Month: September 2019

A rather well-paid Governor

Michael Reddell Adrian Orr

When Adrian Orr was appointed Governor – in late 2017, taking up the job in March last year –  we were given to understand that

Orr’s salary at the central bank would be “in the range of the current governor” [that was reported as a quote from the Minister] “, whose most recent salary has been reported to be around $660,000 a year”.

At the time there was an (unlawfully appointed) “acting Governor” holding office, but it had been announced that he was being paid the same as the previous (lawful) Governor.   The most recent substantive Governor, Graeme Wheeler, had left office a couple of months earlier.

Wheeler’s last full financial year as Governor was the year to June 2017.  In that year, the highest paid person at the Bank is reported (Annual Report) to have received between $850-$860K that year, with a note disclosing that

The highest remuneration band includes a payment of $101,000 for accrued annual leave, which was paid in cash rather than taking annual leave.

In other words, his final year salary looks to have been around $750-$760K per annum.   As I pointed out in this post, it looks as though Wheeler had had perhaps a $90000 payrise that year (the case for which was distinctly questionable, but that is another post).

What of Orr?  The Reserve Bank’s Annual Report was released today.  Orr was in office for the full year, and there are no footnotes suggesting extraordinary payments (eg see above), and the relevant table suggests that the highest paid person at the Bank received $820-$830K last year.

Perhaps among the elites where Grant Robertson moves an additional $70000 a year is a mere bagatelle and pardonably covered by “within the range” of the previous Governor. One suspects ordinary voters might be more sceptical.   (And even if the Minister and the Board thought the Governor’s first year performance was superlative, the overwhelming bulk of the annual payment disclosed today has to relate to the rate at which Orr was first appointed –  and it is hard to believe the Minister would be giving the Governor a big rise when he is telling listed companies he is a shareholder in not to raise directors’ fees at all.)

In truth, high as the Governor’s pay is relative to other government agency CEOs, I would have no real objection to paying that amount for a really top-notch person. It is, after all, a job of great (barely trammelled) power and responsibility.   I strongly object to paying that amount of money for someone who just makes stuff up, tramples across the boundaries of his role, and who shows little no in-depth command of the issues and material he is responsible for.   You might have thought my comments on his speech last week were fairly critical, but my assessment was pretty moderate by the standards of comments I’ve had on it from other knowledgeable people (“woeful”) was the latest one I heard this morning –  and that is before getting started on his really rather appallingly-bad (but well off reservation) second speech last week.

But, as ever, not a murmur of concern is heard from the Bank’s Board or the Minister.  For the latter, it must be convenient that the Governor spins so often, perhaps to keep spirits up.    That might be a job for the Minister and the Prime Minister.  It most certainly isn’t the role of the Governor, and his stewardship to date is diminishing his own standing and that of the institution he leads.  With a Secretary to the Treasury who knows nothing about New Zealand (but at least has an excuse for not doing so) and a Governor of the Reserve Bank who, whatever he really knows, just makes stuff up, the public are very poorly served by our key economic institutions.   Responsibility for that rests with the Minister of Finance.

How unusual is Australia’s record without “recessions”?

Michael Reddell Australia

Over the weekend a reader posted a link to a blog post by a couple of researchers at the St Louis Fed.  People often point out –  sometimes to boast (if you are an Australian politician), sometimes just out of curiosity –  that Australia has gone 28 years with “a recession”, where “recession” here is defined by that convenient (not overly helpful) benchmark of two successive quarterly falls in the level of real GDP,

As a definition of recession it seems to serve mostly because there is no better definition in general use. In the US, there is the NBER business cycle dating committee, which draws on a range of different indicators to reach a judgemental determination of the dates of recession, but those dates are typically only available with a lag, and there isn’t anything similar in most other countries (including New Zealand).

The rather obvious, but all too frequently forgotten, point that the St Louis Fed observers are making is that any sensible interpretation of GDP growth has to take account of the rate of population growth.  There are countries in eastern Europe where the fall in population has been large enough that one could see GDP falling every quarter and yet the average citizen would still their per capita GDP rising.  Even setting aside that extreme, there is a big difference between, say, Germany (with almost no population growth this century, Japan which has had a slight fall in its population in the last five years, and New Zealand with population growth in excess of 10 per cent over the same period.     Australia is another advanced country with rapid average population growth.

As the St Louis Fed researchers point out, once you focus on per capita real GDP the chart for Australia looks a bit different

st louis fed 1

On the “two consecutive negative quarter” rule, Australia would have had three (fairly mild) ‘recessions’ in the period since the end of the early 1990s recession.

In case you are wondering, New Zealand (using the average of our two GDP measures) would also have had three “recessions” (rather more severe) on this per capita metric: 1997/98, 2008/09, and 2010.

It is still fair to note that even on a per capita basis, Australia did not have a recession in real GDP in 2008/09.  As far as I can see that makes it the only OECD country to have avoided two consecutive quarterly falls in real per capita GDP over that period.

But (as the NBER business cycle dating methodology recognises) simply looking at GDP isn’t a particular sensible basis for assessing whether (more broadly) things are going backwards.  Personally, I find looking at the unemployment rate quite useful.   All else equal, if the unemployment rate rises the economy is generating fewer new jobs than the increase in the number of people ready and willing to work.  As with any measure there is some month to month and quarter to quarter “noise” (often just measurement challenges), but if the unemployment has been rising for a couple of quarters (especially in a climate where the long-term trend is downwards) that too is probably a suggestion of an economy going backwards where it counts.

Here is the quarterly series for Australia’s unemployment rate back to the early 1990s.

Aus U to sept 19

Over that period there were seven episodes where the unemployment rate rose for two or more consecutive quarters.  Most of the increases were small, but there were three episodes where the increase was 1 percentage point or more.

Over the same period, New Zealand had four episodes where the unemployment rate rose for two or more consecutive quarters, two of them by a percentage point or more.  The UK and the USA had three and two episodes respectively –  including the very sharp increase in the US unemployment rate at the time of the 2008/09 recession.

It isn’t even as if the extent of the rise in the unemployment rate in Australia over 2008/09/10 was unusually small.  Australia’s unemployment rose less than in the other Anglo countries, but on OECD numbers there were about 10 European countries where the unemployment rate rose by a similar amount (mostly) or even less than in Australia.

Another variable I find worth looking at for Australia is a measure of real income that takes account of terms of trade fluctuations (for commodity exporters much of any adverse shocks show up in price rather than volume, whereas for manufactures and services exporters the balance is the other way round).

This is a chart of real net national disposable income per capita series, produced by the ABS.

RNNDI to 19

It really quite a startling record of steady growth in this series from about 1993 to about 2008.  But the period since then has been quite different (a point that various of the more downbeat domestic Australian commentators often point out – real Australian incomes have not been doing well).  There have been seven periods since 2008 when RNNDI per capita has fallen for two or more consecutive quarters.    Somewhat to my surprise, when I looked at the closest New Zealand series there had only been two such falls since the early 1990s.   The fall in Australia’s per capita RNNDI over 2008/09 was a actually larger than the fall in New Zealand’s per capita real GDI measure.

The St Louis Fed researchers ended their post this way

So should we use Australia as a benchmark when thinking about possible duration of expansions? If so, we have to take it with a grain of salt because looking at just GDP growth doesn’t paint the whole picture. It is important to look at per capita GDP growth to have a broader view.

Their goal wasn’t to bag Australia but to put its experience in some perspective, specifically the importance of taking account of population growth trends when looking at GDP numbers and headline about presence or absence of GDP “recessions”.

This post is in much the same spirit.   I really like Australia and can’t stand the “chip on our shoulder” too many New Zealanders seem to have about the place.  It is different from most other OECD countries –  heavy resource dependence does that, as does rapid population growth – and that needs to be taken into account in comparing cyclical economic performance.      Through some mix of good luck and good management –  mostly the latter in my view (including choices around a floating exchange rate, low and stable public debt, and keeping the state out of the housing finance market) Australia has avoided anything like the worst downturns (whether per capita GDP or unemployment) seen in some other OECD countries (eg the US and –  even more savagely – a number of euro-area economies).  But it is a normal economy, it has upswings and downswings: if no one else the unemployed (and the underemployed) know it (relative to, say, the end of 2007, the median OECD economy now has an unemployment little changed from then, while Australia’s unemployment rate is almost 1 percentage point higher than it was then).

Incidentally, and while on the topic of per capita GDP growth, I had a look at the latest annual growth rates for New Zealand and the 30+ countries for which the OECD has data.  Despite all the talk  –  including from the PM –  about New Zealand doing better than its peers, our real per capita GDP growth in the year to the June quarter (or four quarters on four quarters) was just lower than the median country in the sample (and quite a bit below the unweighted averages of those countries).  Better than Australia over that year (see the first chart) but then –  as this post and the St Louis Fed one help illustrate –  Australia is no stellar performer.

