Reserve Bank DTIs and the cost of crises

I was late getting round to reading the whole of the Reserve Bank’s consultation document, that backs its bid to persuade the Minister of Finance to agree to authorise them (at some future time) to impose debt to income limits on banks’ mortgage lending.   I’d heard from some people who’d read it that it wasn’t very good, but even so I was surprised how weak the document making the Bank’s case is.  This post isn’t a substantive response to the body of the document, which will probably come in a few posts over the month or so until submissions close.  Today I wanted to focus on just one assumption they make.

The Minister of Finance insisted that the Reserve Bank include a cost-benefit analysis in the consultation document, and one that was a bit more than the usual Reserve Bank effort (an unweighted list of unquantified pros and cons).    It is hard to do so when they aren’t wanting to impose the control right now, but they made a valiant effort.   The value in these things is not in the precise bottom line number (inevitably wrong), but in forcing regulators to spell out their assumptions.

In their cost-benefit analysis, the Reserve Bank assumes that a DTI type instrument can reduce –  by a third –  the risk of a financial crisis.    And they assume that (a) financial crises are really expensive (lost GDP) and (b) that in addition to reducing the probability of a financial crises, a DTI instrument can reduce –  by a quarter –  the severity (again, lost GDP) of such a crisis.      If all three assumptions aren’t correct –  if, say, a DTI instrument could reduce the probability but not the cost, or vice versa, or if a plausible crisis wasn’t as costly as the Bank assumed –  the expected net benefits shown in the paper would simply evaporate.

So how costly are financial crises (especially one concentrated in developments around housing) in moderately well-governed market economies which (a) have their own monetary policy, and (b) haven’t run up against hard fiscal constraints?    The Reserve Bank assumes a cumulative loss of 20 per cent (of a single year’s GDP) –  and they describe that as “conservative”, meaning towards the lower end of a plausible range.

The honest answer is that we don’t really know.   The relevant historical sample (of such crises) is exceptionally small.     And even when a financial crisis happens, it is hard to disentangle the contribution of the financial crisis itself from adjustments that would have happened anyway.

Of course, there is the United States in the last decade –  the case that grabbed everyone’s attention at the time.   Plenty of writers since have described it as ‘the worst financial crisis since the Great Depression” –  in some respects (narrow financial system stresses) one could mount an argument that the recent episode was worse.    The Reserve Bank constantly like to invoke Ireland, but while that case study might be useful for some purposes, it isn’t for this one.   Ireland gave up its own monetary policy when it joined the euro, and so had little or no scope for any stabilising macro policy when the crisis hit.

So lets have a look at how things unfolded in the United States.     They had a nasty recession but they weren’t alone in that.  So one benchmark might be to look at how the US relative to, say, other moderately well-governed floating exchange rate countries, and especially ones that had lots of housing debt and house price inflation but didn’t have a domestic financial crisis.   Australia, New Zealand, Canada, and Norway seemed like a nice subset of such countries.

This chart uses IMF WEO annual data. It shows real GDP per capita for the US normalised to 100 in 2007, the last year before the recession (and before the financial crisis itself intensified).   And it shows the average for the four rising house price non-financial crisis countries on the same basis.

US vs NZ Can etc

Sure enough, the US recession was deeper than that in the average of these other four floating exchange rate countries which –  despite the debt and run-up in house prices –  avoided both housing busts and financial crises.      But the cumulative gap between the two lines (ie adding up the differences across the nine years) is just under 10 per cent, which isn’t even quite half of the “conservative” assumption the Reserve Bank is using.

Of course, even among these four countries there are some quite different experiences: Australia didn’t have a real GDP recession at all, and Norway still hasn’t regained the level of per capita income they had in 2007.  That is why it helps to average across a range of non-crisis countries.

Is it a fair test?   If anything, I think the simple difference between the two lines errs towards overstating the costs of the US financial crisis.  After all, the US ran into the effective lower bound on nominal interest rates.  Standard Taylor-rule prescriptions would have had the Fed cut interest rates a lot more than the 500 basis points they did cut by (a nice chart I have in front of me from the Boston Fed illustrates that in the previous six easing cycles the Fed had cut by an average of more like 800 basis points).    And the US went into the crisis with much less fiscal leeway than our fairly unindebted comparative sample.   And, as it happens, each of the four comparators benefited from average terms of trade in the years since 2007 that were higher than those in the previous half decade or so.    By contrast, the terms of trade for the US have been weaker than they were in the pre-crisis years.

