Month: September 2020

Bleak passivity

Michael Reddell Uncategorized

Reading last week’s statement from the not-very-transparent, not-very-accountable, Reserve Bank Monetary Policy Committee I was struck by both the bleakness of the statement and the do-little-or-nothing passivity of the monetary policymakers.

I guess you could argue it wasn’t much different than the previous month’s statement – which wouldn’t be much consolation, since that statement itself was pretty downbeat – but the relentlessness struck me. There was almost nothing positive in the commentary, even six months on from when the Committee belatedly recognised the Covid economic risks and started adjusting policy. The risks, both globally and domestically, are deemed to be to the downside – which seems right to me – and this around a base scenario in which the “the Committee expects a rise in unemployment and an increase in firm closures”. There is, again rightly, an emphasis on the susbstantial uncertainty firms and households face, again here and abroad, as the future course of the virus is really little more than anyone’s guess. We are told – in, I think, materially stronger words than they’ve used before – that “monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit”.

And yet what did they actually do? Nothing.

Seven months on from when they should have been first easing monetary policy, we still have an OCR that is only 75 basis points lower than it was at the start of the year. The Committee continues to cling to their bizarre March pledge – made in a climate of extreme uncertainty – not to change he OCR for a year, a pledge that has/had no solid economic foundations to it. They would prefer people to believe that in some sense they “can’t” move, but all it takes to know that is simply false is a look across the Tasman to Australia where, with a higher inflation target, and higher inflation expectations, short-term wholesale interest rates are 20 basis points lower than those here. Even if you buy the Bank’s claim that the OCR can’t be taken negative yet, there is no obstacle at all to them cutting the OCR to zero now. It should have been done months ago. It should be done now – their own outlook (all that downside talk) tells you as much. (20-25 basis points is, of course, not that much, and not a macro game-changer in and of itself, but in an all-hands-to-the-pump scenario, every little helps – and it would be a third more OCR easing than we’ve had to date.)

And, of course, the claim that the OCR can’t be taken negative now should itself be taken with a considerable pinch of salt. If true, it should of course lead to serious questions of the Bank’s competence and basic preparedness, which don’t yet seem to have been asked (although the Board’s Annual Report must be due out in the next few days, so perhaps…..unlikely as it is …..there will some sign of holding management to account). But it was never very convincing. For a start, had the Reserve Bank simply taken the OCR negative a few months ago it would have (a) rewarded the institutions that had read the – all too visible – international signs and got ready, and (b) encouraged the others to adapt very quickly. Even if the argument was partially defensible in February/March, it is now September….they’ve had months to get it right, and (on the MPC’s own reckoning) the economy could have done with more stimulus over that period. More generally still, a significant part of the way monetary policy works in an open economy is through (a) signalling and (b) the exchange rate: had the MPC moved aggressively months ago, or even now – not next March/April – it would likely have generated a lower exchange rate, supporting the New Zealand economy, and underpinned inflation expectations.

(As a reminder, the exchange rate has barely changed from where it was at the end of last year, real (1 and 2 year fixed) mortgage rates seem to be down perhaps 20-30 basis points since the end of last year, and the inflation expectations – whether survey measures or market measures – seem to be down about 50-60 basis points. Oh, and in case people hadn’t noticed, the unemployment rate has risen and the MPC expects it to rise further. Their August inflation projections – including all that fiscal policy – was also well below target. It is hard to imagine in any other circumstances a central bank doing nothing.)

Now defenders of the Reserve Bank will, of course, point out that the MPC is talking up some sort of “Funding for lending” scheme that it now says “would be ready before the end of this calendar year” (while also noting that “the design of the programme would be agreed and published ahead of deployment” – but there is only one more scheduled MPC meeting before the end of the year). The idea of this scheme is to lend to banks directly at a rate close to the (unnecessarily high) OCR, with the aim to “lower the financial system’s funding costs, and therefore borrowing costs for firms and households, and support the availability of credit to the economy”.

I don’t greatly like these sorts of schemes – although the details, which apparently won’t be consulted on, may matter. By contrast to the OCR, which is an instrument that works pervasively and unconditionally, FFL-type schemes are often available to some market participants but not others (undermining a core principle of efficient policy design, around competitive neutrality), and are often tied to some officials’ preferences around increases in lending to the private sector, whether or not such lending makes much sense in the prevailing economic climate (hint: in an environment of extreme uncertainty, of the sort the MPC talks of, not many firms are going to be voluntarily taking on much debt, and banks would generally be rightly cautious – even if not with the added uncertainty about the Bank’s new capital requirements next year). And an FFL is no substitute for an OCR adjustment when it comes to influencing the exchange rate, typically a really important part of the New Zealand transmission mechanism.