 

The economic plan that wasn’t

Michael Reddell New Zealand economic performance, Productivity

I’m not much into the notion of “economic plans” –  all too redolent of Communist states, known mostly for their consistently underwhelming economic performance.  But at least most of those old “plans” purported only to be five-year plans.  By contrast, earlier this week the current New Zealand government  –  with one year left of its three year term –  released a 30-year “Economic Plan”.    It was released under the signatures of Grant Robertson, Minister of Finance, who has shown no sign of understanding or caring much about New Zealand’s economic challenges, and Phil Twyford, now Minister for Economic Development, but best known for Kiwibuild.

I guess the government must have known there wasn’t much there.  It was, after all, released –  to little fanfare –  while the media were all concentrating on the Prime Minister’s progess in New York.

It is sold this way

The Government’s Economic Plan is set in the context  of our wellbeing agenda and is designed to build a  more productive, sustainable and inclusive economy  to improve the wellbeing and living standards of  all New Zealanders.

All lines and words we’ve heard endlessly now for two years.   The introduction goes on

The Plan identifies eight key shifts and policy action related to each shift that will tackle the long-term challenges the New Zealand economy is facing. They signal our goal to balance outcomes across financial, human, natural and social capital, and will act as an overarching guide for government departments designing economic policy  [er…don’t elected government’s set economic policy, not government departments?]

These shifts and initiatives will deliver on the four economic priorities in Our Plan: to grow and share  New Zealand’s prosperity, support thriving and sustainable regions, transition to a clean, green and carbon neutral New Zealand and deliver responsible governance with a broader measure of success.

New Zealand has a unique opportunity to build on our strengths, and use these to lead the world on standing up to the economic challenges of the next 30 years, turning issues like climate change and the technological revolution into economic opportunities.

You might have thought that a good place to start would be recognising that we’ve trailed the advanced world for 70 years now, lagging behind on the productivity growth that underpins material standards of living and many other choices, rather than making idle and empty claims about “leading the world” in the next thirty.

Instead, there is the same complacency with which Labour went into the last election

New Zealand is recognised as being one of the best places in the world to live. Wellbeing is high for New Zealanders overall, but the benefits of economic growth have been unevenly distributed.

Nothing wrong with the growth performance really; just a matter of sharing the cake differently.

In fact, they sort of know that isn’t true. Get 10 pages into a glossy 30 page document and you do finally find this

Our productivity challenge is complex and long-standing.

But with no sign that they have any narrative explaining how we found ourselves in this position, or how the grab-bag of initiatives (there were 76 on one table –  including Kiwibuild) they list might make a sustained and significant difference.  (All governments for decades having had long lists – the previous government’s Business Growth Agenda as only the most recent, ineffectual, example.)

economic plan.png

In fact, top of the list of their proposed ways to see economywide productivity lift are yet more plans

Industry Transformation Plans – adding value to  key sectors of our economy and leveraging new opportunities.

Substance-lite.

The standard cliches are trotted out among the glossy photos

New Zealand is a trading nation and we want all  New Zealanders to benefit from trade. We are building stronger international connections so that Kiwi businesses get greater access to markets around the world – not just for goods, services and investments, but also for people and ideas. At the same time, we are supporting businesses to get the most from trade and grow the value and reach of our exports.

And yet, foreign trade (exports and imports) as a share of GDP is less now than it was at the start of the century, but there is no hint that the government (or its advisers) understand why.  No mention of the real exchange rate in the entire document.

And it sort of goes downhill from there.  Predictably, corporate welfare –  aka the Provincial Growth Fund –  tops the list of things that are going to make a favourable long-term difference to regional economies.    The top two initiatives that are supposed to “enable a step change for Maori and Pacific economies” (whatever they are) are

Te Arawhiti – Office for Māori Crown Relations – fostering strong, ongoing and effective relationships with Māori across Government.

Government procurement – working to provide opportunities for Māori and Pacific New Zealand businesses to access contracts from the $41 billion we spend each year in Government procurement.

Both might be sensible steps in their own rights, but they simply aren’t commensurate with the challenge.

And there are old, and still silly, lines

We know that New Zealand’s high house prices have diverted capital into the housing market and away from more productive uses. We need to redirect this capital to help businesses to innovate, invest in new technology and pursue growth opportunities.

I’m not sure how many times one needs to point it out but, given the the population, isn’t the conventional understanding that too few houses have been built, not too many?  More real resources –  on the government’s own original plans (Kiwibuild anyone?) – were supposed to be encouraged towards house-building.  And not a mention of actually getting house prices down again.

In fairness, one might acknowledge that the first item on their housing/productivity page sounds okay

Urban Growth Agenda and RMA reform – working to get our urban markets working so they can respond to growth, improve urban land affordability, and support thriving communities.

The problem is that it sounded good two or three years ago, buried deep in the Labour Party manifesto, and it still does.  But there has been almost no action so far, and no indication in market prices (eg of urban land) to suggest anyone much believes the government will act in ways that make a meaningful difference.

And it all ends with three pages of alternative “wellbeing indicators”, continuing to distract attention away from the decades-long failure on productivity.

There just isn’t much there. And nothing at all, for example, about the inevitable tensions (between, say, zero carbon goals and vague aspirations –  and that is all they are – to higher sustained productivity growth).  But, as ever, MBIE does well with the glossy heartwarming photos (from the family playing cricket on the beach at Sumner onwards).

But the Prime Minister must have wanted to suggest there was something there.   The Herald managed to secure an op-ed from her about the plan, as part of their “Mood of the Boardroom” publication.  Perhaps she didn’t choose the title but it (“My hope: a rising tide that will lift all boats”) didn’t suggest much agency, or hence much responsibility and accountability.

It was pretty vacuous piece, but as ever with her you get the sense that (a) she is more interested in sharing the pie that creating a climate conducive to rapid growth in the size of the (per capita) pie, and (b) that she has only a very limited understanding of the economic issues.  That mightn’t matter much if she had a strong team of senior ministers who did. But there is little or no evidence of that.

A good chunk of the article was devoted to make-believe stuff about just how well the economy is doing at present. Perhaps, knowing no better, she takes lessons from the creativity around the facts on display from the Governor of the Reserve Bank?  She seems unaware that growth has been slowing (from never particularly fast rates), that leading indicators are poor, that productivity growth is almost non-existent, and she continues to parrot lines about how good our growth rates by international standards in ways that simply take no account of the rapid population growth rates here (just this week revealed by SNZ to have been even faster than they previously estimated).  For someone focused on “wellbeing”, you might suppose that recognising that per capita GDP growth counts a lot more than the headline number would be a good first step.  But I guess not.

The underwhelming text continues

We need to invest in infrastructure, because it’s the springboard for future growth. This Government is investing record amounts in hospital and school building programmes, alongside large investments in transport safety, regional roads and public transport

Perhaps you will agree with her on the first sentence (although it is striking how few of the touted projects seem to pass robust cost-benefit assessments), but whatever the merits of building more hospitals and schools those aren’t the sorts of infrastructures likely to make much difference to our woeful productivity performance (there might be other good reasons for such spending).  Same goes for spending on “transport safety” –  it isn’t exactly decongesting bottlenecks is it?  And if you went for congestion pricing, existing infrastructures could be used much more efficiently.

And so it goes on.  What about housing?

We’ll also keep tackling the long-term challenge in housing. Our economy works for everyone only when everyone has a warm, dry home, and a decent standard of living.

Well, no.  A strongly-performing economy helps ensure/enable widely-spread decent standards of living.    And her policy solutions are all about symptoms not causes

That’s why we’ve stopped the state house sell-off, stopped offshore speculators from driving up house prices, and built over 2000 state houses in the last year.

and

Business leaders agree that growth in New Zealand has been predicated too much on capital returns, and not enough on productive investment. To build an economy that works for all of us, we need to focus on productivity and innovation, especially through small businesses.

“Capital returns” sound like good things –  good business make money for their owners –  but I’m guessing she was trying to suggest something about capital gains on property. Except that no serious economic analysis really supports that sort of story –  consumption as a share of GDP, for example, not having changed much for decades.  And where she gets the bit about small businesses being particularly important, goodness only knows. I suppose it sounded good.

The vacuity goes on, limited only by the length of the column.  She talks about how “we’ve always been an exporting economy” and having an “ambitious trade policy” but seems to have no idea that exports/imports as a share of GDP are (a) shrinking, and (b) small for a country our size, and somehow thinks that reforming the polytech sector is going to revitalise our services exports.  Well, maybe…..

I don’t suppose Prime Ministers write this sort of nonsense themselves, but capable governments, really interested in reversing the decades of underperformance, would have a lot more substance to put in the mouths of their leaders.  And capable leaders, with a serious understanding of the issues and imperatives, would simply demand much better.

I’ve shown this old cartoon before.

richardson

It ran a generation ago now.

