Bridges and the State of the Nation

I mostly went looking for the text of Simon Bridges’ “state of the nation” speech yesterday to see if there were any signs, at all, that the Leader of the Opposition was going to confront New Zealand’s appalling productivity growth performance.   He had, after all, been Minister of Economic Development only 18 months ago.  There weren’t.

I’ll come back to economic performance and economic policy later, but the rest of the speech had some interesting snippets.

There was a long section on law and order.  There was plenty of rhetoric but one line in particular caught my eye

I am determined that under the next National Government, New Zealand will become the safest place to live in the world.

Wow, I thought, that sounds like a bold promise.  I don’t carry crime data around in my head, so I went looking.   Reporting and collection differences muddy cross-country comparisons of the incidence of crime, and for a full comparison you’d want to look at the full gamut of violent crime, theft and so on.   But the most comparable data across countries is that for the homicide rate.   Here are the homicide rates (per 100000 people) for advanced countries, using UN compilations of data.

homicides

Dreadful as any intentional homicide is, New Zealand doesn’t rank too badly, just a bit better than the median of this group of countries.  But Simon Bridges says that under the next National government, New Zealand will be the safest country in the world.   Say they come to office next year, and are in office for nine years.  That means he thinks that within ten years, they can take steps that will lower New Zealand’s intentional homicide rate by just over two-thirds, to match the record in places like Singapore, Japan and Luxembourg.

I ran this chart in a post late last year, using NZ Police data.

murders

Cutting our murder rate by more than two-thirds would involve getting, and keeping, it, down to the very lowest individual years managed in the last 100 years or so.   It would be laudable goal…….at least if Mr Bridges had any serious and plausible ideas about how to do it.  And the sort of change that really would support, over time, a much lower prison population.   Fifteen murders a year would still be fifteen too many, but even that seems like a tall order, even with an ageing population.  Mr Bridges promises that National will “continue to put forward the ideas” between now and the election to make his “safest place to live in the world” vision a reality.  Count me a bit sceptical, but I’ll watch with interest to see if there is some substance there.

The headline from the Bridges speech was around the promise to index the income thresholds in the tax system.  It would be a welcome, but well overdue, reform if someone finally does it.  But I wondered about some of the details.  This is how Bridges explained what they are proposing.

We will amend the Income Tax Act to make sure income taxes are adjusted every three years in line with the cost of living.

Within a year after every election, Treasury will advise the Government on how much the tax thresholds should be adjusted to account for inflation.

That means income tax thresholds will increase every three years to stay in line with the cost of living.

The first change will be in 2021 and relate to the tax years of 2018, 2019 and 2020.

We will include a veto clause so the Government of the day can withhold the threshold changes in the rare circumstances that there is good reason to do so.

But it will have to explain that decision to New Zealanders.

But why not

(a) adjust the thresholds every year, and

(b) adjust them automatically, with the formula written into the Income Tax Act?

After all, we manage to adjust (for example) NZ Superannuation rates automatically each year.

One of the arguments for indexing the thresholds is to reduce the ability of politicians to use occasional adjustments to present themselves as giving a tax cut.  The Bridges model –  adjustments only every three years, and only on the basis of the Minister of Finance responding to a Treasury recommendation – still seems to keep too much of that potential intact.  Adjusting for inflation will be in ministerial gift, not simply an automatic calculation routinely notified to taxpayers (according to legislative formula) by the Commissioner of Inland Revenue.

I’m also uneasy about this idea that the Minister could reject a specific  indexation recommendation.  First, if the adjustment were being done annually, the amounts involved are so small there could be no compelling reason not to proceed (with triennial adjustments the amounts get chunkier). And, second, we don’t apply this approach to (say) New Zealand Superannuation payments.  What the statutory formula says goes.

If a government thinks there is a persuasive case to raise tax rates –  and from time to time that may be necessary or appropriate –  they should be willing to come to Parliament and make the case in an open and transparent way.  That is, for example, what they have to do if they want to lower (real) NZS payments.    Inflation shouldn’t be able to be used to be used as a silent cover, enabling governments to grab more (real) revenue.

And then there was the economy.  Simon Bridges devoted a lot of space to it in his speech but there was very little serious content.  What it all boiled down to was:

(a) when we were in government our economy was a rockstar (he doesn’t use the word, just ‘one of the best performing in the developed world’)

(b) Labour is raising taxes

(c) Labour is doing wasteful spending (fee-free tertiary education and the the Provincial Growth Fund), and

(d) National would reverse the Auckland fuel levy, and any capital gains taxes, and not increase other taxes in a first term.

(It was notable that despite the talk of wasteful spending –  with which I agree with him on the specifics –  there were no promises to unwind those measures.)

And that’s it.  There was no suggestion of an economic reform strategy –  not even ideas to come –  or even a need for one.  Things would, it appears, be fine if only we had lower (Auckland) petrol taxes and no capital gains taxes.

So, as an aide memoire for Mr Bridges and his economic team, lets remind ourselves of some key New Zealand data.  I ran this table a couple of weeks ago

GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1990 2017
New Zealand 21.4 28.6 37.2
Netherlands 27.4 47.5 62.3
Belgium 25.0 46.7 64.6
France 21.7 43.3 59.5
Denmark 25.1 44.8 64.1
Germany 22.3 40.7 60.4
United States 31.1 42.1 63.3
Median of six 25.1 44.1 62.8
NZ as per cent of median 85.4 64.9 59.2
Source: OECD

When Mr Bridges’ parents were young, New Zealand was still among the very richest and most productive countries on earth.    His children are born into a country where average productivity levels are barely 60 per cent of those in the top tier of the OECD.

And what happened under the government in which he was, by the end, a senior minister.

real GDP phw dec 18

Barely any productivity growth at all in the last five or six years (and allowing for the lags, and the fact that the current government has done little, the most recent year’s data reflects those some policy frameworks and choices).  We dropped further behind Australia over the last decade, and various eastern European countries –  never previously close to us in the last 150 years –  are either snapping at our heels or overtaking us.   Well done them.  Shame on us (and the succession of governments and oppositions).

Successful economies tend to trade a lot with the rest of the world.  Early in their last term, the National Party in government knew this –  reflected in the (slightly wrong-headed) targets for much higher exports as a share of GDP).   Here is the actual and forecast data (for exports –  the import chart isn’t that different) from the most recent Treasury HYEFU.

exports hyefu 18

Foreign trade as a share of GDP has been shrinking this century – under both National and Labour governments –  and nothing Treasury can see suggests that underperformance is about to be reversed.