But here’s the thing. They’ve had a scheme like this in Australia since March. Term deposits rates in Australia have for a long time been closer to wholesale rates than has been the case in New Zealand, but – on checking this morning – are still materially higher than Australian wholesale rates. And although our Reserve Bank has been talking up an FFL scheme for some time now there is no hint in the schedule of retail rates banks are offering that, for example, 3-6 months are holding up but that longer-term rates (relevant to the period when an FFL will be deployed) have fallen away sharply, or at all. Big banks seem to be offering much the same rates for six month retail term deposits as they are for 1 to 5 year term deposits, just as they were at the start of this year. It just isn’t obvious that a realistic FFL is likely to make much difference to retail rates – and actual term rates suggest banks rather share that perception. It would be good to be wrong on this – all the evidence and the MPC comments suggest the economy needs the additional support – but nothing at present suggests it is likely.

Meanwhile, of course, months and months into this severe recession, there is no sign that the MPC or the Bank is doing anything about removing the real effective floor on the OCR (at perhaps -0.5 or -0.75), that results from the official provisions – regulatory interventions – that mean deposits are convertible to cash at par in unlimited quantities, with cash paying a zero interest rate. We have interminable debates and commentary on what macro difference a small further cut to the OCR – to just slightly negative – might make, but nothing on making feasible and useful the sort of deeply negative interest rates the economy might actually need. It is a cavalier indifference to the state of the economy and the plight of the unemployed – and to the health of the public finances – that seems to be shared by most central banks – which makes it no more excusable. One can, reasonably, haggle about whether threshold effects mean that,say, a -0.25% OCR would make much difference – although (a) the ECB seems persuaded, and (b) retail deposit rates in NZ would still be well above zero in such an environment. There should be much less room for doubt about the gains from a deeply negative OCR, including for the exchange rate and inflation expectations.

Of course, those on the left are often keen on fiscal policy substituting for monetary policy – especially while they are in power and get to choose the goodies being handed out – but that isn’t a path to an efficient allocation of resources, a wise evaluation of investment options (what do politicians have on the line?) and does nothing at all for promoting the health and growth of the tradables sector of the New Zealand economy. Whatever the merits of something like the wage subsidy scheme initially, fiscal policy initiatives seem to have become over recent months increasingly dependent on who you know, who is in favour, which project rings political bells, and not on a pervasive, fairly neutral, support framework in which politicians aren’t using your resources and mine to pick winners (unlikely to be so in actuality), rewards favourites and so on. Monetary policy operates much better as a countercyclical stabilisation tool for many reasons, if only central bankers would use it aggressively, or their political masters simply insist they do. It is fit for purpose, and respects the proposition that private firms and households are generally better at spending wisely than governments, in a way that handouts to Green schools, Pacific churches, this or that council, or whatever do not.

Complacent and complicit

Michael Reddell China, NZ politics

There hasn’t been much about the PRC/New Zealand issues here recently. That isn’t because I’ve lost interest, or because the issues have become less pressing, but just because my health has been mediocre enough that I’ve only had the energy for the bare minimum of writing. There is an interesting piece on New Zealand firms’ trade with entities in the PRC that has been sitting on my desk for almost two months, although I hope to write about that in more detail before long.

But the election is now almost upon us, and what is really striking about the campaign – and the media coverage of the campaign – is the complete absence of discussion of any aspects of the CCP/PRC issues, domestic or international. There are lots to choose from. all of which should matter, and on which the parties should be challenged and scrutinised.

There is, for example, the overt pressure the PRC is putting on fellow democracies, India and Taiwan, right now (one could add Japan, in the East China Sea). New Zealand media don’t seem to give much coverage to the China-led tensions on the Line of Actual Control in North India that has already led to fatalities, let alone to the (apparently) much greater threat associated with the repeated incursions of PRC military aircraft into or near Taiwanese air space, and the apparent – really more than “apparent”, quite openly stated – PRC determination to take Taiwan one way or the other. And no New Zealand media appear to have made any effort to gauge the competency (around foreign affairs), or moral core, of those vying for political leadership, by asking them for their perspective on these disputes or how they would think about framing possible New Zealand responses to more overt aggression. Both main parties have been more interested in talking up their “friends” in Beijing – a line they might also reasonably be asked about – than about articulating a clear stance opposed to resolution of political disputes by force.