For some years, I had it pinned to the wall in my office –  the sad procession of successive Ministers of Finance who for decades (this cartoon implies back to the 1950s) had promised that New Zealand’s decline would be reversed (made worse in this case in that Ruth Richardson must have said something along these lines in February 1991, just as the severe recession of that year was taking hold).      Since then, we’ve had Bill Birch, Winston Peters, Bill English, Michael Cullen, and Bill English again, and although we’ve had plenty of cyclical ups and downs, never at any time have we looked like successfully or sustainably reversing our relative economic decline.   It saddens me every time I look at this cartoon –  so many decades, so much failure.

And nothing about Jacinda Ardern or Grant Robertson suggests we’ll manage any better if their policies were adopted than we have for the last 30 or 60 years.

 

 

A strikingly poor speech from the Governor

Michael Reddell Adrian Orr, bank capital requirements, Monetary policy

On Wednesday afternoon the Reserve Bank Monetary Policy Committee released their latest OCR decision.  It was, as predicted, no change in the OCR.  I don’t think it was the right decision on the substance (some background to that here) but at least it was in line with the Governor’s public comments following the previous surprise decision.

I didn’t have that much to say about the two pages (statement plus “minutes”) they released.  So just a few quick points:

  • in the statement the Bank continues to overstate the contribution of the “trade war” to the slowdown in global trade and global growth.  It is a convenient “newspaper headlines” story, but the way they use it suggests they haven’t thought much more deeply about the issues,
  • they talk up the prospects of economic recovery, based on the reduction in interest rates, but never seem to recognise that interest rates had been cut for a reason.  Unless the OCR is cut by more than any fall-away in economic fundamentals, you wouldn’t expect to see a rebound.  As I pointed out last week, actual cuts in variable retail rates lag well behind the fall in market-determined long-term rates,
  • there is something inappropriate about the Bank talking up the idea of fiscal stimulus three times in two pages (not that fiscal stimulus might be out of place in some circumstances, but it is entirely a matter for the elected government).  On the other hand, I guess we should be grateful that the Governor has stepped away from his August comment that “of course the government has to be spending more”.
  • it is interesting that, at least as written, the MPC appears not to have any bias on the direction of the next move in the OCR.   They are very widely expected to cut in November and cut again next year but there is nothing in this statement to lead one to think the MPC shares that view –  if anything, in the minutes we read that “some members”, with a cost-plus model of inflation apparently, believe there is “potential for rising labour and import costs to pass through to inflation more substantially over the medium-term”.   Their predecessors were hawking similar lines in 2015/16.

It is 18 months today since Adrian Orr took office at Governor of the Reserve Bank.  I’ve not infrequently bemoaned the fact that in that time Orr has not given a single substantive on-the-record speech on monetary policy or banking regulation/financial stability (the Bank’s two main areas of responsibility).  Yesterday Orr gave short speech to a corporate audience in Auckland, which dealt with both monetary policy and (in more abbreviated form) banking regulation.  I guess we should be thankful for small mercies.

Sadly, the contents of the speech suggest we have a Governor who simply makes stuff up whenever it suits him.  It is extraordinary in such a powerful public figure, one supposedly operating as an independent and judicious technical expert.  Much of it comes across as almost delusional –  perhaps welcome to his mates in the Beehive, but even they must sometimes wonder whether independent public institutions aren’t meant to be more than cheerleaders.

To take just a few examples of what I have in mind, start here

The good news for New Zealand, unlike many other OECD economies, is that our government’s books are in good shape and there is already a strong fiscal impulse underway from public spending and investment. 

There is no disputing the first half of the sentence.  It is to the credit of successive governments of both parties that government debt has been kept pretty low and stable over recent decades.  But what about that second claim, about the “strong fiscal impulse”?  Well, it simply isn’t supported by the facts at all.    This is from my post on last month’s Monetary Policy Statement when the Governor tried to run the same sort of line.

In fact, it prompted the perfectly reasonable question from Bernard Hickey about whether fiscal policy was actually very stimulatory at all.   The standard reference here is The Treasury’s fiscal impulse measure.  This is the chart from the Budget documents

fisc impulse.png

It isn’t a perfect measure by any means, and in particular one can argue about some of the historical numbers. In my experience, it is a pretty useful encapsulation of the fiscal impulse (boost to demand) for the forecast period. In fact, the measure was originally developed for the Reserve Bank –  which wanted to know how best to translate published forecast plans into estimated effects on domestic demand/activity.

And what do we see.  There was a moderately significant fiscal impulse in the year to June 2019.  That year ended six weeks ago.  For current and next June years, the net fiscal impulse is about zero, and beyond that –  which doesn’t mean much at this stage –  the impulse is moderately negative.    All using the government’s own budget numbers.  And consistent with this, operating revenue in 2023 is projected to be higher as a share of GDP than it is now, and operating expenses are projected to be lower (share of GDP) than they are now.    The Budget is projected to be in (fairly modest) surplus throughout.

And yet challenged on this, the Governor seemed to be just making things up when he claimed that we had a “very pro-active fiscal authority” and that “the foot is on the fiscal accelerator”.    It just isn’t.  Orr must know that (after all, he had Treasury’s Deputy Secretary for macro sitting as an observer in this MPS round).  One even felt a little sorry for the Bank’s chief economist spluttering to try to square the circle, but basically acknowledging that Hickey’s story was right, not the Governor’s.   Perhaps, you might wonder, the Bank thinks the fiscal impulse measure is materially misleading and has its own alternative analysis of the government’s announced fiscal plans. But that can’t be so either: there is no discussion of the issue in the Monetary Policy Statement.

(Incidentally, on Morning Report this morning Grant Robertson tried the same sort of line, only for the presenter to point out to him the fiscal impulse measure, reducing the Minister to spluttering “but we are spending more than the last lot”.  That is true, but the material overall fiscal boost was last year –  and growth and activity were insipid even then, inflation still undershooting the target.)

Was he being deliberately dishonest or simply making stuff up as he went protraying things as he’d like them to be?  You can be the judge, but neither alternative puts our central bank Governor in a good light.

Given that he has since had another 7 weeks to get his lines straight and yet repeats the same line, it looks even worse for him now.  As I said last month, if the Bank has an alternative take on the demand implications of fiscal policy it surely behooves them to lay it out for scrutiny, not just make idle claims inconsistent with their longstanding standard reference source the Treasury estimates).

Just as preposterous was this claim from the Governor

The low level of interest rates globally over recent years primarily reflects low and stable inflation rates – a deliberate and desired outcome of monetary policy.

Here the Governor was repeating much the same nonsense it is reported that he ran to Parliament last month

Over the weekend, I came across an account of the Governor’s appearance on Thursday before Parliament’s Finance and Expenditure Committee to talk about the Monetary Policy Statement and the interest rate decision. …. The Governor was reported as suggesting although neutral interest rates had dropped to a very low level, that MPs should be not too concerned as we are now simply back to the levels seen prior to the decades of high inflation in the 1970s and 1980s.

I’m not going to repeat the entire post I devoted to illustrating just how unusual global (and New Zealand) interest rates now are, both in nominal terms and (even more so in the long sweep of history) on real terms.  In centuries past there was little or no rational expectation of sustained inflation, while these days everyone agrees that medium to long-term inflation expectations are somewhere between 1 and 2 per cent.  The Governor may also have forgotten, in a New Zealand context, that the inflation target here is now materially higher than it was, say, 25 years ago.   Interest rates are, of course, far lower.  Here is just one chart from the earlier post, showing how unusual global interest rates were even five years ago (things are still more anomalous now, especially here).

As a final chart for now, here is another one from the old Goldman Sachs research note

GS short rates

In this chart, the authors aggregated data on 20 countries.  Through all the ups and downs of the 19th century and the first half of the 20th century –  when expected inflation mostly wasn’t a thing –  nominal interest rates across this wide range of countries averaged well above what we experience in almost every advanced country now.

Why does the Governor say this stuff?  Does he have no advisers left who are willing to tell him that what he says just isn’t so?

There are claims that the domestic economy still has “ongoing momentum” and that there is “strong demand for goods and services”.  These claims appear to be based the Governor’s interpretation of comments from the small group of firms the Bank went and visited recently.  Never mind the economywide measures, whether the range of business confidence and activity measures, or…..well, the national accounts.

pc GDP growth.png

He goes on repeatedly about how interest rates make it a great time to invest, as if he’d not given a thought to possible reasons why interest rates might be low (NB, it isn’t just because inflation came down again, see above).  He claims we have a “great environment to invest”, talks of “low hurdle rates for investing”, but seems not to recognise that in a climate of uncertainty, whether around policy (here or abroad) or the economic outlook, the option of simply waiting has considerable value, or thus that there is little reason to suppose that hurdle rates for investing have dropped much, if at all, in more recent times.

As a bureaucrat Orr is apparently convinced it is a great opportunity to invest and that profitable investment opportunities abound.  Experience suggests that people with a bottom line to meet disagree with him.  Here is the Bank’s own chart from the most recent MPS showing business investment as a share of GDP, with a few observations from me.

bus investment RB.png

As I’ve noted here repeatedly, business investment never recovered strongly from the last recession, and if anything (as share of GDP) has been falling back again in the last few years, even as population growth remained strong.

