I’ve just been shopping

There was a British visitor in town yesterday, apparently hosted by the New Zealand Initiative (I might write about his public lecture tomorrow or Monday).  I got the impression he was probably a Blairite – very keen on free trade, free investment flows, and open borders for people too, but also keen on lots of government intervention to deal with what he saw as domestic problems.

The visitor seemed to be a fan of New Zealand (or perhaps particularly of the 4th Labour government –  in his 20s, he’d worked for Mike Moore at the WTO).  We were, he claimed, in some respect the “birthplace of globalisation” –  which would have been news to anyone involved in policymaking at the time.   He told his audience this curious story, bearing some – but not that much – resemblance to reality about how dreadful New Zealand had been in the early 1980s (and we can all agree that assembling TV sets here was insane) and how New Zealand had “flourished” since then.  I don’t suppose he had ever actually had a look at any data, and seen for example that foreign trade (share of GDP) is barely higher than it was back then, that the income and productivity gaps to the rest of the world are larger now than they were then, or contemplated the affordability of a first home.

But one thing you could do in the bad old days – whether Kirk/Rowling or Muldoon –  was go to a shop and expect that your groceries – for example –  would be packed in a bag provided by the shop.  Not just groceries: bookshops, clothes shops, knick-knack shops or whatever.  Those who didn’t want a bag –  perhaps for a single item –  didn’t need to take one.     Perhaps back then the bags were more often paper bags, but we now know that paper bags are not only typically more expensive but more energy-intensive than a simple plastic shopping bag.  And often harder to re-use  (things often don’t store so well in paper bags, and they aren’t very tolerant of liquids).

But, assuming the Prime Minister and her Green Party associates have their way, that simple freedom is soon for the chop.   I’ve just come back from the supermarket, having done perhaps two-thirds of the weekly shopping for a family of five.    There were 15 bags of groceries, and 16 bags with various different lots of fresh produce.  Presumably these all count as the dreaded “single-use” plastic bags, although many will be re-used.   And, of course, when I got all the groceries home and arrayed them on the bench in the kitchen, I noticed that all the “single-use” plastic bags (actually often re-usable) would squash down to a rather smaller pile than the plastic in a single three litre bottle of milk (there were several of them).  I have no use at all for empty plastic milk bottles, or containers of shampoo, or dishwasher powder.  And yet our government proposes to outlaw the simple lightweight useful little plastic bags.

But perhaps the most important thing about the plastic bags I brought home is that when I’ve finished with them (used or re-used) they will all go in the rubbish.  None will go drifting down the street, blowing across the beach or whatever. Like most responsible people, I put my rubbish in the bin, whether at home or out.   Perhaps the Prime Minister doesn’t?  Perhaps James Shaw and Marama Davidson don’t.  Perhaps they can’t trust themselves to bring up their kids not to litter?  But what right do you think you have Prime Minister – in an ostensibly free society – to tell shops what sorts of bags they can and can’t provide (give or charge for) customers?

I can quite see the case for litter laws.   And this is, from the listening to the rhetoric,  a littering issue –  at least when it isn’t just about virtue-signalling, feeling-good and virtuous, and enjoying taking away some freedom to show we hold power.

So why not tighten the litter laws?  Fines tend to lag well behind growth in incomes and prices.  Surely it is an obvious response, that deals with the free-rider issues and associated externalities (unsightliness and visual pollution).  I’m loathe to suggest more worthiness for schools to teach, but perhaps if Labour and Greens voting parents really can’t be trusted to raise their kids not to litter, schools could add that to the daily indoctrination?

There is a consultation document available on the Ministry for the Environment website.  I haven’t read it yet, so I’m not sure quite what the limits to this authoritarianism are: is the Prime Minister also proposing to ban (for example) single-use rubbish bags, or selling salads or rolls or supermarket cooked chickens in plastic wrap/bags?   But I did electronically search the document on the off-chance that it contained any serious economic analysis, let alone a decent cost-benefit analysis.  There was no sign of either.   Which probably shouldn’t be surprising –  par for the course with, for example, the climate change consultation, let alone the (unconsulted) oil and gas exploration decision. I guess it doesn’t matter.  If it feels good they’ll do it.

It is strange to think that Jacinda Ardern and James Shaw could soon have one hankering for some simple freedoms of the Kirk/Muldoon years.

