Expectations

The Reserve Bank’s Monetary Policy Statement is due out on Wednesday.  It will be interesting to see what tone the MPC comes out with.   Quite a bit of the recent media commentary in New Zealand has been rather upbeat, for reasons that aren’t fully clear.  No one seems to expect the MPC to do much that might make a difference, although there will be interest in what the Committee has to say on its handwaving supplementary tools (that do little useful), the Large Scale Asset Purchase programme and, for example, the idea of buying foreign assets.  The latter, if launched at some stage, might get them some headline effects for a day or two – as happened when we tried fx intervention back in 2007 – but beyond that is likely to be even less effective than the LSAP.

Where the MPC could still be of us,  even if they aren’t going to change the OCR, is to apply to refreshing dose of bleak reality to the discussion of New Zealand’s economic situation.  I don’t suppose they will go very far in that direction –  after all, doing so wouldn’t help their ideological allies in the current election campaign –  but they might still help that they shift the ground somewhat.  Even the Minister of Finance has been heard recently reporting that The Treasury –  whose own PREFU numbers are due out next week –  are now really quite pessimistic on the world economy.    And a small, moderately open, economy isn’t that well-positioned if (a) the rest of the world is doing poorly, and (b) domestic macro policy is doing less than usual in a downturn.

The latest expectations data was a reminder as to just how little monetary policy has done this year.  Take inflation expectations as just an example.

The ANZ’s survey of the year-ahead inflation expectations of a reasonably large sample of their business customers hasn’t produced a result as high as 2 per cent since May last year.   As recently as their February survey –  mostly taken before the February MPS when the Reserve Bank was sufficiently upbeat they adopted a slight tightening bias – year ahead expectations were as high as 1.89 per cent.  Now those expectations are about 1.4 per cent, a long way below the target midpoint the MPC is supposed to focus on.

What about the Reserve Bank’s own survey of a smaller sample of supposedly relatively expert observers?  We got the latest read on that last week.

RB infl expecs

As expected, there is a slight recovery in the latest survey, but both lots of expectations are a long way below the target midpoint.  If you were charitable you might argue that the year ahead outlook was at least in part still beyond the Bank’s control, but there is ample opportunity for the Bank to have inflation back to 2 per cent by the year to June 2022.  But respondents don’t believe they will.

And what about market-based measures?   These are the five year breakevens (from the indexed and conventional government bond yields) for the United States and New Zealand.

five year breakevens

The breakevens fell sharply in March, especially in the US –  the focal point for the stresses in government bond markets.  But since then US breakevens have retraced most of this year’s falls.  The New Zealand picture is very different: not only did the implied breakevens start the year miles below the inflation target, but that gap has widened substantially further this year, with little sign now of any convergence/correction.    These implied expectations are 55 basis points lower than they were at the end of last year, or than they were when the MPC was setting policy in February.

Perhaps the best thing about the Reserve Bank’s Survey of Expectations is that it asks the same respondents about a bunch of macro variables, not just about inflation.   If we assume those people are each answering somewhat consistently, we can look at one set of answers in light of others.    For example, we know that the OCR has been cut by only 75 basis point this year, but there is also a question about where respondents think the OCR will a year ahead.  Since the survey done in early February, those expectations have fallen by 78 basis points.  That is actually a bit less than the fall in those same respondents’ year-ahead inflation expectations.  Even if you think (as the Bank typically did) that the two year-ahead measure is more important, you are left with results in which these respondents think real interest rates have fallen only perhaps 25-30 basis points.  It is a derisory change in the face of a shock of this magnitude.

What about government bond rates?  Well, we hear a great deal from the Bank –  and some of their market acolytes – about the difference the LSAP is making.    But how much have year-ahead expectations of the long-term bond rate fallen since February, even taking account of the LSAP (actual and expected)?   A mere 54 basis points.    To be sure, we do not know the counterfactual –  without the bond-buying actual and expectation bond yields might be higher, but the bottom line remains that yields have not fallen much, especially in real terms.

Respondents are also asked about GDP growth and although these responses seem to have got no media coverage in some respects they are the most disconcerting of them all.  Respondents expect real GDP growth of 4.24 per cent in the four quarters to June 2021 (the median response is actually much lower at only 3 per cent) and 2.77 per cent over the following four quarters.   Those numbers might not seem so bad until you realise that the (generally expected) trough in GDP will have been in the June quarter 2020.  It is quite likely that GDP in the four quarters to June 2020 will have fallen by perhaps 15 per cent.    A rebound of only 7 per cent over the following eight quarters would be alarmingly bad.   The question is quite clearly posed: it is not an annual average growth rate that was asked for, although I suppose some may have misinterpreted it that way.    However respondents answered the GDP question-  and there is a huge range of estimates for the year ahead (from -18  per cent to 24 per cent) – respondents expect the unemployment rate to remain high.

The Bank introduced a couple of interesting new questions to the latest survey (I hope they become standard features, and that the results are reported on the main tables on the website).  First, they asked respondents what they expect the OCR to be in June 2030 –  ten years’ hence.  The point here is not that there is anything very special about the specific June 2030 date, but that it is far enough ahead that one could expect respondents to look beyond the current crisis or evident cyclical pressures and think mostly about the long-term structural features of the economy.    The range of estimates was wide –  from 1 per cent to 4.5 per cent –  with a median of 2.5 per cent.    My own response to that question was 2.25 per cent, but since my 10 year ahead inflation expectations (1.5 per cent) were  lower than those of the median respondent (2 per cent) I was a bit surprised to find that I had an above-median estimate of the neutral OCR.

(It would be interesting to invite the MPC members to follow the lead of the FOMC and publish their individual –  unnamed –  estimates of the neutral OCR.)

The other new question asked respondents to estimate the average OCR for the next 10 year.  Again, the median response (1.5 per cent) was higher than my response (1 per cent), a difference likely to be mirrored in a difference in inflation expectations).

If these responses to the Reserve Bank survey capture anything useful at all, they should really be quite concerning to the Governor, to the Monetary Policy Committee, and to those with the legal responsibility for holding the Bank to account (that’s you Reserve Bank  Board and Grant Robertson).  Inflation is expected to be well below target, unemployment is expected to remain worryingly high, the recovery in GDP is expected to be pretty feeble at best, and hardly anyone expects that the Bank will manage to establish any material policy leeway in the period before the next economic downturn hits.    It is a pretty clear case where the informed respondents do not act (write down expectations) as if they believe the Bank is adequately doing its job.

Now perhaps on Wednesday the MPC will come out with some much more upbeat story, and tell us reasons why the views of survey respondents should be discounted.  But if anything at the time of their last MPS, the Bank was more pessimistic than survey respondents, even though their official line has been the monetary policy is providing large amount of stimulus.

Now, of course, the Committee likes to abdicate its responsibilities and put everything on fiscal policy.  But that isn’t the way the regime is supposed to work.  Rather, governments set fiscal policy and then the MPC is supposed to do whatever it takes (loosening or tightening) to deliver the inflation target the government has set out for them.  Respondents to the Bank’s survey know all about fiscal policy, and yet they conclude that the Bank is not acting to do its job, isn’t acting consistent with getting inflation promptly back to 2 per cent or –  for that matter –  with quickly re-establishing full employment.   The peak contribution to fiscal policy is already passing, monetary policy could have been aggressively deployed months ago to be in a position to take up the slack.  Instead, we sit here now with real interest rates barely down much at all, a real exchange rate that hasn’t budged, and yet with really worrying  –  and remediable –  economic and inflation outcomes in prospect.

I’m sure many readers are inclined to discount the significance of inflation expectations.  I’m not one of those who runs a model in which inflation expectations directly set inflation outcomes, but when both expectations (all measures) of inflation are below target and unemployment is well away from full employment, what it tells us is that monetary policy simply isn’t being used to the full.  There is a reasonable debate to be had about whether some countries, or the world,  might emerge from this crisis with much higher –  troublingly high, or (to some) usefully high – but when there is no indication at all, from surveys or market prices, that inflation is even likely to be at target, let alone far overshooting it, we should be able to expect more from the Reserve Bank, not just some handwringing exercise –  from the macro-stabilisation agency –  suggesting that the unemployment is someone else’s problem.

In this case, notably, we need deeply negative interest rates. I’ve seen some banks suggesting that interest rates will eventually go a bit negative because more stimulus is needed.  But it is clear –  including from those banks’ own commentaries –  that that stimulus/support from monetary policy is needed now, not –  even then in half-measures –  sometime next year.

 

 

Perhaps they should start a bank?

In the last few days speeches by two of the Reserve Bank’s senior managers have been published.   The first was from the Deputy Governor Geoff Bascand –  delivered on no obvious occasion to “banking industry representatives in Wellington” –  and the second by Toby Fiennes, formerly head of supervision (operations and policy) but now reduced to Head of Financial System Policy Analysis, at one of those commercial training ventures that are always keen to have (free) speakers from places like the Bank.

Bascand and Fiennes have often been among the better people in the upper reaches of the Reserve Bank.  I’ve been on record suggesting –  before the appointment and since –  that Bascand, if not ideal, would have been a better appointee as Governor.  His speeches have typically been quite materially better than those of his senior management colleagues –  more akin to what we see from people at Deputy Governor level in other advanced country central banks –  although that is true more of his speeches on economic topics than those on banking and financial stability.    Perhaps that isn’t surprising –  his background was in economics, and he had no background in financial stability or regulation until he took up something like his current job three or four years ago.

In this post I want to focus mostly on Bascand’s speech.  He is the more senior figure and is across all the functions of the Bank –  including apparently enjoying the confidence of the Minister as a member of the statutory Monetary Policy Committee.   And if Fiennes’s speech raises one or two points, Bascand’s is really quite egregious in places.

As befits one of Orr’s deputies, the speech pays due obeisance to the public sector employees’ campaign to change the name of the country.     The title?  “Banking the economy in post-COVID Aotearoa”.    As it happens, they the drop one more “Aotearoa” into the first page before reverting, almost without exception, to “New Zealand” (actual name of the country, actual name of the Reserve Bank of New Zealand) for the rest of the speech.

The bottom line message of the speech, however, seemed to be an injunction to banks to lend more.  So much so that, as per the title of this post, one was left wondering why if Messrs Orr and Bascand know so well what the profitable risk-adjusted opportunities are they don’t step down from their secure and quite highly-paid public sector perches and start a bank, or at least offer their services to the credit and risk departments of some existing insurgent bank.

It starts on the first page

In the face of these challenges, the banking sector could choose to hunker down and seek to ride out the storm until the good times roll again. Or, the banking system could continue to step up and play a crucial part in supporting New Zealand’s economic recovery and maximise its potential competitive advantage of relationship lending and customer information. …..

Maintaining institutional resilience while continuing to serve customers in an uncertain environment will demand expertise, courage and an unwavering belief that the people and businesses of Aotearoa will find a way to come out of these challenges.

In periods of extreme uncertainty, isn’t the rational –  and prudent – response of most people to “hunker down”?   And this is an environment of really quite extreme uncertainty –  a point I’m sure we will hear emphasised (again) by Orr and Bascand next week when they put their monetary policy hats on and deliver the Monetary Policy Statement.

But here –  playing with other peoples’ money – they want bank managers to ride blindly –  but “courageously”-  into the cannon fire, as if they (Orr and Bascand) either know better than the shareholders what is in those shareholders’ interests, or just don’t care.   And it is pretty rich coming from people who, with their monetary policy hat on (the tool actually designed to support recoveries) are doing almost nothing.

It is really remarkable for the lack of nuance and subtlety.  I scrawled in the margin against that first paragraph “presumably some mix?”     I doubt there has ever been a market-oriented banking system that-  in a severe downturn – has ever either called in every loan possible at the first sign of trouble, or rushed out boldly to encourage a wide range of borrowers to take more credit.    But there is nothing of this in Bascand’s speech, nothing either about how serious downturns should prompt both lenders and borrowers to reassess the assumptions they were working on, in turn prompting greater caution –  the more so, the more uncertain the path ahead.     Thus it is fine for central bankers to fling out rhetoric about “unwavering belief”, but no one knows which forward path the economy will actually take, how long it will take to get securely on that path, or what crevices there might yet be along the road.  It will make quite a difference to plenty of credit assessments –  whether for existing debt, or those interested in taking on new debt (around many of whom there may be adverse selection risks).

A bit later on there is an entire section of the speech on “Reserve Bank actions to support bank lending”.    It is about as thin.

For example, we get overblown claims like this

Cash flow and confidence became key to New Zealand’s financial stability.

I know “cash flow and confidence” was a mantra of the Governor’s but –  and as the Bank itself would tell us any other time –  the financial system’s soundness was much greater than implied by this assertion of Bascand’s, reinforced a sentence later when he tries to claim that various initiatives had “kept the financial system stable”.   These measures, apparently, included the small cut in the OCR (virtually no change in real terms), whatever the LSAP did to long-term rates, and a list of other regulatory measures which –  useful as most may have been –  will have done little or nothing to “keep the financial system stable”.   System stability is mostly about disciplined lending in the good times.  All evidence suggests –  and other Reserve Bank commentary suggests they agree –  we had that.  One of the risks at present is that if anyone in the banks paid much heed to the Reserve Bank’s rhetoric, those lending standards could be considerably debauched now.

Bascand goes on, being really rather self-congratulatory

Taken together – and without being too self-congratulatory – these initiatives have had a significant impact on supporting the short-term financial needs of households and businesses. This was important to limit failures of businesses with good long-term income prospects, and prevent mortgage defaults and foreclosures for borrowers facing temporary decreases in income.