Then there are developments in Hong Kong, where one might – perhaps – give the main parties a grudging near-pass mark, with the government having suspended (and National supported them doing so) the extradition agreement with Hong Kong. But it has hardly been a full-throated condemnation of the rapid erosion of freedoms in Hong Kong or (say) offers of asylum to dissidents fleeing the territory.

But far worse than what is happening in Hong Kong – and clearly convergence to the PRC model was inevitable at some point, though we all might have hoped for a less-bad PRC by then – is the growing evidence of systematic and intensifying repression across multiple fronts in the PRC in the last few years, including in the period since our last election. Xinjiang has had the most attention – the concentration camps, the extreme surveillance and control, the apparent forced sterilisations, and so on. But it isn’t just about one region, or one minority religion/belief. On a regional basis, Tibet is back in the news, as is the intensifying pressure in Southern Mongolia. The evidence of use of political or religious prisoners for forced organ transplants is even better documented now than it was. The repression of Christians, Muslims, and other sects is intensifying, and any scope for freedom of expression – always limited – seems to be now much more limited. And yet what do we hear from Ardern or Collins (or the other small parties) on any of this? From National, a while ago we had senior Todd McClay touting PRC propaganda around Xinjiang and suggesting it was really none of anyone else’s business. Perhaps he knows better now – though surely he always did – but there has been no retraction, and no willingness to criticise his parties “friends” and donors. And Labour really isn’t any better. Defenders of the PM will suggest that “human rights issues” are raised in private but (a) why should we believe this? and (b) it is unlikely that what is said in private, in apologetic diplomatic language, bothers anyone (in the PRC).

You get the sense that both parties are more interested in keeping in with the dreadful regime in Beijing – that really combines much of the worst of Nazi Germany and the USSR – than in articulating the values of New Zealanders. You certainly get the sense that both parties are more interested in serving the economic interests of a few big corporates (including university ones) than in representing the values and interests of New Zealanders. There is no open criticism, there is no talk of trade sanctions (eg on products using concentration camp labour from Xinjiang), there is no talk of putting in place a system of Magnitsky-type sanctions. And no media seem to ask any of the party leaders of their foreign affairs spokespeople about any of this. What, for example, does “kindness” mean as regards the abuses of the PRC.

One little encouraging development in recent months has been the formation of IPAC, the interparliamentary alliance on China, with significant representation from members of Parliament in a range of countries, including many quite senior figures. Somewhat belatedly, two New Zealand MPs joined: National’s Simon O’Connor and Labour’s Louisa Wall. That’s good – and one can’t imagine the National whips etc can have been entirely happy about O’Connor who has been chair of Parliament’s Foreign Affairs committee. But I’ve not seen a single media piece on this development – no attempt to interview O’Connor or Wall on their views, including of what our main parties or governments should be doing about the PRC, or to talk to the party leaders about their stance on IPAC and its calls for the West to take a stronger stand.

And nearer to home, there is no continuing media coverage of the fact that we go into an election with both main parties still embroiled in controversy – and legal investigations – around donations from CCP/PRC-linked figures. This is most stark as regards the charges facing Jami-Lee Ross (who was a senior National MP at the time of the relevant developments), and several ethnic Chinese New Zealand citizens – including Yikun Zhang, who the parties got together to honour for, in effect, services to Beijing – around donations to the National Party. National has not been straight with the public about anything to do with this affair, and no other party seems bothered. Meanwhile Labour has its own issues – former leader Phil Goff, as regards donations to his mayoral campaign, former Cabinet minister Lianne Dalziel over donation to her campaign, and the obscure SFO investigation into some aspect of donations to Labour in 2017. And yet we hear almost nothing of this – not, I’m sure, out of respect for fair trial rights, but because it suits all the big parties to keep quiet. But why does the media let them get away with it? Are they too unbothered about the corruption of our political system, and the suborning of the process by parties linked to the PRC?

