Productivity, Productivity Commission, and all that

December 21, 2020December 21, 2020 Michael Reddell New Zealand economic performance, pandemic, Productivity, Productivity Commission

I’ve written various pieces over the years on the Productivity Commission, both on specific papers and reports they have published, and on the Commission itself. I was quite keen on the idea of the Commission when it was first being mooted a decade or so ago. There was, after all, a serious productivity failure in New Zealand and across the Tasman the Australian Productivity Commission had become a fairly highly-regarded institution. But even from the early days I recall suggesting that it was hard to be too optimistic about the long-term prospects of the Commission, noting (among other things) the passing into history of the early Monetary and Economic Council, which had in its day (60s and early 70s) produced some worthwhile reports. In a small, no longer rich, country, maintaining critical mass was also always going to be a challenge, and agencies like The Treasury might be expected to have their beady eye on any budgetary resources allocated to the Commission, and on any good staff the Commission might attract or develop (a shift to another office block at bit further along The Terrace was unlikely to be much of a hurdle).

What I probably didn’t put enough weight on in those early days was the point that if governments weren’t at all interested in doing anything serious about New Zealand’s decades-long productivity failure, there really wasn’t much substantive point to a Productivity Commission at all, unless perhaps as something to distract the sceptics with (“see, we have a Productivity Commission”).

Ten years on, it isn’t obvious what the Commission has accomplished. There have been a few interesting research papers, some reports that may have clarified the understanding of a few policy points. But what difference have they made? Little, at least that I can see. Is the housing market disaster being substantively addressed? Is the state sector better managed? Is economywide productivity back on some sort of convergence path? Not as far as I can tell. Mostly that isn’t the Commission’s fault, although my impression is that the quality of the reports has deteriorated somewhat in recent years. But if politicians don’t care about fixing what ails this economy, why keep the Commission? It might be no more pointless than quite a few other government agencies and even ministries, but they all cost scarce real resources.

For the last 18 months I’ve been looking to appointment of the new chair of the Commission, replacing Murray Sherwin who has had the job for 10 years, as perhaps one last pointer to the seriousness – or otherwise – of Labour about productivity issues. There wasn’t much sign the Minister of Finance or Prime Minister cared much at all – or perhaps even understood the scale of our failure – but just possibly they might choose to appoint a new chair of the Productivity Commission who might lead really in-depth renewed intellectual efforts to address the failure, perhaps even in ways that might, by the force of their analysis and presentation, make it increasingly awkward for governments (Labour or National) to simply keep doing nothing. I wasn’t optimistic, partly because I’d watched Robertson and Ardern do nothing for several years, but also because – to be frank – it really wasn’t clear where they might find such an exceptional candidate even had they wanted one.

But then they removed all doubt last week when they announced the appointment of Ganesh Nana as the new chair. There is a strong sense that he is too close to the Labour Party. If that wasn’t ideal, it might not bother me much – especially given the thin pickings to choose a chair from among – if it were matched with a high and widespread regard among the economics and policy community for his rigour and intellectual leadership, including on productivity issues. Or even perhaps if he knew government and governent processes inside out (Sherwin, after all, was a senior public servant rather than himself being an intellectual leader). I don’t suppose the Nana commission is simply likely to parrot lines the Beehive would prefer – and can imagine some of Nana’s preferences being uncomfortable for them from the left – but this is someone who has spent 20+ years in the public economics debate in New Zealand, from his perch at BERL, and yet as far as I can tell his main two views of potential relevance are that (a) inflation targeting (of the sort adopted in most advanced economies) is a significant source of New Zealand’s economic underperformance, and (b) that a much larger population might make a big difference (notwithstanding use of that strategy for, just on this wave, the last 25 years or so.

Then there was this bumpf from the Minister’s press statement announcing the appointment

Ganesh Nana said he is excited to take up the position and looks forward to working with other Commission members and staff to focus on a broad perspective on productivity.

“Contributing to a transformation of the economic model and narrative towards one that values people and prioritises our role as kaitiaki o taonga is my kaupapa. This perspective sees the delivery of wellbeing across several dimensions as critical measures of success of any economic model.

“Stepping into the Productivity Commission after more than 20 years at BERL will be a wrench for me and a move to outside my comfort zone. However, this opportunity was not one I could ignore as the challenges facing 21st century Aotearoa become ever more intense.

“The role and nature of the work of the Commission is set to change in light of these pressing challenges. I am committed to ensure the Commission will increasingly contribute to the wider strategic and policy kōrero,” Dr Nana said.

Whatever that means – and quite a bit isn’t at all clear to me – it doesn’t suggest any sort of laser-like focus on lifting, for example, economywide GDP per hour worked, in ways that might lift material living standards for New Zealanders as a whole.

(And then there was the unfortunate disclosure in the final part of the Minister’s press statement that the government has agreed that while functioning as a senior economic official, paid by the taxpayer, Nana is to be allowed to retain his almost half-share in his active economic consulting firm BERL. There is the small consolation that the Commission itself will not contract any business with BERL, but that should not be sufficient to reassure anyone concerned about what is left of the substance or appearance of good governance in New Zealand.)

A couple of weeks ago the Productivity Commission released a draft report on its “Frontier Firms” inquiry. The Commission does not control the inquiries it does – they are chosen by the government – and this one also seemed a bit daft to say the least, since “frontier firms” always seem much likely to arise from an overall economic policy environment that has been got right, rather than being something policymakers should be focusing on directly. But the Commission might still have made something useful, trying to craft something a bit more akin to a silk purse from the sow’s ear of a terms of reference.

I had thought of devoting a whole post to the draft report, and perhaps even making a formal submission on it, but since the report will be finalised under the Nana commission that mostly seems as though it would be a waste of time. And there is the odd useful point in the report, including the reminder that our productivity growth performance has remained dreadful by the standards of other modestly-productive advanced economies, and that we have relied on more hours worked, and the good fortune of the terms of trade, to avoid overall material living standards slipping much recently relative to other advanced economies. Productivity growth – much faster than we’ve achieved – remains central to any chance of sustainably lifting those material living standards and opening up other lifestyle etc choices.

But mostly the report is a bit of a dog’s breakfast. Just before the draft report was released the Commission released a short paper on immigration issues that they had commissioned. I wrote about that note, somewhat sceptically, at the time – sceptical even though the gist of the author’s case might not be thought totally out of line with some of my own ideas. It turned out that the Fry and Wilson work was the basis for the Commission’s own discussion of immigration in the draft report, a discussion that neither seems terribly robust nor at all well-connected to the “frontier firms” theme of the report. Perhaps the RSE scheme has problems, perhaps some low-skilled work visas are issued too readily, but…..apple orchards and vineyards didn’t really seem to be the sort of “frontier firms” the Commission had in mind in the rest of the report.

Perhaps my bigger concern was about their attempts to draw lessons from other countries. They, reasonably enough, suggest that there might be lessons from other small open advanced economies, perhaps especially relatively remote ones. But then they seem to end up mostly interested in places like Sweden, Finland, Denmark and the Netherlands – all of which are in common economic area that is the EU (two even with the euro currency, most with no disadvantages of remoteness). I don’t think there was a single reference to Iceland, Malta, or Cyprus. Or to Israel – that country with all the high-tech firms and a productivity performance almost as bad as ours. And – though it might not be small, it has many similar characteristics to New Zealand – no mention at all of Australia. Remote Chile, Argentina and Uruguay get no mention – even though two of those three have had strong productivity growth in recent times – and neither, perhaps more surprisingly, do any of the (mostly small) OECD/EU countries in central and eastern Europe, many of which are now passing New Zealand levels of average labour productivity.

There wasn’t any systematic cross-country economic historical analysis or a rigorous attempt to assess which examples might hold what lessons for New Zealand. Instead, there a mix of things that might be music to the ears of a government that wants to be more active, and perhaps to punt our money again on the emergence of some mega NZ excellent firm(s) – without any demonstrated evidence that it (or its officials) can do so wisely or usefully – plus the odd thing that must have appealed to someone (eg the material on immigration – a subject that might still usefully warrant a full inquiry of its own, if the government would allow it, and when better than when we are in any case in something of a hiatus).

This will probably be the last post for this year, so I thought I’d leave you with a couple of charts to ponder.

The first is a reminder of just how little we know about what is going on with productivity – or probably most other aggregate economic measures – right now. As regular readers will know, I have updated every so often an economywide measure of labour productivity growth that averages the two different real GDP series (production and expenditure) and indexes of the two measures of hours (HLFS hours worked, QES hours paid).

mix of econ data

First, there is the huge difference in the two GDP measures. Whichever one one uses – but especially the expenditure measure – suggests a reasonable lift in average labour productivity this year (on one combination as much as 5 per cent). In the period to June there was an argument about low productivity workers losing their jobs, averaging up productivity for the remainder, but how plausible is that when hours are now estimated to be down only 1% or so on where they were at the end of last year (much less than, say, the fall in the last recession)? And thus how plausible is the notion of an acceleration in productivity growth given all the roadblocks the virus, and responses to it, have put in place this year. And although SNZ’s official population estimates have the population up 1.5 per cent this year (to September), if we take the natural increase data and the total net arrivals across the border data, they suggest a very slight drop this year in the number of people actually in New Zealand. I’m not sure, then, which of the economic data we can have any confidence in, although I’ll take a punt that the single least plausible of these numbers is the expenditure GDP one, and any resulting implication of any sort of real lift in productivity this year. SNZ has an unenviable job trying to get this year’s data straight.

But, of course, the real productivity challenge for New Zealand was there before Covid was heard of, and most likely be there still when Covid is but a memory. As we all know, New Zealand languishes miles behind the OECD productivity leaders (a bunch of northern European countries and the US), but in this chart I’ve shown how we’ve done over the full economic cycle from 2007 to 2019 relative not to the OECD leaders but to the countries that in 2007 either had low labour productivity than we did, or were not more than 10 per cent ahead of us then. For New Zealand I’ve shown both the number in the OECD database, and my average measure (which has the advantage of being updated for last week’s GDP release).

productivity 07 to 19

Whichever of the two NZ measures one uses, we’ve done better only than Greece and Mexico. Over decades Mexico has done so badly that the OECD suggests labour productivity in 2019 was less than 5 per cent higher than it had been in 1990. Even Greece has done less badly than that.

(As a quick cross-check, I also looked at the growth rates for this group of countries for this century to date. We’ve still done third-worst, beating the same two countries, over that period.)

It is a dismal performance. And there isn’t slightest sign that our government cares, or is at all interested in getting to the bottom of the problem, let alone reversing the decades of failure. Talking blithely about alternative measures of wellbeing etc shouldn’t be allowed to disguise that failure, which blights the living standards of this generation and the prospects of the next.

(And, sadly, there is no sign any political opposition party is really any better.)