All this without a shred of evidence to support his claims to have made much difference at all.   In this Bascand world, banks would have been rushing into mortgagee sales, closing businesses galore, without any regard at all for longer-term relationship prospects etc, if it hadn’t been for the Reserve Bank.    It is the same spin we used to get from the Governor, and the same lack of evidence.     We’ve had fairly sound and well-managed banks for 100 years or more –  recall that the closest to a bank failure in the immediate post-liberalisation period were two government-owned entities-  but the Governor and his Deputy believe that they are the hope and salvation.

Bascand goes on to talk threateningly about banks retaining their “social licence to operate” –  if there is such a thing, it is really no business of a central bank charged only with prudential supervision of banks.  And then we get to what seems to be the climax of his lecture on lending

But a key determinant of the success of New Zealand’s economic recovery to come will be the willingness of banks to lend to productive, job-rich sectors of the economy so that we can collectively take advantage of New Zealand’s enviable position of having eliminated community transmission. Now is the time for banks to prudently drawdown on their buffers to support their customers. Shareholders will have to be patient for longer-term payoffs, but this forward-thinking, long-term approach will stand bank customers, banks, shareholders, the financial system and Aotearoa in the best position.

Given banks are anticipating a deterioration of their loan portfolios, hunkering down and tightening lending standards may seem to them to be the optimal response to perceived increased risk. However, given banks dominant role in New Zealand’s financial system a synchronised lending contraction across the banking sector would risk a ‘credit crunch’ amplifying the economic downturn (Figure D). Therefore ultimately it is in banks’ own interest to maintain the flow of credit and contribute to the long-term stability of the banking system by preventing large scale borrower defaults and disorderly corrections in asset markets.

There is so much problematic about this it is difficult to know where to start.  There is. for example, the small point that highly productive sectors tend –  almost by definition, and it is a good thing –  not to be ‘job rich”.  For the rest, as noted earlier, you get the impression that people with no experience in banking at all –  or indeed in Bascand’s case any in business at all –  are best-placed to tell private businesses and their shareholders what is in their own best interests.  Based on what evidence, what analysis?   And isn’t it all rather lacking in nuance, since few of these sorts of decisions are ever all or nothing.   And despite the wider economic responsibilities of the Bank, it isn’t even obvious where Bascand thinks these profitable creditworthy projects are to be found –  or how he could be confident of his judgement even if he and his staff could identify some.     Surely a more general answer would be that private agents (banks and other firms and households) are best placed to make their own assessments about choices and risks, but that macro policy (and perhaps now public health policy) can provide the best possible supporting climate for those private decisions to be made.  As it is, even later in this speech Bascand concedes that “our economic challenges remain severe”.   Not exactly a climate for much private sector risk-taking, whether by banks, firms or households.  But it might, for example, be time for a monetary policy central bank to start doing its job.

Risking other peoples’ money was the theme of that bit of the speech. But Bascand also took the opportunity to comment on the Governor’s bank capital review –  the one that will require a huge increase in bank capital to support the existing level of business.   The one that banks, and many outside experts –  not, contrary to the Governor’s claims, just those paid by banks –  warned would lead to some credit contraction, some disintermediation from the banking system, and some higher costs.

Likewise, capital metrics were strong going into this crisis, boosted by Basel III regulatory requirements, a number of years of favourable economic performance, and preparations for the impending implementation of the Reserve Bank’s Capital Review. The COVID-19 crisis has underscored the importance of banks having sound capital buffers; increased provisions for expected credit losses have, so far, been easily absorbed by existing capital buffers. Healthy capital buffers are necessary not only to ensure banks survive crises, but to ensure banks survive ‘well’ and are able to continue to lend to creditworthy borrowers throughout a downturn. The Reserve Bank remains committed to fully implementing the outcomes of the Capital Review. However, as we indicated this past March, this will be delayed one year and not occur until July 20212. We expect to communicate further on the implementation of the Capital Review by the end of the year.

There are really two main points here.  The first is the claim –  that Orr has made repeatedly –  that banks were well-positioned this year partly because they had been acting preemptively to raise more capital in anticipation of the higher capital requirements, which were supposed to be phased in from this year.  Victoria University banking academic Martien Lubberink has addressed directly this claim in a post on his blog.   As everyone recognises, capital ratios have increased since prior to the previous (2008/09) recession, under the influence of some mix of regulatory and market/ratings agency pressure.  But here is Martien’s chart showing total capital ratios for several of main banks operating here for the period, in early 2018, since Orr took office.

total capital ratios

He has another chart showing core (CET1) capital ratios, which also suggests no lift in capital ratios over the last couple of years.

The Bank has been attempting a difficult balancing act: trying to assure us (of what is almost certainly true) that the local banks are very sound, but at the same time trying to get cover for the scheduled large increase in capital requirements.  There would be some reconciliation if banks had been raising actual capital in anticipation of those new requirements but….the Bank’s own data, the useful dashboard, confirms that it just isn’t so.    It is just spin, it is a lot worse than that.

Oh, and note that Bascand reaffirms that the Bank is still committed to moving ahead with the higher capital requirements –  even though it expects the banks to come through the current severe test just fine.    The implementation was delayed by a year back in March, but that is now five months ago, and July 2021 really isn’t far away –  particularly in a climate of heightened uncertainty, including about likely loan losses out of the current recession.  So on the one hand the Deputy Governor and his boss are out their urging banks –  almost suggesting it is some sort of moral duty –  to lend more freely, and on the other hand they are still pushing ahead with their plans to hugely increase actual capital requirements, something even their own modelling suggested would have adverse transitional effects in more-normal times. (Oh, and did I mention all while doing nothing to actually lower real interest rates across the economy, in ways that might improve servicing capacity on current debt, and provide a boost to aggregate demand and –  over time – to credit demand.)

And here I want to refer to the other speech, by Toby Fiennes; in particular this extract (emphasis added)

At the end of May we released our six monthly Financial Stability Report (FSR) which assesses the health of the financial system. This assessment presents particular challenges during more volatile and uncertain times; we want to report openly and fully about the state of financial stability and the risks that we see, but we have to be mindful of the risk of exacerbating the situation, and further undermining confidence.

We used stress tests to inform ourselves and our audience about banks’ and insurers’ resilience. We developed two scenarios to test the banking system, which had similar economic projections to the Treasury’s COVID-19 scenarios 4. Results from our modelling indicated banks would be able to maintain capital above their minimum capital requirements under a scenario where unemployment increased to over 13 percent and house prices fell by a third. However, a second more severe scenario showed the limits of bank resilience. Under this scenario with unemployment of over 18 percent and house prices falling by half, banks would likely fall below minimum capital requirements without significant mitigating actions.

I should note that bank capital buffers have increased significantly in the past decade, in response to actual and forthcoming increases in regulatory requirements; therefore the banks entered the Covid-19 pandemic in a sound position. Additionally, since early April the Reserve Bank has prohibited banks from paying dividends to their shareholders, which further supported the capital positions of New Zealand banks. This gives banks headroom to continue to supply credit, which will play a large role in supporting the economic recovery.

Note that he repeats the same outright misrepresentation –  the bolded phrase –  as his boss.

But it was the rest I was more interested in.  He highlights again the updated stress tests reported in the FSR.    I might be more pessimistic than most economists, so I reckon the 13 per cent unemployment scenario sounds like a good and demanding test.  As with previous similar RB stress tests, Fiennes reports that the banks come through just fine –  at least so long as they don’t markedly lower their lending standards in response to regulatory pressure.  But again –  as was argued during the capital review debates last year –  if the system is resilent to such an adverse shock before capital ratios are raised, what possible credible case can their be for markedly further raising capital requirements?  Especially when the Bank is trying to twist banks’ arms to maintain/increase new lending?   There is just no apparent rigour or coherence to the Bank’s position.

Much the same goes for the line about prohibiting dividends.  I didn’t have too much problem with the temporary ban when it was announced  – on good prudential grounds that in the very unlikely event that our banks got into serious trouble we didn’t want resources being transferred back to the parent, leaving larger losses for New Zealand creditors and taxpayers.   But it is just bizarre to suppose that banning banks from paying dividends will increase their willingness to make new good loans.  If anything, it is only likely to reinforce unease about doing business in New Zealand (at the margin), and since credit demand has fallen notably –  a point Bascand acknowledges-  and actual capital ratios were well above current regulatory minima it isn’t obvious that some shortage of capital in the New Zealand business was likely to be a big influence on lending policy just now.  The suggestion that suspending dividends will “play a large role in supporting the economic recovery” is without support, and if seriously intended is almost laughable.

There is more in Bascand’s speech I could devote space to.   At least what I’ve covered up to here is within the Bank’s statutory mandate re the soundness of the financial system as a whole.    The same can’t be said for this stuff, pursuing the Governor’s personal political agendas on issues where there may be real issues, but they have nothing to do with the Bank’s mandate or powers.

Financial inclusion has become an increasingly important part of the Reserve Bank’s policy agenda in our capacity as a Council of Financial Regulator member and our own Te Ao Māori strategy. The Strategy helps to guide the bank in understanding the unique prospects of the Māori economy, how Māori businesses operate, and what lessons the Bank may learn in setting systemically-important policy with this view in mind. An important part of the Strategy is making clearer the unintended consequences of our policies on unique economies like the Māori economy.

Or one of the Governor’s favourites, climate change.  Here I will just quote one line from the speech

Managing major and systemic risks to the economy, such as climate change, sits squarely within our core mandates.

It simply doesn’t    The Bank has an important, but narrow, statutory role and set of powers around the soundness of the financial system.  Climate change(and policy responses to it) may well represent a significant threat to our economy, our way of life, and so on. But unless –  and even then only to the extent –  it poses a threat to financial stability, not taken account of by private borrowers and lenders, it is really no particular business of the Bank.  Any more than other serious risks –  management of Covid itself as just a contemporary example –  are anything much to do with the Bank.

But the Governor has personal ideological agendas to pursue, and (ab)uses public resources and staff to pursue them.

Standing back from the Bascand speech, what is really rather striking –  and disappointing –  is the lack of an overall framework, the lack of any real rigour or discipline, and a lack of straightforwardness.  Clearly his boss has a cause –  more lending –  to pursue, but like Orr Bascand offers no reason to suppose, or evidence to support the implication, that banks are not acting prudently or appropriately.  And never seriously engages with the implication that if the banking system is sound now and has plenty of headroom, why would it make sense for the Bank to be imposing big new capital requirements, which will assuredly be reducing the willingness of banks to lend.

But, as I noted earlier, if the opportunities are so real no one is stopping Orr and Bascand leaving their safe official perches and starting –  or joining –  a risk-taking bank.  A good supervisor would, however, be keeping a very close eye on any bank riding courageously into the cannon fire –  of extreme economic uncertainty, severe challenges –  in the way Bascand appears to suggest.

Perhaps better if Orr and Bascand turned their minds, and attention, to using monetary policy in the way it was designed to be used, instead of sitting idly by six months into a severe economic shock, with real interest rates barely changed, and the real exchange rate not changed at all.

 

 

 

 

The illegitimate central bank

A standard proposition in the literature on delegating public powers to unelected (agents or) agencies in a free and democratic society is that such agencies should operate in a way that leaves no basis for any reasonable person to suspect that those running the agencies are using their platform, and the associated public resources and powers, for any purpose other than the very specific ones Parliament has provided those powers/resources for.   Abuses and departures from this norm need not –  and fortunately in New Zealand rarely do –  involve officeholders seeking to personally enrich themselves or their families.  Here it is more likely to take the form of using the platform/powers provided for specific narrow purposes to advance the personal ideological and policy preferences of top managers/Board in quite unrelated areas.

The fact that those individuals, in abusing their powers, do so believing –  probably quite sincerely –  that they are doing so in some conception of the “public interest” is wholly beside the point.    We have elections, and a wider of contest of ideas in the public square, to advance causes.   The fact that those individuals might be advancing the views of the government of the day is not just beside the point, but getting towards the heart of it.   The whole case – the only real case –  for delegating substantive policymaking powers (as distinct from narrow implementation/operations) rests with the notions that (a) the policy in question is separable from the rest of policy, and (b) those charged with it won’t be pursuing partisan or ideological agendas.  If not, we might as well have elected ministers make decisions (we can kick them out) and keep the agencies quietly in the backroom as advisers and implementers.

Central banks –  or rather central bankers – have long been at risk of falling into this trap, particularly as more of them were granted operational autonomy around monetary policy.   Rightly or wrongly, people tend to pay quite a bit of attention to central banks (probably rightly given how much difference their monetary policy actions can make to economic outcomes over, say, a 1 to 3 year horizon).   When they speak, the idea has been their words on monetary policy should influence expectations and behaviour –  on the presumption that the speaker has no agenda other than the narrow one s/he is charged with.      Central banks are also often supposed to be a repository of expertise and wisdom.   Sadly, even in the narrow specialist areas central banks have formal responsibility for that, too often neither has really been true (that isn’t just a comment about New Zealand).  But central banks do tend to have lots of resources, and provide cheap copy for media (literally, presumably, in the case of op-eds like the Governor’s one that I wrote about earlier this week).