But in two pages of speech text about the economy there was not a mention –  not even a hint – of any of this.  Of course, none of this is as immediately topical, or offering political mileage, as a possible capital gains tax.  But a serious leader might at least be able to point to the need to do so much better on the economic performance –  material standard of living – front.

It is only about 19 months until the next election.  Sadly, there is no sign from this speech that a future National goverment would be any more serious about reversing our relative economic decline than their predecessors –  of whatever stripe –  for the last 25 years.  Worse still, they seem to have given up believing there even is an issue.

Marijuana and monetary policy

You might not think the two have much in common –  and the silliest, most damaging, monetary policy decisions (think of the MCI) were all our own reasoned doing.  But one of New Zealand’s most stimulating left-wing writers, Daryl McLauchlan thinks that monetary policy offers a model for how decisions about marijuana should be made.

When I saw his article the other day, under the heading “Why a public vote is the wrong way to determine drug policy”,  I assumed it was going to be something about the (de)merits of referenda, reminding readers that we are primarily a representative parliamentary democracy, not one where most decisions are made by plebiscite.  There are some merits to that particular argument –  and some counter-arguments.  But that turned out not be McLauchlan’s argument at all.

Instead, it was a bid to get not just the public out of any decisionmaking around drugs, but MPs as well.   McLauchlan doesn’t want elected people, or those who elect them, making the decisions, but “experts”.

Advanced liberal societies often solve problems of this class, not by politicising them further but by removing them from the political system and building independent, technocratic institutions. Elected MPs used to make decisions about what the official cash rate should be and which pharmaceutical drugs should be funded in the public health system, and they were so obviously terrible at this they devolved that power to the Reserve Bank and Pharmac.   I think we need to do that with drugs.

I’m rather sceptical of the cult of the expert, at least as any sort of decisionmaker.  There are plenty of decisions –  personal and societal –  where we benefit from expert technical advice, whether it is on treatment options for sickness or injury, house renovations, or how best to conduct a war.  But advice and decisions are two quite different things: we don’t, for example, want our generals deciding which wars to fight.   I wrote a post on these general issues –  arguing that experts should be harnessed for their advice, not allowed to set policy courses –  a couple of years ago.

I don’t know a great deal about Pharmac and pharmaceutical drugs –  although I do note that the ultimate decision (how much taxpayers’ money to spend on such drugs) is very much one for MPs and ministers (those we elect, and those we can toss out again).  But I do know quite a bit about monetary policy and decisionmaking frameworks for it.  And we have the added bonus of a recent book, by a former Deputy Governor of the Bank of England, reflecting on appropriate decisionmaking structures in a democratic society, working outwards from his experiences with monetary policy and banking regulation to offer a more generic framework for assessing whether or not decisions should be handed over to independent agencies.  I wrote various posts about it last year, and reviewed the book for the international central banking publication Central Banking.

Tucker sets a list of “delegation criteria” as follows:

A public policy regime should be entrusted to an independent agency insulated from day-to-day politics of both elected branches of government only after wide public debate and only if

  1. The goal can be specified.
  2. Society’s preferences are reasonably stable and concern a major social cost.
  3. There is a problem of credibly committing to a settled policy regime.
  4. The policy instruments are confidently expected to work and there exists a relevant community of expertise outside the independent agency.
  5. The independent agency will not have to make big choices on distributional trade-offs or society’s values or that materially shift the distribution of political power.
  6. The legislature has the capacity, through its committee system, properly to overseee each independent agency’s stewardship and, separately, whether the regime is working adequately.
  7. The society is capable of bestowing the esteem or prestige that can help bind the independent agency’s policy makers to the mast of the regime’s goal.

One can mount a reasonable argument that routine monetary policy decisions meet this standard.  After all, the overarching goal of monetary policy is set by Parliament, and the specific goals (under the legislation passed late last year) are directly set by the Minister of Finance.  And that legislation is backed up by a fairly widely-accepted literature that there are no long-term adverse trade-offs between inflation and output.   The Reserve Bank still has some important discretionary choices –  those short-term trade-offs can matter – but they aren’t choices about what sort of society we want to be, or who –  which sectors/classes –  will benefit at the expense of others.

Even then, the case for an operationally independent Reserve Bank conducting monetary policy is less strong than it once seemed –  those short-term tradeoffs are more important than the designers of the 1989 Act (which bestowed operational independence) really appreciated, and whereas the long-running argument was that inflation couldn’t be kept low enough without independence, we’ve now had a decade when central bankers haven’t delivered inflation as high as society (represented by its elected politicians) asked them to.  Throw in serious doubts about the effectiveness of parliamentary monitoring and scrutiny, and it is hardly an open and shut case any longer.

I’m not arguing to remove operational independence from the Reserve Bank –  although our system in particular still leaves far too much power in the hands of a single unelected official, who isn’t even appointed by people who were elected.  But if day-to-day monetary policy decisions possibly pass the Tucker test, I can’t see how decisions about the legal status of marijuana (or other drugs) could possibly do so.

After all, to set up such a regime –  in which some independent board (presumably appointed by ministers) would make decisions around which drugs should be legalised, for whom, and under what terms and conditions –  authorising legislation would need to be passed by Parliament.  And that legislation would –  under decent principles of legal drafting and institutional design –  need to outline criteria that the independent agency would have to use to make their decisions.   Of course, those principles could be waffly, non-specific, with no clear sense of which tradeoffs matter or which considerations should get the greatest weight.  Some might perhaps even be mutually inconsistent.

But that is no decent basis for delegating power in a democratic society.   And to get to a serious list of goals and constraints, one would have to go through much the same sort of contentious political process involved in either legislating directly or using a referendum to make decisions about legalising (or not) marijuana.   A goal might be able to be specified –  although I doubt it –  but there is no way that, at this point in society’s evolution, social preferences around these issues could reasonably be described as stable.  We can’t even agree on what the relevant criteria, or relevant sets of expertise, might be.  There are libertarians at one hand, people opposed to allowing any intoxicating substances at the other, and all manner of intermediate positions, shaped by all sorts of different considerations (be it about health, crime, freedom, responsibility, nature of society etc).   That is the stuff of politics.  Competing visions, competing philosophies, competing values, competing intepretations of evidence (or even of what evidence is even relevant).   It is what politics is about, and only political processes have the legitimacy to make such decisions (messy as they often will be).