Monetary policy in 2020

December 14, 2020December 14, 2020 Michael Reddell Monetary policy, pandemic

On Saturday I did a guest lecture to the Master of Applied Finance course at Victoria University. Martien Lubberink, who runs the course, invited me along to talk to the students about the Reserve Bank’s monetary policy this year (as it happens, most years for the best part of two decades I used to do a lecture to this same course articulating and championing the monetary policy framework and the Bank’s conduct of policy).

There wasn’t a great deal in the lecture that hasn’t already been covered in one or (many) more posts over the course of the year, but if anyone is interested here are the slides I used

Activity over substance VUW presentation 12 Dec 2020

and this is the story I was trying to tell

Notes for VUW MAF lecture on 2020 mon pol 12 Dec 2020

For the most part, I tried to look at what the Bank has, and hasn’t, done on their own terms. I didn’t, for example, spend lots of time on whether negative OCRs would “work”, but rather took as given the Bank’s repeatedly stated view that they would. I didn’t challenge the “least regrets” approach they have claimed, since the second half of last year, to be guiding them, but looked at how they had done relative to that worthy aspiration. I took for granted their embrace of the notion that in downturns when both inflation forecasts undershoot and unemployment forecasts overshoot aggressive monetary action is warranted. And against the backdrop of all that sort of thing I suggested that the year was best characterised as one of lots of activity, and rhetoric, and not a great deal of monetary policy substance.

For example, I included these two indicative charts comparing (real) interest rate and (nominal) exchange rates this year and in each of the three previous recessions since inflation targeting was adopted.

activity over substance

Whatever the impact of the LSAP and the funding for lending programme etc, the bottom line remains that key financial market prices just haven’t moved very much (and that is another area where I take as given – but also agree with the Bank – that to the extent those programmes work they do so largely by altering interest and exchange rates).

I ended the lecture with some thoughts on how we should evaluate the Bank’s monetary policy performance this year. From my notes

How should we evaluate the Bank’s performance?

We always have to be careful, when evaluating government agencies, not to hold them to unreasonable standards. In this talk I’ve tried to ensure that I use either information that was available to them when they made decisions, their own rhetoric and arguments, or common international central banking practices and standards. We can’t blame the RB, for example, for not pre-emptively easing a year ago in anticipation of a pandemic no one – no central banker anyway – could reasonably know about.

But we, and should, criticise them for:

The failure to recognise and respond to the emerging risks early (monetary policy works with a lag, risks around being near the lower bound were well known),

The failure, having decided that the negative OCR was a preferred option, to have ensured the bulk of the system was operationally ready (almost inexcusable, and has meant we have had monetary conditions tighter than otherwise for most of the year,

The failure to operate as if “least regrets” was actually guiding policy – the evidence for this not being my independent analysis, but their own numbers,

Falling back on exuberant spin regarding the impact of the LSAP, when realistically the effective impact is likely to have been small,

Opening the way to the “$100bn money printing” rhetoric by adopting LSAP rather than a mod-point on the yield curve target (as the RBA initially did, and even the LSAP the RBA is now doing is much smaller relative to the size of the economy),

Allowing the (second-best) sensible FFL instrument to also be framed as some dangerous money printing exercise,

Lack of serious transparency – whether the utter refusal to publish background analysis/research behind the mon policy choices/instruments, even in extremely unsettled times and when the rest of govt was being proactively transparent, or the continued invisibility and silence of the non-executive members of the MPC, and

The lack of effective communications and framing. There have been few speeches all year, hardly any published research, nothing from the non-exec MPC members. Instead, they’ve largely left the framing of issues to critics – notably the ones who think the Bank has done too much and is to blame either for house price inflation and some looming general inflation. There has been nothing authoritative from the Bank, and they seem constantly to have been running to catch up.
It has been a poor performance, that reflects poorly on all those involved: the Governor, his senior staff, the invisible non-exec MPC members, the Board (paid to hold management to account) and the Minister with responsibility for management and the Board.

Of course, it is fair to ask how much difference a better monetary policy – substance and presentation – might have made. By now, perhaps not a lot substantively – the mon pol lags are longer – but into next year it would have helped lay the foundations for a strong recovery, a lift in inflation, and a rapid return to full employment (we can’t afford the 10 years it took after 2007). And, agree with them or not, the RB would stand higher in informed opinion, and if we value the idea of an operationally independent central bank, that would have to have been a good thing. It would truly have been a least regrets strategy.

At the end of the lecture, we had some time for questions. Perhaps the best question was the one I could not give a compelling answer to: why – given their projections, given their avowed “least regrets” approach – has the Bank and MPC not been willing to do more?

I had noted that there were similar issues with central banks in a number of other countries, and indeed that it was striking how relatively little monetary policy had done in this downturn and period of greatly-heightened uncertainty. You can see it in, for example, the published projections of the Reserve Bank of Australia, the ECB, and probably others too – where for several years to come not only is inflation expected to be below target, but unemployment is above general estimates of the respective NAIRUs. As our Governor notes, that is a combination that points in the direction of a lot of monetary policy support.

(As just one example of what is going on elsewhere, the ECB released its latest projections late last week.

ECB inflation

Three years out inflation is still barely back to 1.5 per cent, compared with a target of just under 2 per cent. In these same projections, the unemployment rate rises further from here.)

Central banks could do more to boost the recovery in activity and employment. The quiescent inflation numbers – their own projections – tell us that. In fact, those projections (and market and survey expectations) are best seen as a constraint limiting how much central banks can do; a constraint that when inflation projections are below target should be thought of as a non-binding constraint (especially when central banks around the world have had an upward bias to their inflation forecasts for the last decade).

So why don’t they do more? I don’t know. They don’t say – especially not our Reserve Bank which talks one set of rhetoric (often quite good rhetoric) and acts inconsistently with that rhetoric. Perhaps there is something in the story that active-government left-liberal Governor doesn’t want to use monetary policy because he wants to put pressure on the government to run bigger deficits and further increase public spending. I hope that isn’t a part of the story – it would be profoundly inconsistent with our democratic institutions of government for a non-elected official (and his lackeys on the MPC) to refuse to do their job simply to try to advance their personal political preferences in other areas. Perhaps they don’t believe the rhetoric (they themselves use) and doubt that monetary policy can do much more good in stabilising the economy. Perhaps there is some secure-public-employee indifference to the scandal of prolonged and unnecessarily high unemployment (which never affects senior central bankers, and probably rarely their children): it did, after all, take 10 long years after 2007 to get unemployment in New Zealand back down again. Perhaps there is some embarrassment that with all those years of advance notice they didn’t get their act together and ensure that banks were operationally ready for negative OCRs? Perhaps, globally, there is some discomfort that with all those years advance notice – most having got to the lower bound in the last recession – nothing (repeat nothing) has been done anywhere to make the lower bound less binding, and enable the sorts of deeply negative interest rates that (for example) former IMF chief economist Ken Rogoff has called for.

Sure, it is easy for people to talk about all the fiscal stimulus that has been provided instead of monetary policy. But those published central bank forecasts – here or in other countries – capture all those effects. It is the job of monetary policy to estimate all the other effects and then, if the inflation outlook is below target and the unemployment outlook is above NAIRU-type estimates, to do more, to do what it takes. with monetary policy. That is what we have discretionary monetary policy for. (There are, of course, hard cases where the inflation and unemployment strands aren’t aligned, but as our own Governor has repeatedly pointed out this year, this isn’t one of those times.)

So, I really don’t know the answer to the student’s question. But I should (as should anyone who follows central banks closely), because they should be telling us. Instead, we’ve had a year of few speeches, no visibility (still) for the non-executive MPC members, little or no published research, a refusal to release background documents and analysis, and little or no attempt to articulate and defend a robust framework. 10 days or so ago, for example, the Governor gave a speech to an Australian audience on New Zealand monetary policy this year. As far it went, and by Orr’s standards, it wasn’t a bad speech but it addressed none of these questions. That isn’t good enough, and reflects poorly on everyone involved – the Governor, the MPC, the Board supposed to hold them to account, and the Minister of Finance with overall responsibility for the Bank, for monetary policy, and for economic performance more broadly.

There has been a lot of rhetoric, a lot of busy-work, but not a lot of monetary policy doing what it is there for, and not much transparency and accountability either.

Could do better?

December 2, 2020December 2, 2020 Michael Reddell Immigration, New Zealand economic performance

Minus the question mark, that is the title of a new and fairly short report undertaken for the Productivity Commission by economists Julie Fry and Peter Wilson on “Migration and New Zealand’s frontier firms”. The Commission itself has been charged by the Minister of Finance with reporting on what could be done about so-called “frontier firms”, and has been casting about for various possible angles (apparently their draft report is due later this week). There is a Stuff article on the Fry and Wilson paper here, which begins this way

Despite its best efforts to become the next Silicon Valley, New Zealand has instead attracted a lot of nice people but very few trailblazers.

There probably have been – and still are – a few with that “next Silicon Valley” type of aspiration, but the key point is more like “lots of individually nice people, but probably not much economic gain to New Zealanders as a whole”.

Fry and Wilson’s own summary runs this way

Fry and Wilson key points

Fry and Wilson themselves seem a bit more sceptical on the economic value (to New Zealanders) of New Zealand’s large-scale immigration programme than they were in their short 2018 book that I wrote about here.

I’m a bit ambivalent about the report, even though – considered broadly – it goes in somewhat the same policy direction as the approach I’ve been championing for much of the last decade. Perhaps that is mostly because the Productivity Commission didn’t offer to pay very much for a report, and so the authors didn’t have the time or resource to consider the issues around the economics of New Zealand immigration in any great depth. A serious look at New Zealand’s immigration policy and the connection to New Zealand’s underwhelming economic performance would require, for example, a full Productivity Commission inquiry devoted just to that issue, but the government determines inquiry topics and I gather they’ve refused to have an immigration policy one done, even though immigration policy is one of the larger discretionary government structural policy interventions in the economy. But I can’t blame Fry and Wilson for that.

But unfortunately the (presumed resource) constraint means that the report really isn’t much more than an initial view that large scale immigration over the last 30 years probably hasn’t done much good for New Zealanders, and that hence somewhat less in future would more likely be beneficial. I don’t disagree – and, of course, have gone further than the authors in my hypothesis about the damage large scale immigration may have done (a story they describe as “plausible but untested”) – but who is the report going to persuade? The report doesn’t seek to engage with a broader academic literature that tends to be quite positive about economic gains from immigration, at least in the advanced world as a whole, or with the advocacy for it – including in a New Zealand context – by outfits like the IMF or the OECD. They might – as I do – think many of these results don’t stand up to close scrutiny (eg on the IMF here, or the OECD here), or may not have much application to a single extraordinarily-remote location, but they neither engage with the papers, not articulate their critiques. There isn’t much New Zealand specific formal research, but somewhat to my surprise, there wasn’t even a reference to the big advocacy piece the New Zealand Initiative did in 2017 (reviewed and critiqued at length here).

