A month or so ago I went along to hear the Governor of the Reserve Bank speak at the Law and Economics Association in Wellington. LEANZ is a pretty geeky sort of organisation (or attracts pretty geeky sorts of people) and against the background it was quite surprising how little substance there was to the Governor’s speech, which was billed as “Delivering on Great and Best” at the Reserve Bank. That is the Governor’s grandiose vision: his predecessor claimed to want the Bank to be the “best small central bank” in the world (although did little or nothing about it, including no relevant benchmarking) but Orr takes that a giant step further and claims to want to be the best central bank in the world. You might think that harmless – always good to aim high etc – but in a small country, not very prosperous, it isn’t clear that it is even a sensible goal, and in practice it seems to function mainly as a way of distracting attention from the manifest inadequacies of the Bank, especially under the stewardship of Orr.
I don’t want to spend any time on last month’s speech – there really isn’t much there – but it came to mind when I read yet another empty piece from the Governor yesterday, this time a column in the Sunday Star-Times. I don’t suppose economists were the target audience, but a couple of non-economists I talked it over with seemed to have much the same reaction to it that I did.
It is framed as some sort of disclosure of the inner secrets of the central bankers’ temples.
As New Zealand’s Reserve Bank we hear directly ‘from the horse’s mouth’ what our global colleagues are experiencing and doing.
Thing is, there is this new-fangled invention called the internet, and we too can read all about the activities of other central banks, the speeches of their bosses, the minutes of their decision-making committees. In New Zealand’s case, of course, there has been not a single serious speech on monetary policy or the economic situation from the Governor or any other member of the MPC since they finally woke up to the economic threat Covid, and associated responses (public and private), posed. But that generally isn’t the case in other advanced countries. Check out, just as examples, the websites of the Fed, the ECB, the RBA, or the Bank of England. We can read them, or media reports of them, for ourselves.
But, setting that to one side for the moment, what fresh insights does the Governor have for us from his chats with his central banking peers abroad?
From our most recent interactions it is clear that the common and (almost) simultaneous Covid-19 health shock is impacting nations in similar ways, but the policy reactions and outlooks ahead vary greatly.
Hard to know what the first part of this is actually supposed to mean – after all, the health risk might have been similar across countries, but the actual experience of the “health shock” varied, and varies still, very greatly. And as for the second half of the sentence, it isn’t clear whether he is talking about economic policy responses, public health responses or what, let alone which outlook – economic or virus – he is talking about. It seems to be the economic side of things, judging from the next sentence.
The differences are in large part explained by the initial health of their economy, the underlying drivers of economic activity, and the degree of success in containing Covid-19.
But then it is not clear at all what he is basing anything of this on. Some countries have a rich array of high frequency official data, in some cases even monthly GDP data. Here in New Zealand, our latest official labour market relates to the March quarter. We’ll get an update on that – for the whole of a quarter centred back in mid-May – early next month, but we’ll have no read at all on GDP for that June quarter until mid-September. Not that long ago there was a general sense that our June quarter GDP might have fallen quite a bit further than that in most other advanced countries – sufficiently onerous (rightly or wrongly) was our “lockdown” – but we are still flying blind even on that.
The column appears to be some sort of effort to suggest the New Zealand economy is now doing (relatively) well, but Orr cites no data to support that implication, unsurprisingly perhaps as there really is little such data.
He goes on
The more robust an economy was when first impacted by the pandemic, the more options and flexibility its local policymakers had to respond.
I guess it must be some sort of self-reinforcing conventional wisdom among economic policy elites, but where is the evidence for the claim? Almost every advanced country has done very little very monetary policy and a great deal with fiscal policy – whether it is the highly indebted US and UK, or countries with little public debt like New Zealand and Australia.
Amongst this ‘robust’ group, the initial policy actions have been very similar.
They generally included: ensuring credit and cash is cheap and accessible, increased government spending and investment, support for employers to pay wages and access credit, and additional welfare payments.
Although, of course, as already noted the typical central bank – including the RBNZ – has done very little that matters (lots of sound and fury though), and although I haven’t checked I’d surprised if credit conditions haven’t tightened in other countries too, as they have in New Zealand. And what Orr doesn’t seem to want you to reflect on is that most of the sorts of measures he lists are palliatives: there is place for those, but they do little or nothing to get economies promptly back towards full employment. That is/was the job of monetary policy, but central banks – including our MPC – seem to have abdicated that responsibility, with politicians (including ours) apparently content to let them.
However, the economic impact has varied significantly, especially across sectors of each economy.
The more reliant a nation is on primary production (especially food export revenue) and the manufacture of durable goods (especially e-technology), the better it has fared.
By contrast, the more reliant a nation is on the provision of face-to-face services (e.g., tourism and hospitality) the bigger their fall.
There seems to be no evidence for the loose claims in the second sentence. At least in the OECD there is really only one country heavily reliant on “food export revenue”, and we just don’t have any data yet on how overall economic performance is doing, let alone how it will do as, for example, the wage subsidy ends. (Oh, and if you are tantalised by, say, PMI readings above 50 – as I heard the Minister of Finance going on about in the House last week – recall that (a) these are directional measures only, and (b) our initial trough, even on these surveys was deep)
Then there was this odd comment
Common for all nations is that uncertainty and economic confidence is highly-related to perceptions that the pandemic is regionally ‘contained’.
Not quite sure what “regionally” has in mind here, but in New Zealand itself at present there appears to be no locally-transmitted Covid, in the wider South Pacific and east Asian region there isn’t much, and yet uncertainty remains high, confidence remains modest, because people realise (a) how easily things could unravel, and (b) increasingly, the severity of the worldwide economic downturn.
There was then this loose comment
The common view amongst our international colleagues is that their local economy cannot perform at capacity with the pandemic.