Of course, if I compared Iceland with the four non-crisis countries, I could come out with a number that exceeds the Reserve Bank’s 20 per cent loss estimate.   But the Icelandic crisis (a) wasn’t concentrated on housing, (b) was an order of magnitude more severe (in its own financial system) than the US one, and (c) the Icelandic government ran into severe policy constraints, including exhausting their capacity to borrow.    It is an important case study, but it isn’t the sort of crisis we should be thinking about in contemplating the possible use of DTI controls here.   Arguably, even the US experience is only somewhat enlightening given that an oversupply of houses was a significant element in the US experience.   An oversupply of houses might be fine thing here one day, but it seems unlikely to be an issue here or in other Anglo countries while tight land-use restrictions are in place.  But that is an issue –  not touched on in the Reserve Bank paper – for another day.

If a reasonable “cost of crisis” were, say, a third lower than then Reserve Bank assumes then, on their assumptions about everything else, there are no net benefits from a DTI instrument.

The Greens on immigration: taking the low road

Earlier this week various media outlets were carrying reports of a new speech on immigration from Green Party co-leader James Shaw.  In both Stuff and the Herald articles were headed “Green Party apologises for anti-immigration pandering.   To be fair to Shaw, that wasn’t quite what he said.

A year or so ago, the Greens came out with a new policy on immigration.    The aim was to produce annual population growth of around 1 per cent, and they would adjust immigration policy settings (in light of changes in rates of natural increase or of the comings and goings of New Zealanders) to meet such a target.   At the time they talked a lot about the pressure points that really big net migration inflows caused.   Shaw told Radio New Zealand

“We know that immigration is becoming more of a concern for people and in my experience the vast majority of people aren’t concerned about immigrants, they’re concerned about the impact on house prices, and infrastructure.”

They seemed mostly to be about stabilising population growth pressures, rather than reducing average net immigration very much at all.   After all, average annual population growth in New Zealand in the 20 years prior to the current immigration surge was 1.1 per cent, and rates of natural increase are slowing.

But whatever their intentions, I think everyone who thought about the issue at all seriously, concluded that their policy was unworkable, mostly because of the big –  and not readily forecastable –  fluctuations in the comings and goings of New Zealanders.  I wrote about it at the time

In a sense the fatal conceit in the Greens new policy is the idea that New Zealand’s population growth rate can be held stable from year to year.  While New Zealanders are fairly free to move –  or not –  to the much larger Australian economy in response to changes in relative economic opportunities –  and while New Zealand incomes are so much lower than those in Australia –  we will almost inevitably have the sorts of swings in the net outflow of citizens I showed in the first chart above.  Trying to manage the inflow of non-New Zealanders year by year to offset those fluctuations would be (a) impossible, and (b) something of a fool’s errand even to try.

Others pro-immigration people have made the some point about the unworkability of the scheme.

So in that respect it is good that the specific formulation of a target has been dropped.  If they were serious about a population policy –  and I think they are the only party to have one –  they could have rephrased it to aim to produce average population growth of around 1 per cent per annum on, saying, a five year forward looking basis.    That would have been less unworkable.  But, instead, the numerical target has gone altogether.

From the tone and content of Shaw’s latest speech there must have been a huge backlash in some quarters against the party leadership, and probably Shaw in particular, over last year’s proposed policy.

Last year I made an attempt to try and shift the terms of the debate away from the rhetoric and more towards a more evidence-based approach.
We commissioned some research which indicated that immigration settings would be best if tied to population growth.
Unfortunately, by talking about data and numbers, rather than about values, I made things worse.
Because the background terms of the debate are now so dominated by anti-immigrant rhetoric, when I dived into numbers and data, a lot of people interpreted that as pandering to the rhetoric, rather than trying to elevate the debate and pull it in a different direction.
We were mortified by that

I guess I’m not a Green supporter, but much of this just looks unrecognisable.  Go back and look at the mainstream media coverage, and no one then seemed to think he was “pandering”.   It looked at the time like a serious attempt (apparently backed by some commissioned research) to grapple with some pressing issues –  especially around housing and transport –  and if the solution he came up with wasn’t very workable (and probably should have had a lot more internal stress-testing before it was released for public consumption), it was a serious attempt.  It didn’t blame migrants for New Zealand policy failures, it simply recognised that very rapid population growth can create stresses for us all.   As Shaw noted then

Mr Shaw said the aim of the policy was for better planning, and less hostility towards immigrants.
“The debate around immigration is kind of being captured by those voices who are just simply anti-immigrant, and we really want to make sure that doesn’t happen.