And even if legislation were able to be passed, handing these big decisions over to unelected unaccountable people sitting on a committee, what is gained?   There is no stable agreed body of expertise relevant to making these decisions –  some will emphasis criminal aspects, some health and mental health aspects, some political philosophy, and some…..  By contrast, given a specific inflation target there is a reasonably specific set of expertise relevant to monetary policy decisions. And boards and committees don’t just appear out of thin air: the members are appointed, by elected politicians.  And so, most likely, you policy set depending on the preferences of the politicians who happen to be doing the appointment at the time, and yet without any direct accountability.  Or appointees purusing their own interests, ideologies or preferences – again with no direct accountability.

And, as I’ve mentioned previously around monetary policy, the willingness and/or ability of our parliamentary select committees to provide serious scrutiny and accountability for indepedent agencies is…..to put it politely…..limited at best.   Limited time and limited resources matter, but so do does careerism –  making life awkward in a select committee might be just what the public interest demands, but it isn’t a reliable path to the next promotion into the ministry.

I’m not wedded to referenda in preference to Parliament itself making final decisions (although in general I quite like the model in which referenda are used to give a final yes or no to specific legislation, so that we know exactly what we are –  and aren’t – voting on) but I can’t see how appropriate policy around drugs is, by almost any test, something that should be decided by people we haven’t elected –  whether judges (the unelected committees that have too much policy say in the US in particular) or statutory boards and committees.  Why preference the preferences and biases of those people over our own, especially as we have ample opportunity to hear –  and follow or discount –  their advice anyway?

I ended my previous post, responding to Sebastian Mallaby’s call for more powers to be handed to “experts”, this way

Like most cults, the “cult of the expert” is more dangerous than Mallaby – or most of the expert class – acknowledges.[ partly because “experts” have a track record of badly misjudging all sort of key issues] And hotly contested political debate, messy as it often, wrong directions that it sometimes takes, are how we make the hard choices, the trade-offs, amid the inevitable uncertainty. Abandoning that model is akin to gutting our democracy of much of its substance. So I still want an expert operating on my child, but I want parliaments making laws and setting taxes (not officials) and parliaments taking us to war (not generals).

And I want MPs –  who we can toss out –  or the voters making to key decisions around whether or not to liberalise drugs.  As slowly as is necessarily to thrash through all the details and alternative perspectives relevant to such decisions.

The road to ruin

Venezuela has, of course, been much in the news in the last few days.   Fascinating as the politics and geopolitics seems, there is also an economic story – about one of the greatest economic catastrophes of modern times, perhaps of almost any time.  And all the more sad for being entirely manmade.

Go back 100 years and Venezuela didn’t stand out from the countries around it.  Angus Maddison’s collection of historical GDP estimates suggests that in 1913 real GDP per capita in Venezuela was just a bit higher than that in Brazil and just a bit lower than that in Colombia.   The southern cone countries of Latin America –  Chile, Uruguay, and Argentina-  were much more prosperous.

The presence of oil in Venezuela had been known for centuries.  According to one paper I found

The presence of oil was known in Venezuela even before the Discovery of the Americas in 1492; back then, Indians were aware of the existence of hydrocarbons that appear on the surface of their lands. They used them for medicinal and illumination purposes. Also, they collected oil from small creeks near seepages by impregnating blankets and then wringing them out. They also found asphalt, and they used it for caulking their canoes and impregnating the sails of their boats.

In 1499 Spanish conquerors were impressed with the natural occurrences of hydrocarbons in Venezuela. They learned from Indians to use them for medicinal purposes. They also used it for caulking their ships, illumination and lubricating their weapons.

But the modern history of the Venezuelan oil industry appears to date to the granting of a concession in 1913 to Shell, and after 1919 oil exports became a major element in the economy.     And here is a picture, using Maddison’s data showing GDP per capita for the period 1900 to 1960 for Venezuela and for New Zealand, the United States, and Uruguay (as a representative Latin American country, that happens to fascinate me) and Australia (another resource-rich country).

venezuela 1

You can see how relatively poor Venezuela was early on, and then the really rapid growth in the 1920s –  catching Uruguay – and in the 1940s.    By the end of World War Two, on this measure real GDP per capita in Venezuela was matching that in Australia and New Zealand.  Another decade on and it was heading towards matching the United States.  It was –  according to a fascinating article in Foreign Affairs – about the time democracy and economic liberalisation came to Venezuela (so the authors claim, a very rare example of a resoure-rich autocracy, in which the state owns the resources, making a transition to democracy).

The period from the early 1950s onwards wasn’t particularly good for New Zealand.  None of the traditional advanced countries has done worse than us over that full period.  But consider Venezuela.

venezuela 2

This chart is from the Conference Board’s Total Economy Database, which only goes back to 1950, for the same group of countries.  The earlier chart was expressed in 1990 prices (and relative prices), while this chart uses 2017 international dollars.  Levels comparisons at any point in time are affected by which set of prices is used to convert data from national currency measures.   The period around 1957 still shows up as being Venezuela’s best relative performance, but on this set of relative prices Venezuela then was even more prosperous than the United States.  The key point is that in the late 1950s, Venezuela was right up there, in or around the very top tier of countries on a GDP per capita basis.

But whereas since 1957 even New Zealand’s real GDP per capita has more than doubled (and Australia and the US have done better again), in Venezuela there were only a couple of years when GDP per capita even matched 1957 levels.  At the most recent peaks a decade or so ago, the average Venezuelan was barely richer than their parents/grandparents had been 50 years earlier.   And all that was before things began to fall apart almost completely over the last decade.  No one can have much confidence in the most recent estimates, but if today’s Venezuela isn’t Somalia, it is no Uruguay either.

If one knew nothing more someone might suggest that perhaps Venezuela had had limited natural resources that had now been depleted and its former prosperity was never sustainable.   In fact, Venezuela today has more proven oil reserves than Saudi Arabia and substantial natural gas reserves as well.   This is a manmade catastrophe.   The optimistic take, of course, would be that when the manmade destruction ends, Venezuela can have a bright economic future ahead of it.  Perhaps –  and no doubt the decline of the last decade could be relatively easily reversed – but the allure of those state-controlled oil and gas resources will still be there, and the risks and temptations that took Venezuela down the self-destructive path of the last 50 years.

On a final note, here is the chart showing population growth in each of the five countries.

venezuela 3

From 1950 to about 1990, Australia’s population roughly doubled, but Venezuela’s population quadrupled.    Rapid population growth certainly isn’t a major element in the story of Venezuela’s relative economic decline, but when your economy rests almost wholly on fixed natural resources, exceeedingly rapid population growth tends to constrain the rate of growth in income per head (in ways not paralleled in economies –  such as most of western Europe –  little reliant on natural resources).   Things get rapidly worse when the population keeps on growing fairly rapidly, even as the production and sale of the natural resource goes sideways or backwards.   Despite all those reserves, Venezuela produces less oil now than it did in 1980, despite supporting more than twice as many people (those who haven’t fled across the borders to other Latin American countries).