I guess it depends how you define capacity, but sure when people were forced by state edict to stay home many could not work at all. Once we are beyond that point, again Orr’s interpretation of what his colleagues are saying seems like an abdication of responsibility by central bankers. There are market-clearing interest rates (and exchange rates), but central bankers have decided to do little or nothing about getting actual rates to line up with those market-clearing rates. They are simply content, it seems, to accommodate sustained higher unemployment. Coming from someone who last year was only too keen to talk up the new employment references in the Bank’s mandate, it is somewhat surprising.
In general, household spending and business investment continues to lag behind incomes and earnings. This highlights one limitation of easy monetary conditions in expanding demand.
It does nothing of the sort. What it highlights is the utter failure of macro policy in current conditions. The first sentence of the Governor’s comment – re saving and investment – is almost a classic statement of the case for temporarily much lower interest rates. And yet, in New Zealand, the Governor and the MPC have pledged not to do anything about the OCR until at least March, never mind the attendant excess capacity.
The Governor turns to the future
Looking ahead, accurate prediction is impossible, but preparedness is necessary and feasible.
The type of scenarios policymakers are mulling include: options for when/if a vaccine is developed; the establishment of Covid-19 ‘safe’ trade and travel bubbles; and the management of rolling waves of regionally-contained Covid-19 outbreaks.
Accurate prediction is always impossible. But that second paragraph is all about stuff that has nothing whatever to do with central banks. And as he comes towards the end of his columns we get a series of content-lite bromides. Thus
Globally, the general conclusions are that economic activity needs ongoing support by both government and central banks, and that government fiscal policy is the most potent.
Yes, we know that central banks have done almost nothing, so it is hardly surprising that whatever mitigation of the economic damage is being done by fiscal policy. The Governor seems unable to distinguish timeframes: fiscal policy is/was good at offsetting immediate income losses, but monetary policy works powerfully on slightly longer lags, and the economic challenges aren’t going away.
Oh, and even the Governor recognises the limitations – technical, or more likely political – to fiscal policy
There is also much awareness that fiscal policy cannot subsidise everyone forever. Examples of more targeted government interventions – such as sustainable infrastructure initiatives, and retraining and people mobility are being shared.
These policies are more complex to create and implement, especially at pace and scale.
Interest rates and exchange rates, by contrast, adjust almost instantly, get in all the cracks, and require no state mortgage on all our futures.
The Governor moves on to matters perhaps a bit closer to his responsibility.
Financial stability is also a key focus. The current broad consensus is that banks must be focused on the long-term interests of their customers, which will take strong regional bank leadership.
But it is not clear, at all, what that second sentence means. Whose “broad consensus”? And what about the interests, short or long term, of the people who actually own the banks. And what is this “strong regional bank leadership” all about. Oh, and how does the Governor square whatever it is with the (apparently entirely rational) tightening in credit conditions reported in the Bank’s recent survey.
Then we get this strange paragraph
The financial markets’ tools for measuring risk and allocating money must also be switched on and working, to best assist the reallocation of economic effort. The current big change drivers are more local-regional trade, simpler supply chains, and the rapid adoption of technology to deliver services.
Whatever it is supposed to mean, you might suppose that adjustments in interest rates and exchange rates would be among those “financial market tools”. And quite what relevance does “simpler supply chains” have in a New Zealand, where few firms are part of complex supply chains, and I’d have thought we really didn’t want many people focused on “more local-regional trade” when our ministers and officials keep talking up keeping international trade connections strong.
And he ends
New Zealand had a robust economic starting point at the onset of the pandemic. We have a backbone of primary production and exports. And, for now, a credible containment of the Covid-19 virus.
But, we also have significant reliance on services that require face-to-face interaction. We need to be prepared for multiple health and economic scenarios so as to best manage through the pandemic and arrive at a more sustainable economic place.
But even if you agree with each of those individual sentence (and, at a pinch, I probably could) aren’t you left wondering “so what?” And with no sense at all that whatever happens here, we in the teeth of a worsening global economic downturn, with monetary policy doing little or nothing and even the Governor – most vocal champion of more use of fiscal policy in recent years – articulating a view that fiscal policy has its limits.
Surely we deserve more substance, on stuff the Bank is actually responsible for, from the Governor? And from his senior management members of the MPC. As for the external members, they collect a lot of money from the taxpayer each year, and yet seem to operate as if being invisible, silent, and unaccountable is some sort of badge of honour.
One would like to think that there is more depth, more substance, to offer but the Bank refuses to release any supporting analysis, publishes no relevant research, exposes most of the MPC members to no public scrutiny, and for those we do hear from – the Governor foremost – there is a disturbing sense of people really rather out of their depth, and perhaps just not that interested. More fun to play tree gods and talk climate change than to actually do the core macro stabilisation role Parliament has charged them with, in the midst of the most severe global downturn in a long time, one in which little beyond immediate mitigation is being done to get countries quickly back to full employment. Policymakers here are no better, but whatever is being done here, the less that is being done abroad, the more we need our own policymakers to be doing. Unemployment is a terrible thing, and yet it barely rates an allusion in the Governor’s column. As for inflation, it is a core part of the Bank’s responsibility, expectations have been falling here and abroad – risking compounding the macrostabilisation challenges – and it got not a mention at all.
Back in that speech a month ago, the Governor indicated that the government would be introducing new legislation reforming Reserve Bank governance before the House rises for the election (so this week or next). That reform is long overdue, but under current stewardship – Governor, Minister – we should no more expect improvement from these next changes that we secured from the establishment of the MPC. You’ll recall that the Governor and Minister got together to blackball anyone with current monetary policy or macro expertise from serving on the MPC. That gap is really starting to show up now.