  the Bank doesn’t think they should.  Monetary policy has one instrument and can really only successfully pursue one target.  The Minister of Finance and the Governor agreed that target would be medium-term CPI inflation.

But perhaps my biggest concern is that the Governor is now falling back, quite openly and formally, on the spurious argument that if he cut more now, he would only increase the chances of running into the near-zero lower bound at some future date.   His logic here is totally wrong, and his approach is only increasing the risk of lower-bound problems becoming an issue for the Reserve Bank of New Zealand.

With hindsight that is pretty clear. Remember that I’ve pointed out that we’d have been better off if the Governor had done nothing at all on monetary policy in his four years in office.  Actual inflation would be a bit higher –  since average interest rates would have been lower, and no doubt the average exchange rate –  and, on the Bank’s own reckoning (they point out that expectations appear to have become more backward looking) inflation expectations would have been higher.  Higher inflation expectation would, in turn, have supported higher nominal interest rates now (for the same real interest rates).    But the same analysis applies looking ahead.  If the OCR were cut further and faster than the Bank currently plans then, on their forecasts, inflation and inflation expectations would rise, helping to underpin higher nominal interest rates in future.  The risk of the current strategy –  especially given the Bank’s asymmetric track record –  is that actual inflation continues to undershoot, excess capacity lingers, and in response inflation expectations drift ever further downwards.  If that happens, the nominal OCR will have to be lowered just to stop real interest rates rising.

The lesson from a wide variety of advanced countries over the last decade is surely that, with hindsight, they didn’t cut their official interest rates hard enough and far enough early enough.  I stress the “with hindsight” –  there was little good basis for knowing that in 2009, but there is much less excuse for central banks, like the RBNZ and RBA, that still have conventional policy capacity.

On which point, two other observations:

  • there was still no reference in the speech to New Zealand doing anything about making the near-zero lower bound less binding.  There is simply no excuse for the New Zealand authorities to have done nothing pre-emptive to ensure that the ability to use monetary policy aggressively in the next downturn is not constrained by artificial constraints around the price of physical banknotes.
  • in his alarmist rhetoric about “further inflaming” the housing market, the Governor appears to have forgotten completely the line the Bank used when LVR restrictions were first imposed.  Asked then why not use monetary policy instead, the (correct) response was that our modelling suggesting that it would take 200 basis points of OCR increases to have the same impact on the housing market as the (quite limited) estimated impact of LVR controls.  No one –  not even me –  is suggesting that the OCR should be cut by 200 basis points now.  And if the Bank is concerned about banking system risks from high house prices, it has capital requirements that it could adjust.

Once again, this is a speech that reflects a key aspect of the Governor’s underlying “model” –  his fear that inflation might be just about to break out, all while taking little or no responsibility for the fact that it repeatedly fails to do so.  I’m caricaturing a little bit, but not a lot. Go back and read what he was saying leading into the 2014 tightening cycle, and then read those paragraphs from today’s speech that I included above –  written from a point where the real OCR is still slightly higher than it was before the tightening cycle.  That mindset clearly shapes how he thinks about policy and his asymmetric view of risks.  Past performance might not be a good predictor of future performance in investment management, but in senior managers and key decisionmakers it often is. It is hard to self-correct unrecognized biases –  perhaps especially if the decisionmaker thinks those biases are actually strengths.   The Governor has form. Unfortunately, it is has mostly been poor form.  It is not clear why that bad run is about to break.

In passing, it is just worth noting one of the Governor’s final observations

Central banks do not have special powers of market foresight or a franchise on wisdom. But they do have significant research and analytical capacity that can deliver valuable insights, and this is being applied to challenges associated with the current global economic and financial developments.

And yet, neither in the text of the speech nor in any of the 11 footnotes, is there any reference to any Reserve Bank research at all.

English demonstrates why monetary policy governance needs to change

Writing about monetary policy the other day, I observed that

we all know that ex post accountability for monetary policy judgements means little in practice (perhaps inevitably so)

Our (unusual) system for the governance of monetary policy was built around the presumption that such accountability could be made effective, but it has long been clear that wasn’t correct.  The Acting Chief Economist of Westpac, Michael Gordon, is quoted in the Herald saying:

“There needs be tighter enforcement of it [inflation targeting]. The problem at the moment is the only option the Finance Minister or the Reserve Bank board has is the nuclear option of sacking the governor, and of course they don’t want to do that, so it’s just left to drift.”

I think that is only partly right (and actually the Board can’t dismiss the Governor, only the Minister can).  The issue isn’t so much the lack of powers as the lack of will (in turn perhaps reflecting lack of incentives).  The Board and the Minister could give the Governor a very hard time –  well short of sacking him (something I doubt anyone wants) –  but don’t.

The Reserve Bank’s Board met yesterday and, if past practice is anything to go by, it will have been the meeting at which they finalized their Annual Report –  their job being, primarily, to monitor and hold to account the Governor.  It has been a pretty bad year for the Bank and the Governor.  Inflation continued to undershoot the target, communications has been patchy at best, and the analysis in support of the Governor’s housing finance market controls remains at least as poor as ever.  And then there was the OCR leak.  These things happen –  sometimes it takes a breach to highlight system vulnerabilities –  but the refusal to take any responsibility, and then to resort to smearing the person who brought the leak to their attention, showed something of the character of the Governor, his Deputy, and the Board members who –  passively or (in the case of the chair) actively – backed his approach.  In a post last month, I suggested what a good Board Annual Report might actually look like –  one that took seriously the problems, as well as seeking to build on the strengths of the institution.  We’ll see when the report is finally published, but I’m not optimistic that there will be any evidence of serious scrutiny or accountability.

The Minister’s approach to all this was nicely reflected in another useful Bernard Hickey story

English was asked if the Governor had failed to meet his PTA target with English.

“I think that’s an unfair assessment in the circumstances,” English told reporters in Parliament.

So inflation, on the Bank’s own forecasts, will be away from target for seven years and that’s okay according to the Minister of Finance.  Of course, the first year or two of that wasn’t the current Governor’s responsibility, but it seems unlikely that in the five years of inflation outcomes he is responsible for, inflation will get to 2 per cent at all.   And yet Mr English and Mr Wheeler explicitly inserted that 2 per cent focal point into the PTA.

I’m not sure that “failed” is open to an easy yes or no answer.  But it wouldn’t have been hard for the Minister to have noted that “look. pretty obviously there have been some mistakes and misjudgments, at least with the benefit of hindsight, and that’s unfortunate.  But humans make mistakes –  even politicians do –  and, as I think the Governor has pointed out, often private economists had even higher inflation forecasts than the Bank did”.