But if your central bankers are using their position to advance personal ideological or partisan agendas –  or are perceived to be doing so, even if that is not their conscious intent – the legitimacy and authority of the institution itself will be damaged.  And if you believe that gubernatorial words can usefully shape expectations, it is likely that the effectiveness of the institution will be eroded as well.   A Labour voter will be less inclined to give serious heed to a Governor suspected of serving National interests or ideological preferences than if they think that person is only interested in doing his/her specific job.  And vice versa if the roles are reversed.    And if a Governor is perceived to be advancing partisan interests, the effectiveness of that Governor when operating under a government of a different political stripe is also likely to be impeded.

Wise people who have been “inside the temple” recognise the issue and risks.   Academic and former Bank of England MPC member Willem Buiter has written about it, as has former Fed vice-chair Alan Blinder.  More recently, former Bank of England Deputy Governor Paul Tucker devoted an entire book to the issues around Unelected Power.   It has also been a theme of mine.

Don Brash was Governor of the Reserve Bank for a long time.  Before coming to the Bank he’d been an unsuccessful National Party candidate.   After he left the Bank he went straight into Parliament as a National Party MP and later was briefly the ACT leader.    His interests always seemed more in ideas/policies than in specific parties, but there wasn’t much doubt about where on the spectrum of policy preferences he stood.   In some quarters, even if he never said anything much on topics outside his remit, that left a residue of mistrust.  I doubt Jim Anderton, or perhaps even Winston Peters, even really saw him as a neutral technocratic figure.  But probably where Don really stepped over the mark was quite late in his time at the Reserve Bank, with his speech to the 2001 Knowledge Wave conference. (I wrote about it here.)  The details don’t matter now, but it saw the unelected Governor use his position to champion policies that bore no relation to matters he was responsible for.  As it happens, in many/most cases they were quite at odds with the views of the government of the day, but it should have been just as unacceptable had he been championing preferences of that particular government.    Senior staff, including me, advised him against it –  and the version delivered was materially less out of line than the draft –  in many cases, including mine, even if we happened to personally agree with the substance of what the Governor was saying.   Fortunately Don welcomed challenge/dissent/debate.

One can debate the strengths and weaknesses and records of the two subsequent Governors. I imagine that both were fairly sympathetic to the governments of the day when they were first appointed, but there was never much ground to suppose that either was using his office to openly advance his personal ideological or political agendas.

With the current Governor, now almost halfway through his five year term,  almost from the first he has consistently used his office to openly champion causes for which he has no responsibility, even as his actual conduct in the things he is responsible for leaves a great deal to be desired.     If the Governor presided over consistently excellent, ahead of the game, monetary policy, if his radical policy initiatives around banking regulation had been well-grounded and authoritative, perhaps the wider abuse of office would be a little less worrying –  a worrying foible perhaps, but  arguably incidental to the success of the stewardship of the things he was responsible for.  It would still be worrying –  as it would if, for example, the Chief Justice or the Police Commissioner were openly using their offices to advance their personal political agendas –  but underlying  excellence tends to buy some grudging respect.

Sadly, that isn’t the Orr Reserve Bank.  It is as if the Governor really isn’t very interested in his core functions or even in building strong core capability beneath him.   Transparency and accountability around core responsibilities also seem to be alien concepts. Openness to debate and challenge –  whether inside or outside the Bank –  on core responsibilities also seem alien to him.  And, on the other hand, is very interested in using his powerful position to champion all sorts of issues dear to his own heart, and that of his ideological allies.  I don’t suppose the Governor necessarily sees himself as championing Labour’s interests or that of the Green Party (the two he would seem to have most in common with) but that is the effect when he weighs in on one topic after another, never in much depth, but consistently advancing those personal agendas in a quite undisciplined way.

There has been example after example of this sort of thing going back to when he first took office in 2018, whether it was views on agriculture, on infrastructure, on climate change, on fiscal policy, on Maori economic development, alleged short-termism or whatever.  It remains notable just how few, and unserious, have been the Governor’s speeches on core responsibilities, and how many his speeches and commentaries on these other issues.  It flows down the organisation.  We had another example yesterday.

The Bank from time to time sends out newsletters to those signed up to its email list.  Yesterday’s one was from one of Orr’s deputy chief executives, the Assistant Governor Simone Robbers (she of the 17 person communications department, among other bits of her domain).

RB corporate 2

The full text of the email is here.  It was sent out under the heading “Our priorities and key progress on our mahi” (“mahi” apparently means work, but whether in Maori it carries a sense of responsibilities or of self-chosen agendas isn’t clear to me).   Among the Bank’s self-chosen roles appears to be the campaign to change the name of the country, given the repeated use of “Aotearoa” for New Zealand.

The newsletter isn’t long but it is quite telling.

It begins with this bumpf

While a new ‘normal’ is emerging in New Zealand after the initial response to the COVID-19 pandemic, the pandemic continues to have significant and ongoing consequences across the globe. We are actively engaging with our Central Banking colleagues around the world to share policy advice and insights. As explained in this recent op-ed from Governor Adrian Orr, it is clear from our discussions that the COVID-19 health shock is impacting nations in similar ways, however, the economic and policy impacts differ greatly.

I wrote about that content-lite zone on Monday.

Here in Aotearoa, although we have successfully contained the virus, and many parts of the economy are back up and running, households and businesses face uncertain times and potential further disruption as the full economic impacts of the pandemic become evident.

Name of the country aside, I guess it is unexceptional, but also rather empty.  She goes on

We at the Reserve Bank, Te Pūtea Matua, need to keep working together with all of Government and industry, just like we did at the start of the pandemic, to respond to the challenges. We need to be prepared to manage our economic recovery well, while not losing sight of delivering for the long-term interests of all those in Aotearoa.

These “long-term interests” –  whatever they are –  are simply not something the Reserve Bank has responsibility for.  It seems to be cover dreamed up by the Governor to weigh in on anything he chooses.

And that is it on anything even close to the core responsibilities of the Bank.   Inflation –  let alone inflation expectations – doesn’t get a mention at all.  Nor does (un)employment, that the Bank was so keen on talking about last year.  Nor, perhaps to no one’s surprise, does the utter failure to have had the banking system positioned for negative interest rates –  supposed now to be work in progress, in a highly core area, but no mention here whatever.  Instead, we learn what the Bank has been devoting its energies to

Alongside supporting the economy and all New Zealanders by providing liquidity to banks and coordinating monetary and fiscal policy settings, we have also continued to deliver on our commitments including:

  • Jointly working with The Treasury to see the new Reserve Bank of New Zealand Bill introduced to Parliament
  • Publishing the Statement of Intent (SOI) for 2020-2023 and further embedding our Tāne Mahuta narrative
  • Agreeing to a new five-year Funding Agreement to ensure our long term commitments are met
  • Progressing our Te Ao Māori strategy through our economic research and proactive outreach to regulated entities, Government and Māori partners
  • Working closely with our fellow Council of Financial Regulators (CoFR) members to manage and co-ordinate regulatory work to enable the financial sector to focus on their customers.

During this time, some of our initiatives have received sharper focus as we look to respond to COVID-19 challenges. For example, the financial inclusion issues that are being faced by everyday New Zealanders. We congratulate the banking sector for their leadership in recently becoming the first living wage accredited industry in New Zealand.  It is also a good time to deepen our collective understanding of climate change risk in the financial sector, and ensuring we are all taking a long term and sustainable approach to economic recovery and future resilience.

We are using this period to consider what is ahead and what steps we need to take so we can live up to our vision of being ‘A Great Team and Best Central Bank’ and deliver as kaitiaki (caretaker) against the commitments we made in our SOI.

Actually, the Bank doesn’t “coordinate monetary and fiscal settings”: the Minister of Finance sets the Bank a target, and the government sets fiscal policy, and then the Bank (MPC) is just charged with getting on and doing its monetary policy job, given all of that.

But even set that to one side, what do we see prioritised?    Well, there is the tree god nonsense that the Governor seems so fond of.   Perhaps it does little harm –  although as I’ve unpicked it in the past it is often actively misleading –  but right up there at number two on the list?    Then, of course, we get the Bank’s Maori strategy –  something that is not clear is necessary at all (in a wholesale-focused organisation) –  or which has generated anything of substance (and no research, despite the claims here) in support of the Bank’s actual statutory responsibilities.  But it advances the Governor’s personal whims and preferences I guess.

Then we move off the bullet point list and on to the next paragraph, and even more highly questionable stuff.  There is that line about “financial inclusion” which, whatever it means, clearly has nothing whatever to do with the Bank’s twin responsibilities for financial stability and macroeconomic stabilisation.   There might be some worthy issues there, at least on some reckonings, but they are nothing to do with the Bank.

Then –  and this was the one that caught my eye –  there is the weird reference to the banking sector and the so-called “living wage”.    I’m sure the Green Party must love that settlement, and whatever deals banks want to sign up to for their staff is really their affair, but what has it to do with a prudential regulator, the Reserve Bank –  which is not, repeat, some general regulator of all banking sector activities?    I suppose we should be grateful not to see the Bank praising the Kiwibank decision to refuse banking facilities to lawful and creditworthy businesses doing business that the Governor profoundly disapproves of.

But perhaps that is encompassed by the next sentence.

“It is also a good time to deepen our collective understanding of climate change risk in the financial sector”

Not clear why it is a “good time” (one might have supposed a higher priority now might be, for example, understanding the risks to the financial sector from a prolonged downturn and limited monetary policy response, or to have understood better the issues and options around macro-stabilisation and the (current) effective lower bound on nominal interest rates).  But, for what it is worth, I think we can pretty easily conclude that the risks of climate change to the New Zealand financial sector are vanishingly small.  But acknowledging that might make the Governor’s position – endlessly weighing in on these personal causes –  seem more obviously inappropriate.

And who knows what lurks beneath that

ensuring we are all taking a long term and sustainable approach to economic recovery and future resilience

It isn’t even clear whether the “we” is supposed to refer to the Reserve Bank or the rest of us.  What is clear is that none of it has anything much to do with the monetary policy responsibilities of the Bank –  the bits actually to be able recovery.  Full employment, conditioned on price stability, should be what matters, but none of that gets a mention at all.

And then Robbers ends with this

We are using this period to consider what is ahead and what steps we need to take so we can live up to our vision of being ‘A Great Team and Best Central Bank’ and deliver as kaitiaki (caretaker) against the commitments we made in our SOI.

As I noted earlier in the week there was a speech on this topic a month ago.  It was startlingly empty, devoid of any real sense of (a) why this goal made sense, (b) how the Bank, and those it works for, might know if it was achieving the goal, or (c) what steps management was taking to deliver on the goal.  When he delivered the speech, I noted down a strange comment from the Governor about how it is “therapeutic” to be able to think about these issues.  Even at the time it struck me as a luxury most private businesses wouldn’t have, and one one might not expect a central bank grappling with a deep economic downturn, falling inflation expectations, rising unemployment etc  to have either, at least if it were doing its job.  Then again, the Bank has a big budget and no real accountability so I guess the Governor can simply pursue his whims.

And that is about it.

In a way none of it was that surprising.  This is the Reserve Bank that Orr has been creating in his own image: one that simply isn’t doing its job well, doesn’t have its eye on the ball, shows no sign of thinking deeply about the core challenges it should be addressing….all while pursuing the personal ideological agendas of the Governor (and his handpicked senior management –  most probably you don’t get or keep a job on the top team –  or perhaps further down the organisation either- unless you are all-in with his alternative, non-statutory agenda).  We deserve a lot better, the economy needs more, but there is no sign that the Bank’s Board –  paid to hold the Governor to account –  or the Minister of Finance care.  It is just another marker on the journey of the degrading of the capability of our economic institutions, and of the legitimacy and authority of our autonomous central bank.

There was one final thing I noticed deep down the email (which had various links to other bits and pieces).  As I’ve noted regularly, the new Monetary Policy Committee has now been in place since 1 April last year.  In that entire time, including through some of the bigger macro challenges in modern times, we’ve heard not a word from any of the three external members of the Committee, the ones carefully selected to not be awkward for the Governor, to meet the government’s gender quota, and to exclude –  consciously and deliberately – anyone with current monetary policy or macro expertise.  But now we have.  There is a couple of minute Youtube clip where we see and hear from the externals.   Not, of course, that they say anything of substance, anything about actual monetary policy, inflation, employment or anything.  But they wax lyrical about a wonderful collegial process, and what a learning opportunity has been –  and about how they don’t pay much attention to things for six weeks and then get together, with no undue influence from anyone.  No doubt they are all deeply sincere, but it did have a bit of sense of a hostage video, produced to show that the Committee really exists. It should assuage no concerns at all about the structure, the people, the lack of transparency, and the lack of accountability.

Not expecting enough inflation

I’ve been banging on about the decline in inflation expectations, and the apparent indifference of the Reserve Bank to that, for most of this year.

It was different late last year.  Then, the Bank was making the case –  at least after the event –  for easing monetary policy fairly aggressively with one of the considerations being avoiding the risk of inflation expectations settling lower than was really consistent with the target.  Then –  last year –  the Governor went so far as to suggest that he would prefer to be in a situation where hindsight proved that they had overdone things a little, with expectations rising, and needing to think about raising the OCR again.   They were totally conventional sorts of line for central bankers to enunciate, especially if they were getting uneasy about approaching the conventional limits of the OCR.  I commended the Bank at the time.