 

School days and years

Sitting reading the Herald this morning as my oldest child headed out the door for his first day of the new school year –  two more still on holiday – I noticed that National MP Nicola Willis was making a bid for the state to do more child-minding for her and her husband   She has an op-ed trailing a private member’s bill she will seek to introduce to reduce the summer holidays for school children by a week or two.

That had me wondering how our school year compared to those in other advanced countries.  For some reason, the OECD doesn’t have data on New Zealand in their tables showing the number of hours per year of instruction at primary school.  But the Ministry of Education website says that our primary school have to be open for 390 half days a year (195 days).    The standard primary school day seems to be from 9am to 3pm, and if we subtract an hour for lunch and fifteen minutes for another break, that leaves 4.75 hours per day of instruction time, for a total of 926 hours per year.   Here is how that estimate compares with the other OECD countries for which there is data reported.

school hours per year

In other words, we already have one of the higher primary school hours requirements among the OECD countries.  (Accordingly to one website I looked at, Australia has slightly shorter school years, but slightly longer school days.)  And recall that these aren’t voluntary hours, but coerced ones.   Finland is sometimes touted as having an excellent education system, so I was particularly interested in the hours numbers reported there.  There are some odd looking numbers –  South Korea has a reputation for long hours and very intense schooling, which doesn’t seem to square with these numbers – but I can’t see any credible way in which New Zealand is not already in the upper half of the OECD for schooling requirements.    And everyone recognises that schooling has a considerable element of (compulsory) child-minding about it: home-schoolers rarely spend 900 hours a year on the equivalent learning.

Perhaps also not entirely irrelevant when an MP wants to reduce holidays for kids is to look at minimum annual leave requirements for adults.  It wasn’t until 1944 there were any.  When I was the age Nicola Willis’s kids are now –  and the school year seemed the same length as it is now – that minimum was two weeks.  In 1974, the minimum was increased to three weeks, and in 2007 it was further increased to four weeks.   These weren’t changes proposed by the National Party, but there is no sign Nicola Willis or her leader wants to undo them, so why does she think our kids should be conscripted to the state’s service for even more weeks of the year, even as (most) adults appreciate the greater leisure?

Willis claims a high-minded motive

Most importantly, Kiwi kids feel the impact. Research shows the “summer slide” in student achievement is real. Kids’ literacy abilities can decline over the six-week break, with one study showing students losing months of progress over summer. Much of term one can be spent getting kids back to where they left off the following year. This is a real barrier to achievement.

Count me a sceptic on that one.  “One study” can be found to support almost any argument.  But even if it were true (a) plenty of workers come back to their desks after the summer holiday at a bit of a loose end, less focused than they might be for a few weeks, (b) formal literacy abilities are not the only capability we want our kids to develop, and (c) it would surely depend a great deal on the specific child  (my wife and I both recall going to library almost every day in our school holidays, and one of mine tells me she has read 33 books this month so far).   And if New Zealand’s PISA scores have been dropping –  under Nicola Willis’s party’s term of government –  that isn’t because we shortened the school year.   And if the holidays sometimes drag a little (a) boredom is often good for children (as they find ways to amuse themselves), and (b) so do terms and school years. I presume I’m not the only parent to have noticed children getting tired towards the end of terms, especially towards the end of the year.  They are children, and primary schools ones in particular don’t have the stamina of heathy adults.

But National Party MP Nicola Willis –  a party that once claim to stand for freedom, family etc –  now wants to compel kids into state-run schooling for more weeks of the year.

And why?   That alleged summer time literacy drop isn’t the real reason –  despite that “most importantly” the argument is only introduced late in her article.  What she wants is the state to force kids into school –  away from beaches, climbing trees, picking blackberries, reading, trying out cooking, hanging out with friends, siblings, parents, or whatever –  for longer to make it easier for parents to work long hours (over the course of a year).    It is really as simple as that.

I do have some sympathy for some parents –  not high income ones like Nicola Willis and her husband, for whom these things are purely choices.  Thanks to successive National and Labour governments, good housing in our major urban areas has been rendered ridiculously and totally unnecessarily financially out of reach of many people.  I have no idea how young couples manage to buy a house in this neighbourhood (I bought my first house here at 26 for the equivalent of $300000 in today’s dollar –  the median price in the suburb is now $900000), but part of it is both parents working full-time, not really from “choice”, but from something closer to “necessity”.   But how then do you manage school holidays?

I’m fortunate. Not only did I get into the housing market before the absurdity took hold, but in the five years we both worked fulltime we had a nanny, and I (enjoyed) taking all January off to be around with the kids.  And now we are comfortably a one income family and I (most of the time) really enjoy the holidays and the time with the kids (grown up before you know it anyway).

Not everyone has those options –  although I’m sure Nicola Willis and her husband could, despite her claims of how tough it is for them –  but that doesn’t make the appropriate answer to have the state coerce your kids into school for even more weeks (at the hottest time of the year).  Before you know it, people like her will pop up wanting to have kids in school to (say) 5pm each day as well –  much more convenient for workers I’m sure.

For a National Party MP to fail to recognise that substantial distinction between compulsory attendance (school) and voluntary childcare arrangements tells you again how statist the National Party itself has become.  Perhaps there are regulatory barriers to more after-school or holiday programmes –  one imagines the National government’s OSH rules might be part of that –  and it might be sensible to identify any of those and advocate removing them.  It would certainly make sense to deregulate the land market and make decent housing affordable again, in ways that would give many more families options around part-time work, longer holidays, or one parent or other not engaging in market employment at all for a time.  It might even make sense to explicitly encourage strong two-parent families.   Those are the sort of measures a National Party might once have proposed.   But these days they seem to be mostly statist me-tooers, proposing to deal with one egregious state stuff-up (the housing market) with yet more state coercion.   And this from a party that barely even supports effective school choice, so that more coerced time in schools also typically means not forming our children in the academic heritage of our civilisation, but quite a bit more (mostly unthinking) indoctrination in the values and political beliefs of the teachers.

And now, when the wind drops a bit, I’m off to the beach with my daughter.

Critics of the PM, left and right

I was going to write something short but serious, but then I noticed that Wellington economist (and economics blogger) Keith Johnson had been having another go at me.