Last year we had the political theatre in which the government – with National’s support – rushed through under urgency (keep debate and scrutiny to a minimum) a largely-cosmetic change slightly further reducing the (already severely limited scope) of foreign citizens to donate to directly to New Zealand political parties. It wasn’t a bad change per se, but it consciously and deliberately avoided confronting the much bigger issues: the ability of closely-held New Zealand registered companies owned by foreign citizens to donate (where there have been real and actual issues around PRC-related donations), and around a political culture that has seemed to regard as quite acceptable to take donations – large donations – from New Zealand citizens or residents who are themselves closely connected to the CCP/PRC. Nothing serious has been done about the law, and no party has apparently been willing to take a self-denying vow re PRC-linked donations. And no interviewer or journalist puts pressure on them to do so.

As it happened, I asked about this issue at our local candidates meeting last week. With a bit of a preamble, including noting what last year’s reform had/hadn’t done, I asked National, Labour, Greens and New Zealand First (the parties in Parliament) if they thought their parties should/would take donations from people or companies, NZ citizens or not, with close connections to the Chinese Communist Party (which the PRC operates at the behest, and in the interest, of).

I got no clear and straightforward answer, of the sort one might have expected if, for example, candidates/parties had been asked about people with strong neo-Nazi associations or (one imagines) in days gone by about the USSR or Nazi Germany or the like. It isn’t some obscure party/country I was asking about, but the dominant force in the largest country on earth, a country with a track record of ties – good and ill – to New Zealand.

The young New Zealand First candidate – a researcher in their parliamentary offices – was almost funny. He was desperate not to say the wrong thing and ended up noting that it was a foreign policy question – about NZ political parties taking donations from NZ citizens? – and the question would have to be put to “Winston”.

The Greens and National candidate both get some positive marks. The (very able) Greens candidate noted that her party did not have a specific policy re the CCP and she wasn’t about to make one up on the spot, but noted that she did think New Zealand should be louder in calling out human rights abuses (re the PRC, the Greens this term have been about as silent as the rest). The National candidate suggested – not entirely accurately – that the party is very transparent about all donations, and while he avoided the direct question did suggest we might benefit from some system of registering and disclosing those working for/lobbying for foreign governments (he mentioned the US system, which attracted guffaws from the Green-supporting Newtown crowd). But it was a step up on his National predecessor’s approach at the 2017 candidates meeting.

Labour’s candidate was the only sitting MP, Paul Eagle. His response was that Labour adheres to the law – well, probably mostly – but as he well knew that was not the question. He then went on to suggest that he didn’t know Labour approach to the sort of donations I was asking about and that he would have to check and come back to me. I emailed him the next morning (last Friday) to repeat the question, but – perhaps much as expected – have heard nothing back.

I don’t want to be too hard on individual candidates – all rather junior in their own parties – and it was more telling about the refusal of all the main parties to take this issue seriously, and be quite clear that – no matter how much was on offer – they would not take donations from people with close CCP ties. That said, most of them had little or nothing to lose….and not one was willing to say “but, speaking personally, I think it would be quite inappropriate to take such donations – or those from anyone with close ties with a foreign political party or government”. Not one. It was establishment New Zealand’s indifference, perhaps desperation for dollars, on display. And, of course, no interviewer or debate moderator asks the people with clout – the party leaders – about this, even though it is no hypothetical, and there is a clear track record of such donations in the past. Those donations were, it appears, legal. They were not right (and as Anne-Marie Brady has noted, many forms of PRC influence in other countries, including New Zealand, are legal and yet quite concerning).

The final item on my list of things of which we hear almost nothing in this campaign is the efforts by both main parties (in particular) to ensure that they keep ties in to the PRC’s United Front efforts in New Zealand by recruiting candidates, often to safe list positions, that Beijing will smile on. The grossest example of course was Jian Yang – whose past was finally exposed just before the last election, and who eventually acknowledged misrepresenting his past, at the behest of his then PLA/CCP masters, to get into New Zealand in the first place. National seemed unbothered – Jian Yang claimed they had always known his past, even if the voters weren’t so lucky – and, worse, neither were any of the other parties. On the Labour side, there was Raymond Huo, perhaps not with a past as egregiously awful with Jian Yang’s, but with a present stance arguably worse (the man, who chairing the foreign interference inquiry – extraordinary in itself for Labour – actively tried to prevent Professor Brady for testifying). Rather belatedly this year, both men have decided to move on and spend more time with their families – Yang after having been talked up by National during the year and promised a high list place. But both sides have replaced them. I presume the National replacement for Jian Yang is likely to miss out, but Labour Naisi Chen seems sure to enter Parliament, coming off the back of a past as president of the (PRC-consulate controlled) Chinese students association in Auckland, and who at a recent candidates meeting was reported as also engaging in minimising the Xinjiang abuses. And yet no other party seems bothered, and the media gives the matter almost no coverage.