It all seemed pretty calm and rational (even if unworkable).   In fact, at the time so calm and rational that Shaw could even use the (relatively) moderate “anti-immigrant” to describe those who wanted to pull back more significantly on immigration.

There is none of that calm moderation in this week’s speech.    In a speech of only 1350 words, “xenophobia” appears four times, and “scapegoating” three times (admittedly “racism” gets in only once).    People who disagree with the Greens’ stance are, apparently, characterised by such evils.  And on the other hand, the Greens are the party of love

I’m proud to lead a party that stands for the politics of love and inclusion, not hate and fear


Openness, inclusiveness and tolerance must win out over racism and scapegoating and xenophobia.   Love and inclusion must win out over hate and fear.

If that isn’t pandering, I’m not sure what is.  And all the while attempting to secure the high moral ground.   Thus

We in the Greens are deeply concerned that the debate about immigration policy in New Zealand has, over the course of time, come to be dominated by populist politicians preaching a xenophobic message in order to gain political advantage.

This ugly strain of political discourse is quieter at times of low net migration into New Zealand, but rises at times of when net migration is high – as it is now, and so, at this election, sadly, the xenophobic drum is beating louder.

“Xenophobia” is one of the favoured words of the groups –  whether from the right or the left –  in our society who favour a continuation of our unusually large-scale immigration policies.

My Oxford dictionary defines xenophobia as a “morbid dread or dislike of foreigners”.   I’d challenge Mr Shaw, or others in the media and lobby groups who like to the fling around the word –  or cognates like “fear” (widely used in this year’s New Zealand Initiative report) – as if the only basis for questioning New Zealand’s immigration policy can be something irrational, to produce some evidence for their claims.    I presume Shaw isn’t wanting to apply this description (“xenophobia”) to his Labour Party allies who recently came out with some proposals designed to reduce the net inflow of migrants (at least temporarily), using much the same sort of arguments Shaw himself was articulating, calmly and reasonably, only last year.  No doubt he intend his comments to apply to Winston Peters –  also the avowed target of the New Zealand Initiative’s report.   I’m no fan of Peters, but I’ve read various of his speeches over the years, and listened to him in interviews, and the “morbid dread of foreigners” seems to bear no relationship at all to what Peters is saying.    Do the Greens recognise any legitimate reasons for being sceptical about the merits of the large scale non-citizen immigration programmes New Zealand runs?

“Scapegoating” is one of Shaw’s other favourite words.   Here, there was a section in Shaw’s speech that I totally agreed with

Migrants are not to blame for the social and economic ills of this country.
Migrants are not to blame for the housing crisis.
Migrants are not to blame for our children who go to school hungry.
Migrants are not to blame for the long hospital waitlists.
Migrants are not to blame for our degraded rivers.
It is the government’s failure

But again, is anyone engaged in the public debate saying anything different?   I was flattered to be described recently by the New Zealand Initiative as “New Zealand’s most articulate critic of immigration”.  I’ve said repeatedly that migrants are just doing what all of us probably seek to do –  pursuing the best opportunities for ourselves and our children.  The problem isn’t the individuals, it is the policy choices governments make.  Again, is anyone who is critical of current immigration policy saying anything different?

Shaw seems to have abandoned what he described as

an attempt to try and shift the terms of the debate away from the rhetoric and more towards a more evidence-based approach.

and tried to cover his own poor specific policy proposal last year, by adopting instead the politics of the slur.   And all while pretending to claim the high moral ground.   Perhaps naively, I’d always thought the Greens –  much as I disagree with them on most things –  were better than that.

As it is, we are now left unclear what the Green Party’s immigration policy really amounts to.  To their credit, there is a 10 page densely-typed immigration policy document on their website, but neither it nor the two page summary give us much clarity at all.

They begin

We support an appropriate and sustainable flow of migrants

Which differentiates them from who how?   “Appropriate” is one of those words bureaucrats use when they don’t want to be specific.

And among their three ‘key principles’

Maintain a sustainable net immigration flow to limit effects on our environment, society and culture.

Surely any possible worries about the impact on “society” or “culture” could only stem from “xenophobia”?  Or is that only when other people make such arguments?