But, no.  Instead, the Governor is absolved of all blame/responsibility.

“If world inflation was 2-3% and we were wandering along at 1% and had high unemployment then I think you could say that,” he said.

As the Treasury has pointed out –  to him and to us –  the unemployment rate is still well above the NAIRU, and has been for the whole of the Governor’s term (in fact, almost the whole of the government’s term).  Oh, and there is that pesky new under-utilisation series as well –  almost 13 per cent.

And then there was the first half of that sentence.  It sounded a lot like the sort of nonsense criticism we used to get back in the late 1980s when the price stability target was being set: Winston Peters, for example, used to argue that we couldn’t possibly get inflation lower than that of our trading partners.  Perhaps it was true in the days of fixed exchange rates, but securing that monetary independence was one of the reasons the exchange rate was floated 30 years ago.  If your target inflation rate is lower than that of your trading partners, you should expect to see the exchange rate appreciate over time, and if your target inflation rate is higher, than the exchange rate should depreciate over time.

And as it happens, when I checked the IMF database, world inflation last year was 2.8 per cent last year, a little lower than the 3.2 per cent the year before.  I suppose the Minister had in mind other advanced economies or the G7 –  they each had an inflation rate last year of around 0.3 per cent.

The Minister goes on

“But the fact is we’re dealing with the threat of deflation around the world.”

Well yes.  Many countries have exhausted their conventional monetary policy capacity, and are stuck.  We aren’t, and there is simply no reason why a country with policy interest rates well clear of the effective floor can’t keep core inflation relatively near target.  As Norway has done, for example.

I suspect the Minister knows all this very well, but it is easier and less politically risky to blame deep foreign trends outside our control, than to cast any doubt on the performance of the Governor for whom he is responsible, and risk reflecting adversely on his own government’s economic performance.  He did fire the odd shot across the bows of the Governor last year –  which never came to much, even in his annual letter of expectation –  but perhaps the government itself was under less pressure then?

The Minister continues with his defence, falling back on the “quality problems” approach preferred by his leader.

English said any assessment had to take into account that the economy was growing at faster than 3% with stable interest rates and moderate wage growth.

“These are characteristics of an economy that is actually succeeding, not one that’s failing, and that’s the important context of the discussion you have about the Reserve Bank,” he said.

“Whatever the niceties of Reserve Bank monetary policy, the fact is the economy is producing jobs, it’s lifting incomes and that’s relatively unusual.”

GDP growth has been around 3 per cent in the last year –  but then population growth has been just over 2 per cent.  That’s pretty feeble per capita income growth.  Perhaps GDP growth will strengthen from here –  as the Reserve Bank forecasts –  or perhaps not.

And I’m not sure what to make of the final phrase in that block, the claim that “the economy is producing, jobs, it’s lifting incomes and that’s relatively unusual”.   I’ve been among those making much of the dismal long-term economic performance of the New Zealand economy, but per capita real income growth is the norm not the exception –  and typically at a faster rate than we’ve had in the last few years.

But perhaps the Minister has in mind international comparisons.  Since 2007 we’ve done a little better than the median advanced country in GDP per capita comparisons.  Good quarterly estimates are harder to come by, but I did find some on the OECD website.  Of the 28 member countries for which they have data, the median increase in real capita GDP in the most recent year (typically year to March 2016, as for NZ) is 0.9 per cent.  In other words, per capita growth in the typical advanced country is running about as fast (or slow) as that in New Zealand.  Few people anywhere in the advanced world think that is a mark of success.

Pushed further, the Minister reverts to his “it is all too hard” defence of the Bank (and, by implication, himself):

“But any reasonable person would think that it’s quite difficult when you’ve got a deflationary effect around the world, where deflation has become the big threat, rather than inflation. Our Reserve Bank is trying to achieve the target in a global context where inflation is zero and interest rates are negative in some places,” English said, adding it was challenging for the Reserve Bank to hit its target.”

Many “reasonable people” might think that –  it might sound initially plausible when the Minister of Finance says it –  but they would be wrong.  Many other countries have largely run out of policy capacity.  We haven’t, but we –  or rather the Governor –  have simply chosen not to use it.  Perhaps few people would want to hold against the Bank the initial failure to recognize what was going in the wake of the 2008/09 recession, but it is seven years later now.  We spend a lot of money employing capable people in the Reserve Bank to recognize trends promptly and respond sufficiently firmly to keep inflation near target.  Perhaps one day we’ll also have exhausted conventional monetary policy capacity –  sadly, more probable than it needs to be because the Minister and Governor have done no planning to remove the roadblocks that create effective lower bounds –  but we are nowhere near that situation now.

As I noted the other day, all the Governor has needed to do over his entire first four years in office was…..nothing.  If he’d just left the OCR at 2.5 per cent then, whatever, the global pressures, inflation (and inflation expectations) would be nearer the 2 per cent target today.  I’m sure the Minister knows that.  He probably knows that the 2014 tightening cycle was completely unnecessary, and that subsequent reversal was –  and remains –  grudging at best.  But the Minister won’t say any of that, even in more muted and diplomatic terms.

And I can sort of understand why not.  After all, the economy isn’t in fact doing that well.  Unemployment remains disconcertingly high, the government’s export target is totally off track, per capita income growth is subdued, and there is no sign of governments fixing the disaster they’ve made of the housing market.  But if the Minister is critical of the Governor’s performance –  even though that is the model the Act envisages –  it will probably blowback on the Minister himself.   The Governor isn’t up for election, but the Minister and his colleagues are.

And that was my starting point: the sort of ex post accountability the current legislative framework is built around is simply unrealistic in all but the most egregious (almost inconceivable) circumstances.  And that makes it all the more important to the get the right people for the job in the first place, including not putting so much power in the hands of single unelected person who most probably won’t effectively be held to account if that person does make mistakes or prove not well-suited to the job.  The current Governor only has a year to go on his term.  It is tempting to suggest, quoting Cromwell to the Rump Parliament or (more recently) Leo Amery to Neville Chamberlain

You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!

In fact, we’ll just have to wait out the end of the Governor’s term, and the Minister –  despite his defence –  may be as pleased as anyone to see that term end.  There is a real challenge in finding the right replacement –  there is no obvious Churchill figure (nor, fo course, a crisis of that magnitude)  –  but the focus should really be on reforming the institutional arrangements so that no one person carries that much power without effective responsibility.  Other countries don’t do it.  And we don’t do it in other areas of government.  It is time for a change.