But despite the feeble business investment performance, the Bank expects business investment to recover from here.  There is no hint as to why they believe that is likely…. If there is any basis for their beliefs it seems to be little more than the repeated claim by the Governor and the Minister that it is “a great time to invest” in New Zealand.  But firms didn’t think so over the last five years –  even with unexpected population shocks –  and surely the reason the Bank is cutting the OCR has quite a bit to do with deteriorating conditions and investment prospects here and abroad?

But what do firms know?

Orr seems to more or less acknowledge the uncertainty issue, in these strange sentences, tinged with corporatist sentiments

However, there remains a loud call from all quarters of the country for leaders to better signal investment intent, and ensure we have the policy and goodwill to facilitate access to capital and resources to execute.

This call for investment-intent is to all collectively-owned (e.g., Iwi), Crown-owned (i.e., central and local government), and co-operatively owned (e.g., traditional primary sector) sectors. It is not just to traditional businesses, or any one party.

Easily said, harder to do without a clear desire to work together over an agreed horizon.

Or he could just have mentioned the major policy uncertainties.    Whatever your view on the merits of any of these issues (and I’m steering clear of expressing such views) mightn’t you think that uncertainty around the ETS, water quality policy, highly productive lands policy, the future of the RMA itself, whether any more significant roads will be built by a government apparently averse to them, bank capital regimes, the future of extractive industries might all be among the sorts of factors that might leave businesses and potential investors just a little wary, and pricing that uncertainty into their decisions around investment?

It all comes to a climax in this extraordinary claim in the Governor’s final paragraph (emphasis added).

In summary, we are not alone in the low interest rate environment, this is a global phenomenon. However, what we do have is more policy and business opportunities than most OECD economies and this is something that we need to take advantage of.

If by that he means that New Zealand productivity and per capita income rank far behind most of the OECD countries we used to like to compare ourselves to and that, at least in principle, those gaps could be closed, then I’m right with him.  But absolutely nothing about how policy has been run by successive governments for at least 25 years now has (so it appears from the evidence of hindsight) been consistent with closing those gaps: the productivity gaps in particular have just kept on widening and (though you would never know it from the Governor’s speech) we’ve had little or no productivity growth at all for the last five or more years.  Nothing about current policy suggests that record will improve in the next five years, and if anything one could mount a plausible argument that the measures adopted by the current government are heightening the risk of even worse (relative performance outcomes) in the next five.   Not only is this stuff well outside the Governor’s area of responsibility –  which is about macro and financial stabilisation –  but he either just doesn’t know what he is talking up or knowing better he just mouths such platitudes anyway.

Finally, there are several paragraphs in the speech about the Governor’s proposals to hugely increase the amount of capital locally-incorporated banks will need to have to back current balance sheets.    Notionally, there is process of consultation and deliberation going on at present. But when you read from the sole decisionmaker words like these,

Our proposals would see significant increases in shareholder capital in banks. With banks having more of their own ‘skin in the game’, the owners will sharpen their long-term customer focus, and it will reduce the chance of a bank failure and the cost on society as a whole should a bank fail. These outcomes are highly desirable for the long-term economic health of New Zealand, and should promote deeper and more liquid local equity and debt markets.

We finalise our decisions in early-December this year. Whatever our final decisions, we will be insisting on transition to higher capital at a sensible pace.

with all those “will”s, you get a pretty strong sense of pre-judgement.  That is, of course, what you’d expect when those proposals were based on very weak analysis –  numbers plucked out of the air at the last minute –  and when the Governor is prosecutor, judge, and jury in his own case, and where he knows that there are no effective appeal rights against his verdict as unelected unaccountable decisionmaker.

It really isn’t good enough.  Citizens should expect better.  The Bank’s Board is paid to hold the Governor to account, but they are almost worse than useless (they provide shadow without substance, suggesting there is scrutiny and accountability when there isn’t).  If the Minister of Finance were doing his job, or Parliament’s Finance and Expenditure Committee was doing its job, some pretty hard questions would be being asked about just what is going wrong at the Bank, and how such shallow –  and frankly embarrassing –  material is emerging from the mouth of such a powerful public figure.

Instead, no doubt, things will continue to drift, and the slow decline of New Zealand’s economic institutions –  hand in hand with the continuing decline in New Zealand’s relative economic performance – will continue.

But, you businesses out there really should be investing. This Governor tells you so.

 

 

 

Some IMF modelling on NZ

Michael Reddell IMF, Immigration, New Zealand economic performance

Earlier in the week I wrote about the IMF’s less-than-impressive Article IV report on New Zealand’s economy and economic policy.   As part of the bundle of documents released last Saturday there was the Selected Issues paper – a collection of some supporting research/analysis undertaken by Fund staff to help underpin the Article IV report and Fund surveillance of New Zealand more generally.

On this occasion, there are three such papers.  The one that caught my eye was the first: a modelling exercise under the title

TRADE, NET MIGRATION AND AGRICULTURE: INTERACTIONS BETWEEN EXTERNAL RISKS AND THE NEW ZEALAND ECONOMY

In this paper staff took a Fund model carefully calibrated to capture key features of the New Zealand economy and used it in conjunction with their global model to look at several possible shocks New Zealand might face over the coming years.    There is a piece on possible agricultural shocks (pp19-21) which may interest some readers, but my focus was mostly on the other shocks they studied:

  • a significant growth slowdown in the People’s Republic of China,
  • a significant growth slowdown in Australia, and
  • and a significant (exogenous to New Zealand) change in net migration from (a) the PRC, and (b) separately, from Australia.

They illustrate the estimated transitional effects and report the model estimates for the long-term steady state effects.

The PRC growth shock involves (mainly) materially slower productivity in China, such that 10 years hence PRC GDP is 11.9 per cent lower than the (WEO forecast) baseline.  You’ll have heard New Zealand politicians and other lackeys parrot lines about how New Zealand depends heavily on the PRC for its prosperity etc.  The IMF modellers are having none of it.  Here are the New Zealand economy responses (quarters along the horizontal axis).

sel issues 1.png

On this model, a 12 per cent lower level of GDP in China –  largest trading partner, first or second largest economy in the world –  leaves New Zealand…….every so slightly better off in the long run (but treat that as basically zero).  Oh well, never mind…..I don’t suppose it will stop the lackeys doing their thing, but it is a helpful reminder that, to a first approximation, countries make their own prosperity.

The scenario of an adverse growth shock in Australia is of similar magnitude (Australia’s GDP is 9.3 per cent lower than otherwise in the long-term.  I won’t clutter up the post with the same set of charts for the Australia shock, but suffice to say that the bottom-line results aren’t that different.  This time, a 9.3 per cent sustained fall in GDP in the economy that is our second largest trading partner and largest (stock) source of foreign investment is estimated to reduce New Zealand long-run GDP, but by only 0.03 per cent.  I’d treat that as zero as well.  In both cases, a lower real exchange rate is part of the way the New Zealand economy adjusts, so consumption here is a touch lower (it is relatively more expensive) but overall real incomes generated in New Zealand (GDP) are all but unchanged.

That was interesting, but not really that surprising (in truth, even I might have expected a slightly larger adverse effect).   It was the migration shocks, and the Fund’s modelling of those, which should really garner more interest and scrutiny.  Note that these results have already had bureaucratic scrutiny: the paper notes that

The chapter benefited from valuable comments by the Treasury of New Zealand and participants at a joint Treasury and Reserve Bank of New Zealand seminar.

Both institutions have some smart and critical people.

Here is the shock re PRC immigration

Additional Net Migration Effect in New Zealand. There are permanently fewer migrants to New Zealand from China. There is a 0.1 percent reduction in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 1.0 percent lower.

This shock is added to the PRC growth slowdown shock illustrated earlier.  As the Fund’s model is calibrated, these are the results.  The additional effect of the migration shock is the difference between the two lines in each panel.

sel issues 2

The Fund writes these results up as “a bad thing”

The fall in net migration would exacerbate the negative spillovers to New Zealand
from China. Real GDP would now be 0.7 percent lower than baseline in the long term.

Which is true, of course, on their model.  But, strangely, not once in the entire paper do they mention per capita GDP.  The population in the long-run is 1 per cent lower, but GDP is only 0.7 per cent lower, implying that GDP per capita is 0.3 per cent higher in this “Chinese migration shock” scenario than in the baseline scenario.  That sounds like a good thing, for New Zealanders, not a bad thing, at least in the longer-term.  (Since labour input and GDP both fall by the same amount, it doesn’t look as if this model can deal with endogeous changes in productivity).  For what it is worth, real wages in New Zealand are also higher in this scenario.)

What about the Australian net migration shock?

Additional Net Migration Effect in New Zealand. There are permanently more migrants to New Zealand from Australia. There is a 0.26 percent increase in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 2.6 percent higher.