This year the Bank –  Governor and MPC –  seem to have given up again, just when it matters; amid the most severe economic downturn in ages, amid significant actual falls in inflation expectations.  As a reminder, unless steps have been taken to remove the effective lower bound on nominal interest rates (and that has not been done anywhere yet) then the lower inflation expectations are, all else equal, the less monetary policy capacity there is to do the core macro-stabilisation job of monetary policy.   And that risks being a self-reinforcing dynamic.

There is no single or ideal measure of inflation expectations.  There are different classes of people/firms for whom such expectations matter, and different time horizons that matter.   Very short-term expectations get thrown around by the short-term noise (notably fluctuations in oil prices).  Very long-term expectations (a) may not matter much (since there are few very long-term nominal contracts) and (b) probably won’t tell one much about the current conduct of macro policy (whatever inflation is going to be between, say, 2045 and 2050 isn’t likely to much influenced by whatever is going on now, or those –  ministers or MPCs –  making monetary policy decisions now.

For a long time, the Reserve Bank’s preferred measure of inflation expectations was the two-year ahead measure from the Bank’s survey of the expectations of several dozen moderately-informed or expert observers.  Two years got beyond the high-frequency noise, and the survey only added questions about five and ten years expectations in 2017.

2 yr expecs july 2020

In the latest published survey expectations fall very sharply.    There will be an update on this series published next week.  I wouldn’t be surprised if there was a bit of a bounce, but I wouldn’t expect it to be large.  The Reserve Bank’s own Monetary Policy Statement will be released the following week.  Perhaps they may have become a bit more optimistic, but recall that in May their inflation outlook –  even backed by their beliefs about the efficacy of their LSAP bond purchases –  was very weak.   Two years ahead their preferred scenario had inflation just getting back up to about 1 per cent.

Now, of course, things are somewhat freer in New Zealand than they were back when those earlier surveys and forecasts were done –  perhaps even more so, sooner, than most expected back then.  On the other hand, the border restrictions remain firmly in place and the wider world economy –  which seems to get all too little comment here –  is only getting worse.   I noticed in the Dom-Post this morning that that is now the official advice of The Treasury to the Minister of Finance.

All of this is, however, known by people participating in the government bond market.  And since the New Zealand government now issues a fairly wide range of bonds, and a mix of conventional bonds and inflation-indexed bonds, we can get a timely read on the inflation rates that, if realised, would leave investors equally well off having held a conventional bond or an inflation-indexed bond (the “breakevens”).   They aren’t a formal measure of inflation expectations, and at times can be affected by extreme illiquidity events, but it is also unlikely there is no relevant information (although Reserve Bank commentary tends to act as if this data can/should be completely ignored).

For a long time, there was only a single indexed bond on issue in New Zealand.  The Bank had persuaded the government to issue them back in the mid 1990s, but then emerging budget surpluses meant issuance was discontinued.  The single indexed bond matured in February 2016.  For a long time the longest conventional bond was a 10 year maturity.  But even with all those limitations, the gap between the indexed bond yield and the Bank’s 10 year conventional bond rate looked plausibly consistent with “true” inflation expectations.  Through much of the 00s, for example, the breakeven was edging up to average about 2.5 per cent.   Recall that there was never much of the indexed bond on issue, and never much liquidity either.

Since 2012 there has been a new programme of inflation-indexed bond issuance, and there are now four maturities on issue (September 2025. 2030. 2035, and 2040).   Go back five or six years to the time when the Reserve Bank (and most the market) thought higher interest rates were in order and you find that the breakevens were close to 2 per cent.  Given that in 2012 the government had slightly reframed the Reserve Bank’s monetary policy goal to require them to focus on the target midpoint of 2 per cent, breakevens around that level were what one would have hoped to see.  And did.

After that, things started to go wrong, with the breakevens beginning to fall persistently below target.  As it happens, of course, by this time it was increasingly realised that actual core inflation was also falling below target.

But what of the more recent period?   One problem in doing this sort of analysis, if you don’t have access to a Bloomberg terminal, is that the data on the Reserve Bank website used to provide yields for the four individual inflation-indexed bonds, but only benchmark five and ten year yields for conventional bonds (ie not yields on specifically identified individual bonds).  That didn’t much over very short-term horizon –  there just aren’t that many bonds on issue –  but potentially did for slightly longer-term comparisons.  However, in the last week the Bank has started releasing daily data on yields on all the individual government bonds on issue, indexed and conventional, back to the start of 2018.  That is most welcome.  As it happens, the government has also now started issuing a conventional bond maturing in May 2041, reasonably close to the maturity of the longest inflation-indexed bond.

In this chart I’ve calculated breakevens as follows:

  • take each of the indexed bond maturity (September 2025, 2030, 2035 and 2040)
  • use conventional bonds maturing in April 2025 and May 2041, and interpolated between bonds maturity in April 2027 and April 2033, and between bonds maturing in April 2033 and April 2037 (to give implied conventional bond yield for April 2030 and April 2035)
  • calculate the difference between each indexed bond and the yield on the conventional bond with the closest maturity date.

long-term breakevens

These breakevens, or implied inflation expectations, were uncomfortably low (relative to the target) even back in 2018. Things have only got worse since then.

Not that these are not breakeven inflation rates (or expectations) for a single year –  say 2025-  in the way that survey expectations (including the RB survey) are.  They are indications about average CPI inflation over the whole period to, say, 2025.

I thought there were several things that were interesting about the chart:

  • breakevens seemed to be trending downwards (if only modestly) well before the current recession began.  That seemed pretty rational –  the growth phase (here or abroad) wasn’t likely to last forever, and it was becoming increasingly clear that central banks were likely to feel quite constrained in the next downturn,
  • the divergence between the blue line and the other two this time last year.  That was when the Reserve Bank felt obliged to cut the OCR quite bit, and to start running those lines I referred to at the start of this post about downside risks around inflation expectations.  One could interpret the subsequent closure of the gap as a mark of some credibility for the Reserve Bank.  Expectations of inflation over the next five years rose a bit, and the gap between the 2025 and later expectations closed up again.
  • the sharp decline in the breakevens, for all three maturities, beginning in March.  Some of that will have been about the extreme illiquidity event in global (and local) bond markets in mid-March (something similar happened in 2008/09), prompting various central banks, including our own, to intervene in bond markets,
  • perhaps most importantly, the substantial divergence that has now opened up between the breakevens for the period to 2025 and those for the longer maturities.  All three lines picked up to some extent after the Reserve Bank added inflation-indexed bonds to the list of assets they would buy under LSAP, but since then the breakeven for the period to 2025 has gone basically nowhere, sitting at just above 0.4 per cent per annum (compared to an inflation target over the period of 2 per cent per annum).  By contrast, the grey line is back close to 1 per cent, not that much below where it was last year.   Even these lines understate the extent of divergence, because the breakeven to 2035 includes the five years to 2025.    If we could back out an implied breakeven just for the five years from 2030 to 2035 it might be around 1.3 per cent –  still not great, still not consistent with the target, but no worse than last year.
  • to the extent one can yet read anything into the 20 year numbers, and implied breakeven inflation rate for 2035 to 2040 would be higher still, although still below 2 per cent.

There are pluses and minus to be taken from all this.

The positive feature is that if one looks 15 years ahead, markets don’t expect New Zealand to deliver on a 2 per cent inflation target, but their (implied) view on that is no worse now than it was last year.  That isn’t great but it is better than the alternative.   On the other hand, it tells you almost nothing about the current conduct of monetary policy, since (a) current monetary policy won’t be affecting inflation outcomes 15 years hence, and (b) almost certainly, neither will the current key players (Orr or Robertson).

The negative feature is just how weak those five-year average expectations are, averaging around 0.4 per cent, well below the bottom of the target range, let alone the 2 per cent midpoint the MPC is supposed to focus on.   And this is the horizon that current monetary policy is affecting, and which the current key players (Orr, Robertson, and the MPC) will be affecting.    And these breakevens are down so far this year that real interest rates have not fallen much at all.   Here, for example, is the real yield on the 2025 inflation-indexed bond.

2025 real yield

No change over a year.  Or even if there was something odd going on at the end of July last year, no material change since (say) February this year, even as a severe recession and deflationary shock hit New Zealand and the world.  Even with the Reserve Bank intervening to support this market.   That is a pretty damning commentary on monetary policy simply not doing its job –  real yields over a five year horizon will always be heavily influenced by expected changes in short-term real policy rates.

As a final cautionary note, the deflationary shock was pretty much global in its effect, but here is the five year breakeven chart for the United States since the start of 2018.

US 5 yr

Not only can you see how much closer the breakeven has been to the Fed’s target for the inflation rate but, more importantly in the current context, how strongly the five-year breakeven has rebounded since March.   It is a very different picture to what we’ve seen in New Zealand.   There are some differences: the respective inflation-indexed bonds are slightly differently specified, and the Fed is not buying indexed bonds (unlike the RBNZ). But all else equal, the fact that the RB is buying indexed bonds and the Fed is not should be pushing New Zealand breakevens up relative to those in the US.  [UPDATE: A reader  draws my attention to the fact that the Fed is buying TIPS.]

The Governor and the MPC seem to have been all too keen to abdicate responsibility in this crisis, deferring almost everything to fiscal policy and simply refusing to cut the OCR further.  How much fiscal stimulus to do is a political matter outside the Bank’s control, but however much the government has done –  and it will soon be doing less, as the wage subsidy ends –  it is increasingly clear that the Reserve Bank is simply not doing enough.  Low and falling inflation expectations are inappropriate, inconsistent with the mandate, at the best of times, but far more troubling when central banks are unwilling to take official short-term rates deeply negative.  The Governor and his colleagues seemed to know that last year when it wasn’t much of an issue, but to have forgotten –  or simply chosen to ignore it –  this year.  It is as if they are simply indifferent to the (un)employment consequences.  That shouldn’t be acceptable, including to the Bank’s Board and the Minister of Finance who are responsible to us for the MPC’s stewardship.

 

Empty vessels

A month or so ago I went along to hear the Governor of the Reserve Bank speak at the Law and Economics Association in Wellington.   LEANZ is a pretty geeky sort of organisation (or attracts pretty geeky sorts of people) and against the background it was quite surprising how little substance there was to the Governor’s speech, which was billed as “Delivering on Great and Best” at the Reserve Bank.  That is the Governor’s grandiose vision: his predecessor claimed to want the Bank to be the “best small central bank” in the world (although did little or nothing about it, including no relevant benchmarking) but Orr takes that a giant step further and claims to want to be the best central bank in the world.   You might think that harmless –  always good to aim high etc –  but in a small country, not very prosperous, it isn’t clear that it is even a sensible goal, and in practice it seems to function mainly as a way of distracting attention from the manifest inadequacies of the Bank, especially under the stewardship of Orr.

I don’t want to spend any time on last month’s speech –  there really isn’t much there –  but it came to mind when I read yet another empty piece from the Governor yesterday, this time a column in the Sunday Star-Times. I don’t suppose economists were the target audience, but a couple of non-economists I talked it over with seemed to have much the same reaction to it that I did.

It is framed as some sort of disclosure of the inner secrets of the central bankers’ temples.

As New Zealand’s Reserve Bank we hear directly ‘from the horse’s mouth’ what our global colleagues are experiencing and doing.

Thing is, there is this new-fangled invention called the internet, and we too can read all about the activities of other central banks, the speeches of their bosses, the minutes of their decision-making committees.    In New Zealand’s case, of course, there has been not a single serious speech on monetary policy or the economic situation from the Governor or any other member of the MPC since they finally woke up to the economic threat Covid, and associated responses (public and private), posed.  But that generally isn’t the case in other advanced countries.   Check out, just as examples, the websites of the Fed, the ECB, the RBA, or the Bank of England.   We can read them, or media reports of them, for ourselves.

But, setting that to one side for the moment, what fresh insights does the Governor have for us from his chats with his central banking peers abroad?

From our most recent interactions it is clear that the common and (almost) simultaneous Covid-19 health shock is impacting nations in similar ways, but the policy reactions and outlooks ahead vary greatly.

Hard to know what the first part of this is actually supposed to mean –  after all, the health risk might have been similar across countries, but the actual experience of the “health shock” varied, and varies still, very greatly.  And as for the second half of the sentence, it isn’t clear whether he is talking about economic policy responses, public health responses or what, let alone which outlook –  economic or virus – he is talking about.  It seems to be the economic side of things, judging from the next sentence.

The differences are in large part explained by the initial health of their economy, the underlying drivers of economic activity, and the degree of success in containing Covid-19.

But then it is not clear at all what he is basing anything of this on.   Some countries have a rich array of high frequency official data, in some cases even monthly GDP data.  Here in New Zealand, our latest official labour market relates to the March quarter.     We’ll get an update on that –  for the whole of a quarter centred back in mid-May –  early next month, but we’ll have no read at all on GDP for that June quarter until mid-September.  Not that long ago there was a general sense that our June quarter GDP might have fallen quite a bit further than that in most other advanced countries –  sufficiently onerous (rightly or wrongly) was our “lockdown” – but we are still flying blind even on that.

The column appears to be some sort of effort to suggest the New Zealand economy is now doing (relatively) well, but Orr cites no data to support that implication, unsurprisingly perhaps as there really is little such data.

He goes on

The more robust an economy was when first impacted by the pandemic, the more options and flexibility its local policymakers had to respond.

I guess it must be some sort of self-reinforcing conventional wisdom among economic policy elites, but where is the evidence for the claim?   Almost every advanced country has done very little very monetary policy and a great deal with fiscal policy –  whether it is the highly indebted US and UK, or countries with little public debt like New Zealand and Australia.