(And it is also time for a break. I’ve been slowly recovering from surgery last week. I have a reasonable amount of energy for the basics, but none to spare, and next week I have some other stuff I just have to do. If there are any posts next week, they will be few in number.)

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The social democrats at the Productivity Commission

A short time ago, a press release from the Productivity Commission dropped into my in-box, announcing the release this morning of the Commission’s draft report on better urban planning.    The Government asked the Commission to take a first principles, or “blue skies” approach to the issue.

I’ve been increasingly skeptical of the work of the Productivity Commission.  They often provide some interesting background analysis and research, and yet they increasingly seem to be well described by the old line “when your only tool is a hammer, it is tempting to see every problem as a nail”.  The Productivity Commission is mostly made-up of, and run by, (able) long-term public servants.  Public servants design and help implement the instrument of state –  government attempts to remedy problems, typically with government-based tools.  There is a self-selection bias problem –  people who are inclined believe in the importance/viability of government solutions are more likely to work for government than those who don’t –  and a greater reluctance than usual to ask hard questions about one’s own capabilities, since government agencies typically face few market tests and weak accountability.  The Productivity Commission –  like the OECD –  tends towards smarter better government, not to asking hard questions about whether we couldn’t just get government out of the way in many more areas, as prone too often to being the source of problems rather than the solution.

The Productivity Commission’s report runs to over 400 pages, and since it was released at 5am this morning, I assume no one has read it all.  I was, however, struck by the fact that in a 600 word press release there is no mention of property rights and a single mention of markets (and that not positively).  There is a 10 page overview of the entire report, and a word search suggests that “rights” does not appear at all and “markets” only once.

My unease was heightened when I read this line in the press release

Planning is where individual interests bump up against their neighbours’ interests, and where community and private objectives meet. It is inherently contested and difficult trade-offs sometimes have to be made. These decisions are best made through the political process not the courts.

Again, no mention of rights.  And the prioritisation of the amorphous “community interests”.   The suggestion of increased reliance on the political process rather than the courts hardly seems like a recipe for a clear, stable, predictable (and non-corrupt) regime for managing potential conflicts between the property rights of various individuals and groups.

Perhaps this draft report will recommend some  useful steps in the right direction.  Time will tell.  But on the face of it –  the shop window, of the press release and summary – it seems to fall quite a long way short of a first principles approach in a free society.

Woodhouse on immigration

Bernard Hickey had an interesting article the other day, having talked to both the Minister of Immigration and the Minister of Finance about the growing calls for a rethink of immigration policy, and particularly about the high number of relatively lowly-skilled migrants that have been allowed in.   I’m still staggered that we grant immigration approval, even for temporary work visas, to any labourers, let alone 6500 of them.

The Ministers seem torn.  Woodhouse in particular often comes across, as Steve Joyce typically does, as a true believer.  Immigration is good and, if anything, more immigration would be better.  Of course, there is no evidence of these benefits to New Zealanders at an economywide level –  Ministers don’t produce any, and their advisers in MBIE and Treasury don’t either.  25 years of the current policy, and 70 years of high immigration since World War Two (with a brief exception between the mid 70s and the late 80s), and you’d think the advocates of the policy would have no real trouble demonstrating the benefits to New Zealanders of their policy, if they existed.  I know people still debate the merits of free trade (although most of the debate these days is about the non-trade aspects of preferential trade agreeements), but pretty much everyone welcomes the much cheaper cars, clothes, TVs etc that followed from the dismantling of import controls.  It was a clear gain for the overwhelming bulk of New Zealanders.

But there is simply nothing comparable for the succession of large scale immigration programmes New Zealand has run.  As a reminder, we’ve had one of the very largest planned immigration programmes anywhere, and one of the very worst productivity performances among advanced countries for decades.  The best case story must be that the immigration just stopped things getting worse, but no one has even been able to show that.  Of course, there is the hardy perennial of the wider range of ethnic restaurants.  But it is hard not to think that that is typical example where upper income people are capturing almost all the gains. I can’t imagine that people on the average wage or below eat out much at all.  Actually, with three hungry kids and a (good) single income, we don’t.

If Woodhouse and Joyce are true believers, there are signs of a bit of unease, and bet-hedging, going on.   Woodhouse repeatedly runs John Key’s line that the demand for immigrant workers is a “sign of success, not failure”, but when pushed on the possibility that –  as Treasury warned –  high levels of low-skilled immigration could be dampening wages for low-skilled New Zealanders, he accepts the warning but notes that in his view the “evidence is not clear yet”.   That isn’t exactly a ringing statement of confidence.  The Minister of Finance is similarly hesitant.  Perhaps even MBIE is beginning to have second thoughts?

The curious thing about the current debate is that on my reading of the international literature and evidence, no thoughtful advocate of large scale immigration really bothers to contest the idea that if you bring in lots of unskilled immigrants it will probably have some adverse effect on the wages of the native unskilled.  Those who are more enthusiastic will stress their view (their reading of the evidence) that the effect is pretty small, and might go on to argue that often recent immigrants aren’t actually competing with natives at all, but with the last-but-one cohort of earlier immigrants.  That competition is part of how the (claimed) wider national benefits of that sort of immigration (as distinct from the possible productivity spillovers from really highly-skilled and innovative people) arise –   it makes projects viable that otherwise wouldn’t have been.  Defenders of the New Zealand programme can reasonably point out that our immigration programme is less heavily weighted towards unskilled people than those of many other countries –  the US, with its focus on family-based immigration criteria, is a prime example –  but that unskilled (or modestly-skilled) component of our immigration can only benefit New Zealanders as a whole (and it may not do so even then)  if it changes relative prices –  making relatively unskilled labour relatively cheaper.    If it doesn’t do so, there is no point in having it at all  (at least on economic grounds –  the ostensible basis of the programme).

Ministers like Woodhouse and Joyce devote huge amounts of time to recounting stories of labour shortages in particular sectors, or regions, or firms and how they –  and their wise bureuacrats –  closely monitor emerging pressures etc, juggle and refine the approved occupational categories to match supply and demand.  It has all the overconfidence of a Soviet-era central planner –  and not a jot of faith in the markets, or indeed in their fellow New Zealanders.