I’ve never met Johnson but did rather admire his independent run for mayor of Wellington in 2016, campaigning (as much as anything) against the wildly uneconomic proposal for the ratepayers of Wellington to fund an extension to the runway at Wellington Airport.   From memory, in the STV system used in Wellington, I voted for him (well) ahead of the winner, Justin Lester –  who commits public money as if it is confetti (and whose council is apparently still trying to sort out a traffic management plan to fix leaking pipes in a dead-end street, now leaking for a whole month).   Quite possibly the only thing we have in common is living in the same suburb –  from the occasional photo posted on his blog I reckon I can see his house from where I’m typing.

Anyway, Johnson is clearly not a fan of yours truly.  There was a whole post a couple of years ago rather more sympathetic to Graeme Wheeler in the matter of the OCR leak (which I had alerted the Bank to, only to have Wheeler attack me in a press release).

There has never been any doubt that he comes from the left.   I don’t.     That said, I was very glad to see National ousted in 2017.  They’d done almost nothing in their nine years and, at very least it was time for a change.  No one would have been more pleased than I had the new government actually followed through on the campaign talk about lifting productivity growth and fixing the systematic dysfunction that is the housing market.   I even wrote a post at the time Jacinda Ardern became leader offering some specific suggestions.

Sadly, there has been so sign of anything serious.  Instead, there is a great deal of Prime Ministerial blather, interviews with foreign media, walking and talking with celebrities. But not much sign of real governing, in ways that might make a real difference to (at least) economic and housing outcomes.  And then there is the shameful silence on matters PRC –  I wonder if any of the media will ask her what she made of George Soros’s Davos speech –  he these days a doyen of the global centre-left –  calling on the West to take much more serious Xi Jinping’s threat to free societies.

So, yes, I don’t have much time for Jacinda Ardern.  As I suggested in a previous post, she might be well qualified to be Governor-General.  It is less clear that she is equipped to be Prime Minister.   They were her own words –  published in one of most esteemed serious newspapers in the world –  that I had a go at in my post the other day: lightweight, grossly misrepresenting history, and –  for all the rhetoric –  not offering anything of much substance that appears much different from what has gone before.

Which prompted Johnson’s first post.  He started with some (favourable) comments that economic historian Gary Hawke had apparently made about this blog.

Not that I am totally in awe of either Reddell or Hawke, both of whom are typical of the NZ Establishment – in my view at least being among the Tall Poppy Scything denizens that a young consultant colleague of mine once called a ‘bunch of arrogant bastards’.

I’ll take engagement with ideas and arguments over “awe” any day.

Apparently, I can’t really criticise the PM on productivity or housing

The first and most obvious objection to Reddell’s castigation of Ardern for perpetuating House Price Inflation and Failing to Address our Low Productivity is that He is Part of the System.

One might well ask then ‘What the hell did he do during his career to tackle the problems he identifies?’

That’s easy.  The Reserve Bank doesn’t do productivity or land use regulation.

He goes on

The second major objection of Reddell’s ‘analysis’ is that it is just plain rude.

You can reach your own view on that, but fortunately this is New Zealand not Thailand (lese-majeste and all that), and when you take the job of Prime Minister you should (she probably does) expect all manner of scrutiny.

And getting fully into his game we get this

Purporting to be an erudite independent-minded economic commentator, he nevertheless let slip his disdain of the so-called ‘left-liberal elites’ thereby placing himself firmly in the Alt-Right / Neo-Liberal camp.

Essentially he is arguing in favour of the plutocratic nationalism – in the form of the NZ National Party, the UK Conservative Party and the US Republican Party and Big Businesses Lobbies – and against the possibility of young people rediscovering hope in politics.

This Cassandra sounds to me like a jealous, covetous, exclusive bitch whose ears have been caressed by the Vipers of Malice.

Not sure how much overlap there is between the so-called Alt-Right and the so-called Neo-Liberal camps.  I don’t identify with either.   And, as I noted yesterday, I’m sure the National Party has never mistaken anything I’ve written here for support for them. (Republicans chose as their candidate a man totally unsuited by character and temperament to be President, and if they are more or less sound on abortion, have debuached the public finances and promoted interventionist foreign policies with which I have no truck.

And yet

Not that I disagree with everything that his says about the NZ Economy and its management. He is a smart fellow with whom it would be challenging to engage in a structured discussion on NZ economic policy.

And he is right to warn that rhetoric is no substitute for substance and that pretending to reinvent the wheel of Welfare Economics – while battening down Public Sector borrowing – simply raises expectations that cannot be reconciled or delivered.

I’ll take that.  It was a big part of my point.  There is – so far –  no “there” there amid all the talk of “kindness” and “wellbeing”.

But having, it appeared, largely conceded my substantive point, he presumably thought it necessary to finish with abuse

What I thoroughly disagree with him over is his misunderstanding of the difference between Policy Advocacy by a politician who openly declares her preferences and allegiances, and Policy Assassination by a biased, back-biting pseudo-academic with axes to grind and panties to bunch.

In this regard Mr Reddell should remember that the exercise of power without responsibility is the prerogative of the whore – not of the critic – panties bunched or off.

Never having had an ambition to be an academic, pseudo or otherwise, I’m not quite sure what he’s on about.  Where there is an important difference is between politicians who talk a good talk, and citizens who might reasonably ask for evidence of substance.

As for the weird conception that I wield “power” –  with or without responsibility……..

I came back to Johnson’s blog today to find two more posts.    One runs under the title “Croaking Cassandra: Making NZ A Country for Angry Old White Men” –  which is a bit odd really as, as far as I know, Johnson is white, and quite a bit older than me.   Personally, I’m keen on improving the country for young New Zealanders –  people like my kids who will soon face the prospect of unaffordable housing costs, in an economy heading towards upper middle income status.

The entire post consists of extracts from readers’ comments on my post on Ardern’s op-ed run together.    I’m not sure what the point is, although I have left a comment on the post to ask.  I’m bemused, but I thought some of you might be interested to find bits of your comments popping up somewhere else.

And then there was a third post headed “Jacinda Ardern: When Kindness May Not Be Enough”.   That sounded like music to my ears.

But before he got to his own substantive points, there was another go at me.

Apropos of my defence yesterday of our NZ Prime Minister Jacinda Ardern against the harridan drag artist blogger Croaking Cassandra,

“Harridan drag artist blogger”: well, that’s a new one.  Surely it must offend the sensitivities of some oppressed minority?   (But not me –  it just seems weird.)

But that was just a lead-in to an important observation from someone on the left

“I nevertheless feel the need to sound a note of caution on the gushing approbation that our girl is receiving in the world’s media from those of leftward tendencies.”

Hard to disagree, although personally I try to avoid describing adult women holding responsible accountable offices as “girls”.