But in the rest of this post I wanted to comment mostly on two areas where I wasn’t particularly convinced, even as someone generally somewhat sympathetic to the thrust of the report. The first is the claim – also in those Key Points above – that New Zealand’s policy for attracting skilled migrants is “close to international best practice already”. The authors seem to offer little or no support for this proposition, but even if it were true it would not be particularly reassuring given that (a) we take a lot of migrants, as a percentage of New Zealand’s population, and (b) the evidence suggests that on average migrants are no more skilled than comparable New Zealand cohorts. The large numbers of people who have managed skilled migrant entry as low-level retail or cafe managers, for example, suggests that if this is world best practice, world practice is pretty poor (which in many cases is true no doubt, but that is their problem not ours). But more specifically, we also know that the New Zealand system for granting residency to “skilled migrants” is now strongly skewed in favour of people who are already in New Zealand – explicitly favouring people from abroad with New Zealand qualifications and New Zealand work experience (with bonus points for living in remote corners of this remote country). That favours absorption and integration, but generally not outstanding excellence: our universities generally not being top-tier, and our economy not being some global centre of excellence. It simply isn’t that easy for, say, a young family – parents perhaps good graduates of top 20 overseas universities – to just get residency in New Zealand, not without first relocating temporarily to the ends of the earth on a short-term visa in the hope residency eventually works out. To the extent there is benefit for New Zealand putative “frontier firms” in migration, it some of those sorts of people – with some proven work experience globally – who are likely to be more valuable than some 21 year old student studying at Massey who couldn’t get into Stanford or Cambridge.

Of course – and here I think Fry and Wilson probably agree – not that many top tier foreign people are likely to want to live and work here (as distinct from the boltholers), but lets not get complacent that our current skilled migration system is really fit for purpose, whether as to target number or conditions of entry (and although it isn’t dealt with in this report, a lot of our residency grantees don’t even come in via the skilled migrant pathway).

(On that “not that many top tier foreign people are likely to want to live and work here”, see my doubts expressed a few years ago about the the-new Global Impact Visas. Rereading that old post yesterday, nothing in what we have seen and heard of the scheme’s operation so far would lead me to materially alter my view of the prospects.)

The Productivity Commission over the last couple of years has emphasised quite a bit a desire to see New Zealand-based firms investing more beavily in technology. I’ve been uneasy about this line of argument because at times the Commission has seemed to put the cart before the horse, not digging deeply enough to understand why the New Zealand economy is underperforming and more profitable business opportunities aren’t apparent. This emphasis seems to carry over to the Fry and Wilson report – no doubt delivering something consistent with what the client was looking for. There are several pages (in what is really only a 30 page report) on opportunities (“very significant upside productivity potential”) if only we made it materially harder for firms to hire foreigners.

The predominant mechanism they seem to have in mind – whether in relation to students, working holidaymakers, or RSE workers (there is a whole section on the fruit industry) – is that if labour is harder and more expensive to get, firms will invest in technology. On the one hand, they seem to be buying into a model in which immigration has driven down wage rates (for which the evidence, considered broadly – as opposed to a few concentrated subsectors – is quite thin; in New Zealand wages have risen faster than GDP per hour worked over the last few decades). But there are also disconcerting parallels with a couple of very shaky arguments. Back in the disinflationary 1980s there was sometimes an argument used (in the UK and here) that a high real exchange rate – pretty much an inevitable part of a transition towards low inflation – was really quite good because it would encourage strong firms to invest more heavily in advanced technology etc to retain competitiveness. There was never much sign of that in the aggregate. And more recently we here claims that materially increasing minimum wages, from already quite high (relative to median wages) levels, will itself boost productivity and stimulate investment in technology. There might be some of that – firms will look for ways to mitigate the forced increase in labour costs – but there is no evidence in support of it as some sort of economywide pro-productivity strategy. And so I’m also uneasy when this argument is applied so simply to immigration. Perhaps there is something to it at an individual firm level, but it is unlikely to hold much at an economywide level. (Relatedly, much of the discussion in the paper seems to be about average labour productivity, and very little about the – conceptually more important – total factor productivity. One can raise labour productivity in ways that still leave the overall economy worse off – Think Big in the 1980s was probably such an example.)

The authors seem to favour a much lower level of non-citizen immigration to New Zealand (on average over time), not just nipping and tucking in a few individual migration approval streams. But if so, then their paper seems to neglect a rather important adjustment channel. As they note, historically New Zealand economists tended to emphasise the significance of the short-run demand effects of migration (and the well-established point that the short-run demand effects tend to outweigh near-term supply effects plays an important part in my own story). But if immigration by non-citizens is cut back markedly and for a prolonged period we would expect to see a reduction (perhaps a quite significant one) in the real exchange rate. And – to take the fruit industry as an example – a lower exchange rate might well more than outweigh any sector-specific wage effects from reduced access to migrant workers, leaving no particular incentive for the industry to invest more aggressively in technology to replace labour (for the existing tradables sector this is my story of how adjustment works once reform is done not just to an indvidual firm – deprived of access to labour – but at an economywide level). It isn’t that I really disagree with the Fry and Wilson direction of policy, but their analysis seems a bit too simple, and also inclined to treat the existing structure of the economy as a given (whereas on my argument I think we would, over time, see quite a different mix of sectors).

Fry and Wilson end their paper with some specific post-Covid suggestions for the government

fry and wilson 2

I’m sceptical that the 4th bullet has any content to it, although the broad direction of their recommendations isn’t one I’m uncomfortable with. My own suggestions (from a speech a few years ago) are along somewhat similar lines.

reddell immigration specifics

Finally, in their paper Fry and Wilson note of my views

While plausible, Reddell’s hypothesis has not been tested empirically. However, it is
possible that the natural experiment provided by the Covid-19-induced border closure will
enable more solid conclusions to be drawn.

I don’t think that is so. Most importantly, for a natural experiment you really want New Zealand immigration policy changed with all else unchanged, but this year too much has changed all at once for any sort of read, let alone a clean one. Among those changes, the differential ways different countries have handled Covid, massive fiscal stimulus (which, all else equal, tends to put upward pressure on the real exchange rate), most other countries also closing their borders to a greater or lesser extent, and a big disruption to key elements of our tradables sector. Oh, and all parties expect – political parties seem to champion – a return to the immigration status quo ante just as soon as possible.

For anyone wanting to read more of my story, there is this older paper from 2013, a speech on related topics from 2017, and a chapter in a recent book on New Zealand policymaking in which I look at some of the issues around New Zealand’s long-term economic underperformance, with an emphasis on the notion that however sensible large scale immigration may be for some countries, it seems not to have been more recently so for a remote land heavily reliant on a fixed stock of natural resources, and with few or no asymmetric shocks having worked in our favour for 100 years or more.

Robertson playing distraction

November 26, 2020 Michael Reddell Housing, Monetary policy

On Tuesday afternoon we learned that the Minister of Finance had written to the Governor of the Reserve Bank about housing and monetary policy. At his press conference yesterday, the Governor told us that the first thing he knew about it was on Monday, suggesting that the government had become worried over the weekend that it was on the political backfoot on housing and felt a need to be seen to be doing something/anything, to change the headlines for a day or two at least.

There wasn’t much to the Minister’s press statement. Perhaps it might even have seemed not-unreasonable if he’d come into office for the first time just a few days ago, but he’s been Minister of Finance for three years, and the housing disaster has just got steadily worse over that time. Little or nothing useful has happened in that time to do anything other than paper over a few symptoms of the problem. And no one believes any agenda the government has is likely to markedly change things for the better: if they did, expectations would already be shaping behaviour and land/house prices would already be falling. Why would one believe it when the Prime Minister refuses to talk in terms of materially lower house prices, and even the Minister of Finance yesterday could only talk about wanting “a sustained period of moderation in house prices” – ie enough to get the story of the front pages, not to actually fix the problem? That makes them no better than their National predecessors.

And so he made a bid to play distraction, writing to the Governor and suggesting that he (the Minister) might change the Remit the Monetary Policy Committee operates under. The Minister can make such changes himself (he does not need the Bank’s consent), but must seek comment from the Bank first.

It was a limp suggestion, as the Minister must have known when he wrote the letter (and as The Treasury would almost certainly advised him, if he asked for advice from them). In the Remit, consistent with the Act, the MPC is required to use monetary policy to keep inflation near 2 per cent, and consistent with that to do what it can to support “maximum sustainable employment” (in practical terms, low unemployment). And then there is this

The Minister suggested in his letter that he might like to add “and house prices” to the end of the worthy grab-bag phrase in b(ii).

b(ii) has been in the Bank’s monetary policy mandate (the old Policy Targets Agreements – which I’d link to, but the Bank seems to have removed them from their website) since the end of 1999. It was inserted when Labour became government that year and the new Minister of Finance, Michael Cullen, wanted some product differentiation. The Bank had had a bad run over the previous parliamentary term, including the period when it ran things using a Monetary Conditions Index operating guideline, which led to us actively inducing a wildly unnecessary degree of variability in short-term interest rates. Cullen had also, for some years, been somewhat exercised about the cyclical variability of the exchange rate.

It was cleverly-crafted wording. Don Brash agreed to some new words that sounded worthy – who, after all, wants “unnecessary” variability in anything – but which really changed nothing at all. Better (or worse) still, no one has ever known quite what it meant, or if it meant anything at all beyond what was already implicit in a medium-term approach to inflation targeting (looking through short-term price fluctuations – per b(iii) now – had always been integral to the way we’d run thing). A lot of time and energy was spent trying to articulate what it might mean – the Bank’s Board were particularly exercised, since they were supposed to hold the Governor to account, and it wasn’t clear how, if it all, b(ii) changed anything. For practical purposes, in all the years I sat on the OCR Advisory Committee, with b(ii) as part of the mandate we were advising against, I’m not convinced it ever made any material difference to any specific OCR decision. If the Governor didn’t want to tighten much anyway, it was sometimes a convenient reference point – wanting to avoid “unnecessary instability” in the exchange rate – but a more hawkish Governor, or a more accurate set of forecasts, might just as easily have determined that any resulting pressure on the exchange rate, while perhaps a little regrettable, was nonetheless, “necessary”. And then there were the tensions – avoiding a bit more upward pressure on the exchange rate might actually contribute to increasing the variability in output, and so on.

The clause was, and is, largely meaningless in any substantive sense. From a purely substantive perspective I’ve argued for some years that it should simply have been dropped, but the fact that it lives on is a reminder that documents grow not necessarily because the substance requires it, but because there is a political itch to scratch.

So Grant Robertson’s suggestion that he might change the Remit to add “and house prices” to b(ii) should be seen in exactly that light. It is about scratching political itches – and distracting from the government’s own failures on housing – not about substance. We know this also because the Minister was at pains to reassure people that he wasn’t proposing to change the operational objectives the MPC is required to pursue. If not, then adding “and house prices” is really no more than getting the MPC to add another few lines to the occasional MPS, to imply that they had paid ritual obeisance. It might do no harm, but it will do no substantive good either.