Which is strange in a way since, in their former pre-politics lives, both Woodhouse and Joyce were private sector CEOs, operating medium-sized businesses.  Of course both were in domestically-oriented sectors (private hospital and radio respectively)  –  which is where the firms are who do tend to benefit from immigration, at the expense of the tradables sector.  But perhaps the business mindset comes through in this way: from any individual firm’s perspective, it would be worse off if it (in isolation) were not able to draw in immigrant labour.   Business CEOs aren’t paid to worry about the national economy, but about the best interests of their shareholders (and perhaps other direct stakeholders).  If my individual rest home  –  or dairy farm –  can’t import Filipino labour and competitors can. I’m in a much worse position.  In  a business with tight margins, it might even be enough to force me out of business.  But you simply can’t do –  as business people commenting on public policy often do –  and translate straight from an individual firm’s perspective to a whole economy perspective.

At an individual firm level, increased demand is, typically, a sign of success, and the need to take on more staff is, typically, too.  At a whole economy level, increased demand might simply be the result of high levels of immigration (foreigners coming, or New Zealanders not leaving because the Australian labour market isn’t that good).  We know –  and it has been the consensus view of New Zealand macroeconomists for decades –  that the short-term demand effects of an upsurge in immigration exceed the supply effects.  Why?  Because immigrants are people too: they need housing, schools, shops, offices, roads etc,  And each fully fitted out member of a modern economy needs physical capital equivalent to several years of additional labour supply.   And this is partly why it is hard to detect the wage effects of immigration –  in the short-run, immigration actually creates its own demand, supporting employment and activity.  It often takes time for any relative price changes to work through, and there is always lots of other stuff to complicate a reading of the data.

So the individual business person sees immigration as imperative (never pondering how other economies ever prospered without high levels of immigration) because s/he mostly sees the situation his or her specific firm faces right then (which is how markets do and should work). For a rest-home operator, advertising for staff at the prevailing wage might bring no suitable New Zealand applicants.  But why would it when immigration settings have allowed in lots of immigrant labour to the sector, typically from countries with much lower wages than New Zealand?  New Zealand wages in the rest-home sector get driven towards the minimum wage, and New Zealanders gravitate elsewhere.  It is individually-rational behavior all round.  The possibility of reducing access to immigrant labour will scare the individual rest home operator –  or even employers in the sector as a whole.  Where will we get labout from they ask?  New Zealanders won’t do the job. they will say.

In fact, New Zealanders won’t at the prevailing wage –  which both they, and employers, treat as given.  But it isn’t a given.  Pull back on the ability to bring in lowly-skilled immigrants and the market will adjust.  In the Hickey piece, Michael Woodhouse is quoted as worrying that shutting the door overnight would be “quite damaging”.  And perhaps it would be quite disruptive, but his is a straw man worry.  After all, these things can be phased. Give a year’s notice for example.   Halve the number of work visas next year, and halve it again the following year.  Pull down the number of residence approvals by 10000 a year for each of the next three years. I’ve got no problem with clear signaling of a reform path.

Recall the high levels of immigration create a lot of demand.  With a much lower targeted annual inflow, many fewer people will be required in sectors directly oriented to a rising population (not just construction, but all the projected employment growth in non-tradables sectors).  So when the rest-home, or the dairy farm –  or those firms employing immigrants labourers or clerks –  go looking for New Zealand staff, they probably will have to offer a bit more than they have been (especially in sectors that have been heavily reliant on immigrant labour), but they’ll also find more New Zealanders looking for work.  In the short-term higher wages offered by an individual firm help draw staff away from competitors in the same industry, but over time they will draw more people into the industry itself.  Will this undermine competitiveness of our tradable sector firms?  Well, no, because with a much lower rate of immigration we would finally see our interest rates converge to those in the rest of the advanced world –  and without population pressures, any house price responses would be pretty muted, to say the least –  and the exchange rate would be lower, probably quite a lot lower.  Because here is the thing, for all that ministers like to talk about tradables sector firms needing immigrant labour, once you take a whole economy perspective, tradables firms typically aren’t better off at all –  slightly cheaper immigrant labour (what the firm itself sees) only slightly offsets the adverse impact of the higher real exchange rate.  Almost all the gains have flowed to firms in the non-tradables sector, and not surprisingly our exports (share of GDP) have done poorly, and there has been no per capita growth in tradables sector output for 15 years now.

It is time Ministers started taking a whole of economy perspective on immigration, not the individual business CEO perspective they have been bringing to the issue (backed by their business supporters).  In passing, the other day, I noted that if one wanted to do something about work visa numbers, one could look at imposing a rule that said that, in most circumstances, no work visas would be granted for any position paying less than, say, $100000 per annum (perhaps phased in over two or three years).  I haven’t given the option a lot of detailed thought, but on the face of it, it looks very attractive.  And, frankly, if we did that I’d be a lot more relaxed about having a lot less central planning around work visas –  there might be little harm in allowing any firm to hire anyone in a job paying more than $100000 for a single, non-renewable, three year work visa.  It would be a lot more skills (and market) oriented than the current work visa system.  And to the extent that immigration did intensify wage competition it would be for people at the upper end of our income distribution rather than at the bottom end –  which seems rather less unappealing on social justice grounds.

Having said all that, I should reiterate that my own main area of focus is on the (high, but fairly stable) long-term residence approvals programme.  When I started working in this area around 2010, I took for granted the official rhetoric that our immigration was very skills-focused and built my arguments on that assumption.  The essence of my story –  that rapid immigration-fuelled population growth has put persistent pressure on real interest rates and the real exchange rate, skewing the economy away from business investment (especially in the tradables sector) and undermining productivity growth –  works on that assumption.  Since then, I’ve become more aware of just how modestly-skilled most of our immigrants are, and have also come to focus more on the heavy burden our remote physical location imposes in generating really high incomes for lots of people.  None of that story is much affected at all by short-term swings –  up or down –  in official net immigration numbers.

And so, while I welcome the current debate, which is raising some important issues, I am uneasy that with a few policy tweaks here and there, or a resumption of a larger outflow of New Zealanders to Australia (in many ways, that exodus is the defining feature of New Zealanders’ experience in the last 40 years), will remove the current vocal discontent, without ever having addressed the longer-term questions I’m raising about the possible links between our medium to long-term immigration programme and our disappointing poor longer-term economic performance.

On which note, readers might be interested in the latest issue of North and South magazine, which features 20 pages of immigration-related articles. Included in that is a fairly lengthy interview with me, where I try to keep the focus mostly on the medium-term issues –  the connection with our longer-term productivity performance.  The editor has chosen for her “Quote of the Issue” this line from me.