Again, this shock is on top of the sustained slowdown in Australian growth modelled earlier (and thus is probably best thought of as a reduction in the net outflow of New Zealanders to Australia, the income gap having changed a bit in our favour).   Here is the chart of those results.

sel issues 3.png

In sum, the population is 2.6 per cent higher in the long-run and GDP is 2 per cent higher.   The Fund again spins this as a positive story (it appears under the heading “How Net Migration Could Improve Outcomes for New Zealand”) but again completely overlook the per capita story.  In this scenario, real GDP per capita is 0.6 per cent lower than in the baseline.  New Zealanders are poorer (and in the long-run real wages in New Zealand are lower).  It isn’t even as if there is much of a short-term vs long-term story (the GDP effects just build pretty steadily over the 10 year horizon).

These effects become large if you apply them to the scale of the non-citizen migration we’ve had in New Zealand in recent decades.  Cumulatively, they would not be out of line with the observed slippage in New Zealand productivity relative to other advanced countries over that period.

So the headline out of this particular paper should really be “additional migration makes New Zealanders poorer in the long-run, at least according to IMF modelling”, not stuff about how helpful immigration is.  A focus on GDP might make sense if you are building an army (raw numbers matter) or to silly comparisons politicians make.  Other people know that per capita GDP is much the more important variable, relevant to material living standards etc.  On its better days I’m sure the IMF knows that too.

In a way, even in their report on New Zealand the IMF shows glimpses of recognising that high rates of immigration might not be so good for New Zealand (whatever the possible benefits in some other places).  Both in the main Article IV document and in the Selected Issues paper “a remote location” comes first in the list of factors the Fund identifies as constraining New Zealand productivity.  Combine that glimmer of recognition (and I could also recommend to them this piece) with their own published model results suggesting that, at the margin, immigration makes New Zealanders poorer –  recall that this model is calibrated by the Fund to capture what they see as key features of the New Zealand economy) –  and it might have pointed disinterested observers towards suggesting to New Zealand governments that they consider rethinking their enthusiasm for such high (globally unusual) rates of immigration to a relatively unpropitious location.   Instead of which, the Fund (like the OECD) tends to act as cheerleaders for New Zealand immigration policy.

The IMF, of course, is not a disinterested observer.   It knows little distinctive about New Zealand – and New Zealand’s productivity performance has long been an awkwardness, even a bit of an embarrassment, for the international economic agencies.  And it is a global champion of the idea that immigration is good and more immigration is better.  If you think that an unfair characterisation, check out this post (and this more NZ focused) where I unpicked parts of an official IMF paper which purported to show that

If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

What do I actually make of the latest IMF paper?  Not that much to be honest.  I’m sure the authors could probably play around with their model – it is calibrated rather than estimated –  to produce results more suitable to the causes of their masters in Washington.  And since productivity isn’t affected, one way or another, by immigration in this model, I’m certainly not attempting to suggest that these results are somehow reflective of the sorts of channels and models I’ve been championing as central to the New Zealand story.

But when even the champions of high immigration to New Zealand acknowledge that there is not much (any?) New Zealand specific research showing that high rates of immigration to New Zealand, in New Zealand’s specific circumstances (eg remoteness, resource endowments, institutions etc) has been beneficial to New Zealanders over recent decades, it should be a little uncomfortable for the officials and politicians who champion the status quo that one of the leading internation economic agencies, pretty sympathetic to their approach, nevertheless (and without really trying) manage to produce research once again casting doubt on whether on this central tool of economic policy –  probably the biggest structural intervention our governments have done over the last 25 years –  is really working for New Zealanders.

Perhaps someone might ask the Prime Minister or the Leader of the Opposition why they act as if they are so convinced that on this count the IMF is wrong.  (Oh, and they might stop parroting the “our prosperity depends on China” line too.  IMF modelling confirms (common sense) that it simply doesn’t.)

 

Economists and “populism”

Michael Reddell Fiscal policy, Uncategorized

My son is doing the Scholarship history exam this year and the topic is something like “populism in history”.  It got me interested and I’ve been reading various books and talking the issue over with my son trying to get straight in my own mind just what “populism” actually is.

It seems like one of those elusive terms where each user means something subtly different, usually –  at least when it is quasi-academic usages –  things/beliefs/actions the author themselves disagrees with, often almost viscerally.  I’m still left unclear that it means anything much different than “things/views which are popular with a significant share of the population, perhaps even a majority, but where those views cut across or defy those held by the contemporary elites of the society in question”.   Since there is no particular reason to suppose that contemporary “elite” opinion is any better or closer to being right, to the truth,  than anyone else –  especially where competing values are at stake – any use of the term derisively seems to mostly tell you more about the user than about the merits (or otherwise) of the particular cause/movement at that moment bearing the label populist.     Is there any real difference between, say, Brexit and, say, the climate strikers, but one often bears the label “populist” and the other typically doesn’t –  even though the latter often seem considerable more fevered, even messianic (“the end of the world is nigh”) than the former?

What prompted all that was the latest survey from the IGM panel of European economists which turned up in my in-box the other day.   I find these surveys interesting, but the reason depends a bit on the question.  Sometimes the answers genuinely tell you something about the balance of the literature and expert opinion on some relatively technical aspects of economics.  At other times, the answers tell you more about the political preferences and inclinations of the (European) elite economics profession than anything else.   The latest survey was about populism, undefined of course.

Here was the first question.

IGM 1

As a group they seem pretty confident of that answer.  I’m a bit sceptical that one can be quite that confident (hardly anyone was even uncertain), but that question wasn’t the one I was mainly interested in.

Here is the second question.

IGM 2.png

Taking the right-hand panel (where answers are weighted by the relevant experts’ confidence in their answer), 62 per cent of this expert group believe that more government spending (or more tax and spending in combination) would be likely to “limit the rise of populism in Europe”.  Only 5 per cent of respondents disagree.

And here is the third question

IGM 3

A similar proportion believe such fiscal measures should actually be taken.   This time, a larger proportion (15 per cent) disagree, but (a) no one disagrees strongly, and (b) the net balance favouring more such measures is still huge: 65 per cent in favour, 15 per cent against.

I found these results pretty extraordinary.   They are frustrating in a way because one can’t quiz the respondents on why they think government spending/tax can make such a difference, but perhaps they reflect that old line that the solution you propose is often influenced by the tool you happen to have, regardless of whether the tool and the problem are well aligned at all.    Economists tend to think primarily in terms of economic instruments  (tax/spending) and perhaps to economic diagnoses.  I suspect the results also tell you something about just how centre-left oriented (a big place for smart government and clever interventions) economists as a group (whether in government or academe) have become.

Because it is not as if Europe doesn’t already have quite a lot of government spending.   Here is the OECD measure of general government outlays as a share of GDP (in the Irish case, it is as a share of modified GNI –  a measure the Irish authorities use to adjust for the international corporate tax distortions to reported Irish GDP).

gen govt 2018.png

There are a few small European countries down the left-hand end of the chart but every single one of the top 22 government spending OECD countries are European, and not one of the non-European countries has government spending in excess of 40 per cent of GDP.   Where do people worry about European “populism”?  Well, one reads stories about France (Le Pen), Italy, Austria, Germany, Hungary, Poland and so on.  A few years ago the concern was Geert Wilders in the Netherlands.  And, of course, there is Brexit.  Every single one of those countries is in that top-22 group of really rather large spenders.

Perhaps those big-spending Europeans are, in many cases, spending a bit less (share of GDP) than they were 25 years ago  but it is hardly a climate where government spending is at minimalist-government levels (even Korea is now over 30 per cent of GDP).  And yet these expert economists want even more taxes and spending?  Perhaps doing so wouldn’t dash longer-term growth and productivity prospects –  some of the countries with the highest average labour productivity are also among the group of largest spenders – but when your starting point is the highest rates of government spending anywhere, it is hard to believe that more spending, more tax, could be more than a very short-term palliative, buying off the symptoms of discontents for a few months or years with more bread and circuses, without actually dealing with the root causes (whatever they are) behind the various phenomena the economists had in mind when they use that “populist” label.  Brexit sentiment will dissipate because a UK government chooses to spend more like a Continental?  Seems improbable.  The popular support for Viktor Orban will dissipate if Hungarian governments increase government spending from 10th highest in the OECD to, say, 5th?  Again, it doesn’t seem to get to grips with what bothers voters, or Orban. (Or, outside Europe, Trump as a phenomenon of insufficient government spending? Really?)

In fairness, I guess the questions don’t invite the respondents to offer a menu of possible responses.  Perhaps many of them think things other than more government spending are equally, or more, important.  But the overwhelming support for more government spending/tax gives a pretty strong hint that they think simply spending more money, perhaps more smartly, is an important part of responding to those concerns they so much dislike.  My own suspicion is that is more a case of “physician heal thyself” –  that today’s “elites”, with no particular claim to legitimacy (can’t point to God, heredity, sustained military virtue or anything more traditional), might look in the mirror and reflect on themselves, their values, aspirations and behaviours.  Perhaps they lay claim to having “technical expertise”, but it doesn’t (probably shouldn’t, other than as advisory input) count for much –  even if sound –  if conflicting values are at stake.   Do today’s establishment leaders invite trust and confidence?  It doesn’t look that way to me (in New Zealand either) and so it seems unlike that simply tossing more money at the situation is anything like a big part of “the answer”.