But it won Robertson quite a few headlines, and even got the markets excited for a while, temporarily prompting the sort of lift in the exchange rate that might otherwise appear appear out of step with the government’s alleged desire to promote investment in more “productive assets”.

But if there was anything real to it – if the aim was actually to make the MPC set monetary policy differently (tighter at present) – it would, of course, have to have come at the cost of a more sluggish recovery, lower than target inflation, and cyclical unemployment higher than necessary. Which would have seemed very odd coming from a Minister of Finance who had explicitly introduced to the Act – what was always implicit – the cyclical unemployment dimension just a couple of years ago, complete with reminders of the importance his Labour forebears – notably Peter Fraser – had placed on full employment. (I suppose, charitably, it could have involved some more fiscal stimulus to offset less monetary stimulus, but if the Minister had been serious about that he could do it anyway – the RB sets monetary policy in the light of government fiscal choices whatever they are.)

But of course it wasn’t serious. It was political theatre, and distraction, including an attempt to distance himself from monetary policy policy that he had explicitly authorised. Thus he claims

mof letter

But as the Minister knows very well, not only was the Bank well advanced in thinking about unconventional monetary policy options by then – they’d published a whole Bulletin article about it in May 2018 – and much of the rest of the world had been using them for some years, but that the LSAP programme (the one actually in effect this year) has been inauguarated with the explicit and repeated consent of the Minister of Finance himself (through the guarantees he has provided to the Bank). Unconventional monetary policy is, in any case, yet another ministerial distraction, since no supposes that whatever contribution monetary policy might have made to this year’s house price developments, it would have materially different if the Minister had ensured that the Bank had its act together in ways that meant that they used a negative OCR this year.

Anyway, the Minister’s letter prompted a quick response from the Bank. Perhaps some wonder if that was necessary – these things could be dealt with to a greater extent in private – but I’m with the Governor on this one. It was the Minister who chose to issue his letter the afternoon before the Bank’s long-scheduled FSR press conference. The Bank had no effective choice but to respond, and better to put things in writing than just rely on throwaway comments at a press conference.

I thought the Governor’s letter was mostly a fairly sensible and moderate holding response. He promised to come back to the Minister with more considered thoughts on the suggested addition to b(ii). There were a couple of bits that could be read more pointedly. For example, the Governor noted that

We welcome the opportunity to contribute to your work programme aimed at improving housing affordability. As I’ve said publicly on many occasions, monetary and financial regulatory policy alone cannot address this challenge. There are many long-term, structural issues at play.

The Bank had, in fact, had some nice lines to that effect in its Monetary Policy Statement just a couple of weeks ago

RB on housing

This is a government failure, not a central bank one. But I guess I wouldn’t expect any central bank Governor to be quite that pointed in public.

Several have also noted that the Governor pointed out that the Bank already considers house prices in setting monetary policy.

I can assure you that the MPC, in making its decisions, gives consideration to the potential impact of monetary policy on asset prices, including house prices. These are important transmission channels that affect employment and inflation. Housing market related prices are
also included in the Consumer Price Index, for example rents, rates, construction costs, and housing transaction costs.

But actually that was a bit cheeky. On those terms, at times like these the Bank positively welcomes higher house price inflation because of the beneficial spillovers they think that leads to in raising CPI inflation. Recall just a few weeks ago their chief economist was actively welcoming higher house prices, distinctly averse to falling prices.

Out of that first round, I’d suggest that the Governor came out ahead on points. The Minister got his headlines – lots of them in some media – but the Governor gave no hint of believing that there was likely to be anything of real substance there.

But the Governor must have over-reached yesterday. At the FSR press conference he expansively declared his pleasure that the Bank has been invited to share its expertise in advising on the wider issues of supply and affordability. In an interview with Stuff – now the frontpage story in the Dom-Post – Orr went further, talking about the tax advice they might also offer. It wasn’t clear what expertise the Governor thought the Bank had in these areas – there is nothing in their research publications or speeches in recent years that suggests any – but I guess that doesn’t often deter the Governor.

But all that talk can’t have gone down well with the Minister, as the newsroompro newsletter this morning includes this

milnes rb

Ouch.

All seems not to be sweetness and light between the Governor and the Minister. But then they deserve each other really. Robertson was engaged in a transparent attempt to distract briefly from the three years of failure of his own government, writing to the Reserve Bank – sure to get headlines – rather than putting the hard word on his own boss and his ministerial colleagues. And Orr, who surely knows there is nothing there and how empty b(ii) really is – and who genuinely seems to think monetary policy should be focused on boosting aggregate demand in ways that lift inflation and employment, can’t help himself in openly trying to embrace a much wider role as adviser on all manner of things that really have nothing much to do with the Bank. Meanwhile, through this period we have had precisely no serious speeches or research papers on monetary policy, we have a central bank that fell back on LSAP partly because it didn’t think to do the basics and check that banks could operate with a negative OCR, and (of course, still) the invisible external members of the Monetary Policy Committee. A high-performing central bank and Monetary Policy Committee would have done a much better job over months of articulating a story, and explaining the place of monetary policy in the mix.

Then, of course, there was the question as to whether had the proposed amendment to b(ii) been in place back in March anything about monetary policy this year would have been different. Orr – probably diplomatically – avoided answering that, but of course the straightforward answer is no. That is so for two reasons. First – and this is a point Orr made in his MPS press conference – the threat to output, employment, and inflation in March was so large that the operational objectives the Minister has given the MPC would simply have impelled a significant easing in monetary policy. But the other reason – actually more an explanation for monetary policy choices than is often realised – is the forecasts. Back in March, hardly anyone (no one I’m aware) would have forecast the rise in house prices we’ve actually seen. Most probably expected – I did – something more like 2008/09, with a dip in prices for a time. So sitting in an MPC meeting in March with an amended b(ii) the house price issues would have appeared moot. Monetary policy would have been conducted just as it was. Oh, and not to forget my point earlier: no one knows what b(ii) means in practice anyway.

But of course if the Minister took any economic advice at all before sending his political theatre letter, he’d have known that too.

So change the Remit, or don’t, in this way and (a) it won’t make any difference to the conduct of monetary policy, and (b) it won’t change the fact that the reforms that might make a real difference now to land/house prices are all matters under the control of ministers already, backed by their majority in Parliament. If my kids can’t buy houses 10 years hence, it is going to be the fault of Ardern and Robertson, and not at all that of the Reserve Bank.

Funding for lending and other myths

November 18, 2020November 18, 2020 Michael Reddell pandemic, Reserve Bank

There is a huge number of stories around at present on various aspects of monetary policy and the (successive) governments-made housing market disaster (the two being, in fundamentals, quite unrelated). Were I in fine full health and energy I’d no doubt be writing about many of them. Instead, I’m going to focus here just on the controversy around the Reserve Bank’s so-called Funding for Lending programme, the details of which were announced last week.

It isn’t always inviting to defend the Reserve Bank, since they are often (as here) their own worst enemy, but on the essence of the FLP programme I’m mostly going to. That doesn’t mean I think it is a particularly good scheme – there is a perfectly straightforward way to lower interest rates (the OCR), which influences the exchange rate as well, that they simply refuse to use. And they have named the scheme in a way that actively misleads and invites misunderstanding from those who haven’t thought hard about monetary systems.

All the FLP programme really is is a scheme to lower interest rates a bit more without changing the OCR. That isn’t just my take; that is the official Reserve Bank view. Here is the graphic from the MPS last week as to how they think the thing works

FLP 2

Even that is a bit inaccurate since – as the Governor explicitly noted in his press conference the other day – the expectation that the Bank will be willing to offer funds (not a dollar has yet been transacted) has already done the job. Retail deposit interest rates have fallen relative to the OCR.

But you will note that nothing in that graphic talks about a channel in which additional funds are now available in ways that enable banks to lend in ways, at rates ($m), they couldn’t otherwise.

There are at least two good reasons for that.

The first is that banks are simply not funding constrained. In fact, they are awash with central bank provided funding/liquidity: total settlement cash balances that were about $7bn pre-Covid are now about $24bn. If lending is not occurring at present to the sort of borrowers that some politicians or commentators might prefer – and you have to wonder what such private transactions have to do with them – it isn’t because banks are facing some sort of funding constraint (actual or prospective – there is no uncertainty that adequate funding will be available, including because the Reserve Bank’s core funding requirements – on precise types of funding – have been markedly relaxed for the duration). The Governor made basically that point in his press conference the other day: if not much new business lending is happening at present that is most likely because there is considerable (much larger than usual) economic uncertainty – not anyone’s fault, not anything that can quickly be allayed. That uncertainty affects both prospective lenders and prospective borrowers. Market reports – and the RB credit conditions survey – indicate that banks have tightened their effective credit standards, which is surely what one would expect – probably even hope for, from prudent bankers – in such a climate. There will always be chancers, keen to borrow, but in such a climate banks should probably be particularly cautious about potential business borrowers without strong collateral who are particularly keen to borrow.

So at a system level (and we have no reason to suppose it is different at an individual bank level), settlement cash – which is what the Bank is willing to supply – simply isn’t a constraint on lending. (It wasn’t really even in the 2008/09 recession here, although then New Zealand banks and their parents had reasonable concerns about ongoing access to specific classes of desirable funding.)

As importantly, at an aggregate level any Funding for Lending programme lending does not replace other funding/deposits. In the normal course of bank business in a floating exchange rate economy, and for the system as a whole, deposits arise simultaneously with lending. All bank lending either results in a reduction in someone else’s loan or adds to deposits. That is true within the banking system as a whole, although not for any individual bank (if Bank A increases lending particularly aggressively most of the new deposits may end up at other banks in the system). Any Funding for Lending loans to banks add to their liabilities, but they (collectively) don’t need those liabilities to increase lending. What FFL loans will do, in direct balance sheet terms, is to increase bank borrowing from the Reserve Bank, and increase bank lending to the Reserve Bank (settlement cash balances). And that is it. All the other deposits will still be there.

Now this isn’t to suggest that the FFL scheme is futile. It is not. As the Reserve Bank notes, it is a way of lowering interest rates a bit more. And that is really all. It does that partly through signalling effects and partly (ultimately) because each individual knows it can compete a bit less aggressively in the term deposit market and still be sure (individually) of having ample funds. If all banks respond similarly, there won’t be systematic drains from any of them. And there won’t be much need for many actual FFL loans to occur at all. Time will tell whether the scheme is much used, but if it isn’t that is almost a bonus: it worked (lowering term deposit interest rates relative to the OCR) by the Bank’s willingness to provide, without needing actually to provide much at all.

From banks’ perspectives they’d probably prefer (at least in aggregate) not to use FFL much at all. After all, they borrow at the OCR and then the additional settlement cash (in aggregate) just earns them the OCR, and in the process they just blow up their balance sheets a bit more. But they probably like the option value of knowing the Bank is willing to lend at the OCR – which happens to be roughly where short-term interest rates are.