There’s just no evidence over 25 years –  indeed over the whole 70 years since WWII – that we’ve had gains for New Zealanders across the board from immigration.

Rereading the interview there are a few things I’d word differently –  and when I spoke to the journalist, I wasn’t really appreciating that she wanted to run pages of text verbatim – but it provides a reasonable flavour of some of the issues, and the political puzzles (why, for example, are the Green and Maori parties apparently so much on board with the status quo).

In one of other articles, this passage caught my eye.

Matthew Hooton admits he might have backed the wrong horse for the past two decades. …..he opined in the comments section of the Dim-Post blog site that he was reconsidering his long-held stance on immigration:  “There is also the argument on immigration that the liberal globalists (of which I count myself one) have spent at least 20 years arguing. ‘Immigration is good for you because it makes a country more cosmopolitan and internationally connected and also a moral duty, and if you are against it you are racist’.

“My regular use of this argument over many years (or at least one like it) was a reaction to the vile way Winston Peters raised the issue in the early 1990s……But it is a false argument.  Immigration is a choice. No country has to take anyone if they don’t want to….But for 20 years, no one in authority in New Zealand has really made the case for why immigration is good for us –  just if you’re agin it, you’re a racist, provincial xenophobe.  Yet as I look back over the last 25 years in New Zealand, I’m not sure that Peters was wrong on the substance of the issue.”

Hooton is a politics and PR guy, not someone with a strong economics orientation, and yet his natural home is on the (market) liberal right of politics.  At a time when the latest poll suggested that even 60 per cent of National voters think something needs to be done about immigration, I thought it was a telling acknowledgement of how the ground might be shifting on this (really large large scale government intervention) issue in New Zealand.  It isn’t even now a conventional left-right issue –  people of the centre-right orientation of Kerry McDonald and Don Brash are also calling for change. If anything, the fault lines now seem to fall along these lines: individual employers with a firm-level perspective, and academics/bureaucrats on one side.  The rest of New Zealand is considerably more skeptical as to quite what they are gaining from this programme that John Key, Steven Joyce, Michael Woodhouse and Bill English still seem ready –  perhaps ever more out on a limb –  to defend.

 

Debating monetary policy

Monetary policy matters.

Other things matter more of course.  Even in the economic area, the long-term prosperity of a country and its people is affected very little by the quality of the country’s monetary policy. But the short to medium term matters too.  And monetary policy can make quite a difference to how the economy performs, and the employment opportunities open to its people over horizons of typically a couple of years, but potentially stretching out to five years.

So it is encouraging to find various people weighing in on how monetary policy should be conducted –  partly on the questions of where the OCR should be right now (about which there will always be quite a bit of uncertainty even if everyone agreed on what target monetary policy should be pursuing), but more importantly on what target monetary policy should be aimed at.  In this post, I’m going to disagree with several recent contributions to the debate, but differences of view are vital if there is going to be debate at all.

Of course, many of these issues are addressed and dealt with –  passively or actively –  in the design of the Policy Targets Agreement.   Those documents matter, a lot.  In the PTA, the Minister of Finance constrains the otherwise unchecked power Parliament gives to a single unelected individual (a person in turn chosen by faceless company directors with no democratic mandate or public accountability) to run monetary policy as s/he chooses.  The process behind agreeing the PTA is clothed in secrecy –  even years afterwards the Reserve Bank refuses to release the relevant papers.  It needn’t (and shouldn’t) be so.  This isn’t just a bureaucratic piece of paper, but the design of the policy “rule” that will govern New Zealand’s short-term stabilization policy for the following five years.

I’ve noted previously the much better approach taken in Canada –  where the Bank of Canada had an open process of research and reflection in advance of the next review of its equivalent of the PTA.  There is no reason at all why New Zealand shouldn’t do that, and more.  Instead of relying on occasional passing comments from the Minister of Finance or the Secretary to the Treasury about their views on the (absence of a) case for substantive change to the PTA, the Treasury and the Reserve Bank, supported by the Minister of Finance, should be promoting an open research programme, inviting outside submissions, and looking to host a conference/workshop early next year where interested parties could engage and offer advice to the Minister and whomever the Board determines will be next Governor.  Among the many issues such a work programme might look at is how best to design the policy rule to cope with the risk that New Zealand hits the near-zero lower bound in the next five years (as an illustrative piece  –  see Fig 1 – by a senior Treasury economist highlights, it is hardly a trivial risk).  It might seem uncomfortable for the Bank –  once upon a time, as an insider, I’d probably have pushed back too.  But it is what open government should actually look like.  In practice, we all know that ex post accountability for monetary policy judgements means little in practice (perhaps inevitably so).  Getting the “rules” right at the start  –  and appointing good people, which probably includes shifting towards a committee decision-making model for monetary p0licy – probably matters more.    (For avoidance of doubt, I’m not championing any particular changes to the PTA, although there are a few matters that could usefully be tidied up.)

But to come back to the various contributions to the debate that I’ve seen over the last few days.

In their weekly commentary, the ANZ economics team says they will offer some more detailed opinions on the framework “down the track”, but for now they offer two suggestions:

It’s arguable whether CPI inflation is the right target. It might be better to include a basket of various price indices. Some back-casting to see whether policy and economic outcomes would have been improved under different targets or a basket would also be useful

We need a better framework for driving more co-ordination between fiscal and monetary policy.   …there are limits to what monetary policy can do. It is now widely appreciated that fiscal policy and structural reform need to do more heavy lifting to generate better growth outcomes globally. But that is easy for many to say when there are no mandates or requirements to follow through. Monetary policy needs mates

On fiscal policy, I offered some skeptical responses to the ANZ’s thoughts in this area last year.  I remain skeptical.  If they are arguing for a more expansionary fiscal policy at present (as they were last year) it is a recipe for a higher exchange rate, and no higher  growth (other than around the near-zero lower bound, monetary policy offsets the demand effects of fiscal policy).  I’m not opposed in principle to greater coordination of fiscal and monetary policy –  and as we near the lower bound on interest rates it may become more important – but now hardly seems the time for more spending.  Our debt isn’t that low, and that borrowing capacity could yet be very important.  If “monetary policy needs mates” in the current context, some mix of more extensive land use deregulation and reduced medium-term immigration targets look more appropriate.  But both would make sense on their own terms, whether or not monetary policy faced particular challenges.