One could, perhaps, explain away any one of the items on this list. Not all are perhaps quite as important as the others, the economy is not in great shape, the virus lurks etc. But it really isn’t adequate as an excuse – whether from the political parties, who would clearly just prefer the issue didn’t come up – or the media which seems to do nothing to raise it. Those companies trading with firms in China must be delighted. They certainly don’t want any risk that they might fall foul of PRC displeasure – as some industries in Australia have, where the government has taken a somewhat more forthright stand – and simply expect that the rest of us should pay the price while they sup with the devil without even the precaution of carrying a long spoon.

And perhaps it is fair to note that foreign affairs often aren’t central in New Zealand elections but (a) many of these issues aren’t about foreign affairs, but about how we govern ourselves, and (b) that isn’t always so (think of our past whether around nuclear ships, Springbok tours), and (c) on most reckonings the PRC is now a big and threatening presence on the world stage, and in many individual countries. Troubled as the US political system is, it is notable how different the tone of the comment – fact of the comment – is there, whether from Democrats or Republicans.

Our so-called leaders really are a shameful bunch, apparently more interested in keeping their heads in the sand (or those of the public) and keeping the deals and donations flowing, rather than evincing any interest in leading conversations about either emerging geopolitical risks, the nature and character of the PRC, and/or the PRC’s activities here. It should be sobering to recall the break-ins to Professor Brady’s home and office that happened during this parliamentary term. Both National and Labour set out to minimise the potential issue – other parties as bad – and now it seems to suit them for such events to be brushed over and forgotten.

If the politicians are bad – and they are the ones who really matter, who vie to lead and who would like us to believe they have our long-term best interests at heart – the media is (with rare occasional exceptions) little better. It is pretty shameful all round. Beliefs and values that are worth their salt are worth paying a price for, but it isn’t clear that National or Labour (or, as far as I can tell, the rest) have any values worth the name when it comes to the most consequential evil regime now on the planet and its activities here and abroad. That is sad commentary on what New Zealand – once quite clear about its opposition to the Soviet Union or Nazi Germany, under parties of either stripe – has become.

For those with access, there was a good article in the Financial Times last week about coercive economic “diplomacy” by the PRC. The article was by New Zealander Jamil Anderlini, the FT’s Asia editor. He made the case for countries to stand, and work, together to resist the PRC’s attempts to use trade pressure countries – calling for a new and better United Front of democracies with common long-term interests in this area. Our politicians seem to think it is just to cower and defer to the regime, and do as little as possible to ever upset them (which only ever encourages thugs), rather than standing with other countries that share something rather closer to our values than National’s and Labour’s CCP friends do.

House prices

Michael Reddell Housing

Looking at the polls, or the flow of daily news, in many respects it no longer much matters what policy positions the leader of the National Party is enunciating. Hardly anyone supposes that the government after the election won’t be either Labour alone, or Labour and the Greens. And so if we are at all concerned about policy, what matters for the next few years is what Labour’s leader is saying, and what – as incumbent Prime Minister – she has been doing.

Three years ago we were told by the Prime Minister – and correctly so – that the housing situation in New Zealand was pretty bad (the word “crisis” was often flung around). House prices had risen enormously in the previous few years, as indeed they had under the previous Labour government, and the National government prior to that. She made much of “child poverty”, and most serious observers recognise that a significant contributor to problems in that area was the extraordinarily high level of house prices in New Zealand. A few thought Labour was getting serious about fixing the grossly-distorted housing market – making it a functioning market, rather than a thing rigged by central and local government. The Executive Director of the New Zealand Initiative had even done a joint Herald op-ed with Phil Twyford who was then Labour’s housing spokesman.

I was among those who was on record here as being sceptical. Controversial reforms only happen if they have strong backing from the leader/Prime Minister. But whether under Andrew Little or Jacinda Ardern, Labour leaders in Opposition never highlighted the core problem – the land use restrictions – and only ever cited the palliative or distraction measures Labour was proposing; ones which, if they had any effect at all, might be a few percentage points in a climate in which house prices were perhaps twice what they really should be in a functioning market with abundant land. When, with a functioning land market and the lowest interest rates in a very long time, real rents should have been cheaper than ever.