He goes on to include lengthy extracts from an article on a local left-wing website, and cautions against paying too much attention to Helen Clark’s gushy promo for the Prime Minister  in Foreign Policy.   And then offers his editorial

“Of course, I massively endorse the sentiments behind Kinder Government –  as well as being more than ready to support Women Warriors against the Baddies who are often authoritarian. reactionary, and male.

But much of what is being said is Not New….

In fact, it may all be perceived by many as yet another illustration of what I have termed The Big Lie.

So Jacinda –  Go for It – But retain some humility.

Don’t get caught in your rhetoric and over-promise.

And kindly take account of the realities [including] you lead a front bench that is very short on real talent.

Hard to disagree really, although personally I don’t much care whether Prime Ministers are male or female. Performance is what should matter.  And we aren’t getting it.

But apparently never content to end with a rational mildly-sceptical take on his own sainted leader, Johnson feels the need to hit out again.  This is the final paragraph of that post:

Quite apart from that, you need to spend a bit more time covering your derriere. You can’t expect those accustomed to power who are authoritarian, reactionary, and male [i.e people like Croaking Cassandra Michael Reddell] to let you do your thing unmolested.  Believe me –  they are coming for your girl.

So  –  on his own terms –  his leader has a front bench without much talent, appears to be over-promising and underdelivering, and what she has to watch for is people like me.     It would be the voters I’d be more worried about if I were her.  New Zealanders seem to rather like their Prime Ministers being feted by overseas media and celebrities (whether Ardern or Key) but there will come a time when they are impatient for results.  Better results need better policy.  Johnson himself more or less makes that point.

And then I noticed a more-eminent commentator from the left, Chris Trotter, also had some new comments on the Prime Minister under the heading “The Jacinda Problem”.

It would seem that we misunderstood the Labour leader when she promised us a transformational government. Our naïve assumption was that she intended to transform New Zealand society when, clearly, it was herself she was determined to transform.

There will, of course, be a great many Kiwis who cannot get enough of their PM’s global celebrity status. Seated on the same stage as Sir David Attenborough. Discussing mental health with Prince William. What’s not to like? Jacinda is only going where Bono has so boldly gone before.

He goes on to make various policy points –  serious stuff not being done – where I might differ on specifics while endorsing general thrust, but this is his conclusion.

Jacinda is the most accomplished ambassador for New Zealand to have graced the global stage since David Lange bowled-over the Oxford Union. That is not, however, enough. Jacinda is not New Zealand’s MC, she’s our PM.

It’s time for her to start acting like one.

There is lots of rhetoric, lots of moving among the echo chamber of the like-minded overseas elites, but not much substance, all underpinned by even less robust analysis.

Keith Johnson can call me all the names he likes –  perhaps “harridan drag artist blogger” should now appear on the banner for the blog?  – but it doesn’t change the unease that thinking people from both left and right are beginning to feel.  Where’s the beef?

 

 

 

 

 

 

 

What to make of the inflation data?

There seemed to be a little in this week’s CPI numbers for everyone.   The Reserve Bank’s favoured core inflation measure was unchanged at 1.7 per cent (and the model slightly revised downwards the estimate for a couple of quarters back), bringing up now a full nine years in which this core measure has been below 2 per cent.   The CPI ex food and energy series –  a standard international core inflation indicator –  doesn’t get much attention in New Zealand, but annual inflation in that measure was (up a bit) 1.6 per cent.  The last time that inflation measure was above 2 per cent –  excluding the GST change –  was late 2007.  That was so long ago, there will be voters in next year’s election who don’t even remember 2007.

New Zealand inflation measures –  even the sectoral core measure –  are biased upwards these days by the repeated large increases in tobacco taxes.  The price indexes rise as a result, but these tax increases aren’t what economists typically think of when they use the term “inflation”.     Neither Statistics New Zealand nor the Reserve Bank publish a decent core measure that also excludes government charges and tobacco taxes, so I’ve come to quite like the series SNZ does publish for non-tradables inflation excluding government charges and cigarettes and tobacco.  Here is the annual inflation rate in that series.

nt ex jan 19

The annual inflation rate in this measure did pick up a little, but (a) is no higher than the last couple of local peaks, and (b) even 2.5 per cent core non-tradables inflation just isn’t consistent with core overall inflation being back to 2 per cent.   The Reserve Bank was still cutting the OCR in late 2016 when this particular inflation rate series was around current levels.

What about the wider world environment?  Here is CPI ex food and energy inflation for the G7 group of countries.

g7 cpi ex

The picture for China also doesn’t suggest global inflation is rising.

And all this is against a backdrop in which both the world economy and New Zealand’s economy seem to be losing steam.      The pick-up in the sectoral core factor model measure of inflation to 1.7 per cent in the last couple of quarters might be “encouraging” in some sense, if one could readily point to factors that were likely to intensify resource pressures from here, or drive up perceptions of a “normal” or natural inflation rate.  But….the Christchurch rebuild is winding down, immigration seems to edging down, and the terms of trade show no sign of moving to a new higher plateau. There is no fresh wave of productivity growth, inducing firms to invest heavily, and encouraging consumers to spend in anticipation of future higher living standards.  If you believe in housing wealth effects (I don’t see any evidence in aggregate for them), even house price inflation has faded.   There is some fiscal stimulus in the pipeline, but it is nothing like some of the positive demand shocks we’ve gone through in the last 10 or 15 years.  This has the feel of being about as “good as it gets” (thoroughly lousy when contemplating productivity, but here I’m just thinking of capacity pressures, and things which might boost core inflation).

And it isn’t too different abroad.   Global growth projections are getting revised down a little: in the US fiscal stimulus is fading and monetary tightening is beginning to bite, in the euro-area activity indicators are weakening (and add in some Brexit uncertainty on both sides of the Channel), and in China things don’t seem to be developing well.  Commodity prices were a big worry at the end of the last boom, in 2007 into 2008 –  concern about spillover into inflation expectations and wage demands – but not so much now.  And it isn’t as if global monetary policy has suddenly got a lot looser either.  There just isn’t much reason to think core inflation –  here or abroad –  is likely to rise further, and neither here nor in most countries abroad is inflation at target.   When the next recession comes, core inflation is likely to fall from here.