But perhaps the more interesting question is whether the CPI itself is the “right” target.   There is no compelling theoretical reason to prefer CPI inflation over any other of the range of possible nominal targets (individually or in combination).  One could think of using various wage indices, the private consumption deflator, nominal GDP, a differently constructed CPI, or perhaps even the exchange rate itself.  One could target levels instead of rates of change.  One could, to be deliberately absurd, consider anchoring to the price of tomatoes, or the prices of houses or –  oh, we’ve been there before –  the price of gold.     Plausible arguments could be mounted for most of those options.   We ended up, 25 years ago, settling on the CPI (more or less) because it was prominent measure, somewhat understood by the public.  There wasn’t a huge amount of analysis behind the choice at the time –  and we knew the CPI had its pitfalls, more so then than now – but it has stood the test of time.  Almost all the countries that have adopted inflation targeting, use CPI-centred targets.  The important exception, the US, uses the private consumption deflator.

Having said that, it is also important to recognize that monetary policy has never just been driven off the CPI inflation rate.  First, there are all manner of exclusions and adjustments to get to a sense of where some “core” or “underlying” measure of CPI inflation is right now. Few people, for example, are particularly bothered by the fact that annual headline CPI inflation is currently 0.4 per cent.  What bothers them more is the interpretation of that data –  hence the range of estimates suggesting “core” CPI inflation is probably somewhere in a range of 1 to 1.5 per cent.  And, as importantly, policy has never targeted current inflation.  No matter what the Reserve Bank did it couldn’t make any material difference to inflation for the September quarter of 2016.  So policy looks ahead to forecasts of (CPI) inflation.  But when it looks ahead a couple of years, the precise index the Bank is using doesn’t matter very much.  Their forecasting models embed assumed relatively stable relationships among the various elements of the economy –  and if they think the economy is going to evolve in a way that will lift pressure on resources over the next few years, that will show through typically in whatever variable they are forecasting –  whether it is the CPI, private consumption deflator, wages or whatever.   Some of those series might be more volatile than others, and so if one did shift to using them as the basis for the PTA target, one could have to take that into account in the design of the PTA.  One can’t simply assume that all the rest of the parameters of the PTA could sensibly be left unchanged if one replaced CPI with some other price/wage/income index as the centerpiece of policy.  The LCI, for example, is much less variable than the CPI –  so small movements in it tend to matter more.

I’m not, at all, opposed to further work being done on evaluating alternative rules.  But my prior is that most of the alternatives would make little difference (when evaluated using forecast data).  The bigger issues –  and disputes –  have not really been about what index the Reserve Bank might be targeting but about (a) their overall read on the outlook for resource pressures, and (b) which risks they choose to tolerate.  Neither seems likely to have been much different if they’d been handed a different index (and a suitable target for that index) some years ago.  They –  and most of the market economists –  thought inflation (however defined) would pick up quite strongly (hence the presumed need for such large interest rates increases).  They were wrong, but a different target wouldn’t have changed their model of how they thought the economy was working.

Shamubeel Eaqub’s latest weekly column has thoughts along similar lines to the ANZ’s. but he is a bit more specific, arguing (if I read him rightly) that the Reserve Bank should be charged with targeting an index that includes house prices.

There is nothing sacrosanct about how our CPI treats housing (actual rents, and the cost of constructing a new house, but not the land price).  It isn’t an uncommon approach –  and is used in Australia for example.  One could easily argue for an alternative approach – the one used in the US (and in our private consumption deflator) –  in which actual and imputed rents (the latter in respect of owner-occupied houses) were used, but not construction costs.    That latter approach was long the preferred option of the Reserve Bank, and I still have a hankering for it.  In fact, for a few years in the early days of inflation targeting, for accountability purposes the target was expressed not in terms of the CPI, but of an alternative index that used the imputed rents approach.  But for the last 20 years, the Reserve Bank has been content with, and positively endorsed, the current “acquisitions” approach.

Eaqub argues that if land prices had been included in the CPI – I’m not sure what weight he envisages –  inflation on that measure would have been “2.5 per cent or more for the last three years”.  Perhaps so, but we’d also have switched to using an index that was much more variable than the CPI, and that greater variability would need to be taken into account in writing the PTA.  Moreover, given that the combination of land regulation and immigration policy (or tax policy problems, as Eaqub might argue) have imparted a very strong upward bias to real land prices over several decades, that would also need to taken into account in setting the appropriate target range.  It seems to be an argument that would have led to higher real interest rates over history.  But, if so, it is worth reflecting that we’ve already had the highest interest rates in the advanced world for the last 25 years, and a mostly overvalued real exchange rate to match. I’m not sure how exacerbating those imbalances looks preferable to what we’ve had.  Add to the mix of challenges that monetary policy runs off forecasts, and no one has good forecasting models for urban land price fluctuations. and at best I think such a suggestion would require a lot more in-depth evaluation.    Or we could just fix up the structural distortions that mess up our urban land market –  but not, say, those of Houston, Atlanta, or Nashville.

The final contribution to the monetary policy debate that I wanted to touch on today was a thoughtful column by my former Reserve Bank colleague (now apparently the chief investment officer for a funds manager) Aaron Drew.  Aaron believes that  interest rate cuts are doing more harm than good (globally and in New Zealand).  In taking that view, he isn’t alone.  The BIS in particular has at times argued that the world would be better off if only central banks got on and lifted policy rates back to some more-normal level.  I’ve thought there was a germ of an insight there in that monetary policy can’t make much difference to the long-term structural prospects of the economy –  and the biggest challenges many countries face are the widespread decline in productivity growth.

Beyond that, I think the argument is just wrong.    After all, we’ve already twice tried the experiment of raising interest rates in the years since the 2008/09 recession.  Both prove rather short-lived experiments.  Aaron cites two arguments in support:

Two key arguments are made as to why cutting rates may be making things worse rather than better. The first is essentially a confidence argument. Cutting rates to very low levels, and in the extreme case to negative levels, signals that things are very wrong with the economy. Households and firms react to this by pulling-back spending.

The second key argument is that cutting interest rates to very low depresses, rather than boosts, household spending because the negative impact it can have on savers and the retired outweighs positive impacts elsewhere.

On the first of these arguments, I’d question just where the evidence anywhere is to support it.  It is certainly true that whatever forces have led central banks to adopt such low (or negative interest rates) are extraordinary –  out of our range of historical experience.  And the associated weakening of income growth prospects should have led people to become quite a bit more cautious –  prospects now just aren’t as good as they seemed 10 years ago.  But if central banks simply pretended those pressures weren’t there, it doesn’t suddenly make them go away.  But whatever the arguments about negative interest rates, that isn’t an issue New Zealand currently faces –  our OCR is still higher than the US’s policy rate has been at any time in the last seven years or more.