What were they proposing? There was the proposed foreign buyers ban, the extension of the bright-line test, and ring-fencing. There was the vaunted capital gains tax, and talk about immigration (although the specifics would have changed the net flow for only one year). And, of course, there was to be Kiwibuild. If you dug enough in Labour’s manifesto you might find mention of land-use reform, but it never got much attention or profile at all.

And where are we now after three years in office? The REINZ’s measure of median house prices has risen by another 27 per cent – and real house prices are so high that 27 per cent increase at these levels are much more material, and damaging, than 27 per cent increases might have been 20 years ago. There hasn’t been much general inflation in the last three years – about 5 per cent in total – so real house prices are up in excess of 20 per cent in just three years. In none of that period was the economy performing spectacularly well, and of course this year has been flat out disastrous, mostly due to events beyond the government’s control.

And what has the Labour-led government done in that time? They’ve done some of their specifics – the PM last night claimed the foreign buyers ban had made a difference – while others have just fallen by the wayside. Capital gains tax is no more, and Kiwibuild was one of the government’s more embarrassing failures – not that, even if delivered, it would have made more than a jot of difference to the underlying, land price issue. Oh, and they’ve been consulting on locking up more land – especially on the outskirts of Auckland – as allegedly “highly productive”. Thank goodness we didn’t have that sort of government when Carlaw Park was in use as market gardens or Manurewa or Lower Hutt or…..

Asked about house prices in the debate last night, the Prime Minister seemed reduced to hand-waving. Perhaps the foreign buyers’ ban did make a small difference – it is genuinely hard to tell – but even with it real house prices have still risen in excess of 20 per cent in three years. For a city with median house prices at five times median income – and Auckland, Wellington and Tauranga are far higher than that – that 20+ per cent real increase is equivalent in cost to a whole additional year’s income. (In well-functioning markets, house price to income ratios of three are quite sustainable).

She seemed reduced to claiming that she couldn’t have fixed the housing market in three years – a claim that is not only wrong, but belied by the fact that her government has shown no real sign of trying, and is not promising anything much different in the next three or six years. One might almost believe that the Prime Minister doesn’t really care about the level of house prices at all, so long as she can keep it in check as an electoral concern. And, as a statist at heart, she’ll be happy when lots more people are in state houses – perhaps a reasonable outcome in itself, for a small minority, but hardly a systematic solution to one of the most egregious policy disasters in modern New Zealand history. (On that statist note, did anyone else note that when talking about lifting living standards her only answers seemed to be higher minimum wages and the state paying “living wages”, with never a hint of firing up overall economic performance in a way that would support market-led much higher wages all round.)

But we heard nothing from the Prime Minister – last night or in other speeches or interviews – suggesting she has any sort of vision of much lower house prices in New Zealand. I saw this post on Twitter yesterday afternoon

The Little Rock metropolitan area is bigger than Wellington and Christchurch but smaller than Auckland. These houses are about as far from the centre of town as Upper Hutt is from central Wellington or Orewa to central Auckland. And just look what you get for around NZ$300000. (In a place with interest rates just as low as those in New Zealand with – for the leftwing journalists currently aggrieved at loose macro policy – a central bank doing even more to buy up all manner of assets.)

But you don’t hear the Prime Minister talking of that sort of affordability as something New Zealand should be matching. But think about the sort of difference it would make if we did – not just to people buying a house to live in, but to the cost of supplying rental accommodation as well. It isn’t some silver-bullet to the issues around poverty – 50 years of real economic underperformance aren’t just about house prices – but it would make an enormous difference, and (not incidentally) turn houses back into a (lifetime) consumption item, not something to stress about or speculate on the value of it. Fear of missing out – which has, reasonably enough, driven many younger people – would be a thing of the past.

And even if one granted – what may have been the PM’s point – that writing a robust new land use law might take some time, markets trade in a forward-looking way. If anyone really thought Labour was serious about taking steps that might make a three bedroom house on a decent section affordable again, they’d hold off buying. And those who own the artificially-scarce land available for development would be looking to offload it now – developed or not – before that scarcity premium vanished from the price. But there is no sign of any of that. Instead, we have the government’s official economic advisers forecasting a new surge in house and land prices once the immediate Covid dip has passed.