But Europe’s top economists, rightly or wrongly, see things differently.

Policy costings office: a perspective from Australia

Michael Reddell Fiscal policy

Over the years I’ve written a fair bit here about the idea of some sort of independent fiscal analysis body (most recent post here, with links to earlier ones).   There are ever-increasing numbers of such agencies around the world, partly because the EU says each of its member countries has to have one.  As I’ve argued here, I think there is a reasonable case for some sort of such body here – small and focused on all macro policy rather than just fiscal policy – but I’ve become increasingly sceptical of the sort of direction the current government has chosen to take.   They seem to be looking at something that serves mostly as free research for MPs costing policies, perhaps most closely resembling the Australian Parliamentary Budget Office set up a couple of election cycles ago.

The Treasury yesterday held an excellent guest lecture on the issue, with the visiting speaker being no less than Jenny Wilkinson, the Australian Parliamentary Budget Officer (CEO of the office) herself.  She spoke very well, answered lots of questions, and certainly left me (and I assume others) with a much better understanding of how the Australian system works.  Of course, as the incumbent CEO speaking in an open forum in another country, one doesn’t expect her to highlight any weaknesses or pitfalls but it was very valuable nonetheless.

Wilkinson included in her presentation this chart, used in our own government’s consultation document, categorising the responsibilities of the various independent fiscal offices around the advanced economies.

fisc council chart

Not many such agencies do policy costings for political parties.  Of those that do, all are in much larger economies than New Zealand.  And the US CBO is largely an adviser to Congressional committees, not costing proposals for candidates for office.

Small countries don’t have this sort of state-funded function.  One reason might be that there really aren’t many economies of scale.  Policy is probably no more complex in Italy or Australia (right hand of the chart) than in Iceland or Slovenia (left hand end) but there just aren’t so many resources to throw around in smaller countries.  Wilkinson told us that her office has about 45 staff, scaling up to around 55 around elections, and as if to confirm my prior that there aren’t many economies of scale she told us that Victoria’s own state PBO doesn’t have many fewer staff than her federal version.  Given that states and the Commonwealth between them do all the stuff our central government does –  and such an office has to be able to handle issues in any area of policy more or less on demand – it is hard to see how a high quality operation (and the Australian office appears to be one) could be run in New Zealand with fewer than 40 staff.  By contrast, the Parliamentary Commissioner for the Environment reports that it has 20 staff, and the Productivity Commission has three commissioners and about 15 staff.

As Wilkinson noted, every country’s fiscal institution has its own backstory.  One of the reasons I’ve been sceptical of a New Zealand costings agency is that, having followed New Zealand politics closely for 40+ years, it isn’t obvious when, if ever, a modern New Zealand election has turned on specific policy costings.  Wilkinson told us that the origins of the PBO relate to the period after the 2010 Australian election when both the Coalition and Labor were vying for the support of independents to form a government, and one of the independents insisted that both parties submit their programmes to the Commonwealth Treasury and the Department of Finance for costing.  Under the (rather loose) Australia rules, the (Labor) government’s policies had already been costed by the bureaucrats, but when the Coalition programmes were evaluated the officials reckoned there was a significant fiscal hole.    She went on to claim that in almost every election back to 1987 there had been significant debate about costings (of opposition parties) and that some elections “may” have turned on that (she didn’t given details of which, or how).  In the last two elections she claimed that use of the PBO has meant that costings are just no longer an election issue.

As she spoke there was discernible titter around the room, clearly remembering the “fiscal hole” debate before our own last election.  But I think it is wrong to think the Australian experience is relevant to that episode, which wasn’t about the cost of any specific programmes (which is what PBO evaluates for parties) but was mostly about the overall fiscal parameters and just how tight they’d prove.  As far I could tell, nothing in what a policy costing body was doing would have changed that debate (which resulted more from the current New Zealand focus on debt targets, of the sort they don’t really seem to have in Australia).

Another aspect of the presentation that surprised me was (a) the number of costings the PBO does, and (b) the extent to which demand is not concentrated just in the pre-election period.  In fairness, she noted that the latter had surprised them too.  In the most recent year (an election year) they’d done 2970 costings, while in the previous two non-election years they had averaged about 1700 costings. Only MPs can request costings, and there are 227 MPs (across House and Senate).     Those numbers don’t mean 2970 separate items of policy, as many of the costings will be, in effect, rework as members or parties iterate towards a policy that meets their ends and will be scored by the PBO as not costing too much.

In many respects, the PBO seems to operate as a (in NZ parlance) “shadow Treasury”.  The PBO is apparently required to use the same economic parameters etc as the government is using (through the Commonwealth Treasury and the Department of Finance), so there is no independent view on how the economy or programmes might work.  What the PBO is doing is, in effect, telling parties how the Commonwealth bureaucrats would score/cost their policies if they found themselves in office after the election. I guess that has some uses, but it is hardly independent advice or an alternative perspective –  it not only cements the dominance of existing parties in Parliament (since only existing MPs can use it) but cements the dominance of the paradigms and models of the existing public service departments.

Related to this, and in answer to a question from me, Wilkinson observed that what the PBO can best do is cost programmes that represents small deviations from the status quo (they have good tools to estimate direct and immediate fiscal costs/gains) while wider economic second round effects, and the associated fiscal impacts, are likely to be small.  But, and using her own (deliberately extreme) example, if some party were to campaign on getting rid of the welfare state, her office could do the direct fiscal costs, but could offer little or nothing on the wider economic (or social) effects of such a policy, including the possibility that it might have large long-term indirect fiscal implications.    They will only offer qualitative statements about those wider effects.  Which left me thinking that the the PBO probably does very well on things that don’t matter that much, and can’t offer much on the bigger issues that elections probably should really be about  (whether about the welfare state, climate change, productivity or whatever).     We don’t devote 45+ FTEs to a specialised institution to help parties develop their welfare or productivity policies.   And while fiscal costs will always matter, arguably reasonably credible aggregate fiscal rules (commitments to surpluses or low debt) provide most of the effective discipline that is needed (at least, that would be my interpretation of the last 25 years of New Zealand).  Plans change in office, as do economic and political circumstances.

Another thing not to like about the PBO model is that it operates in secret.  Costings are not published by the PBO before an election (although the PBO will correct things if a party mischaracterises material PBO has provided them), whereas (in NZ) the Official Information Act would generally, and appropriately, apply to work and costings undertaken by executive government agencies at public expense.

From a New Zealand perspective, I’m also not persuaded how important detailed programme costings are.  Australia has an electoral system that usually produces a majority (in the lower house) government from a single party/bloc.  We don’t.  At least while we have a party (or parties) who can go either way after an election, any election manifesto is really little more than an opening bid.  Sure, there is more onus on the big parties to have a decent set of numbers, but (say in 2017) both knew that whatever they took into the election would, in government, depends on what price they had to pay to secure New Zealand First support (and, in Labour’s case, on how large the Green share of the centre-left vote was).  Perhaps you might spend a lot on detailed costings (of the PBO sort) of the service was free to the user, but what real value is there to the public in that service.  Especially when, for example, New Zealand First has never been a party unduly focused on providing lots of detail in its manifestoes (somewhat rationally so, since what they can actually get will depend on vote share and coalition partner –  they don’t expect to lead a government themselves).

I could go on, but that is probably enough for now.  As I say, it was a very useful presentation (I hope Treasury makes her slides available) from a technocrat’s technocrat.  I’m left sceptical on two main counts:

  • first, whether elections ever much do, or really should, turn much on precise fiscal costings. Perhaps it appeals to inside-the-Beltway technocrats to conceive of that model, but I see elections as mostly about things like competing visions, competing personalities, competing diagnoses, and competing claims to competence.  If so, why spend so much on highly-detailed and expensive state-funded costings, that the parties themselves don’t think it worth spending their own money on?
  • second, we should think harder about the whole panoply of support and information etc we provide to political parties and the public, preferably without further reinforcing the favoured position of established large parties.  Thus, it is interesting to note that written parliamentary questions are much much less used in Australia, as a way of garnering information, than is the case in New Zealand. (“In the years 2008–2014 only about 8 questions in writing were being asked each sitting day, but this number increased to 19 in 2015, and was 14 in 2016.”).   What about better resourcing select committees (to me a better use of money)?  And if we threw in a free PBO service, should we reduce existing money parliamentary parties are funded with?  If not, why not?  And would resistance to that idea suggest the costings were some epicurean nice-to-have rather than a central element of a well-functioning democracy?  And then, of course, there is the OIA.  Mightn’t it be better to require agencies to release documented costings models themselves, in ways that would allow political parties and their consultancy firms to use them to the extent they judge appropriate (and not otherwise).