The second is an empirical matter. Aaron argues that, in contrast to the usual experience, in the current climate lower interest rates are dampening demand and inflation, not contributing to raising them.  It could be so, but it isn’t obvious why it should be.  He emphasizes the adverse impact of low interest rates on those –  the retired –  consuming from the earnings of fixed income assets, as well as on those saving for retirement.  But the flipside of that approach is the lower servicing costs of debt –  especially for the people who already had debt outstanding before the latest surge up in house prices.  And real interest rates have been falling for 25 years now.

But even if the income effects in New Zealand did work in Aaron’s direction, the substitution effects don’t.  All else equal, lower interest rates make it more worthwhile to do a project today than it would have been without that interest rate cut.  And, perhaps more importantly, for all the fuss around exchange rate movements on the day of MPS announcements, I don’t know anyone who thinks that if New Zealand had kept interest rates much higher –  and Drew is quite open that he was arguing against cuts (and still thinks he was right to do so) even a year ago –  we would not have a higher real exchange rate today.  That was the certainly the view the Governor took last week, and I agree with him.

There are some nasty distributional implications of what has gone in the last decade. Many of the old are unexpectedly much worse off (but most aren’t because most are largely reliant on NZS).  The implications for other age groups are much less clear.  But distributional consequences are an almost inevitable part of unexpected real economic changes. If there aren’t the high-returning projects to generate lots of new investment, the value of (returns to) savings will fall.  Central banks can’t alter that, and any slight difference they can make will be marginal at best.   As I noted yesterday, it is not as if central banks are holding policy rates down while long-term bond rates linger high.  Rising house prices are , of course, a big burden on the young –  but, at least technically, that effect is easily mitigated, by reforms to land use regulation and/or changes to immigration policy.  And recall that in real terms, nationwide house prices today are little different than they were in 2007 –  when interest rates were much much higher.

Aaron claims he doesn’t want to abandon inflation targeting, but I’m not sure what his alternative would practically look like.   He thought the OCR was already too low last year when it was 3 per cent.  Perhaps he is right that raising the OCR back to, say, 3.5 per cent would lift business and household spending and raise inflation.   But the evidence to back such a strategy seems slender at best.  To adopt such an approach would involve the Reserve Bank going out on such a limb –  adopting an approach so different to every other advanced country central bank –  that we would have to impose quite a burden of proof on anyone advocating such a strategy.

This post has got longer than I expected.  Apologies for that.  There are important issues and debates to be had.  We should be encouraging the debates, and associated research programmes, not assuming that the answers are already all in.

 

 

 

Norway and the kitchen sink

In their weekly commentary yesterday, the ANZ economics team offered some thoughts on monetary policy and inflation targeting as conducted in New Zealand.   Among their comments was a reaction to my post the other day about Norway’s success in keeping inflation (and inflation expectations) up.

We noted some comparing the inflation performance of New Zealand and Norway last week, with the latter managing to achieve its inflation target. The argument was that other central banks had achieved it through looser monetary policy so the RBNZ could too. It certainly may be possible to get inflation up by throwing the kitchen sink at it. But household debt in Norway has risen to nearly 230% of disposable income (and is one of the highest in the OECD); that’s an accident waiting to happen. Is the economic cost of CPI inflation being 0.4% versus an arbitrary magical 2% that dire an outcome when one considers the possible side effects of this ‘kitchen sink’ style approach?

As a reminder, here are the policy rates for Norway and New Zealand.

policy int rates nz and norway

I don’t want to put too much weight on Norway, but:

Norway’s approach doesn’t look like ‘the kitchen sink” to me.  It looks like what many/most other central banks have done.   As inflation pressures around the world proved much weaker than most had expected, Norway had more leeway than most (their policy interest rate still hasn’t got to zero, let alone the extreme lows of Switzerland (-0.75 per cent) or Sweden (-0.5 per cent).  They used that leeway, and it seems to have delivered results (inflation fluctuating around target).   By contrast, our Reserve Bank has been constantly reluctant to cut –  having only realized quite late in the piece that they really shouldn’t have been tightening.  As I noted the other day, had the Reserve Bank done nothing more than hold the OCR at 2.5 per cent for the whole time since Graeme Wheeler took office, it is likely that today New Zealand’s inflation rate would be nearer target, and there would be less reason to worry about inflation expectations.  Had they set the OCR at its current level –  2 per cent –  even a year ago, things would look less problematic on the inflation front than they are now.  I don’t accept the characterization that even cutting the OCR to 1 per cent now would be an over the top reaction.  After all, even at that level our nominal policy interest rate would still be materially higher than those in most of the rest of the advanced world (with the important exception of Australia, but then Australia has a higher inflation target than most countries do and so –  all else equal –  should really have slightly higher nominal interest rates).  And many of the advanced economies would have been grateful to have had any additional policy leeway they could have found.  They didn’t have it.  We do.

Am I wholly comfortable with the idea of policy rates at 1 per cent or less, here or in other countries?  No, I’m not.  There is a variety of factors that help explain why policy rates, and long bond rates, are so low –  notably changing demographics and deteriorating productivity growth, both of which weaken the demand for investment –  but I don’t think anyone fully has the answer.  And if you ask whether, over the next 30 years I expect real interest rates to be higher than they are now, I’d answer yes to that.  But that just isn’t (or shouldn’t be) the basis for setting policy rates now –  apart from anything else, we just don’t know much of this stuff with any confidence/certainty.

When central banks set policy rates they should be, more or less, responding to market forces (savings supply, investment demand) –  attempting to mimic what the market would do if governments had not given central banks the right to issue our money.  In the immediate wake of the 2008/09 recession, it was plausible to argue that central banks were holding short-term interest rates down.  Implied future long-term interest rates (freely traded in the market) didn’t come down much at all.  These days that argument no longer holds. In fact, yesterday 10 year government bond rates in New Zealand were actually below 90 day bank bill rates.

yield gap

If anything, on this measure, monetary policy has been tightening not loosening (not inconsistent with my earlier chart showing that the real OCR remains above where it was for most of the post-recession period, even as inflation continues to undershoot).  The last time this measure got above zero was in early 2015, just before the succession of OCR cuts began.