As a mark of how sold-out the public service apparently now is to the wishes and feelings of the government of the day, there is also on the MfE website a cutesy little questionnaire –  of the sort I’ve seen a few times now on various agency websites. Here was MfE’s

plastic

Totally loaded one way, and no room at all for my answer: I’d change shops at present to avoid those which don’t provide packaging.  The local supermarket tried out a plastic-bag free Friday last year.  It didn’t last that long, but while it did I actively avoided the place on Fridays.

And all because the PM and her followers can’t pick up their rubbish, and won’t punish more heavily the transgressors who litter.  Or because they simply have no respect for the simple freedoms of buyers and sellers, whose choices hurt no one else.

 

 

 

 

Summers on macro policy

At the end of yesterday’s post, I included a reader’s comment highlighting a recent lecture by prominent US economist (and former Treasury Secretary) Larry Summers in which, among other things, he posed the question of how it was that so much of the advanced world has had pretty underwhelming economic growth rates even with real interest rates so much lower than we had been used to (for several hundred years) and –  at least in the US case –  with such large fiscal deficits.  Linked to this, he raised some of the sorts of concerns I’ve repeatedly raised here about the preparedness of authorities to cope with the next recession –  as he notes, the recipe for dealing with recessions in the US has been 500 basis points of cuts in the Fed funds rate, and no one –  including market prices – thinks that the US (or Japan or the ECB) is going to have that sort of capacity when the next recession comes.

At the time, I hadn’t gotten round to listening to that talk –  to the New York Economic Club in May – or to another talk Summers had done about the same time to an ECB conference.  But I did get round to doing so this morning.   For those who, like me, prefer to read texts of addresses (a lot quicker), there aren’t transcripts unfortunately, but both talks are only about 20 minutes long (there is a long Q&A session in the first).

Both talks are worth listening to.  I don’t find everything in them persuasive at all –  he is, for example, a big fan of increased tax and government spending, and of much-increased government infrastructure spending (even as he recounts the extreme inefficiency of the way much US infrastructure spending is actually done).  But he is a smart speaker, and the talks are not riddled with excessive amounts of jargon.   And, even if our neutral interest rates are still higher than in most other places, we face some of the similar challenges.  In particular, about coping with the next serious recession, whenever it comes.

And Summers reminded his listeners of stylised results that the probability of a recession in any one year (conditional on not already being in a recession or just emerged from it) seems to be about 20 per cent.   Recessions are almost never recognised until far too late –  again he reminded listeners of an Economist magazine exercise in looking at IMF forecasts: not once, in some 180 case of countries experiencing a year of negative GDP growth had the IMF forecast such an outcome 12-18 months in advance.  Closer to home, in writing the other day about the Reserve Bank’s survey of expectations, I noticed that in the August 2008 survey, respondents (including many of the main forecasters) on average still didn’t see any sign of a recession.

Summers takes the view –  hard for any serious person to contest –  that the eventual recovery in the US after 2009 was very slow, unsatisfactorily so.  On OECD estimates, only this year has the output gap closed, and last year the unemployment gap closed.  Many other countries had at least as bad as experience:  our own wasn’t much better.   He argues more should have been done with fiscal policy, but perhaps the key point is that more needed to be done (on top of 500 basis points of interest rate cuts, several rounds of QE, other specific liquidity measures, and a significant fiscal stimulus).   Next time round, there isn’t 500 basis points of conventional capacity.

We had 575 basis points of OCR cuts, a bigger swing in the structural fiscal position than in the US, bank guarantees, special liquidity provisions, and a big fall in the exchange rate.  Despite that, we had years and years of excess capacity (whether on RB, Treasury, or OECD numbers) and core inflation still isn’t back to target.   Next time, there isn’t 500 basis points of conventional capacity.

I’m less convinced that Summers has a solution to the problem.   Structural reforms to lift potential growth would be good, but even if they happen they don’t deal with the natural cyclicality of the economy, take years to produce their full effect –  and don’t seem remotely likely in today’s dysfunctional US political system.