And if I had the analytical resource implied by 40-45 more staff and had to deploy it somewhere in the public sector, it is far from obvious that a policy costing operation (with supporting analysis and research as the PBO) would offer the highest benefit-cost ratio

IMF: telling it like it isn’t

Michael Reddell IMF

Since New Zealand joined the International Monetary Fund almost 60 year ago now –  amid all sorts of controversy we were very late to join – their officials have produced a report (Article IV consultation) on New Zealand’s economy every year or so.  These reports used to be held very closely –  which might have made for more free and frank advice – but these days they are routinely published for most countries (including New Zealand).    I’ve participated in quite a few of these reviews over the years, in New Zealand, in other countries where I’ve worked, and in my time on the board of the IMF.  I increasingly wonder why they bother.  For most countries, there isn’t an obvious gap in the market for economic commentary requiring a supranational agency to fill, and if there is occasionally some really good analysis included with the published report, it is rare for the IMF to be adding very much value.  That has long been so in New Zealand.

The IMF once had a fearsome reputation as a nest of fairly hardline ‘right wing’ economists.   The reality of hard budget constraints can have that sort of effect.  And bankers will put conditions on their loans.

But, of course, the IMF doesn’t really have an independent existence.  It is governed by an Executive Board meeting in near-permanent session, where the clout is held by Executive Directors appointed by, and dismissable by, the governments of larger economies and –  reasoanably enough I suppose –  the actions and words of the IMF tend to reflect the politics and preferences of the shareholders.   It isn’t that the Managing Director is unimportant, but the Managing Director gets and keeps her job, and her effectiveness, by keeping onside with the shareholders.   Good money gets thrown after bad –  in places like Greece, Pakistan, and Argentina –  to reflect these shareholder political preferences.  Sometimes the MDs even have personal political and career ambitions to pursue, in turn usually dependent on the goodwill of major shareholders (bearing in mind that every single MD  –  including the next one – has been from Europe.   Except perhaps on quite narrowly technical points, it doesn’t make sense to think of Fund’s view apart from the politics and preferences of the governments that dominate it.    Like the OECD, that makes it part of the centre-left consensus on most things.

But there are also lower-level institutional incentives.  The IMF wants to be “helpful”, it wants access, and its mission-team leaders want to be promoted to more important responsibilities.  When dealing with normal countries with reasonably normal governments, there is quite an incentive to make nice, to talk up things the government you are dealing with is fond of, not to make much of consistency through time (governments change after all).  All compounded by the tendency for Fund missions to weigh in on stuff they really don’t know much about at all (staff tend to have a great deal more macro expertise than that on, say, productivity or housing –  reflecting their formal mandate –  and New Zealand being a somewhat idiosyncratic economy, and staff turning over quite quickly, few really know much about New Zealand).

The latest Article IV report for New Zealand was published on Saturday.   Being dropped into a news deadzone (only accentuated by the RWC) presumably the government –  which has its say on timing –  wanted even less coverage than the little attention these reports usually get in New Zealand media.

Which was odd in a way because in many respects the document  –  at least the headline bits –  could have been published by a government PR body.   There was, for example, that talk about the “solid” economic expansion which must have been welcome, at least until one dug down a few paragraphs and found that staff recognised that any relatively decent performance, albeit (as they note) with skewed downside risks is coming only from supportive macro policy (fiscal and monetary), not from any robust long-term foundations.  Oh, and that they thought that the unemployment was now lower than could be sustained.

Lots of policies were deemed “appropriate”, but with little or no supporting analysis it was hard to know why we should agree with the social democrats from Washington.  Last year the Fund seemed keen on a capital gains tax, but this year –  free and frank advisor role notwithstanding –  the waters have apparently closed over that option and it gets no mention at all.  Last year, Kiwibuild was talked of positively, while this year’s report –  written weeks ago –  is left with vague talk of resets, “key programs still need to be calibrated” etc.

It is on the productivity front that the Fund is perhaps the most far-fetched.    Buried deep in the report is this chart (of OECD data)

IMF MFP 19

Which is a chart so bleak it could almost have originated here.

They also note that business investment has been weak this decade.

And yet, like our own government agencies I guess, they include projections in the report suggesting that total factor productivity growth is just about to accelerate away again, and that lots of capital-deepening business investment will also occur over the next five years (projections to 2024).    From a quick glance at global or domestic bond markets, you’d have to think that market pricing doesn’t really agree with the Fund.   Oddly, when they comment explicitly on the productivity projections we are told to expect this renewed growth because of “cost control and efficiency gains”.  Well, maybe…..

But, or so we are told by the IMF, there is in fact a promising productivity-focused policy agenda already being implemented by the government.  Perhaps you missed it. I did.

But here is what the IMF has in mind

Addressing long-standing low productivity growth continues to be a central concern. In this respect, some important first steps have been taken, including the introduction of a new R&D tax credit regime; the creation of the New Zealand Infrastructure Commission to help in closing infrastructure gaps; and the reform of the vocational education and training sector.

and, elsewhere in the same document

Within the greater focus on wellbeing under the Living Standards Framework, the government has a roster of policies to foster productivity growth. These include introducing an R&D tax credit regime, continuing to increase education spending, creating a New Zealand Infrastructure Commission to enhance procurement and delivery and set up of an infrastructure pipeline, using wage increases to further more inclusive growth, and fostering regional development through the Provincial Growth Fund and greater focus on regional immigration to align immigration of skilled labor with employers’ needs in the regions.

Spare us.

In case you are wondering that “using wage increases to further more inclusive growth” appears to be a reference to the government ramping up the minimum wage, combined with some modestly-sympathetic references to the proposed Fair Pay Agreements.  If you think those two will boost TFP growth (whatever you might think of the “fairness” arguments), I’m sure someone has all manner of scam projects to sell you.

Or perhaps it was the Provincial Growth Fund –  which no credible observers thinks is likely to lift economywide productivity –  or fees-free tertiary education (“continuing to increase education spending” –  and last year the Fund was explicitly keen on something like fees-free).  I haven’t focused on vocational education reform, but count me sceptical that it is going to make much sustained difference to economywide productivity.

I get that outfits like the Fund like interventions like R&D tax credits. Perhaps it will even make a difference (although I’m sceptical) but the Fund’s supporting “analysis” seems to be no more than “R&D spending in New Zealand is low, so we should have more government subsidies”, with no analysis for why firms haven’t regarded it as attractive to spend more themselves.  And, who knows, perhaps the Infrastructure Commission will do some good work, but (a) it makes no spending decisions, and (b) the government’s own actual infrastructure choices have been more about keeping the Greens happy than about having a credible chance of enhancing productivity growth.

Oh, and it wouldn’t do to skip the other reform the Fund seems most keen on –  it features in the covering statement.  On housing, they seem still right with the government

The reform of the institutional structure, including the establishment of the Ministry of Housing and Urban Development, should help in implementing housing policies. Further work is needed to complete the agenda, including enabling local councils to actively plan for and increase housing supply growth.

(with no mention at all of initiatives that at least some regard as signficant backward steps)  but they still want action on tax, this time an even flakier option

Tax reform, such as a tax on all vacant land, should also be considered.

Again with no supporting analysis whatever.  (Land value rating would be the more sensible, and feasible, option in that space.)

And, bottom line surely, despite having a spiffy new bureaucracy “house prices are expected to continue rising under the baseline economic outlook”.

The other point from the report that I wanted to touch on here was around the Reserve Bank’s bank capital proposals.   The Fund is keen.

The proposed higher capital conservation buffers would provide for a welcome increase in banking system resilience. The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the banking system.

Of course, there is no supporting analysis for that proposition either. In a a short report perhaps that might be too troubling, except that as I have pointed out before this seems to be a classic example of the Fund simply going with the flow and echoing whatever the authorities happen to favour at the time.    Don’t want to make life awkward for our mates at the Reserve Bank, I suppose.

Here was what I said when the Fund mission released their concluding statement at the end of their visit to Wellington

They are not much more than a couple of sentences in a press release, with no published supporting analysis.  And the Fund almost always backs the authorities – who are the people they talk to mos?t  –  especially when central banks and regulators want to put more restrictions on banks. Why wouldn’t they?  Any economic costs don’t sheet home to them.  But the IMF’s support isn’t without its problem for the Reserve Bank.     Here is what they said

The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the dominance of the four large banks with similar concentrated exposure to mortgages, business models and funding structures.

Which, by logical deduction, appears to be saying that current levels of capital are grossly inadequate to the risks the New Zealand banking system faces. But there was no hint of these serious risks in past Financial Stability Report from the Reserve Bank (although they amped up the rhetoric in the latest one), and –  perhaps more to the point –  no hint of that in past IMF Article IV staff reviews or Executive Board discussions.  This snippet is from last year’s Article IV report, published as recently as June last year.