But ANZ appears to believe that the best argument against following Norway in doing what it takes to get inflation back to around target is that Norway’s household debt is among the very highest in the OECD.  In both my posts on Norway, I have pointed out that Norway has had very large house price increases and high household debt.  The Norwegian government has responded to any associated financial stability concerns, by accepting the central bank’s recommendation to impose a “countercyclical capital buffer” on banks –  a relatively non-distortionary measure that requires banks to temporarily hold a larger margin of capital, just in case.

But the Norwegian story is much less alarming than ANZ makes out.   First, while house prices in Norway are very high, here is house price inflation in Norway for the last decade or so.

norway house price inflation

Not great, but much lower than what we’ve been experiencing recently in New Zealand.

And what about household debt?  I presume the ANZ economics team have read Chris Hunt’s Reserve Bank Bulletin article explaining some of the many pitfalls in comparing household debt to disposable income ratios (this piece looking across Nordic countries is also useful)?

That partly reflects challenges in comparing the level of debt across countries.  There are several types of issues.  For example, many countries include the debt associated with unincorporated business activities (small business owners, owner operated farms and some lending associated with rental property) in household sector accounts, since getting good breakdowns can be difficult.  In New Zealand, farm lending and non–mortgage lending to small businesses is not part of household debt, while mortgage lending that finances small business should also be excluded. However, much of New Zealand’s rental property is held by small investors, and lending that finances (the business) of renting out residential property generally is included in the New Zealand measure of household debt.

The other important difference is the way that institutional differences, such as those in the tax system can affect the gross assets and liabilities on a household’s balance sheet across countries, even if the net wealth is the same for two households.  In the Netherlands, for example, interest deductibility for mortgages on owner occupied houses encourages borrowers to have interest only mortgages on the liability side of their balance sheet and, for example, tax-preferred insurance policies on the other side.  At some point, the asset is used to extinguish the liability, but for households with the same amount of wealth and income, both financial assets and financial liabilities will be higher in the Dutch system than they would in the New Zealand system.

In Norway, for example, interest on mortgages is tax-deductible, which is not the case (for owner-occupied houses) in New Zealand.  A country with a stronger tradition of occupation pension schemes, for example, will –  all else equal –  tend to see higher outstanding levels of household debt, and higher levels of pension assets on the other side of a household’s balance sheet.  And a country in which the government levies high rates of tax on individuals and returns the proceeds in high levels of public services (consumed by households) will, all else equal, have a much higher ratio of household debt to disposable income –  for no greater threat to financial stability –  than a country with a lower average tax rate and a lower flow of public services to households.  Last year, on OECD numbers, Norway’s government receipts were 55 per cent of GDP, while New Zealand’s were 42 per cent.    It makes a real difference: if we look instead at the ratio of household debt to GDP, Norway (currently 95 per cent) is actually slightly below New Zealand (currently 99 per cent).

In short, comparisons across time in individual countries are generally meaningful (since the institutional and tax features typically change only slowly), but comparisons across countries at any one period in time are fraught.  The Reserve Bank article rightly focuses on the former.

The Reserve Bank publishes household debt data back to 1990.  In 1990, household debt in New Zealand was 28 per cent of GDP.  That ratio is now 99 per cent of GDP.    Here is a long-term time series chart I found for Norway

norway-households-debt-to-gdp

Household debt to GDP in Norway was already around 70 per cent in 1990, and hasn’t been as low as 28 per cent any time in the 40 year history of this series.  If one looks just at, say, the years since 2007, Norway has had more of an increase than New Zealand has, but over a longer-run of time household debt here has increased by (materially) more than what they’ve experienced in Norway.

Of course, perhaps ANZ would like to now reverse the argument and suggest that we need to be even more cautious since we’ve run up much more debt (in change terms) than Norway.  But then they’d have to confront the stress tests (in New Zealand) and the judgements of the respective supervisors that both countries’ banking systems are sound.  Recall those New Zealand stress test results –  and the ANZ is the largest bank in New Zealand –  in which a 55 per cent fall in Auckland house prices and an increase in unemployment to 13 per cent wasn’t enough to severely impair the position of New Zealand banks.  If ANZ thinks that conclusion misrepresented their risks, a phone call to the Reserve Bank’s supervisors might be in order.

Arguing against doing what it takes to get inflation back to fluctuating around 2 per cent on the basis of household debt numbers just isn’t very compelling. And as I’ve noted before, most of the increase in household debt is in any case a reluctant endogenous response to higher house prices, themselves the outcome of land use restrictions colliding with immigration-driven population pressures.

And that is before considering the other side effects of the current (“reluctant cutter”) policy approach the ANZ seems to be endorsing.  We’ll get another read on the unemployment rate tomorrow, but for now the unemployment rate of 5.2 per cent is well above any estimate of the NAIRU (including Treasury’s of around 4 per cent).  The unemployment rate has been above the NAIRU for seven years now, and almost by definition that gap is one that monetary policy could have done something about had the Reserve Bank chosen to.  There are well-documented long-term adverse implications for the individuals concerned if they are out of employment for long.  That is a rather more concrete cost –  seven years –  than the sort of ill-defined, but quite well protected against, risk around the level of household debt that ANZ worries about.  The Swedes ran policy for several years worrying about household debt risks, before they finally realized that Lars Svensson was right after all and began to cut rates aggressively.

There are distributional implications too. The “reluctant cutter” approach has left our (real and nominal) exchange rate higher than it needed to be –  consistent with meeting the inflation target. In the longer-term countries get and stay rich by finding products they can sell successfully to the rest of the world –  that is, after all, where most of the potential consumers are.  As a reminder, here is our export performance.

exports to gdp by govt

Another 100 basis points off the OCR wouldn’t transform this picture –  the long-term challenges are more about structural policy –  but in the last few years the trend has been in the wrong direction, and a misjudged stance of monetary policy has reinforced that.

There are some other things in the ANZ commentary that I agree with. I strongly endorse their call for a monthly CPI (a properly done one), and I was pleased to see their skepticism as to whether the large scale immigration programme is producing per capita income gains for New Zealanders. I might return to some of the questions about the best design of the monetary policy regime another day.

In the meantime,  for all of the ANZ’s economics team unease about the risks of housing debt, there is no sign of ANZ having published its submission on the Reserve Bank’s proposed new LVR controls.  So we still have no way of knowing whether their CEO was serious is his call for the LVR limits to be set even tighter than what the Reserve Bank is proposing.

The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent.

I don’t suppose he was, but it would be interesting to see the economic arguments and evidence for such a proposal.