Which is a (perhaps longwinded) way of saying that the controversy over whether the Bank should have tied these loans to “productive lending” – a weird notion in itself, but that is a topic for another day – is strange and largely empty. I suppose the Bank could have insisted it would only lend under FFL to the extent banks increased their business lending, but had they done so there would have been a very real prospect that the mechanism would not have worked at all. As noted above, banks are not funding constrained and – as almost everyone seems to agree, with the possible exception of Andrew Bayly – to the extent business lending is not growing (it doesn’t usually in recessions), it has little or nothing to do with availability of funding. The scheme is designed to lower interest rates, and seems to have done that. Tying eligibility to particular types of lending – that just aren’t attractive at present, to most borrowers or lenders – would have markedly reduced the effectiveness of the tool, with no gains for the actual lending the politicians purport to champion. That, in turn, would have been a recipe for deepening and lengthening, a bit more than necessary, the recession. Some seem not to mind that, but one would have hoped that neither the government (which made employment an explicit focus for the Bank) nor a responsible Opposition would want that.

But to repeat, the Reserve Bank are supposed to be experts in this stuff, and yet they directly contributed to the problem by so egregiously mislabelling the scheme, in a way that led laypeople to think that somehow “funding” was the constraint on lending (or that up to $28 billion would be pouring into new lending, when in fact the simple availability of new settlement cash will probably no difference whatever to the stock of loans on bank balance sheets). Had they called it a supplementary short-term interest rate management tool it would have been more accurate – but I guess would have sounded less glamorous at the time.

Finally, note that unlike the LSAP programme, the FFL does not involve any material financial risk to the Crown or the Bank, so there was no need for a Crown indemnity. Any FFL loans are fully-collateralised on highly-rated securities, and the Bank’s haircut requirements are usually quite demanding, and all the loans are on floating rate terms (the OCR, as it potentially changes), matching the floating rate liability the Bank will also be assuming (the additional settlement cash balances).

Not doing their core job

November 12, 2020 Michael Reddell Uncategorized

This isn’t going to be one of my usual lengthy post-MPS posts. I really just wanted to make one point about the disconnect yesterday between the words and the actions of the Governor and the MPC.

There were more than a few good words and phrases from the Governor, and even a few in the document itself. There was, for example, the reiteration of the MPC’s so-called “least regrets” framework, under which for now they say they’d rather run the risk of inflation being a bit high than run the risk that they (continue to) undershoot the target the government has laid down for them. And there was the Governor’s response to Stuff’s Thomas Coughlan about whether the Bank’s new mandate – the employment bits – had made any difference to monetary policy decisionmaking this year: he said not, since both unemployment and inflation indicators/outlooks had pointed to the need for much easier monetary policy, even highlighting the risks of inflation expectations settling below target. On Radio New Zealand this morning, Orr even allowed himself to say yes when asked if monetary policy would do “whatever it takes” to lean against a cyclical economic slump.

All of which sounded great. It was pretty much standard inflation-targeting cyclical stabilisation stuff, especially when overlaid on a background of the last decade when – as the Governor put it – central banks hadn’t demonstrated such a good track record in getting inflation back up to the target (recall that in our case in particular that target is set by elected governments, and that set by the current government is much the same as that of their predecessors.

But what do the MPC’s forecasts show? Recall that these published forecasts include all the expected effects of the monetary policy stance announced yesterday (although perhaps not the proposed new LVR controls), including the new Funding for Lending scheme (which, as the Governor noted, the Bank thinks market pricing for retail deposits has already anticipated).

Here are their CPI projections.

RB forecasts CPI

Inflation does not get back above 1 per cent – the very bottom of the target range – for two more years, at which point it will have been more than 2.5 years since the Covid-related severe downturn got underway. It is three years from now until inflation is forecast to get back to 2 per cent.

What about the unemployment rate, still probably the best indicator of excess capacity (at least in a forward-looking context)? They expect that the unemployment rate will keep rising and will be still 6.3 per cent by the end of next year. And at the end of 2023 – more than 3 years away – they still think the unemployment rate will be 5.2 per cent, barely lower than the current 5.3 per cent. Their output gap estimates for the year to March 2022 are slightly larger (negative) than their – inevitably wildly imprecise – estimate for the latest quarter.

And then there are inflation expectations. In a distinct step forward yesterday there was quite a bit of discussion of inflation expectations in yesterday’s MPS, including in the minutes of the MPC meeting. At least some members must be getting quite worried, even if staff gallantly try to play down the issue by refusing to engage with direct estimates of breakeven inflation from the government (indexed and conventional) bond market.

They included this chart in the document

RB inflation expecs nov 2020

On this measure – which deliberately excludes all market-based measures – inflation expectations are below target for the next several years and well below the target midpoint. The longer those low expectations persist the harder it will be for monetary policy to do its job. (Note that the latest of the RB’s own expectations surveys still has medium-term inflation expectations well below target, even though respondents now believe the OCR will be taken negative next year, and presumably included that expectation in their in responses about inflation too.)

And yet what did they do in response to this outlook? Nothing. Simply nothing. And in the process pushed the exchange rate – usually a key adjustment mechanism in New Zealand downturns – even further above the level it was, whether yesterday morning or at the start of the year.

There is simply no sign that they take their own rhetoric seriously. There is no sign of a central bank acting as if it really believes it would be better to run the risk of a temporary overshoot of the inflation target. There is no sign of a central bank that acts as if it thinks cyclical unemployment is a scourge that should be countered aggressively, at least while the inflation outlook allows it. And there is no sign of a central bank acting as if it takes the slump in inflation expectations as something it needs to take seriously.

Instead they are content with rhetoric (sometimes quite good rhetoric) and handwaving, and throwing around big dollops of money in ways that make little useful difference (and whatever good effects the Bank thinks those tools are having are already baked into the forecasts). Oh, and of course no serious accountability either: it is now 19 months into the new MPC and not one of the external members – the ones who don’t work directly for the Governor – has given a speech or a serious interview.

Oh, and remaining wedded to that bizarre commitment made in March – before the severity of the crisis was apparent to them – not to touch the OCR for a year, come what may.

(Of course, some readers may want to defend the RB on the basis that they – readers – don’t believe a negative OCR could help. There is an argument to that effect – I’m among those who resolutely disagree – but the point here is that it is not an argument the Bank itself is relying on. They claim monetary policy is still capable of doing useful and important stabilising stuff….and yet won’t even cut the OCR to zero, let alone negative, despite (a) such weak foerecasts, and (b) averring that a lower OCR would do good stuff.)

Coda

October 22, 2020October 22, 2020 Michael Reddell New Zealand economic performance, Productivity

And so we now have a single political party in a position to form a majority government. Between our single-chamber Parliament and the historically very tight party discipline on Labour MPs, the new government will be able to do whatever they like over the next three years. And where significant things are not done, it will be entirely down to them: their choice.

Of course, they didn’t promise much, so most don’t seem to expect much. But the issues, challenges, and problems don’t go away just a party or government chooses to ignore them. House prices for example – where the Prime Minister has consistently refused to suggest she might act in ways designed to markedly lower the price of urban land/houses.

Or, and the economic issue that mostly drove the creation of this blog, New Zealand’s dismal long-term economic performance. In short, productivity growth (and the lack of it), and our continued decline relative to other advanced economies.

The outlook wasn’t good before Covid – the last government was doing nothing, and Labour was promising nothing, that would have prevented those well-established and dismal trends continuing. But now there is Covid to confront too.

One view of the outlook was contained in the International Monetary Fund’s World Economic Outlook forecasts published last week. The IMF doesn’t have a particularly good track record as a forecaster, but its forecasts do have two particular values at present: first, they are compiled consistently for a wide range of countries, and second, they forecast/project five years ahead, which on most readings is currently far enough out that one could think of things by then being back to some sort of new normal. For what it is worth, the IMF also has no particular partisan interest in New Zealand, but has also, over the years, tended to run relatively upbeat stories about New Zealand when it does comment.

Unfortunately, the IMF does not publish productivity (eg real GDP per hour worked, or MFP) forecasts. But here is a chart showing their forecasts for growth in real GDP per capita for their “advanced country” grouping over the period from 2019 (pre Covid) to 2025).

IMF WEO 0ct 20

Third worst of all the advanced countries over this period, at least on the IMF’s telling. And do note that the countries a few to either side of us all have materially higher levels of labour productivity than New Zealand does, while the countries to the far left of the chart – best-performers – are mostly the countries (I’ve previously highlighted here) that started way behind and are now matching, and move to roar ahead of, New Zealand. On these projections, our relative decline – underway now for 70 years – keeps on keeping on.

Are there any silver linings? I couldn’t find any when I dug a bit deeper:

as I noted, since these numbers are for 2019 to 2025 they shouldn’t be affected by either measurement challenges, or real differences in economic structure, that contribute to quite different GDP outcomes for some quarters this year,
the difference also can’t be down to differences in how quickly unemployment drops back to normal (itself a thing amenable to policy, especially in a country with its own exchange rate): in most countries by 2025 the IMF thinks that unemployment rates will have got back to pretty close to 2019 levels (NZ’s is about 5 per cent, so not quite there, but it won’t explain anything like the differences in the real GDP chart). For what they are worth, the IMF also publishes output gap estimates for G7 countries, and they are also back near zero by 2025.
I didn’t look deeply into what border assumptions the IMF is making, but I did check their population growth projections, and they continue to forecast high rates of population growth over 2019 to 2025 (hardly lower than the rate for the previous six years, and third fastest in this group of countries), which again suggests they must think something like a new-normal re-establishes before too long.
the IMF seems to think that investment as a share of GDP will also be more or less back to pre-Covid rates by 2025 (unfortunately in New Zealand business investment in the last decade was very subdued, especially once one took account of the needs of a rapidly-rising population).

Sadly, the only realistic interpretation one can take is that the IMF thinks that over 2019 to 2025, on current government policies, New Zealand’s productivity growth performance – labour productivity and MFP – will be simply shocking. Most probably negative – the only way to square falls in real GDP per capita, unemployment returning towards normal, and a reasonable level of investment – and almost certainly far worse than in almost all other advanced economies, and especially far worse than the performance in the countries that were aiming to close gaps with the OECD leaders.

It is a really dismal outlook.

Of course, it is only one set of forecasts. The IMF may be completely wrong, even specifically about New Zealand’s relative performance. But it isn’t clear what about policy or the economic environment should be expected to generate decent productivity growth over 2019 to 2025, especially after the fairly dismal performance in the pre-Covid years.

One would like to suppose it was the sort of issue the Minister of Finance would be intensely focused on. One would like to think that The Treasury’s post-election briefing would have extensive analysis on the issue and possible remedies, and indeed how political party promises may even worsen the outlook. But such is the malaise around New Zealand economic policy and performance that it seems unlikely.