Orr continues

Amongst this ‘robust’ group, the initial policy actions have been very similar.

They generally included: ensuring credit and cash is cheap and accessible, increased government spending and investment, support for employers to pay wages and access credit, and additional welfare payments.

Although, of course, as already noted the typical central bank –  including the RBNZ –  has done very little that matters (lots of sound and fury though), and although I haven’t checked I’d surprised if credit conditions haven’t tightened in other countries too, as they have in New Zealand.   And what Orr doesn’t seem to want you to reflect on is that most of the sorts of measures he lists are palliatives: there is place for those, but they do little or nothing to get economies promptly back towards full employment.    That is/was the job of monetary policy, but central banks –  including our MPC –  seem to have abdicated that responsibility, with politicians (including ours) apparently content to let them.

However, the economic impact has varied significantly, especially across sectors of each economy.

The more reliant a nation is on primary production (especially food export revenue) and the manufacture of durable goods (especially e-technology), the better it has fared.

By contrast, the more reliant a nation is on the provision of face-to-face services (e.g., tourism and hospitality) the bigger their fall.

There seems to be no evidence for the loose claims in the second sentence.  At least in the OECD there is really only one country heavily reliant on “food export revenue”, and we just don’t have any data yet on how overall economic performance is doing, let alone how it will do as, for example, the wage subsidy ends.   (Oh, and if you are tantalised by, say, PMI readings above 50 –  as I heard the Minister of Finance going on about in the House last week –  recall that (a) these are directional measures only, and (b) our initial trough, even on these surveys was deep)

Then there was this odd comment

Common for all nations is that uncertainty and economic confidence is highly-related to perceptions that the pandemic is regionally ‘contained’.

Not quite sure what “regionally” has in mind here, but in New Zealand itself at present there appears to be no locally-transmitted Covid, in the wider South Pacific and east Asian region there isn’t much, and yet uncertainty remains high, confidence remains modest, because people realise (a) how easily things could unravel, and (b) increasingly, the severity of the worldwide economic downturn.

There was then this loose comment

The common view amongst our international colleagues is that their local economy cannot perform at capacity with the pandemic.

I guess it depends how you define capacity, but sure when people were forced by state edict to stay home many could not work at all.  Once we are beyond that point, again Orr’s interpretation of what his colleagues are saying seems like an abdication of responsibility by central bankers.  There are market-clearing interest rates (and exchange rates), but central bankers have decided to do little or nothing about getting actual rates to line up with those market-clearing rates.  They are simply content, it seems, to accommodate sustained higher unemployment.  Coming from someone who last year was only too keen to talk up the new employment references in the Bank’s mandate, it is somewhat surprising.

In general, household spending and business investment continues to lag behind incomes and earnings. This highlights one limitation of easy monetary conditions in expanding demand.

It does nothing of the sort.  What it highlights is the utter failure of macro policy in current conditions.  The first sentence of the Governor’s comment –  re saving and investment – is almost a classic statement of the case for temporarily much lower interest rates.  And yet, in New Zealand, the Governor and the MPC have pledged not to do anything about the OCR until at least March, never mind the attendant excess capacity.

The Governor turns to the future

Looking ahead, accurate prediction is impossible, but preparedness is necessary and feasible.

The type of scenarios policymakers are mulling include: options for when/if a vaccine is developed; the establishment of Covid-19 ‘safe’ trade and travel bubbles; and the management of rolling waves of regionally-contained Covid-19 outbreaks.

Accurate prediction is always impossible.  But that second paragraph is all about stuff that has nothing whatever to do with central banks.  And as he comes towards the end of his columns we get a series of content-lite bromides.  Thus

Globally, the general conclusions are that economic activity needs ongoing support by both government and central banks, and that government fiscal policy is the most potent.

Yes, we know that central banks have done almost nothing, so it is hardly surprising that whatever mitigation of the economic damage is being done by fiscal policy.  The Governor seems unable to distinguish timeframes: fiscal policy is/was good at offsetting immediate income losses, but monetary policy works powerfully on slightly longer lags, and the economic challenges aren’t going away.

Oh, and even the Governor recognises the limitations –  technical, or more likely political – to fiscal policy

There is also much awareness that fiscal policy cannot subsidise everyone forever. Examples of more targeted government interventions – such as sustainable infrastructure initiatives, and retraining and people mobility are being shared.

These policies are more complex to create and implement, especially at pace and scale.

Interest rates and exchange rates, by contrast, adjust almost instantly, get in all the cracks, and require no state mortgage on all our futures.

The Governor moves on to matters perhaps a bit closer to his responsibility.

Financial stability is also a key focus. The current broad consensus is that banks must be focused on the long-term interests of their customers, which will take strong regional bank leadership.

But it is not clear, at all, what that second sentence means.  Whose “broad consensus”?  And what about the interests, short or long term, of the people who actually own the banks.  And what is this “strong regional bank leadership” all about.   Oh, and how does the Governor square whatever it is with the (apparently entirely rational) tightening in credit conditions reported in the Bank’s recent survey.

Then we get this strange paragraph

The financial markets’ tools for measuring risk and allocating money must also be switched on and working, to best assist the reallocation of economic effort. The current big change drivers are more local-regional trade, simpler supply chains, and the rapid adoption of technology to deliver services.

Whatever it is supposed to mean, you might suppose that adjustments in interest rates and exchange rates would be among those “financial market tools”.  And quite what relevance does “simpler supply chains” have in a New Zealand, where few firms are part of complex supply chains, and I’d have thought we really didn’t want many people focused on “more local-regional trade” when our ministers and officials keep talking up keeping international trade connections strong.

And he ends

New Zealand had a robust economic starting point at the onset of the pandemic. We have a backbone of primary production and exports. And, for now, a credible containment of the Covid-19 virus.

But, we also have significant reliance on services that require face-to-face interaction. We need to be prepared for multiple health and economic scenarios so as to best manage through the pandemic and arrive at a more sustainable economic place.

But even if you agree with each of those individual sentence (and, at a pinch, I probably could) aren’t you left wondering “so what?”   And with no sense at all that whatever happens here, we in the teeth of a worsening global economic downturn, with monetary policy doing little or nothing and even the Governor –  most vocal champion of more use of fiscal policy in recent years – articulating a view that fiscal policy has its limits.

Surely we deserve more substance, on stuff the Bank is actually responsible for, from the Governor?  And from his senior management members of the MPC.  As for the external members, they collect a lot of money from the taxpayer each year, and yet seem to operate as if being invisible, silent, and unaccountable is some sort of badge of honour.

One would like to think that there is more depth, more substance, to offer but the Bank refuses to release any supporting analysis, publishes no relevant research, exposes most of the MPC members to no public scrutiny, and for those we do hear from –  the Governor foremost –  there is a disturbing sense of people really rather out of their depth, and perhaps just not that interested.  More fun to play tree gods and talk climate change than to actually do the core macro stabilisation role Parliament has charged them with, in the midst of the most severe global downturn in a long time, one in which little beyond immediate mitigation is being done to get countries quickly back to full employment.  Policymakers here are no better, but whatever is being done here, the less that is being done abroad, the more we need our own policymakers to be doing.  Unemployment is a terrible thing, and yet it barely rates an allusion in the Governor’s column.  As for inflation, it is a core part of the Bank’s responsibility, expectations have been falling here and abroad –  risking compounding the macrostabilisation challenges –  and it got not a mention at all.

Back in that speech a month ago, the Governor indicated that the government would be introducing new legislation reforming Reserve Bank governance before the House rises for the election (so this week or next).  That reform is long overdue, but under current stewardship –  Governor, Minister –  we should no more expect improvement from these next changes that we secured from the establishment of the MPC.  You’ll recall that the Governor and Minister got together to blackball anyone with current monetary policy or macro expertise from serving on the MPC.    That gap is really starting to show up now.

Credit conditions

The Reserve Bank conducts a six-monthly survey of banks on aspects of credit conditions, trying to get at things not just captured in headline base bank lending rates.  The last regular survey was conducted in March but, of course, quite a lot has happened since then.  So, to their credit, the Bank has conducted a one-off additional survey in June to try to get a sense of how Covid and the associated economic disruption has changed things.    The numbers and the Bank’s write-up are here.  There is a good series of summary charts at the back of the write-up, some of which I will be using in what follows.

The survey has both current/backward looking questions and questions about the outlook, differentiated by type of borrower (SME (turnover less than $50m per annum), household, corporate, agriculture, and commercial property).   Here is the Bank’s note

The June Survey was completed in the last two weeks of June 2020 by 12 New Zealand registered banks, including all of the five largest banks. The period covers credit conditions observed over the first six months of 2020 and asks how banks expect them to evolve over the second half of the year.

In the face of a severe, unexpected, economic downturn, and a substantial lift in uncertainty about the outlook, you’d probably have expected credit conditions to have tightened.  For any given level of interest rates, banks would be less willing to lend.   That would be an entirely rational response, even if banks were quite confident about their overall financial health based on the existing loan book.  Credit demand –  which respondents are also asked about –  is a bit more ambiguous: credit demand for new activities might reasonably be expected to take a hit, but some borrowers will have a heightened demand for credit to tide them over a sudden unexpected loss of income.

What we see in the survey is, more or less, what one might have expected.  Sadly, the survey hasn’t been running long enough to benchmark the data against developments in previous recessions.

On the demand side, the two competing effects are most visible in the responses for SMEs.

cconditions 1

Working capital demand has increased a lot, and is expected to increase a lot more in the second half of the year, while demand to finance capital expenditure has fallen quite a bit and is expected to fall a lot further.     The picture for bigger corporates is similar, if perhaps not as stark.   Overall demand for credit increased for these two business categories, but fell for all the others.  “Credit availability” fell, as one would expect, across all these subsectors, and is expected to tighten further in the second half of the year.

One of the good things about this release write-up is that the Reserve Bank has released detailed disaggregated data from the survey that they do not usually publish.  Quite why they don’t publish it routinely is an interesting question, but then this is an organisation not exactly known for its routine transparency –  although you’d think that data collected under a statutory mandate, collated at tsaxpayers’ expense, should be routinely published.

Anyway, the data are there this time.    First, there is a distinction between the price and non-price aspects of credit availability, actual and expected.  Higher credit spreads will be the key aspect of price.

For households (mortgage and personal lending) all the actual and expected tightening in credit availability took the form of non-price measures, but for all four business categories the price effect (higher credit margins over base lending rates) dominated.  Here again, as illustration, is the chart for SMEs.

c conditions 2

There is a further degree of disaggregation on the aspects of the credit availability responses, but only for the period already been.  For each subsector respondents are asked about:

  • collateral requirements,
  • serviceability requirements,
  • maturity and repayment terms,
  • covenants,
  • interest markups
  • other price factors.

For households, the only material changes were (tighter) serviceability requirements.  That is interesting –  if not too surprising –  given (a) slightly lower interest rates, and (b) some temporary easing in the Bank’s LVR restrictions.

Here is the chart for SMEs

CC SME

and for larger corporates

CC corporate

There are some interesting differences, but the stark similarity is in the higher interest rate mark-ups.  For both subgroups, covenant requirements appear to have eased – one guesses semi-involuntarily as many borrowers will probably have blown through previous loan covenants.  I don’t know quite what to make of the differences in the green bars –  “other price factors” – but would welcome any comments/suggestions.

What of commercial property loans?

cc comm property

That’s pretty stark.  For every component, policies and conditions have tightened, apparently quite materially.  Perhaps not too surprising –  and in many past downturns –  commercial property loans, especially those on new developments, have been a key source of bank losses-  but interesting nonetheless.

And, finally, agricultural loans.  Farmers keep farming, and –  for the moment anyway –  commodity prices have held up. But in any global economic downturn, commodity prices often bear the brunt. In this case, the adjustment by lenders appears to have been mostly in the interest mark-up agricultural borrowers face.  As the graph shows, credit spreads have been widening for some time, in the face of some mix of factors including the Bank’s markedly increased capital requirements (farm borrowers tend to have alternative sources of finance).

cc agric

The final component of the survey asks about factors influencing the availability of credit.  There isn’t a line for “severe unexpected recession etc”, but here were the interesting aggregate responses to the standard list of items.

cc factors

Cost of funds is almost invisible as an issue –  whether wider credit spreads in funding markets or lower base (OCR etc) rates –  and so is any change in competitive pressures.

Respondents suggested that regulatory changes had been helpful –  presumably this will refer to the temporary suspension of the OCR restrictions, the temporary delay in the increase in minimum capital ratios, and perhaps the temporary reduction in the minimum core funding ratios.  Together these changes have, as one might expect, worked to mitigate a tightening in credit availability, but note the aggregate effect is not that large.   On the other side of course, the two material effects are an adverse change in the banks’ assessment of risk, and in the willingness of banks to take any given level of risk.  Both seem highly rational and sensible responses in a climate like that of recent months.

What to make of it all?   Probably none of the results is terribly surprising, and it will be interesting to see how these results compare with those of the next regular survey in September (when we must hope the Bank will again release more-disaggregated data).