There are strange observations such as

Only make decisions to use immigration as an instrument of economic policy openly by an Act of Parliament

I don’t really disagree, but…..immigration policy operates under the Immigration Act, passed and amended by Parliament.  And among the purposes listed in that Act is

contributing to the New Zealand workforce through facilitating access to skills and labour

The Immigration Act, at least in its modern guises, has always been substantially an instrument of economic policy.

There is lots of detail on various aspects of the policy, but no sense at all as to how many permanent non-citizen migrants we should be seeking to take each year.  We know they are keen to take more refugees, but it isn’t even clear whether that increased intake would be in addition to the total number of non-citizens we take in each year at present, or whether additional refugees would replace some others.

On voluntary migrants they say

an open immigration policy would be unmanageable, and it is the Government’s duty to ensure that voluntary immigration is managed in the national interest. Although ‘national interest’ can mean different things to different people, the definition that has informed our national immigration policy for many years is that we should accept people who will bring skills, capital, or other desirable attributes with them.

And they have a view on the types of skills which should be favoured

Give priority in the skilled migrant category to skills needed for a sustainable society and economy, such as scientists, engineers and other trades with specialised skills applicable to fields including — but not limited to — organic farming, biodegradable materials, recycling, and renewable energy and fuels.

But there is nothing, at all, as to whether current target levels (around 45000 per annum residence approvals) is too high, too low, or about right.

Not even their general stance towards the environment gives much clue.   In discussing “yearly immigration quotas” they say we need

an assessment of the ability of our environment to cope with population increases, taking into account changes in energy use and other behavioural and infrastructural factors;

but they also talk in the same breath of

the need to have spare environmental, social and cultural ecological capacity to accommodate potential returning New Zealanders and people displaced by climate change

But what does it all mean?   You could mount a good argument, on environmental grounds, for a much lower annual target for new residents.   And the likely economic costs of meeting our climate change emissions commitments –  made more difficult by rapid increases in population – would just reinforce that, especially as the Greens are explicit that immigration policy needs to be managed for the interests of New Zealand, not the world.   But that doesn’t seem to be the Greens approach at all.

And then of course, there are the cultural dimensions.  Here is what they have to say

The Taonga of our people, and sites of historical, cultural, environmental, recreational, and general emotional significance for resident New Zealanders, should be protected from adverse impact as a result of immigration, and should not be seen as up for sale to wealthy newcomers. The Green Party will:

1. Take all reasonable steps to prevent immigration numbers, and the sale of land to rich immigrants, from having an adverse impact on Taonga.

But, again, what does it mean?   And why isn’t it what the Greens themselves would refer to as “xenophobia” if anyone else was raising the issues?

Perhaps one can only conclude that answering fairly basic questions like how many non-citizens we should take in each year, or even just what rationing devices we should use to decide which migrants to take, is altogether too hard.  That isn’t promising for a party that wants to be in government only a few months hence.

Reading Shaw’s speech the other day, I did notice this line

in fact, the Greens have the ambition of being the most migrant-friendly party in Parliament.

I did carefully note the potential distinction between “migrant-friendly” and “migration-friendly”, but when I first read the line I was struck by how similar it was to lines one sometimes sees from ACT.   David Seymour obviously thought so too, as he was soon out with a release casting doubt on the Greens’ claims in this area, and suggesting that ACT really was the most pro-immigration party.    Perhaps the Greens just want to be known as nice, while Seymour explicitly eschews niceness

We stand up for productive immigrants and the businesses that employ them, not because it feels nice, but because New Zealand needs immigrants

In fact, I suspect both parties have quite strong globalist leanings –  more so than a concern for the interests of existing New Zealanders –  but neither can quite bring themselves to consistently adopt such an approach.  Curiously, both also seem keen on values statement and the indoctrination of immigrants –  even if they probably couldn’t agree much about what ideas they’d indoctrinate the immigrants with.

If it weren’t for such leanings, it is hard to imagine the Greens –  vocal champions of clean rivers etc –  wouldn’t be much more strongly advancing an agenda that avoided government policy exacerbating population pressures on the environment.    Whether on economic grounds, or environmental grounds, the immigration programme we’ve run for at least the last 25 years (through all sorts of year to year swings in the overall net inflow or outflow) simply doesn’t look to have been working in the interests of New Zealanders as a whole.  If the Greens disagree, it would be good to see the argumentation and evidence.