Changing tack, for some months I’ve been writing much less here than I’d really intended or hoped to. I’ve made occasional references to my indifferent health. I’ve had bugs occasionally in the past that have hung around for a couple of months, never amenable to medical diagnosis, and then eventually gone away and I kept expecting this would be the same. But despite some moderately good weeks at times – this week wasn’t one of them – it hasn’t, and my doctor now reckons that I have some – perhaps fairly moderate – version of chronic fatigue syndrome. And while it still seems most likely that it will eventually go away again, there is no immediate timeframe for that. It seems a rather pathetic thing to have, but I can’t really ignore, say, the three daytime naps I needed on Tuesday.

As a result, I’ve decided for the time being to stop attempting to maintain any sort of regular blog output. As I’ve said to various people who’ve asked, I’m probably only able to operate at 50 or 60 per cent of normal, and while I’m fortunate in not having to try to hold down a fulltime job, I have other fixed commitments (household and other) that demand almost all that energy. Since there are good days, and even a few relatively good weeks, and there many issues (even if I don’t have the concentration to dig into all of them as I’d like), I expect I will probably post here from time to time. But I won’t be trying to meet any schedule. For anyone who wants to not miss out on those posts, feel free to subscribe to get posts by email, and I also use Twitter (@MHReddell) to, among other things, provide links to any posts here.

And now it is time for a lie down…..

The PRC and our politicians

October 15, 2020 Michael Reddell China, NZ politics

I wrote a post a couple of weeks ago noting how silent the competing politicians, and the media, had been on issues around the People’s Republic of China during our election campaign. The campaign has now almost come to an end, and nothing much has changed. That is, no doubt, just the way our politicians like it. No awkward questions, no challenges, no serious scrutiny of their own institutional complicity, no nothing.

I’m not going to repeat that post, but there are a few new points, and one I inadvertently overlooked and which has (or should have) acquired fresh life in the last week or so.

Perhaps you noticed that yesterday the PRC was elected to term on the UN Human Rights Council, along with a bunch of other egregious states. These elections are done by secret ballot, which must be terribly convenient for the politicians as the votes they instruct to be cast for their country normally remain secret. But there is nothing to stop journalists asking about New Zealand’s vote, or asking the Leader of the Opposition (or leaders of the minor parties) what stance they think New Zealand should have taken. It isn’t impossible that New Zealand abstained or even voted against – China’s election was far from unanimous – but surely voters have a right to know what stance our government took as regards such an egregious a human rights abuser as the PRC? It would be great if they did vote against – and they did join a recent multi-country letter on some of the PRC’s abuses – but it is pretty feeble stand if they won’t tell their own citizens they took such a stance. And if the government won’t say, what stance would National, ACT, or the Greens have taken?

Incidentally, reading the belatedly-released Labour manifesto – which, remarkably, had no reference to China, even in the foreign policy section – I noticed this

labour ethics

So government agencies – including the NZSF and ACC – will no longer be taking equity exposures to companies owned or controlled by the PRC/CCP? I don’t suppose so, but it rings fairly hollow if the PM and her colleagues think New Zealanders could “stand proudly behind” such investments.

Through the election campaign it seems that the National Party has carried on with its deference to the PRC/CCP. An Australian-based China analyst drew our attention to this

New Zealand: Guo Yezhou, deputy head of the International Department of the CPC Central Committee, exchanged views with Peter Goodfellow, President of the New Zealand National Party, via videolink. #nzpol https://t.co/0KH8bgNTry pic.twitter.com/fDbA4RHR1Z
— Geoff Wade (@geoff_p_wade) October 4, 2020

Now perhaps it would be one thing for the National Party’s foreign affairs spokesman to be meeting with the PRC Ambassador (as with the ambassadors of other countries) but this is a party-to-party meeting, in the middle of a New Zealand election campaign. The same Goodfellow who previously championed Jian Yang, and who refuses to come clean on the National Party’s involvement/association with the CCP-affiliated people now facing electoral finance charges. What values, one wonders, do the ordinary members of the National Party share with the CCP? Few, if any, I imagine, but if so what is the party hierarchy doing holding party-to-party exchanges with the CCP. Pretty confident that in days gone by it was only the Socialist Unity Party that had much to do with the USSR Communist Party.

But the real prompt for this post was something I forgot to mention in the earlier one.

A couple of months ago, Professor Anne-Marie Brady at the University of Canterbury (with a couple of research assistant co-authors) published a paper titled “Holding a Pen in One Hand, Gripping a Gun in the Other: China’s Exploitation of Civilian Channels for Military Purposes in New Zealand”. It had been submitted as supplementary paper to the Justice select committee of the New Zealand Parliament and is substantially devoted to documenting the connections between New Zealand entities, especially universities, and PRC PLA-affiliated institutions and organisations. As she noted in the first of her Key Points

The People’s Liberation Army’s (PLA) rapid militarisation program is accelerating via an international technology transfer strategy, which includes academic exchanges, investment in foreign companies, espionage and hacking. Scientists work globally, so by accessing universities or tech companies in states with an advanced technology
sector like New Zealand, the PLA can get a foothold within the international network of scholars working on a given subject area.

It didn’t seem terribly controversial – previous papers by other authors have documented the PLA connections with many universities here and abroad – and I didn’t read it at the time.

But a few days later I noted the news that Canterbury University itself was ordering a review into the publication of this paper. Other academics apparently did not like it one little bit, and the Canterbury seemed ready to play along

Canterbury’s deputy vice-chancellor, Professor Ian Wright, said the complaining academics believed the publication contained “manifest errors of fact and misleading inferences”.

Brady herself appears to have been, at least temporarily, silenced and her voice has been totally absent from the public square in this year’s election campaign. You’ll recall that it was during the 2017 campaign that she released her Magic Weapons paper on PRC influence/interference activities in New Zealand, to the discomfort of much of the political class.

It seemed a very odd approach from the University of Canterbury. Academics often like to remind us that they have some sort of “critic and conscience” role in society, and that the freedom to speak openly and publish their material – in turn exposed to scrutiny from the public and peers – is a big part of how academe is supposed to run. And so if there were problems with Professor Brady’s paper, wouldn’t the normal approach have been for those who thought they had identified problems – whether of fact or interpretation or emphasis – to have published something themselves, and let the issues be fought out openly.

I’m, of course, not an academic myself, but many/most of the signatories to an open letter that was released last week are. Addressed to the Vice-Chancellor of the University of Canterbury, the (now in excess of 150) signatories wrote

Professor Anne-Marie Brady’s work has had a far reaching impact on public and policy discussions globally, which is why we were dismayed to read Martin Van Beynen’s report in Stuff entitled “Canterbury Uni orders review into publication by China expert Anne-Marie Brady”. All of us are familiar with Professor Brady’s superb report “Holding a Pen in One Hand, Gripping a Gun in the Other” that was submitted to the New Zealand Parliament’s Justice Select Committee this past July. We are shocked to read that your Deputy Vice-Chancellor, Professor Ian Wright, gave a statement to the press confirming that the University was entertaining the complaints, and giving them currency by explaining that they allege that the paper contains “manifest errors of fact and misleading inferences.”

We, who know this area, can see no manifest errors or misleading inferences based on the evidenced material provided in the report. The paper does not make “inferences.” People who study it may draw some, but that does not mean the paper made them, misleading or otherwise. Since Professor Wright publicly voiced the allegations a group of us peers again went through Professor Brady’s Parliamentary submission. We find in it no basis for the allegations. Some of the links in its comprehensive sourcing have gone stale since she submitted it but those URLs all still work if put into Wayback or archive.today.

We are disappointed to see no prompt follow-up, explanation or clarification of the University’s position concerning the allegations. The impression left by that published report should have been corrected to show that the University did not intend any endorsement of the complaints, nor an approval or acceptance of complaints to the University as the appropriate way to criticise academic work. The silence has been interpreted as collaboration in slander against a very distinguished scholar whose work has been consistently based on sound social scientific methodology.

We would have expected you to stand up for your university, the right of any of its members to publish their research freely, however contentious, and for Professor Brady as a brave colleague. She has been the target of a harassment campaign and threatening menace because of the serious implications of her important research.

We ask that you issue a prompt and full apology to Professor Brady on behalf of the University of Canterbury for not rejecting the complaints against Professor Brady and instead referring the complainants to the normal way of disagreeing with a paper – publishing their criticism. Professor Wright should publicly apologise for allowing his statement to give credence to the complaints, whether or not he intended that.

We know of no valid basis for any “review” of Professor Brady’s work other than by her peers and other researchers and commentators, as is normal for academic research and publication. That will and should include informed criticism as and if grounds emerge. Her publications are subject to peer review. They have brought great international credit to your University. You risk destroying that credit, to leave it with her alone.

And yet this fairly stinging attack on the university, and robust defence of Anne-Marie Brady’s paper has had almost no coverage in New Zealand. And this even though the signatories include, from abroad, some leading academic authors on issues around modern China, as well as several local academics and – to my surprise – two Labour MPs.

(Regular readers may recall that this is not the first open letter in defence of Professor Brady in the years since she first went public on these issues – the earlier one was about the apparent indifference of our political leadership to the break-ins to Professor Brady’s home and office that were widely regarded as most likely to have had PRC origins.)

One might suppose that in the middle of an election campaign, when academics – including many from abroad – and MPs have signed an open letter about attempts to silence or intimidate a leading academic writing on important public policy issues it would spark some serious coverage. Questions, for example, to the Prime Minister, questions to the Leader of the Opposition, questions to the Minister of Education (what sort of system is he presiding over than sees such chilling “reviews” of controversial material), of the two Labour MPs who signed the letter, and perhaps even of the Natiomal MP – Simon O’Connor – who has sometimes put his name to efforts to push back on the PRC but who is strangely silent this time. But not a word. It is all-too-easy to see why the politicians would prefer the issue, and probably Professor Brady, to just go away. But why almost all the media make themselves complicit with this shameful silence is a bit more of a mystery, but not to their credit.

The publication of the open letter finally prompted me to read Professor Brady’s paper. To be honest, I was prompted by this line from the open letter

We, who know this area, can see no manifest errors or misleading inferences based on the evidenced material provided in the report. The paper does not make “inferences.” People who study it may draw some, but that does not mean the paper made them, misleading or otherwise.

In the past, sometimes when I have read Professor Brady’s pieces I have thought she drew stronger inferences and implications than the facts, as she presented them, seemed to warrant. But reading through the latest paper I was struck by the almost-complete absence of inference. She offers, and appears, to document a long series of fact, and offers some thoughts on possible policy responses. I can quite see that some of those involved would prefer (a) that the facts weren’t know, and/or (b) that people looked more benignly on the PRC/PLA connections that benefit their universities, but the significance of those connections is a matter for debate, not for chilling attempts at academic censorship. But neither our politicians nor our media seem to care. Coming on top of how Professor Brady has been treated over the last three years it is a sad commentary on (a) what New Zealand has come to, and (b) how in the thrall of the PRC our universities and business/political sectors seem to have become. And all this without even mentioning things like the Confucius Institutes that our universities host and partly pay for, providing access to our schools for PRC entities and messaging.