I guess what struck me was the widening in the credit spreads business borrowers have been facing.  The published time series data from the Reserve Bank on business lending rate is pretty lousy –  a single series for “SME new overdraft rate”.   That headline rate has fallen only about 70 basis points this year.   That isn’t too surprising –  since the OCR has fallen 75 basis points, and floating mortgage and bank bill rates not much more.  The credit conditions survey tells us that typical business credit spreads over base rates have risen (probably quite rationally so in the changed economic climate).  But we also know that inflation expectations have fallen quite a lot –  data from the indexed bond market suggests about 70 basis points this year.  In other words, the combination of increased risk perceptions and a passive central bank doing little or nothing, in the face of one of the most severe economic downturns, here and abroad, for many decades, real business lending rates are rising.     That is quite insane outcome, but a choice made by Orr and the MPC, and apparently condoned by the government (and the Opposition for that matter).  It is quite extraordinary, almost certainly without precedent in a country with (a) a floating exchange rate, and (b) a sound financial system, and (c) sound government finances.

One half of the government’s brain seems to recognise the issue.  They just extended the scheme whereby small businesses can get interest-free loans from the government.   Quite why they think those favoured few –  in many cases, probably some of the worst credits –  should be able to borrow at zero while the rest of the economy  (but especially the business sector) borrows at materially positive real interest rates, often complemented by tightening non-price conditions is a bit beyond me.

Oh, and remember that this surveys suggest banks expect credit conditions to tighten further from here.

Thinking Big still

Just before I went on holiday I wrote sceptically about the “five point economic plan” speech given by the then National leader Todd Muller.

We were promised then a series of major speeches fleshing out the framework Muller enunciated.  Among the five points was this

Delivering infrastructure had this promise

Before the end of this month, I will announce the biggest infrastructure package in this country’s history. It will include roads, rail, public transport, hospitals, schools and water.

My heart sank somewhat.  A new and different Think Big? But lets see the specifics.

Of the five points Muller had outlined, this seemed to be one where they were investing any hopes they might have of lifting New Zealand’s medium-term economic performance.

New leader Judith Collins started on the details with a speech given on Friday and some supporting documents.    This announcement had (a) some big headline numbers for spending over the next decade, (b) the “roads, rail, public transport” components for the North Island north of Tauranga, several of which are mainly about periods well beyond the next decade, and (c) some material on how they propose to replace the RMA, and to fast-track some of these projects in the meantime.  I think there had already also been a promise to build an expressway between Christchurch and Ashburton.

I don’t have any particular problem with building more and better roads where they make sense.  Same goes for rail within cities, again where such proposals make robust economic sense.  (I’m much more sceptical of things like cycleways, whether across the Waitemata Harbour or locally.)  And clearly congestion is a major issue in Auckland and –  for what is really a pretty-tiny city by international standards – to some extent in Wellington too.  Congestion has real economic and welfare costs.  National’s leader referred to one estimate of those costs in Auckland (presumably this one) at around $1 billion a year –  and since the study was done a few years ago, perhaps it would be reasonable to use a higher estimate now.

But we have tools that can deal with congestion.  Pricing.  It is a tool that seem to work when tried in other countries/cities.    Of course, simply pricing congestion doesn’t mean building no more roads ever, but it (among other things) helps give a better steer as to what the real price of congestion – and the value people put on avoiding it – and it deals with the congestion directly in the meantime.    Even the current government’s Minister of Transport has been on record suggesting that congestion pricing is “inevitable” at some point, just not now.

And what is National’s stance, to address what Collins calls a “congestion crisis”?

Looking further ahead, if we and Auckland Council ever look at congestion charges in the future, my Government will insist they are only ever revenue neutral, with other fuel taxes reduced to compensate.

“If we ever”….Not exactly a ringing endorsement, looking to shift the ground in the debate.  Perhaps congestion pricing isn’t easy electoral politics, but it is the direction we need to be heading.  It might actually make a material difference within five years, unlike (as far as I can see) most other things in the National plan.

Instead the focus seems to be a flinging around some big numbers, not being too bothered about how robust any analysis supporting the mooted projects is, and all with little or no sense of decent mental model of what has gone wrong with New Zealand’s economic performance,   And yet it is, supposedly, “the Plan that New Zealanders –  including Aucklanders –  have been waiting for, for generations”.

Pretty sure that last sentence isn’t true.  Collins, for example, talks up the “if onlys”, in her case around Sir Dove-Myer Robinson’s “rapid rail” proposal, that got lots of attention in Auckland in the early 70s.  We moved to Auckland about that time, but I was 10 and can’t claim to have given it huge attention.  But here’s the thing: the population of the Auckland urban area then was about 650000, the birth rate had been dropping for a decade, and the new government was just about to markedly tighten up on immigration access, a policy that carried through for the following 15+ years.  And even with all the New Zealand tendencies to boosterism, neither central nor local government was persuaded that Robinson’s scheme made economic sense.  Nor, most likely, did it.  Collins also talks up the City Rail Link project, the costs of which have escalated greatly since the government she was a part of first signed off on the project, which didn’t look very economic even then.

The promise seems to that this big infrastructure spend-up is going be pretty transformative in economic terms.  There are these quotes

This city is broken by congestion. Every Aucklander and every visitor to Auckland knows it. Congestion costs Aucklanders over $1 billion per year. That’s the strict economic loss. It represents lost production, lost productivity, lost opportunity.

But congestion is far worse than that. Congestion means unreliable journey times. It means frustration at sitting idle on the motorway. It means goods being delivered late to our ports. It means Mum being late to pick up the kids from rugby practice. It means a tradie only doing two, rather than four, cross-town trips per day. That’s fewer jobs for him; less income, and less economic activity.

I guess $1 billion per annum is supposed to sound like a big number.  In fact, it is about 1 per cent of Auckland’s GDP.   Fixing the problems is probably worth doing, but 1 per cent of GDP is tiny in the context of either Auckland’s gaping economic underperformance, let alone that of New Zealand as a whole (recall that the productivity leaders are more than 60 per cent ahead of us).

And yet, according to Collins, there are really huge gains on offer.

National’s approach to infrastructure is simple: Make decisions, get projects funded and commissioned, and then get them delivered, at least a couple of years before they are expected to be needed. That is the approach that transformed the economies of Asia from the 1960s.

Quite possibly, some east Asian cities/countries did infrastructure better than New Zealand has, but I’d be surprised if National can cite any authoritative development studies suggesting that the catch-up of that handful of successful east Asian economies was primarily about moving things/people more easily around their own countries.  They are typically regarded as outward-oriented, tradables-sector led, growth stories, perhaps with improving infrastructure going hand in glove with those flourishing outward-oriented opportunities.

But, as least as far as we can tell from this speech, or the framework one Muller gave, National’s policy approach is now primarily inward-looking?  That has long been the practical effect of the policy approach they (and Labour) have adopted over 25+ years, but it isn’t usually so blatantly put.

Collins went on.  Build these roads, rail etc and

Half of New Zealand lives in the Upper North Island region. We want a genuinely integrated region of 2.5 million New Zealanders. Our vision is to transform the four cities to be one economic powerhouse. We will unlock their potential so that the upper North Island becomes Australasia’s most dynamic region.

Recall that the expressway to Whangarei, complete with possible tunnel under the Brynderwyns, is –  even on this plan –  well over a decade away.  And recall that in the regional GDP per capita data, Northland has the lowest per capita GDP in the entire country, suggesting that if Whangarei has any part in some future “Australasia’s most dynamic region” it has a very very long way to come.      But even forget about the Whangarei bit of the fairytale for now, do the National caucus have any serious idea how far behind key bits of Australia productivity levels in New Zealand actually are (and Australia is no great OECD productivity success story)?   As a hint, that 1 per cent of GDP Collins talked about fixing won’t even begin to make a visible dent in the productivity gap –  a gap only likely to continue to widen for the next few years, even if Collins plan did eventually make some small helpful difference.

National –  like Labour really –  seems to have no idea at all what has gone wrong with the New Zealand economy, what has taken us from among the very richest and most productive countries on earth to be some slightly embarrassing laggard, increasingly unable to offer the best to our own people.   But they’ll just fling some more cash at things –  as Labour does, just a slightly different make-up – in the hope of getting elected, and the vague sense then the something must be done, and anything is something.

Here is the Collins approach to project evaluation

The economists will tell you we should build projects only when they’re needed. My sense from my time in politics is that you just want the government to get infrastructure projects built. You just want them done. And you want them done ahead of time.

My Government will be informed by processes like NZTA’s Benefit-Cost Ratio analysis, and by advice from the Infrastructure Commission. But we will not consider that analysis or that advice to be holy writ when making decisions about major transformational projects. Think about all of the Roads of National Significance the National Government built.

I don’t think Transmission Gully passed a decent cost-benefit test, even when it was going to be operational by now.

Now I’m not about to suggest that officials and appointees to government boards should be making the decisions, but any well-done cost-benefit analysis should be a key hurdle in any proposed commitment of large amounts of public money.  Perhaps there are reasonable arguments about methodology or about specific assumptions used in the calculations.  All that can and should be debated, but a project that cannot return a decently positive benefit-cost ratio is one the public should be very sceptical of.  Simply waving your hands and talking about “major transformational projects” should be no more acceptable now than ever.     And having projects in place “ahead of time” –  when few projections about the future, including about population, are that robust –  also has significant economic costs, even at today’s lower public sector discount rates.

One other questionable aspect of National’s plan is what they call “intergenerational funding”.  This is fancy language for borrowing, in this case off the core Crown accounts and having NZTA borrow instead.  As far as I can see there is almost nothing going for this particular approach –  one already indulged in by Labour, with Housing New Zealand now borrowing on-market.  It will be a (a bit) more costly than the central government borrowing itself, with no more likelihood the debt will be defaulted on, it is less transparent,  and unless the government is proposing to delegate all final decisions on projects to officials (which they –  rightly in my view –  show no sign of) there is no reason to think it will either tap new sources of capital (the NZ government not being debt-constrained) or introduce new disciplines on Crown capital spending.  There is, or can be, a place for government borrowing, but decisions on that are better taken, and managed, centrally.

So there were big numbers in the announcement, some big projects (which may or not be economic, may or may not ever happen even if National winds), but little or no sense of a credible economic model lying behind it, grounded in the specifics of New Zealand’s underperformance.  And if there is such a model at all, it just seems to be more of the same –  rapidly growing, but quite volatile, population – the strategy that has so comprehensively failed for the last few decades.      More and better roads aren’t going to materially change that.  Nor –  although it should be done as a matter of priority –  are the sorts of land use reforms that might make house prices more affordable. The new Leader of Opposition suggests a National government might do something there.  But we’ve heard that story before – whether from National in Opposition in 2008 or from Phil Twyford in Opposition in 2017.  Perhaps this time really would be different, but I’m certainly not counting on it.

Little changes

The good news of the morning was that Jian Yang will be leaving Parliament at the election.  Perhaps the only disappointing aspect is that he didn’t stick around to be voted out, but at least he will be gone, and our Parliament will no longer have a CCP member, former part of the PRC military foreign intelligence system, champion of the evil Party/state in its ranks.   Oh, and someone who acknowledged that he had actively misrepresented his past –  on instructions from his PRC bosses –  to get residency and citizenship here in the first place.  In any decent country he’d not have been in Parliament in for long in the first place –  a decent party wouldn’t have selected him, decent opposition parties would have made his political position untenable, and once alerted to his acknowledged lies about his past the relevant authorities would have acted to prosecute him, perhaps even deport him.  But this is New Zealand.

A party with a modicum of decency, prioritising some values higher than soliciting donations and doing trade deals with a barbaric repressive regime, might even have insisted that Jian Yang step aside when he past become very public.  But this was the New Zealand National Party.

And although Jian Yang is finally going, it appears to have been his own doing.  Perhaps the unease about his past has become such that (a) he could not really hope to go any higher in politics, and (b) his presence was only going to be lightning rod for discontent.   And no serious person was likely to say anything much sensitive in his presence, given his known close ties to the PRC Embassy.  It can’t be that the grind of endless interviews with the critical media wore him out: he’s not given any.   Perhaps he can be more use to National now, bringing in the donations, away from the spotlight of Parliament?

Whatever his reasons, there is not a thing to suggest that it was National that had finally done the decent thing.  After all, recall that a few months ago he was promised one of the list places specially designated by the party’s Board  (recall that he announced that only to the Chinese language media).  Recall too that when Todd Muller took over Jian Yang was pushed a few more places up the caucus rankings, and left in place as chair of a select committee.   And perhaps more telling still, it was only a few days ago that Todd Muller was defending Jian Yang, with arguments so thin they can only have been the words of someone determined to follow in the unworthy tradition of Bill English and Simon Bridges, championing the presence of Jian Yang in Parliament.  There was no sign the party was about to turn him out –  and, of course, Jian Yang has had close ties to the party president Peter Goodfellow, himself as shamefully obsequious to the PRC/CCP as they come.

Here were some of Muller’s remarks reported by Newshub earlier this week.  Asked about Jian Yang’s refusal to answer questions from the English-language media, Muller apparently responded this way

Muller says it’s not true that Dr Yang is avoiding the media because he has fronted on issues to do with statistics.

“He’s done close to 10 in the last 18 months in his role as spokesperson for statistics across all the various media outlets,” Muller told Magic Talk on Monday. “This view that he’s somehow not fronting for media isn’t correct.”

The last time Dr Yang released an English media statement was almost a year ago when Stats NZ’s Chief Statistician Liz MacPherson resigned over the handling of the 2018 Census.

“He’s made very clear statements to the media in the past… He’s statistics spokesperson so I would think that’s fair that when he talks to the media it’s in that context,” Muller said.