The market doesn’t seem convinced that there is higher inflation in prospect either.  Breakevens from the indexed and conventional government bond market have been falling in other countries.  And here is the New Zealand picture, updated so that the last observation in this monthly chart is yesterday’s data.

breakevens jan 19

In the US, at peak, markets were pricing future inflation averaging a touch above 2 per cent.  Here we never quite got even to 1.5 per cent, and in the last couple of months the breakeven inflation rate (implied expectation) has dropped away again.  People putting real money on these things are implicitly pricing the average inflation rate over the next 10 years in New Zealand at 1.1 per cent.   That seems too low to me, even allowing for an excessively cautious central bank over the last decade (and hardly a vote of confidence in the amended Reserve Bank legislation passed last month), but even if you are sceptical of the level, the direction should be troubling the Governor (and his associates just about to be appointed to the new Monetary Policy Committee).   There doesn’t seem to be any sense any longer that a normal inflation rate in New Zealand is 2 per cent. (My thoughts on making sense of the indexed bond numbers are here.)

It is clear that, with the benefit of hindsight, the OCR should have been a bit lower over the last couple of years.    That is simply the same as observing that core inflation has again undershot the target (and implied expectations suggest that outcome isn’t simply an anomaly).    That isn’t the same as recommending now that the Governor should cut the OCR at next month’s review – and I’m quite he won’t anyway.   There is a reasonable case to be made for a cut now – low inflation, growth pretty insipid etc, tempered by the fact that the unemployment rate (a lagging indicator) is probably around the NAIRU –  but the cautious bureaucrat still lurking in me probably wouldn’t yet go that far.  But the case for a more explicit easing bias does seem increasingly clear.

(It is always good to have diversity of views. My post the other day on the Prime Minister’s FT article seems to have excited another local economics blogger.  Apparently I am a member of the “New Zealand establishment” –  surely a thought that would appal them as much as it appals me –  and some sort of lackey of the National Party (and, worse, the US Republican Party).  I almost fell off my chair a few months ago when someone told me that Simon Bridges had made some positive remarks about this blog, but I doubt any regular readers would ever have taken me as sympathetic to a party that failed to do anything about productivity, failed to do anything about housing, and which seems more interested in pandering to the PRC –  and keeping the funding going –  than in the wellbeing of New Zealanders and the integrity of our society.)

 

 

Planning for the next recession

In a post earlier this week, I made passing reference to a new opinion piece on Newsroom headed “Why we need a recession plan”.  The article is written by another former Reserve Banker, Kirdan Lees, who these days divides his time between the University of Canterbury and economic consulting.  His article is organised around a list of five reasons, although it combines his arguments about the form any such plan should take.

I strongly agree that we need some serious, credible and open planning for the next recession (whenever it comes, but it is now eight or nine years since the last one and neither the foreign nor domestic outlooks are looking particularly rosy).  Indeed, in respect of monetary policy, it is a case I’ve been making for about as long as this blog has been running.    The case might have seemed a bit abstract four years ago –  especially to anyone who paid much attention to the Reserve Bank’s pronouncements (that interest rates were rising, and inflation would soon be getting back to target).  It should be much more pressing now, as the growth phase has got old and yet (New Zealand) interest rates are at record lows and inflation still isn’t back to target.  But, unfortunately, there has been nothing serious from the Bank –  under Wheeler, (unlawful) Spencer, or Orr.  They claim to believe there just isn’t a problem; that monetary policy can do as much as ever.

This is, more or less, Kirdan’s first reason.

Reason 1: The outlook now points to recession risk with little room for interest rates to do much

But interest rates have never been so low, leaving little headroom for monetary policy to kick in. Mortgage and lending rates can’t fall by much if the big banks are to retain margins. 

As a reminder, the real obstacle is around wholesale deposit interest rates. By common consensus, official interest rates could be lowered to perhaps -0.75 per cent, but any lower and the strong incentives are for people (including particularly wholesale investors) to convert their assets into physical cash and use safe-deposit boxes and strongrooms.  Conventional monetary policy no longer works then.     That means our Reserve Bank could cut the OCR by up to around 250 basis points –  more than many advanced country central banks could –  but in typical recessions they’ve needed to cut interest rates by 500 basis points (575 basis points last time, and the recovery then was very muted).

There are ways around this lower bound constraint, but the Reserve Bank and the government have shown no signs of any action (or even any serious analysis).  In principle, things could be done in a rush in the middle of the next recession, but that is almost always a bad way to make good policy, and by failing to clearly signal in advance that the authorities have credible responses in hand they are likely to worsen the problem (see below).

Kirdan doesn’t seem to see much scope for doing anything to increase the flexibility of monetary policy.  His focus is on fiscal alternatives.

Reason 2: By the time Treasury calls a recession it’s too late to trigger a fiscal stimulus plan

Not just Treasury of course.  Economic forecasters and analysts are hopeless at recognising recessions until they are well upon us (among the reasons why no one at all should take any comfort from the latest IMF update –  international agencies are among the worst in recognising things before they break).

It would always be better to have good forecasts, even so-called nowcasting (where is the economy right now –  given that our most recent national accounts data relates to the July to September period last year, and even that is subject to revision).      Kirdan is an optimist and believes we can do (materially) better than just waiting for the GDP data.

Today, a myriad of timely data exists: across transport movements, customs data, privately held data on small businesses (such as Xero) and consumption (such as Paymark). A small panel of experts could use that data to gauge recession risk and tell us when to pull the trigger.

In principle, of course, all these data are available to Statistics New Zealand (which could require them to be provided under the Statistics Act), and if the data could be available to “a small panel of experts” it could presumably be available to the Treasury and the Reserve Bank.

But even if these data can provide a few weeks advance notice of negative GDP quarters, there are bigger questions which more-timely data can’t answer.   The first is how long any downturn will last.  That matters quite a lot.   A couple of weak quarters might sensibly lead the Reserve Bank to consider a cut to the OCR, and probably the exchange rate would be weakening anyway.   But that is very different from a couple of weak quarters foreshadowing a deep and prolonged recession.   Telling the difference isn’t easy.  And who seriously supposes that –  in a democracy –  we are going to hand over to a panel of experts (self-appointed or otherwise) decisions about when to trigger big fiscal stimulus programmes which –  whatever their composition –  have huge distributional consequences.  These are inherently political choices, which will benefit from technical input, but the accountability needs to rest with those we elect (and can eject).

On which note

Reason 3: Economic theory can help: a fiscal plan needs to follow three principles
When it comes to fiscal stimulus principles, macroeconomists have their own triple-T: stimulus needs to be timely, targeted and temporary.

Which looks fine on paper, but is much less help in practice.  If you want “timely”. monetary policy can typically be adjusted faster than fiscal policy –  exchange rates, for example, adjust almost instantly to monetary policy surprises, and often in anticipation of monetary policy actions.   And monetary policy moves are designed to be temporary, but without tying anyone’s hands: you raise the OCR again when you are pretty sure inflation is going to back to target.