At this election, the two previous United Front connected MPs – Jian Yang, he of the CCP/PLA, and Raymond Huo (the one who tried to stop Brady even testifying to the foreign interference inquiry) will pass from the scene and back into private life. But it is not as if any of the parties seems to have had a change of heart, as they’ve rushed to select new Beijing-comfortable ethnic Chinese candidates – one of whom, former head of the Chinese Students Association (consulate-controlled entities), is now certain to enter Parliament.

And then there is ACT. Not long ago it might have seemed almost irrelevant, but now seems likely to emerge from the election with quite a few MPs. ACT leader, David Seymour, has from time to time been heard uttering some quite encouraging words on the PRC, including some forthright comments at the time of the Hong Kong unrest last year. However at least one person, who knows his stuff in this area, has become quite disillusioned with ACT, suggesting that principle has been traded in for opportunism to some considerable extent.

At the request of people with associations with him I’ve previously published links to translations of a couple of pieces by Auckland-based dissident Chen Weijian, who edits the Chinese-language online publication Beijing Spring. Here is a link to an authorised translation of a new piece, Has the ACT party betrayed its principles on China?

The views are solely those of the author. He begins noting his previous enthusiasm for ACT

It’s voting time in New Zealand. Until fairly recently, I had the comfort of knowing that there was a party and politician that stood for the values I cared about: David Seymour’s ACT.

When Seymour supported the Hong Kong protests here in Aotearoa he captured my interest. He was the only New Zealand politician to express solidarity by appearing in person at gatherings of students in this country supporting the rights of Hong Kong.

Seymour delivered well-considered, passionate speeches backing the demonstrators. That was when I decided to vote for the ACT Party.

However, David’s recent actions are inconsistent with the words he spoke when I took him for that rarest of species: a politician of principle.

But then proceeds to discuss the extensive advertising ACT has apparently been doing in the CCP-aligned Chinese Herald, including apparently in the 1 October special edition devoted to the PRC national day and the celebration of the Party.

He goes on to highlight’s ACT’s selection as a candidate – albeit well down the list – who has an extensive background in missile technology (and from whom, apparently, never a discouraging word has been heard about the PRC). The article ends

Most Chinese immigrants, even if highly educated in China, do not rise to such high status positions so soon after settling overseas. However, Ms. Xiao’s ascent has been preternaturally rapid.

Right now, fellow liberal democracies such as the USA and Australia are working hard to squeeze out CCP influence through party-state organs such as the United Front and other limbs of Beijing. Many people with special relationships and obligations to the CCP are in a panic.

It is my strongly held conviction that New Zealand must do the same, and ACT, as a leading voice for liberty, should do the same. Until that happens, they will never get my vote.

I’m much less convinced than the author that ACT has, for a long time, been much of a party of principle – rather they tend to hunt where the votes are, whatever it takes, and this time Chen suggests that that is among the Beijing-sympathetic bits of the ethnic Chinese community. So in many respects I’m less bothered about ACT, which will always be at most a peripheral player in New Zealand, but his penultimate paragraph is one that rings truer to me.

Unfortunately there is little or no evidence that our major parties – notably this time the Labour Party, which will certainly lead the next government – really care at all, or even take seriously these issues. There is a complete absence of any moral leadership on these issues, whether from National or Labour, and too many establishment institutions – notably the universities – seem to quietly cheer on, even egg on, that failure, that choice.

If the silence and complicity of both National and Labour is telling, there is no sign of the minor parties is any better (I’ve been through almost all their websites in a fruitless quest for a party I might consider voting for).

Housing, the Reserve Bank, and interest rates

October 13, 2020 Michael Reddell Housing, Reserve Bank

Last week it was reported that the Reserve Bank’s chief economist Yuong Ha had told assembled journalists (at a media briefing on the Bank’s proposed new tools – all while they refuse to use the core one they already have) that

“The worse situation we’d face right now is actually if we had house prices falling.

Ha isn’t just any official. He is one of the four internal members of the Reserve Bank’s Monetary Policy Committee. He was appointed as chief economist by the Governor, but serves on the statutory MPC with the endorsement of the Bank’s Board (themselves appointed by the Minister of Finance) and of the Minister of Finance himself. His department delivers the forecasting and analysis that typically guides the rest of the MPC in their deliberations. In principle at least, he wields quite some clout.

In practice, there is reason to doubt just how much influence he has. He was appointed 18 months ago (somewhat to the surprise of many observers, and perhaps with more emphasis on his service as an Orr-lackey, including around the generation of Orr’s tree-god rhetoric, than for any particular analytical or policy depth). And in that time he appears to have given not a single on-the-record speech – this in the Orr administration that claims to be more pro-active in its external communications and speaking – or paper. It is a striking contrast to, say, the Reserve Bank of Australia or the Bank of England. And it is not as if management has held back to allow the external members of the new MPC to shine: they’ve either been unwilling to, or been forbidden from, speaking at all. And all this through turbulent and uncertain economic times.

But the Bank obviously feels they have to wheel Ha out from time to time so he gets to do the odd interview and the like. Some of them have been quite odd, and all too often reading Ha’s remarks one gets the sense that he just hasn’t really adjusted to operating in the major leagues (he’d had almost no external profile or media experience prior to taking up this job), and that many of his comments probably leave his colleagues wincing just a bit. From a senior statutory officeholder the Bank – and more importantly the country – deserves better. If they were doing their jobs, the Board and the Minister would insist on it.

As just one example, earlier in the year – mid-March actually – we saw this in the Herald reporting comments in a panel discussion Ha had participated in, and casting doubt on just how much difference asset purchase programmes might make.

yuong ha

As it happens, I think he was right then. In fact, he was running the fairly standard line the Bank had run for some time. It is just that within a few days there was going to be volte face and suddenly the Bank would be claiming that large scale asset purchases were making huge amounts of useful difference.

There was also this little snippet I’d forgotten until I went looking for the quote above.

ha apr 20

Perhaps there really is/was a good reason for the Bank’s ongoing resistance to any serious transparency, but that certainly isn’t a compelling argument.

I’m not going to try to track down all the quotes I’ve seen this year – and no doubt some have been perfectly reasonable articulations of the (poor) policy Ha is a consenting party to.

But I suspect that the most charitable interpretation of last week’s comments is that it was just another such mis-step. That Ha had simply never taken a moment to reflect on how what he was about to say would sound – most particularly in the last days of an election campaign. Or lifted his perspective from some equation in which these dubious “wealth effects” might have shown up. There was a – highly arguable – narrow point that he might have made, but instead he ranged expansive appearing the welcome New Zealand’s iniquitous house prices as somehow “a good thing”. (And, contrary to at least one commenter I saw, I don’t suppose it had anything to do with the personal financial positions of Ha or any other members of the MPC – very comfortable as they all no doubt are.)

Here is the fuller quote from the interest.co.nz article

ha quote on housing

There is a quite confused mix of things going on in those comments. On the one hand suggesting that higher house prices are “a good thing” in terms of supporting demand at present (a monetary policy commentary) and then shifting into financial stability matters for which Ha has little or no responsibility. And it is here that he suggests that falling house prices at present – any falls apparently – would represent a worrying (“worse”) situation from a financial stability perspective. But the subsequent comments are then all over the place. Clearly journalists pushed back and suggested that modest falls in house prices are hardly likely to jeopardise the stability of the financial system – as indeed the repeated Reserve Bank stress tests show – and so then Ha is left floundering, falling back on “wealth effects” again, suggesting – at least by implication – that these could threaten the financial system. It was all just very badly done (on the assumption that his remarks are fairly reported in context). And he ended up simply feeding the narrative that somehow the New Zealand economy is a house-of-cards reliant on house prices staying high, or rising, indefinitely, and that the Reserve Bank is somehow party to this conspiracy against the nation’s young and poor. And comes across as backing the reluctance of our political party leaders to do anything that might lower house prices.

I don’t really believe it is the institutional view. If I’m not a great fan of the Governor I have heard him do much better on this issue (and have even used those remarks to defend the Bank on occasion). He’s pointed out the falling house prices only pose a serious systematic threat when (a) house prices have fallen a long way, and (b) when the unemployment rate goes very high and stays high for some considerable time. That is the consistent result of the Bank’s stress tests, including those done in the last three months. One could easily add that whether one approved or not of the Bank’s LVR restrictions – I didn’t and don’t – they did have the effect that few people buying a house since 2013 will have had a deposit less than 20 per cent, and prices have mostly risen quite a bit since then. That is really quite a large buffer (ie if house prices fall even 15 per cent – a bit more than they fell in the 2008/09 recession – very few people are going to have any modest negative equity.

And I’ve heard the Governor better articulate even the wealth effect (dubious) story, to be rather clearer that the Bank has no vested interest in high or rising house prices, but that one way monetary policy can work – all else equal – is by affecting asset prices. What, of course, no one at the Bank points out is that in 2008/09 real house prices fell by 15 per cent – and took five years to get back to previous peaks – even as the Bank cut the OCR by 575 basis points). There is nothing necessary about cuts to the OCR – in recessions – driving up house prices, as for example we also saw after 1987/88 and in the late 90s. Why is that so? Because recessions typically involve income loss, heightened uncertainty, and some tightening in lending standards. (What has made the last few months a bit different? Massive income replacement in the near-term, and the removal of the LVR restrictions – temporarily ending financial repression will tend to have the sorts of effects we’ve seen.)

For myself, I remain very sceptical of the idea of any material housing wealth effect at all. The Bank has been running this line for the last 15 or so years – really since the 00s boom got into full swing – but its case has never been very persuasive, and it remains a story one hears much more vocally from our central bank than from others operating in countries with high/rising house prices. My scepticism on this count is now of long standing, and has both a conceptual and empirical strand. At a conceptual level, higher house prices do not represent greater wealth for the population as a whole (that makes them quite different from, notably, higher stock market valuations, especially those resting on business innovations and rising profit opportunities etc). There is, of course, a distributional effect affecting some people (although not generally owner-occupiers, who have a natural position owning one house and wish to consume housing services for the rest of their lives). Those holding rental properties, who can reallocate their portfolio are certainly better off when prices rise (and worse off when they fall). But their gain is exactly offset by losses to the renters, and to those in a demographic wanting to shift into home ownership.

Ha himself was asked about part of this

Asked whether there was a point at which high house prices would actually have an inverse effect – IE leave people, especially renters, with less cash to spend on stimulating the economy, Ha said this was something the RBNZ was constantly monitoring.

But it doesn’t suggest they have done any serious work on this hardly-new issue.

That it isn’t new is documented, no doubt inter alia, in this article published in the Reserve Bank Bulletin as long ago as 2011 (of which I was editor and co-author). It was mostly an article about understanding consumption behaviour in aggregate, and the abstract read as follows (emphasis added)

Household spending is typically the largest component of economy activity. This article sets out some ways of thinking about what shapes household consumption decisions and looks at New Zealand’s experience over the last decade or so – a period marked by rapid growth in asset prices and debt, and by big swings in economic performance. Large unexpected, but sustained, shifts in incomes appear to have been the biggest influence on total household consumption. Fiscal policy also appears to have played a role. It is less clear that the large increases in asset prices played a substantial role in influencing total household spending.