On monetary policy, if I heard him correctly, he toys with the possibility of moving from an inflation target to something like a price level target or a nominal GDP target: both might have some merit, although both would be hard to make credible, especially for policymakers who have erred on the side of caution for the last decade.  Perhaps his closest-to-specific advice was that if the inflation target is supposed to be symmetric (as both the US and NZ ones are), surely 9 years into a recovery, with unemployment at 4 per cent or just below (and pretty subdued productivity growth) if ever inflation should be a bit above 2 per cent it is probably now.    The same could, almost certainly, be said for New Zealand (or, perhaps to a lesser extent, Australia).  Such higher inflation outcomes would help hold up inflation expectations, and help induce a little more resilience (gains at the margin) in coping with the next serious recession.

Perhaps it isn’t his specific domain, but I was a bit surprised that Summers made no mention of actually addressing the fundamental administrative barrier that limits the ability of central banks to lower official short-term interest rates below about 0.75 per cent.  If, as Summers does, you take seriously the view that low neutral rates will be with us for some time –  he seems to see little in prospect (from savings behaviour or investment demand) to change that situation – then it should be untenable to keep in place the adminstrative restriction that allows people to move limitless amouts from interest-bearing accounts (potentially negative interest) at no substantial cost.  One doesn’t have to call for the abolition of cash to believe this constraint can be very substantially alleviated (whether by capping the overall note issue, and auctioning new increments) or putting a conversion fee in place for significant transfers.   If authorities –  politicians and central banks –  aren’t willing to address that issue, and soon, they really need to be thinking again about raising inflation (or price level or NGDP) targets, to allow more leeway in recessions.  These issues have to be addressed now: to do so only in the middle of the next recession will undermine the effectiveness (including in stabilising expectations) of any change.

What staggers me is the apparent indifference of policymakers and politicians to these issues and risks.    The experience of the last decade really should be fresh enough in everyone’s mind –  and the awareness of the limitations of conventional policy at present –  to create a sense of urgency about getting prepared. But there doesn’t seem to be such urgencty….in the euro-area, in the US, in the UK, in Japan, or in New Zealand.  I touched yesterday on the rather glib complacent responses the Reserve Bank senior management gave at the press conference

I see that rather shortsighted attitude was carried over to the Bank’s FEC appearance (from Newsroom’s account).

Orr said that should this scenario [sustained weak growth] eventuate, the bank had a set of “unconventional tools” that it had been developing.

Assistant governor John McDermott spoke in May about five unconventional tools the bank had been working on that could be used during a financial crisis. One of these is quantitative easing, essentially the practice of printing money to buy bonds to stimulate the economy.

The bank would buy Government and commercial bonds as well as foreign government bonds, with the intention of weakening the Kiwi dollar.

Other approaches the bank could take include negative interest rates of as low as -0.75 percent, and guaranteeing bank liquidity by offering term lending facilities for banks.

But this scenario remains unlikely – it would effectively be a crisis occurring on top of an existing crisis.

Orr and McDermott know that even with all the quantitative easing and associated liquidity measures in other countries –  that eventually reached the limits of conventional policy –  the recoveries were very slow and painful almost everywhere.  And if that final sentence is really to be read as them suggesting we can’t have a significant downturn now because somehow we are still in an “existing crisis”, they really aren’t fit to be doing their job.   Nominal interest rates in New Zealand at present might be low at present by historical standards, but there is no credible sense in which the New Zealand economy has been in “crisis” in recent years.

In passing, one aspects of Summers’ talk I found unconvincing was his suggestion that despite the big apparent fall in neutral interest rates, the underlying fall is likely to have been much larger, masked –  he claimed – by the effect of fiscal policy across much of the advanced world.  He refers to both stock and flow measures.  On stocks, government debt is certainly higher than it was in many/most advanced countries, but as this IMF chart highlights total debt in the advanced world as a whole total debt (public plus non-financial private) as a share of GDP is barely changed over 25 years, and is lower than it was going into the last recession.

IMF debt chart

As for flow measures, here is a chart showing OECD estimates of the structural primary fiscal deficit (general government) for the OECD as a whole, median OECD country, and for the United States specifically (where deficits are widening again now).

structural bals aug 18

Actually, the latest observations for all three series are no worse than they were in 2006 or 2007, just prior to the last recession.  The median OECD country has been running a small primary surplus, and the average for the last five years is little different than for the five years prior to the recession.        It is hard to see much compelling basis for the suggestion that fiscal policy is masking an ever deeper decline in the underlying neutral interest rates than what we (appear to) observe.

Anyway, for those interested in such issues, Summers is worth listening to and thinking about.