In the UK they tried what looked like a clever fiscal wheeze in the last recession: cutting the rate of VAT for a year, and only a year.  It looked like a fairly sensible move at the time it was announced –  encouraging people to bring forward consumption.  And it probably would have been if the downturn had been short and sharp, but it wasn’t.  More generally, people like the IMF championed fiscal stimulus in 2008/09, but again implicitly on the view that economies could rebound quickly.  When they didn’t, the mix of economic and political arguments about “austerity” took hold and only complicated the handling of the economy.

Of course, if you get can get your legislation through Parliament you can write cheques (electronic equivalent) quite quickly –  Kirdan is keen on focusing temporary additional spending on “poorer families” –  but you can’t do the same for the sort of infrastructure spending that those keen on fiscal stimulus often champion.

Kirdan’s reason 4 had me puzzled.

Reason 4: Trotting out the same tired approach will provide the same tired results 

One of the enduring traits of fiscal policy is tacking on extra spending in good times and taking away spending just when it is needed.

Hard to disagree too much with that second sentence –  pro-cyclical fiscal policy is a problem.

But even if you think there is a role for some active counter-cyclical fiscal policy, I wasn’t clear on the connection to what came next

Governments seeking a labour boost need a better targeted fiscal stimulus. That means targeting labour-intensive industries such as such as health and education, construction, horticulture, accommodation and retail industries. ….

But identifying labour-intensive industries is not enough. Maximum effectiveness comes from targeting the labour-intensity of the entire supply chain: labour-intensive industries that in turn use labour intensive inputs from other industries are the best bets for fiscal stimulus.

It seems to be an argument for, in effect, targeting reductions in average labour productivity –  by focusing on boosting industries that are (directly or indirectly) more labour-intensive.  Perhaps –  just possibly –  there is a case for something of the sort, as a pure short-term palliative, in a very deep economic depression, but in an economy where lack of productivity growth has been a decades-long problem (and particularly evident in the most recent growth phase) targeting low productivity industries doesn’t seem a particularly sensible medium-term approach.

Which brings us to the last point in Kirdan’s article

Reason 5: Articulating a trigger for the fiscal plan shapes the expectations of Kiwi businesses

I don’t think ministers can articulate a highly-specific trigger for action –  so much will depend on context (what is going on here and abroad) –  and attempting to do so is only likely to create a rod for the government’s back.  But where I do agree is that there needs to be a clear and credible commitment from both the government and the Reserve Bank that prompt and firm action will be taken if the economy turns down substantially, and particularly if that is in the context of a serious global event.

Kirdan’s focus is fiscal, and I have no problem with his points that (for example) debt to GDP should be expected to rise in a severe downturn, without threatening the medium-term commitment to moderate debt levels.  In fact, we would probably agree that there should be some public debate now about how the next downturn should be handled, as there is a risk that we get a serious downturn and the government is still fixated on its medium-term debt target (and avoiding leaving a target for National to attack them), even if that isn’t what is needed in the short-term.

But in my view, the argument generalises.  One of the problems we face going into the next severe downturn –  whenever it occurs –  is that (a) every serious observers knows that monetary policy has limited capacity, even in New Zealand and much more so in many other places (in the euro-area for example, the policy rate is still negative), and (b) that there are real political/social constraints on the flexibility of fiscal policy in many places (partly because debt levels are often high, partly because of distributional considerations, partly memories of post-stimulus austerity).  I’m not necessarily defending these constraints, just attempting to identify and describe them.

Faced with these limitations, the quite-rational response to a downturn will be to assume that there isn’t that much authorities will be able to do about it.  That, in turn, will deepen any downturn, and be likely (for example) to lower inflation expectations, making the recovery job even harder (it is going to be even harder to generate inflation in the next recession than it was in the last one).   Perhaps the general public don’t yet recognise these constraints, but many more-expert observers already do, and the news will rapidly spreads if and when a serious downturn gets underway.  What, people in Europe would reasonably ask, can the ECB do?  How much, Americans will reasonably ask, will the Fed be able to do?  And what appetite will there be for much large scale on the fiscal front.   These things matter to us, even if our government has more fiscal leeway than most, precisely because recoveries from serious recessions often result from the combined efforts of many authorities at home and abroad.  Many engines are likely to be missing in (in)action next time round.

I’m critical of our own government and Reserve Bank on these issues.  It isn’t clear that other countries’ authorities are doing anything much more –  there seems too much of simply hoping the situation will never arise and interest rates will get back to “normal” first.   But we can’t do anything about other countries, and we can get ready –  and have the open conversations – ourselves, taking account of the probable constraints other countries will face.     There may well be a place for some fiscal action in the next serious domestic recession, but monetary policy is better-designed for stabilisation purposes and we could be taking action now that would give people and markets much greater confidence that the lower bound won’t bind.      To the extent there is a role for fiscal policy, it is more likely to be used well if there is open debate and contingency planning now –  although my expectation is that, however much advance discussion there is, political constraints (community tolerance) will bite quite quickly.  We shouldn’t need discretionary fiscal policy in a short sharp recession, and it is unlikely to be there long enough in a deep and prolonged recession.

Finally, to anticipate comments about quantitative easing programmes.  Reasonable people can interpret the evidence about those programmes differently (I tend towards the sceptical, once we got out of the midst of the immediate crisis) but I’m not aware of anyone who regards even large scale QE programmes as more than pallid supplements to what conventional monetary policy could usually be able to do.

A serious Reserve Bank would be engaging –  indeed leading, given its role in stabilisation policy –  this sort of discussion and debate.  At our Reserve Bank the Governor has now been in office for 10 months and we’ve had not a single speech on monetary policy issues.  Quite extraordinary really.

(UPDATE: In my post last Friday about stress tests and the Reserve Bank’s plans to increase bank capital requirements, I referred to a letter the Governor had sent to a journalist who had written a critical article.  I noted then that I had lodged an OIA request for the letter, and that the Bank is legally required to respond as soon as reasonably possible.  Given that the letter was already in the public domain (the recipient being a private citizen) there were no obvious grounds for any deletions, except perhaps the name of the recipient.  The letter had been written only a couple of weeks ago, so there were no search problems, and no good “holiday period” grounds for delay.  That request was lodged nine days ago and I’ve still not had a response (and we also still haven’t seen the background papers the Governor promised in the letter that he was just about to release).     As it happens, the recipient of the letter –  Business Desk’s Jenny Ruth –  has now sent me a copy, which I appreciate, but that doesn’t justify this small scale Reserve Bank obstructionism around a major public initiative –  capital requirements –  in which the Governor will act as a one-man prosecutor, judge and jury in his own case –  at potentially large cost to the rest of us.)