Talk about deliberately obtuse.  As Muller knows very well, the legitimate media interest in Jian Yang has nothing to do with Statistics New Zealand (not that he had done that well in that minor role –  has anyone heard anything from him in recent months on the inadequacies of our official statistics?).

Then there was this

Muller said Dr Yang has been transparent about his past.

“He’s been very clear in the past in terms of his history and the length of time he’s been in New Zealand. Obviously one of the key points is when he left the Communist Party, he left 26 years ago. These things tend to want to be trawled over again.”

As Muller knows very well, you don’t just leave the CCP –  especially having worked in the military intelligence system –  by failing to pay the annual membership fee.  And as for the preposterous claim that he had been transparent about his past…….it was only after six years in Parliament and sustained journalistic investigative work that that past was finally revealed to the public.  Since then, Jian Yang has avoided any serious questioning, but simply refusing to engage.  Some transparency.

The article reminds us of Jian Yang’s close ties to Beijing

In October 2019 Dr Yang was one of 50 New Zealanders who were invited to attend the CCP’s 70th anniversary celebrations in the Chinese capital.

He also accompanied former National leader Simon Bridges on a trip to China where a meeting was set up with Guo Shengkun, described as head of China’s ‘secret police’.

Playing down that latter point somewhat; Jian Yang was apparently instrumental in arranging the meeting, such are his ties to the evil regime.

And then Muller’s values-free approach is put fully on display

Muller pushed back against criticism of Dr Yang’s ties to the CCP.

“It’s a massive country for us in terms of trade and relationships and my experience in the context of all the corporate export roles I’ve had is that as you build relationships with people in China, they are members of the Communist Party – that’s sort of how it works, right?

“You end up having conversations and building deep relationships with people who have roles in the Communist Party and China because that’s their system.”

Well, perhaps….but this isn’t Beijing, this isn’t where the writ of the CCP is supposed to run, this is the New Zealand Parliament.

In a way though it is almost a little unfortunate that Jian Yang will soon be gone.  He was the visible and particularly stark tip of the iceberg, but almost beside the point as this late stage.  The real issue is the wider National Party deeply deferential approach to Beijing, and its refusal to make a stand on any issue of the excesses of that regime.   This is the way I put it last week.

The real issue now isn’t about Jian Yang’s own choices, but about the rest of our political system (and much of our media for that matter).   It clearly suits Jian Yang to avoid any English-language media –  he is, after all, elected by all National Party voters, not just a few CCP-aligned ethnic Chinese one – but if the leadership of the National Party had even an ounce of decency on these issues it really wouldn’t be Jian Yang’s choice at all.  It would be as simple as “front up, honestly and fully, pretty whenever you are asked, and if not well forget about any caucus seniority, in fact forget about a list place at all at the next election”.   No one  doubts that if  any of that succession of leaders had wanted Jian Yang to be accountable to the public and to voters he’d do so, or he’d be gone.  So his silence is the silence of Bill English, Simon Bridges and now Todd Muller.   The same “leaders” who’ve been, for example, utterly unbothered by Todd McClay’s defence of the Uighur concentration camps, and who utter not a word about the activities of the PRC/CCP at home, abroad, or here.   Totally sold-out.

Jian Yang might soon be gone, but Todd Muller, Simon Bridges, Gerry Brownlee, Todd McClay and Peter Goodfellow are still very much in place.  There is no sign that the mindset has shifted even slightly.   Quite probably with Jian Yang having gone, National will wheel up another ethnic Chinese candidate whose acceptability will be based on his ties to the PRC embassy and his ability to work the rooms of the various United Front bodies here for party funding, but whose CV will presumably look a bit less obviously egregious than Jian Yang’s came to be.   This is, after all, the party that went soliciting donations for CCP affiliate Yikun Zhang and his mates, and had one of his CCP associates as part of their candidates college, preparing the ground for a bid for a place on National’s list.

It is one of those times when the excesses of the CCP/PRC are becoming ever more obvious to anyone not determined to keep their eyes wide shut.  But there is no sign of any shift in stance from National, no sign of any moral leadership –  in fact, over the last couple of years they’d be the first to complain if the current government, itself not great over the PRC, showed any slight hints of backbone.    This is the disgraceful party that has a senior MP on record suggesting the Uighur concentration camps are no one’s affair but China’s.   These people, and their business/university allies, seem to have no moral core.  Even around Hong Kong we’ve heard only the feeblest, most reluctant, of comments from Muller.

Is there some hope in the fact that Tamaki MP Simon O’Connor is now part of the interparliamentary alliance on China (together with Labour Louisa’s Wall)?  I guess it is better than nothing, but there is nothing anywhere to suggest that the National leadership group is at all happy about such modest independence of thought.   Then again, I’m not aware that any of the media have asked Muller or Foreign Affairs spokesman Bridges what they make of the IPAC and of O’Connor’s membership and calls.  Given that O’Connor is Bridges’ brother-in-law I guess that might be a little awkward.   But it would seem to be a fair question just a few weeks out from an election, as the PRC becomes more aggressive, more threatening (including in their attempts to criminalise anyone anywhere in the world criticising the regime).

It is good that Jian Yang will soon have gone. But the deeper issues around the corruption of New Zealand politics –  National and Labour particularly on this score –  haven’t changed a jot.  Neither party has done anything to fix the electoral donations from CCP affiliates scandal, and both seem more intent on donations flowing than on the sort of values most New Zealanders hold, including the many ethnic Chinese New Zealanders who deplore almost everything to do with the CCP.  And if they are dragged occasionally to utter a mild word of criticism for the latest PRC abuse, you always get the sense it is reluctant, not born of any conviction whatever.

(After 5-6 weeks of ill-health my troublesome bug is finally abating.  However, we’ll be on holiday next week so no more posts until Monday week.)

 

National’s five-point plan

At the end of my post yesterday morning I noted briefly

Of course, if Labour’s approach is bad, at least (being the government) it is on the table.  It is now less than two months until voting starts and we have no idea what National’s approach might be, but no reason to suppose it would be materially different or better.

Within a couple of hours we had a plan from National, or at least what Todd Muller describes as “the framework for the party’s Plan to create more jobs and a better economy”.   Just like the Prime Minister, he has a five-point plan, outlined in a speech given in Christchurch yesterday.   If you want the potted version there is even a one-page graphic.

graphic nat

I was no more impressed than with Muller’s previous speech, although at least he has dropped the (historically ill-grounded) paeans to Michael Joseph Savage.   There still seems to be a great deal of me-too-ism about it: we’ll be just like Labour only more competent.   If he has values and a political philosophy, they seem to bear little or no relationship to those the National Party was built on.    It is the sort of speech any (losing) centrist Labour Party leader could have given.

It is explicitly an economic speech, but there was no obvious economic framework, no sign that he or his advisers had thought hard about what has ailed the New Zealand economy for a long time, about how National might fix it, and how that might tie together with the immediate recovery needs (having been accused by one commenter yesterday of being an “armchair theorist”, here was my post-Covid note on such issues).

Anyway, to step through the speech.  First, there was the flawed framing.

According to the Reserve Bank, New Zealand faces its worst economic downturn for 160 years. I don’t think the magnitude of that has yet sunk in to the public or the media. That’s partly because, these past few weeks, everyone has quite rightly been more preoccupied with the shambles at the border and in our quarantine centres. But, if the Reserve Bank is to be believed, ahead of us lies the greatest economic and jobs crisis that anyone in this room has ever known.

Even though the fall in the GDP in the month of April was absolutely huge –  could we have measured it, perhaps 40 per cent –  no one supposes that what lies ahead is worse than New Zealand’s experience of the Great Depression.   Most likely, what we face is something more like, perhaps a bit worse than, the severity of the late 80s and early 90s.  That’s quite bad enough.

And a scale of loss and dislocation that National, at least in this framework speech, appears to have no answer for.

Thus, we learn that they are quite happy with macro policy as it stands and don’t appear to think the Reserve Bank needs to be doing anything more (than the little they have done so far).  And we get rather florid rhetoric on fiscal policy, supported by (it appears) nothing.

Since the Fiscal Responsibility Act, the economic and political debate in New Zealand has tended to be on the quantity of borrowing or debt repayment each year. These remain critically important. Getting back to fiscal surplus and then paying down debt to 20 per cent of GDP is necessary, not least because New Zealand will inevitably confront another natural, economic or health disaster in the next couple of decades or beyond. But just as important is to focus on the quality of spending.

Labour forecasts net core debt will reach 53.6 per cent of GDP in 2024 under their policies. That’s an eye-wateringly high level. We will work hard to try to keep it lower than that, which would put New Zealand in a better position to recover. But of far greater longer-term importance is that Labour projects that under its policies, but with a far stronger economic environment than we face today, net core debt will still be as high as 42 per cent by 2034. That means Labour intends a mere 11 per cent reduction in net core debt, over a decade. At that rate, we will not get back to the safe 20 per cent mark until perhaps the mid-2050s.

National does not regard Labour’s attitude as anything like prudent. It would leave an enormous debt, not so much to our children but to our grandchildren. And it would leave our children and grandchildren – and also ourselves – profoundly vulnerable were the global economic and strategic outlook anything other blissful for three successive decades. Covid-19, the trade war between the US and China and this city’s recent history all say that is not a safe bet.

There aren’t many specifics there but Muller is clear that National would be spending less (not necessarily a lot less, but less) than Labour, so that source of support for a faster demand recovery is apparently off the table.   He plays up the debt numbers but never mentions the large assets (NZSF) on the other side, which mean that even the peak debt numbers would last year have put us among the less indebted half of the OECD.  He never engages at all with the possibility that lower long-term interest rates might –  just might –  make a higher long-term debt ratio sensible.  And, of course, there is no hint of when he expects to get back to 20 per cent of GDP, or on what sort of path.

(To be clear, I am not a fan of high levels of public debt, but on a proper measure we’d peak at around 40 per cent of GDP even on this government’s numbers.  And like most rhetorical fiscal hawks in the current context, he offers no other path for a prompt return to full employment).

And then, of course, there is the question of how seriously to take the talk of future fiscal restraint. There was this, for example,

Let me tell you what that means in practice. In 2020/21 and 2021/22, my Government will not be scared of investing more in retraining, if we are confident it will genuinely improve productivity, lower unemployment, increase the tax take, reduce the cost of welfare and improve wellbeing over the following decade. My Government will not be scared of investing over the next decade more in the first 1000 days of life, if we are confident it will improve outcomes from the school system for a generation. Similarly, social housing and mental health. Nor will my Government be afraid of investing more in roads and public transport, if we are confident they will still be improving New Zealand’s productivity 50 or 100 years hence. And my Government will not be afraid to invest more in water storage or carbon-replacement technologies, if they will support higher living standards and greater wellbeing on an even longer timeframe.

It would be surprising if a public transport project now were boosting productivity 100 years hence, but you are left wondering what Muller wouldn’t be spending on.

Now, to be fair, he tells us there will be a series of major speeches outlining details of the five point plan.   But the gist –  what was in yesterday’s speech –  wasn’t encouraging,   Of their headings

Responsible Economic Management consisted of nothing but rhetoric.  We can probably all agree that quality of spending matters, but there is little in National’s track record suggesting they’ve done much better on that in the past (just different specific waste) and –  more importantly –  no clue as to why we’d think they’d better in future.  Labour has been spraying money at favoured entities in recent weeks, but which ones (specifically) is National opposing?

Delivering infrastructure had this promise

Before the end of this month, I will announce the biggest infrastructure package in this country’s history. It will include roads, rail, public transport, hospitals, schools and water.

My heart sank somewhat.  A new and different Think Big? But lets see the specifics.

Muller boasts of delivery, but wasn’t it the previous National government that put in place the contracting structure for Transmission Gully.  And I’m always a bit surprised at National using the Christchurch repair and rebuild process as a plus.

Reskilling and retraining our workers is flavour of the day (it was a big part of the PM’s speech the other day too), this time with rhetoric about capturing something called the “Creativity Wave” in the 2020s.    But from a party offering no more macro stimulus to demand (see above), uninterested in our high real exchange rate, and (previously) opposed to fees-free it all has the feel of rhetoric and displacing headline unemployment figures at present.   When there are jobs on offer, firms and individuals tend to invest in the skill development required.

A Greener, Smarter Future may be good political rhetoric, or the sort most Labour ministers could have delivered, but seems about as empty.   This section concludes thus

National’s vision is of a post-Covid economy that is greener, smarter and better than the one we had before.

Sounds fine, but what (specifically) is the government’s role in getting there, and what is National proposing to do to give us some hope of achieving all this environmental stuff while also reversing the decades-long decline in relative productivity?  Nothing was on offer in this speech.

And finally, there was

Building Stronger Communities.  I’m sure Muller is genuine about some of this, but what of this gratuitous line

Every community needs strong community institutions to maintain and enhance their social capital. Many of those institutions were damaged a generation ago, and I don’t believe they have been repaired.

Another opportunity for Muller to have a go at the reforms instituted by the 4th Labour government and by his own mentor and former boss Jim Bolger?  So the decline of churches, sport clubs, Scouts and Guides, marriage and so on is down the evil reforms of the 80s and 90s is it?  If so, which of those reforms does he think specifically contributed and which is he proposing to undo?    Of course, the answer to the latter question is “none of them”.  It is just shallow opportunistic political rhetoric.

I don’t really disagree with Muller that

our opponent doesn’t believe in having a plan, hasn’t delivered on her promises, and has a track record of failure across the board.