IMF capital

Not a word from staff, from the Board –  or, indeed, fron the New Zealand authorities in their published comments –  of a pressing need for a huge increase in minimum capital ratios.

In other words, take what the Fund says with a huge bucket of salt.    And if, perchance, the Governor has second thoughts and doesn’t go ahead with large increases, probably next year the Fund would be back to tell us that was “appropriate” too.

As I say, I really struggle to see the value of the Article IV reports.  At one level, perhaps that reflects the fact that the Fund is a macro agency, and macro policy has been where New Zealand –  all on its own –  has done pretty well over the last 25+ years (low government debt, low stable inflation etc etc), and where we face hard issues the Fund has little or nothing to offer except the institutional sympathies of the centre-left.  But it isn’t as if New Zealand is the only place where they struggle to add much value, or make much difference to important debates in a timely ways.  If it were wound up – rarely ever happens to international agencies of course –  it is hard to see how the world would be the poorer.  Some officials would be – and I had several very remunerative years on their payroll –  but not obviously the world, and certainly not New Zealand policymaking or economic analysis.

The Fund does often publish some research done in association with the Article IV report in a separate document. They have done so again this time.  I haven’t yet read the paper in full, but on skimming through it there look to be some points worth coming back to later in the week.

 

 

Inane crude economic nationalism

Michael Reddell Kiwibank, Uncategorized

I picked up the Dominion-Post newspaper from the front step this morning to find this blaring back at me.

Kiwibank 1

The second page was entirely green, with a little Kiwibank logo and the twee marketing  line “Kiwis backing Kiwis”.  (I guess advertising must have been more expensive in the Herald, where it is “just” wrapped round the sports section).

Rarely had I ever been more glad that I’d never been tempted to shift my banking business to the state-owned Kiwibank.  The crude nationalism on display today was at possibly an even more inane level than the last such NZ-owned bank’s advertising campaign I wrote about

TSB photo.jpeg

That one was on display at the heart of New Zealand’s “globalist-central” (if there were such a place), just over the road from the New Zealand Initiative, and a few hundred metres from places like MFAT, MBIE and The Treasury.   If it had any merit, at least that campaign did have some modicum of substance to it: at least some of the profits of foreign-owned banks are in fact remitted abroad (as the profits –  whether from Wellington, Auckland or wherever – of Taranaki-owned banks are, at least in part, remitted to…..Taranaki).   What of it you might reasonably ask, but at least there is some factual foundation.

But the Kiwibank campaign takes leave of all rational foundation to suggest, quite blatantly, that somehow if you bank with an Australian-owned bank (as most of us do) you are not only disloyal, but actually supporting the Australian rugby team.  How one wonders?  I know it isn’t the cricket season today but isn’t the evil ANZ one of the biggest sponsors of New Zealand cricket?   It is just nonsensical –  all the more so for running wrapped around newspapers produced by two separate foreign-owned and controlled companies.    Are we “disloyal” –  and somehow supporting the Wallabies –  for reading the Dominion-Post?  

From my previous post

I didn’t move to Korea and yet the screen I’m typing to was made by a Korean company, and the profits from its design and manufacture presumably accrued to the owners of Samsung.   I didn’t move to the United States, and yet the platform this blog uses is (I think) American, and the profits from what I pay for using it accrue to the owners of that company.   One could go on –  the car, the printer, the TV, the bottle of French wine, or those Californian oranges in the fruit bowl.  The jersey I’m wearing is American and the books on the shelves next to me are from all over the Anglo world –  there will (producers hope) have been profits associated with each of them. 

To which I could add the Ecuadorian bananas in the fruit bowl, the Iranian dates I was baking with this morning, and the phone I was using, with componentry from all over the world.  And, of course, there are New Zealand –  the suburban bakery where I picked up the bread for lunch, or the supermarket (which perhaps I’m suppposed to feel even better about because it is part of a co-op, although what I’d prefer was some plastic bags for my groceries.

Most of us rarely give much thought to the nationality of the owners of the companies who produce the products and services we purchase.  No one supposes that owning an Apple phone means we are “supporting” the United States.  Mostly, that makes a great deal of sense (even if those Iranian dates sometimes do make me pause and I wouldn’t be buying a Huawei phone).  I’m glad my bank has been in New Zealand since 1840 – not one of these johnny-come-lately operations –  and that the capital behind it is provided voluntarily by its shareholders (from around the world, if no doubt disproportionately from Australia) rather than taken from taxpayers by coercion to invest in a bank that has struggled to earn a decent rate of return over its life so far and where there is little or no effective accountability for its operations or actions.

I presume Kiwibank has highly-paid marketers who tell them this sort of campaign “works”. Perhaps it plays especially well with politicians like Shane Jones.  But even if it does, it is something that shouldn’t be encouraged.  And the sentiments particularly shouldn’t be indulged/fed or whatever by a wholly state-owned company, whose owners strut the world proclaiming their commitment to open and multilateral trade, rules-based orders, and all that.

 

Tradables and non-tradables

Michael Reddell Uncategorized

Every so often I get round to updating my charts of some indicators of the relative performance of the tradables and non-tradables sectors of our economy.  With new GDP numbers out yesterday, now seems as good a day as any.

This is my headline chart.

T and NT to june 19

Here tradables is a rough and ready aggregation of primary sector and manufacturing GDP (from the production GDP numbers) and exports of services (from the expenditure GDP series).  Non-tradables is the rest (of GDP).   The idea is to split out those sectors which face international competition from those that don’t.     It is no more than an indicator, and people often like to point out the components of “non-tradables” where, at least in principle, there is international competition.   But as a rough and ready indicator, it serves its purpose.   It was first developed by a visiting IMF mission about 15 years ago to help illustrate how one might think about the impact of a lift in the real exchange rate.

You will recall my line (oft repeated) that really successful economies tend to be ones with really robust tradables (and exports –  although the two aren’t the same thing) sectors.  Not because tradables are special, but because success in the (much bigger) wider world market, or against the wider world of competing producers, is an indicator about something going right in your economy.

Whereas in New Zealand, the economy appears to have become increasingly skewed towards non-tradables.  In per capita terms, there has been no growth in this indicator of tradables sector GDP since 2002 whereas the non-tradables sector has grown by 40 per cent.   There have been a few ups and downs in that tradables line of course.  There was some brief encouragement in that lift a few years ago, but the new level is nothing to write home about.  If anything, the tradables line looks to be tailing off again, at least a bit.

There are people out there who really really don’t like this indicator.  So for them, and to shed a bit more light on what has gone on, here are the individual components of the tradables line.

T components.png

In real per capita terms:

  •  mining sector GDP is a bit less than it was at the start of the 90s,
  •  manufacturing sector GDP is just a bit below the level first reached in 1997, 22 years ago,
  •  for all the dairy intensification, forest plantings etc, the same is true  of agriculture, forestry and fishing –  just a bit below the level reached 22 years ago.

Actual real GDP for all three sector has risen quite a bit, but there are almost 1.2 million more people than there were in 1997.

What of services exports?  They have grown a lot, even in per capita terms. But the growth was a generation ago now: real per capita services exports more than doubled between 1991 and 2002.  Since 2002, there has only been about 6 per cent growth, in total. Over 17 years.

And some context on services exports from last week’s post.

services exports small OECD

New Zealand has the smallest share of services exports in GDP of all these smallish OECD countries –  and by quite a margin.       And it isn’t as if we are closing the gap.   Over the last 20 years, services exports as a share of GDP have barely changed in New Zealand (with some ups and downs) while for the median of the other smallish OECD countries, the increase was 6.7 percentage points of GDP.

It is hard to (rapidly grow) exports from New Zealand.  Distance is a big obstacle (at least for anything other than natural resources), and so are regulatory limits (some probably warranted, others probably not) on the utilisation of the fixed stock of natural resources.

But it always pays to keep an eye on the (real) exchange rate.  One way of looking at the real exchange rate is the price of non-tradables relative to the price of tradables.  That has been rising substantially in New Zealand.  The other is simply to use one of long-term international indices, deflating a nominal exchange rate index by some measure of costs and prices.   This is a chart I’ve used every few months

rel ULcs

Sure, the exchange rate has been falling a bit in the last few months (the chart is quarterly and thus only  up to June) but it is nothing out of the ordinary relative to the average level for the last fifteen years  –  which was far higher than the average for the previous few decades (since, say, the mid-70s).

There is nothing wrong with a high real exchange rate –  in fact, it is a natural outgrowth –  if your economy is doing well and generating consistently strong productivity growth relative to the rest of the world.   But, of course, that isn’t the situation in New Zealand.   The government doesn’t directly set the real exchange rate –  and the Reserve Bank has very little influence on it beyond the short-run –  but government policy choices have helped skew the economy in ways that mean the tradables sector has been squeezed, such that we’ve had almost no growth in real per capita tradables sector GDP this century.

And no political party in Parliament seems to have any real idea about how to change that, or any real desire to address seriously the issue.