Among the many points traversed was this chart

housing and C

If you think there is nothing very interesting to it, that is sort of the point. Private consumption – even consumption ex housing – as a share of GNI showed no consistent trends or even cycles over (then) 20 years, and nothing to even hint at any sort of material economywide wealth effect, even as real house prices had risen enormously.

And this chart is from a followup discussion note I did a year later, showing the sharp increase in housing “wealth” over the decades.

housing and c 2

Some individuals will have felt wealthier. Some will have been wealthy. But many others will have felt or been poorer. In aggregate – as you’d expect , since we don’t export houses to any considerable degree – not much sign of any material economywide effect. I’ve seen nothing to suggest things have been different in the wake of the rise in house prices of the last decade. It is very hard to unpick what is causing what in a business cycle – and so house prices are often rising when the economy is growing quite strongly, both influenced by similar third and fourth and fifth factors. But as I noted almost a decade ago

If one looked at NZ consumption and savings data for the last decade unaware that there had been a house price and credit boom, one would not immediately think there was anything unusual to explain.

More generally, the Reserve Bank needs to find better, and consistent across their people and across time, ways of communicating that it is not responsible for house prices and it does not, or should not, have a view on where house prices should go (up, down, sideways). As a bank regulator, the Bank has a responsibility to ensure that banks are adequately placed to cope with sharp falls in house prices, especially those accompanied by sharp sustained rises in unemployment (which one would not expect to be the case if land use was substantially liberalised). The Bank appears to have done that – perhaps overdone it with the new capital, requirements. Beyond that, house prices are just one of those thing they may need to factor into their forecasts (of which there are many), not something it should be opining about the merits of. And while I would never encourage them to weigh in, given the Governor’s politicised remarks on all manner of other policy issues, if they are going to weigh in you might hope it was on the side of more affordable house prices and better opportunities for the young and the poor.

Finally – and this post has gone on quite long enough – you’ll have noticed the story yesterday that Heartland Bank is now offering a mortgage product at (just) less than a 2 per cent interest rate. From a housing affordability perspective this should have been a cause for muted celebration. Instead, we get headlines about driving prices to even more unaffordable levels.

The (real) cost of housing really should now be at an all-time low. The cost of using a house (rent, actual or imputed) is the cost of using a long-lived assets. With very low interest rates, the alternative returns from other assets should be expected to be very low, driving real rents down. Lower interest rates also slightly lower the cost of bringing new houses to market – holding costs of land, financing costs during the construction phase etc. And the cost of building materials themselves shouldn’t be materially affected by interest rates (and lows in interest rates are often reached in very low-inflation environments). Ah, but I hear you say, what about land, which is after all in fixed supply. But even there two things weigh against a very substantial effect. First, sustained low interest rates are often associated with low productivity growth (few investment opportunities) and that may be a true of rural land as anything else. But second, and more important, it is only the unimproved value of the land under a house (actual or potential) that should be affected by interest rates, and – in a liberal land market – that unimproved land value will be a relatively small part of the overall price of a house+land. That, of course, is not the way it is in modern New Zealand, but that has nothing whatever to do with the Reserve Bank or monetary policy, but with successive waves of central and local governments that make land – abundant in New Zealand – artificially scarce for housing purposes.

And a few days out from an election we, of course, don’t hear a single significant political party either pointing this out, or promising to make a real and substantial difference.

Debating the economy

October 8, 2020October 8, 2020 Michael Reddell NZ politics

At lunchtime yesterday I went along to the debate sponsored by Victoria University’s Institute for Governance and Policy Studies among the finance spokespeople for our various political parties. I presume the invitation had been spread reasonably widely, but in the end only Labour, National and the Greens turned up (New Zealand First’s Fletcher Tabuteau was ill and sent an apology, and I presume, quite rationally, David Seymour was spending his time where he thought potential ACT voters might be).

Having only three speakers, and all of them serious figures, had some advantages – there was only an hour, and no one wants lots of time going to people/parties that aren’t in, or likely to be in, Parliament.

The Green Party’s Julie-Anne Genter spoke first. She was very fluent. We heard about the four principles the Greens suggest they build all policy around. These were “ecological sustainability”, “social responsibility”, “non-violence and peace”, and “subsidiarity’ (whatever one makes of the rest of them I wasn’t sure how their nationwide plastic bag ban fitted with the notion of subsidiarity). And then there were the six major policies. Remarkably, I even found myself agreeing with one of them – I might normally be categorised as being on the right, but I’ve long hankered for a system that treats victims of accidents and of long-term illness/disability more similarly (the Greens want ACC to cover both).

But for the Greens, the economy seemed to be just something for governments to use to redistribute and pursue their own visions. There was no sense at all that sustained growth in real wealth mostly arises from private sector entrepreneurial activity. So we heard briefly about the poverty action plan (higher taxes and a lot more welfare spending), ACC (see above), on housing all she emphasised was the government building a lot more housing (with no recognition that, all else equal, that if the government builds more the private sector is likely to build fewer).

And finally there was transport. This was the one place where she mentioned stimulating the economy (recall that the debate was about economic policy). The Greens, of course, want lots more trains – rapid regional passenger rail, not just between Auckland, Hamilton and Tauranga (almost certainly uneconomic as they would be) but from Wellington to Napier and to Wanganui, the overnight train from Auckland to Wellington (why, when one can fly in an hour?), and then in time down the whole east coast of the South Island. In her words “just as it used to be”. It was breathtaking – bringing back memories of time Gabs Makhlouf told as, as a new arrival at The Treasury, that the thing New Zealand got wrong decades ago was insufficient investment in rail. There would be, on the Greens’ telling “massive productivity benefits” from this rail programme. Quite possibly she meant that these “massive productivity benefits” might also stem – and a little more plausibly so – from more public transport in our cities, but beyond the cities themselves it just seem to take leave of any sense of reality or economics (and that without even the points Richard Prebble made on rail in his column in the Herald earlier this week).

I think it was safe to say that the Greens’ vision would be one that would make us poorer – perhaps not in absolute terms, but certainly further widening the alarming productivity gaps that already exist to the rest of the advanced world. Then again, as I noted in my post the other day, no one votes for the Greens because they care about economywide economic performance, or the choices it makes possible.

National’s Paul Goldsmith was next. Sadly – for the spokesperson of the largest Opposition party – there wasn’t much there. We got the upbeat stuff about how he was sure the country would get back on its feet – smart entrepreneurial people, products the world wants, and all that. I guess that is all fine in a short-term Covid context, but it rather ignored 70 years of relative economic decline, that has continued more recently under governments led by both major parties. We heard about National’s temporary income tax cuts – you might approve or disapprove (I think they are less bad than spraying money around favoured projects, less good than a temporary GST cut, and less good – and much more expensive – than looking to monetary policy) – but it was all very short-term in nature. We then heard about how many jobs were being created each month in the last term of previous National government – even as per capita income growth was very subdued – allegedly based on “business investment and confidence” seeming to ignore just how weak business investment actually was for the whole of the last decade (National or Labour).

He was on more appealing ground – although probably not to the predominantly left-wing audience – when he emphasised the importance of a vibrant private sector – including in job creation – and spoke of the increasing regulatory imposts, including Labour’s further increases in the minimum wage and in sick leave requirements.

Oh, and then there were the “bold plans” for infrastructure. Fair enough. They are proposing to spend a lot of money – but then so are the Greens – but there was no sense of a narrative of how this might make a real difference to reversing decades of productivity underperformance. No sign, in fact, that he really cared. It was sad, if a little predictable (we’ve heard nothing different from his leader).

Then Labour’s Grant Robertson spoke. He was on-message, and so we heard about his aim of building a ‘base for truly sustainable economic development”, about infrastructure spending, about the $4 billion the current government has apparently already put into rail, and (a little more positively) about the National Policy Statement on housing. Less relevantly perhaps we heard about the new Public Service Act, and changes to the Public Finance Act, and to the Reserve Bank Act (it was a fairly geeky audience), about spending on improving the “three waters”. And then he did throw in the p-word: Labour apparently wants to lift productivity, and believes it will do this by “heavy investment in skills”, a “significant boost” to R&D subsidies, and by supporting small business and pursuing their trade agenda. Oh, and he ended noting that next year the government would have climate budgets, and that it was important that the government keep up its push for 100% renewables.

It was pretty underwhelming stuff, and again there was no real sense that – even with all the resources of The Treasury and the Productivity Commission at his disposal – the incumbent had any serious ideas about making more than marginal differences to productivity (recall that, for example, we already have some of the highest adult skill levels in the OECD), or was even particularly bothered about doing so. Robertson seems to be a safe-enough pair of hands, if continued managed decline is your vision.

There was a short question time – too often with long questions. In it, Paul Goldsmith allowed himself to get bogged down on the question of whether his family would spend or save the temporary tax cut if they received it (who cares, although he probably should have had a better pre-prepared line). Asked about why Labour wouldn’t adopt a tax policy more like that of the Greens, Genter opined that it was because the level of political debate was so trivial and the main Opposition party was distorting people’s perceptions etc. Also from the Greens a reminder that they want to go even beyond the Welfare Working Group recommendations in lifting benefits. Goldsmith did make the point that only a better-performing economy supports higher sustainable incomes.

The final answer I noted down was from Goldsmith. He stressed the importance of job creation (hard to disagree) but in commenting on the housing market seemed only interested in pushing back against the new regulatory imposts on landlords. Agree with him on that or not, it simply isn’t the main game. Get house prices down to 3 or 4 times income in our larger cities and rents won’t just stop rising, but one would expect them to fall. But – consistent with his leader, and with Labour’s shameful stance on this too – there was not even a hint that National would welcome, or pursue, lower house prices.

It was all deeply underwhelming. As one respected commentator I talked to afterwards observed “that takes us an hour closer to the grave, and we are none the wiser”. We have two big parties with no interest in, or ideas for, reversing decades of economic decline, and almost running scared from any suggestion that house prices might appropriately fall, all complemented by a third party only really interested in cutting the cake differently and perhaps shrinking the size in the process.

The Minister of Finance was born in 1971. He’s been on record admiring the economic performance and institutions of places like Denmark and Sweden. In 1971, real GDP per hour worked in New Zealand was 79 per cent of that of Sweden and 85 per cent of that of Denmark (our relative decline was already well underway). By 1990 – when the 4th Labour government he is keen to dissociate modern Labour from left office – that was 72 and 64 per cent respectively. Last year, it was 60 and 57 per cent. There is a whole range of countries – mostly in Europe, but including the US (and probably Singapore and Taiwan) with average labour productivity 60 to 70 per cent higher than that in New Zealand. Productivity really matters for the living standards this country can offer its people, but none of these parties seems to have anything much to offer. All evidence suggests they really don’t care either.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Year: 2020