But when he claims

Ladies and Gentlemen, in the end, I have a very simple message for you and all New Zealanders this election campaign: National has a plan to rebuild our communities and our economy, to get Kiwis back to work and to deal with the economic and jobs crisis.

There was nothing at all in the speech to lead any reasonable observer to think it was so.   Perhaps those future “major speeches” will give us something concrete, as part of a serious well-thought-out strategy that links the immediate challenges with the longer-term deep-seated problems in the New Zealand economy.  But on what we’ve seen so far, I wouldn’t be optimistic about that.

 

Economic policy malaise

Reflecting on the economic outlook, it hasn’t been the best of weeks.

Across the Tasman, a large chunk of Australia –  key market/source of exports, imports, investment etc – is locked down again for six weeks.   It is a reminder, including to anyone contemplating investment decisions, how easily things can be blown off track again.  And that is in a country with a death rate still (slightly) lower than New Zealand’s.  The coronavirus situation in much of the rest of the world doesn’t look that great either, and with it the outlook for the world economy.  Perhaps, at the margin, that troubled world economy contributed to the decision announced this morning to close Comalco.

Closer to home, the NZIER QSBO results were out.   ANZ’s commentary summed it up succinctly but bleakly under the heading “Worrying”.  Of course the June quarter outcomes will have been dreadful, but the forward-looking indicators weren’t really much better.   These sorts of surveys don’t always have much predictive power –  more unexpected stuff happens –  but they paint a pretty bleak picture of how businesses were seeing things just a couple of weeks ago.  Again from the ANZ

Today’s data will be worrying for the RBNZ and Government; firms are reportedly hunkering down, shedding workers, and cutting prices. But more monetary stimulus is needed, and an aggressive, front-loaded approach is warranted.

And all that is despite the massive fiscal spend over the last four months, which has for now replaced a fair chunk of the lost private sector income during that period, even as it saddles us –  and future governments –  with much more severe constraints on fiscal freedom of action in the years to come.    All that income support (in one form or another) will have helped keep private spending quite a bit higher than otherwise.  All the talk was about “tiding over”, but to what, to when?  It has always had the feel of a policy approach dreamed up back in late February/early March when the government (and Reserve Bank) were still refusing to take very seriously that economic shock that was already engulfing the world.

In that context, it was interesting to have confirmation from the Prime Minister that the wage subsidy scheme will not be extended further –  and given that firms get it as a lump sum, presumably the bulk of what will ever be paid out even under the extended scheme will already have been paid out.     Ending the scheme seems appropriate –  extending it the first time was probably more about politics than economics.    Anything else would have looked like a bizarre attempt to freeze chunks of the economy as they were six months ago, refusing to face the reality of a changed world.    But the scheme was putting large amounts of cash in the pockets of people in the private sector, supporting spending and holding GDP higher than otherwise.  And what comes after it?

Part of the answer, of course, is the higher-than-otherwise benefit paid to those who’ve lost their jobs as a result of Covid.   But it is only for 12 weeks, is still mostly about income replacement (buying time) rather than supporting a self-sustaining recovery in underlying economic activity, and of course many people just won’t be eligible for it.  Perhaps the government will decide to extend this scheme, but even if that were to happen it has its own problems (deterring the search for a new job).

One might, perhaps, have hoped for signs of a serious, rigorous, well-thought-out strategy from the Prime Minister.  As it happens, she gave a pre-election speech to her party’s Congress on Sunday.   As her party is odds-on favourite to dominate the next government I read it, twice actually.  In the speech the Prime Minister purported to offer a plan – a five-point plan even.

Today I am announcing our 5 point plan for our economic recovery.

It’s about investing in our people, it’s about jobs, preparing for our future, supporting our small businesses, entrepreneurs and job creators and positioning ourselves globally.

Sadly, she showed no sign of actually understanding how economies work or prosperity arises.    Anyone, what of the five points?

Which brings me to point one of our plan – investing in our people.

Whence follows a list of handouts, which might (or might not) individually make sense, but by no stretch of the imagination or language can be called investments.  Income support is fine, but it is no basis for recovery.

Perhaps this was a little closer to “investment”

That’s why we made a $1.6 billion investment in trades and apprenticeships training, which includes making all apprenticeships free.

We’ve also made those areas of vocational training where we need people the most like building and construction and mental health support workers – all free. The potential impact of these policies is huge.

Except that this is the government that had already introduced the fees-free policy, only for it be revealed that it was mostly income support too (transfers to people who would already have been undertaking tertiary education anyway).    And the new measures could have a feel of measures designed more to keep headline unemployment down than to actually revive the economy.

Even the Prime Minister recognises that training isn’t much use if there are no jobs.

But retraining isn’t enough if there aren’t jobs to go into at the end of it.

And this is where the second part of our plan kicks in, what I like to simply call, jobs, jobs, jobs.

She proceeds to run through some government initiatives.

First is the Big New Zealand Upgrade Programme designed to tackle our core infrastructure deficit. We announced it at the beginning of the year, and it amounts to $12 billion of road, rail, public transport, school and health capital funding. It could not have come at a better time.

That programme may or may not have merit, but as she says it was announced in January,  judged appropriate/necessary then –  pre-Covid.  It was factored into economic forecasts, including those of the Reserve Bank, then.  On to some other spending.

As part of our COVID response we have committed funding to providing an additional 8000 public houses, bring the total number of state and transitional houses to be built by this Government to over 18,000 by 2024 – thank you Megan Woods and Kainga Ora.

It is the largest house building programme of any Government in decades, and I’m proud of it.

But when we’re talking about infrastructure, it’s not just about the projects we in the government are responsible for, we also have the opportunity to partner with communities, with iwi and local government.

That’s what the $2.6 billion worth of shovel ready projects we announced earlier this week were all about.

Things like Home Ground, a project by the Auckland City Mission that will provide 80 apartments with wrap-around support and care, or the Poverty Bay Rugby Park Grandstand, least Kiri Allen stage a sit-in, right through to the Invercargill inner-city development.

It would take someone closer to the detailed data than I am to unpick quite how much of this is really new spending, and how much is just putting details to spending programmes (like the PGF) already allowed for.  Nor is there any sense of (a) displacement (lots more state houses will, almost certainly, mean fewer private houses being built) or (b) value-for-money (what is the taxpayer doing funding the Invercargill city redevelopment, throwing more money at KiwiRail or –  wonder of wonders –  tens of millions at the Wanganui port.

And then at the end of the “jobs, jobs, jobs” section we get this

Collectively these projects are estimated to create over 20,000 jobs in the next five years.

No analysis to support that number (and we’ve seen before how PGF job estimates are concocted) but even if it is correct, total employment in New Zealand is about 2.8 million people.   “Jobs, jobs, jobs”, even on the PM’s numbers, looks tiny.

She goes on to list a few environmental jobs projects.  Perhaps they are worthwhile, but they certainly aren’t a private sector led recovery.

But moving along

That brings me to the third plank of our plan – preparing for the future.

The whole of that plank is here

Restoring our environment is one thing, decarbonising it is another.

Investments in waste management and improving energy generation will be key- and this is where I am signalling there is more to come.

Preparing for the future also means supporting our businesses to innovate, especially as we go through a period of digital transformation.

There will be few among us who haven’t changed our routines and habits as a result of COVID-19. By the end of lockdown I can confirm that Damien O’Connor did indeed discover the unmute button on zoom.

We want to support our small businesses through this digital transition, which is why we established a $10 million fund to incentivise e-commerce and train more digital advisors.

It’s also why we will keep encouraging innovation in all forms. So we’ve created a $150 million fund to provide loans to R&D-intensive businesses.

Well, okay.  If you are of the left, you might find that appealing, but even then you’d have to concede there wasn’t much to it, not much that will help generate a rapid and strong economic recovery.

But there is, it appears, a role for the private sector.

All of this builds to the fourth part of our plan, supporting our small businesses, our entrepreneurs and our job creators

Which sounds good, until you read the text and realise that all she has to offer is the wage subsidy scheme, and the small business interest-free loan scheme, which was extended for a few months.    Income support etc has its place, but it isn’t the foundation for a strong robust economy or a rapid return to full employment.

And what of the final plank?

And the final plank of our five-point plan is to continue to position New Zealand globally as a place to trade with, to invest in, and eventually to visit again.

This has been an export-led lockdown, and so too will it be an export-led recovery.

Sounds good as an aspiration, but frankly seems unlikely.   What does Labour have to offer specifically?

That’s why a few months ago we provided $200m to help exporters re-engage with international markets, and support firms looking to export for the first time.

It’s also why we continue to expand our trade relationships. The limitations of the last few months didn’t stop us launching our free trade agreement talks with the UK …

We are investing $400 million in tourism because we know it is part of our future, and because open borders will be again too. It is not a matter of if, but when it is safe.

And on that, we already have work underway.

We are progressing with all the checks and balances needed for a trans-Tasman bubble, and also on reconnecting with our Pacific neighbours. We have a framework in place that will help Cabinet make a decision on when quarantine free travel with these parts of the world should resume.

All pretty small beer really.  No one supposes that a UK preferential trade agreement is going to matter very much, and in recent weeks we’ve heard David Parker fulminating about the frustrations of the EU’s position on trade negotiations with them.   And, of course, this is the economy that –  for all the talk of trade agreements –  has had foreign trade shares (exports and imports) falling as a share of GDP this century, the high point of this wave of globalisation.   There is also no sense of recognising that the real exchange rate remains very high –  not down at all, despite the big hit to one of our main tradables sectors.   And all this was nicely complemented by the government’s primary industries strategy announced early in the week and now championed as Labour Party policy, which (as the economist Cameron Bagrie pointed out) involved primary exports falling as a share of GDP over the next decade, even as that sector was supposedly going to help lead the recovery.

And that was it.  That, apparently, was the government’s economic recovery plan.

Typically we look to monetary policy at the main counter-cyclical stabilisation tool.  Ideally, it might be complemented by good pro-productivity structural reforms – of that sort successive New Zealand governments have lost interest in –  but they take time to design well and implement –  whereas monetary policy can be deployed very quickly.

Of course, in the context of the Covid shock it would have made sense to have deployed fiscal policy and monetary policy together.  Even if monetary policy can be deployed very quickly, it does not put money in the pockets of households instantly (and in the context of a “lockdown” and the immediate (quite rational) fear-induced drop in economic activity, there was a place for immediate income support.  But if monetary policy does not work instantly that is why it should be being deployed aggressively and early.  Had monetary policy been used aggressively and early –  starting back in February when the first OCR cut should have been done – by now we would be seeing quite a lot of the fruits (the full effects of monetary policy adjustments typically take 12-18 months), providing a stimulus to demand and activity as the fiscal support is wound back (as it is being, on announced government policy).

As it is, we have had almost nothing from monetary policy.  The OCR was cut belatedly, then an irrational floor was put on the OCR by a Monetary Policy Committee that was still struggling to comprehend the severity of what they were facing.  And because the Reserve Bank reacted only slowly and to a very limited extent, we’ve ended up with hardly any fall in real interest rates at all (inflation expectations have fallen almost as much as the OCR).   The exchange rate hasn’t fallen at all.  The Reserve Bank likes to make great play of their LSAP programme, but it mostly works –  if at all –  by lowering interest rates and underpinning inflation expectations.  And since we know expectations have fallen, and real interest rates have barely fallen, at the very best the LSAP programme can only have stopped things tightening.  In the Prime Minister’s words, this is a really severe global economic downturn……and yet monetary policy has done almost nothing; none of that necessary support is now in place even as the fiscal income support winds back and the domestic and world economies remain deeply troubled.

Of course, the failure of the Reserve Bank to do anything much useful rests initially with the Governor and his committee (the one he so dominates that we’ve never heard a word from any of the three external members, the one he ensured had no one with serious ongoing expertise in monetary policy appointed to it).  But they are officials, ultimately accountable to the elected government.  In fact, ever since the Parliament made the Bank operationally autonomous in 1989, the Act has always recognised that officials could get things wrong, and allowed for the Minister of Finance to directly override (transparently) the Bank.  The current government carried those provisions into its reform of the Reserve Bank, but now –  in a really severe economic downturn, in which the Reserve Bank is simply not doing its job –  they seem too conservative, too scared, to use well-established statutory powers.  They are happy to put in place limited zero-interest loan schemes for small businesses, but unwilling to ensure that –  amid the bleak economic outlook –  market prices for business and household credit are anywhere near that low.   In effect, that means they prefer to let more businesses fail, more people end up languishing on the dole, more “scarring” (a point the PM made in her speech) as if wishful thinking and idle hope was a substitute for serious policy.

Right from the start of the coronavirus, this government’s approach has been –  in essence –  to provide lots of income support and hope that the world gets back to normal pretty quickly.   It was a dangerous and deluded approach from the start, something that becomes more evident with each passing month.  All the more so as other countries’ governments are similarly failing to do much that might support a robust recovery elsewhere.  The current New Zealand government seems to have no ideas, no plan, to be unwilling to use the (low cost) powers they do have to help get relative prices better attuned to supporting recovery.  There is a growing risk that we are drifting into another of those periods –  perhaps worse this time –  as we saw after 2008, when it took 10 years to get the unemployment rate back to something like normal (with little or no productivity growth), and no one much among the political elites (either side) seemed to really care.

Of course, if Labour’s approach is bad, at least (being the government) it is on the table.  It is now less than two months until voting starts and we have no idea what National’s approach might be, but no reason to suppose it would be materially different or better.