Now, we know the government has had a report recommending its own rewrite of planning law. Who knows what will come of that, but it is hard to be optimistic. Again, if it were genuinely going to open things up we’d see the smart money moving already and peripheral land prices falling. But no sign of that – any more than there was when the Auckland spatial plan was put in place.

The dominant ideology of Labour (and much more so the Greens) seems to be simply opposed to allowing the physical footprint of our cites to expand much at all, a firm opposition to allowing markets to work in determining where new development takes place (thus, in combination cementing in quasi-monopoly land prices), all while both parties are wedded to driving up the population rapidly. Of course, some of them will tell you they are keen to facilitate greater urban density in existing suburbs near the central city or around transport hubs. I don’t have too much problem with that in principle, but it don’t think it is either right – or probably politically tenable – to ride roughshod over community preferences (many/most new developments run a system of private covenants, and it isn’t obvious why existing neighbourhoods shouldn’t have that possibility if that is what most existing owners want) and – more importantly here – there is little or no evidence that the drive for density, and height, is likely to lower the cost of a constant-quality unit of housing. Sure, you economise on land – even though gardens are what many people would actually prefer (revealed preference illlustrates that) – but the cheapest way to build houses is single-level properties, and (I’m told) the per unit costs of apartment blocks of several storeys are really quite high. Unless the land market is opened, so that there is genuine amd aggressive competition to supply new development sites, it is very unlikely that anything is going to change to deliver land-abundant New Zealand the sorts of real house prices it could, quite readily, have.

And that’s just a disgrace; a shameful reproach on both major parties (and their sidekicks) – but it is Labour which has been in government these last few years and almost certainly will be for the next few. It is inefficient and discourages inter-city labour mobility, but – more importantly to me – it is simply deeply unjust, with the burden falling most heavily on the young and the poor (in New Zealand that means disproportionately Maori), on new arrivals, and on those without wealthy parents, or even just on those who value self-sufficiency and earning their own way in life.

I look at my own teenage children and grow increasingly angry at the indifference of a Prime Minister who endlessly talks about “kindness” but has done nothing to fix the grossly distorted housing market, just presiding over ever-worsening imbalances. My son came home from the church youth group the other night telling me that one of the church leaders had said that he and his wife had purchased their first (inner Wellington) house for $25000 (at what would have been near the peak of the early 70s boom). That is about $250000 in today’s money. I checked that same house this morning – now almost 60 years old – and an online calculator estimates a value of $755000. Sure, real incomes are higher now, but in a functioning market that doesn’t justify higher – constant quality – real house prices. How would almost any early-mid 20s couple today purchase a first home in our cities? That should be a normal and reasonable expectation – looks still to be in much of the US – but this government seems quite content to turn the vast bulk of the country into a nation of renters. I recall going to Switzerland for a central banking course about the time I bought my first house, and being told by our hosts that prices in Berne were so high that really only department heads at the central bank owned their own houses/apartments. I was shocked – and disapproving – then, but never imagined it would be the case in land-abundant New Zealand. But something increasingly close to that is the legacy of National and Labour.

I try to be even-handed on this blog, and thus I should repeat that I have no idea if National would be any better now. They weren’t last time – despite positive rhetoric then too – but perhaps this time would have been different. But it doesn’t matter. They won’t be in government for the next few years. And all the evidence is that we have a Prime Minister who doesn’t care about lowering house prices, is uninterested in spending political capital or making the case to do so, and to the extent Labour has policy ideas in this areas none are likely to deliver real house prices lower than the disgracefully high level they were even three years ago when Labour took office.

Technology

Michael Reddell Uncategorized

Politicians of whatever stripe seem to want to associate themselves with “technology”. It was then British Labour Party leader – and Opposition leader – Harold Wilson who 57 years ago gave the speech where he talked of the new economy he looked to, referring to the “white heat of technology”. Perhaps it was the same in the 19th century too, but we certainly see and hear a lot about it in 21st century New Zealand. The economy continues to underperform, while same strange alliance of industry lobbyists and politicians want to talk up “technology” and so-called technology industries. I don’t think there is much difference between National and Labour on this one, but National is in Opposition, and yesterday Judith Collins was at it again.

As reported here, she wants to “double New Zealand’s technology sector in a decade, and specifically to double “New Zealand’s technology exports” to “$16 billion by 2030”, complete with talk of the sector being bigger than dairy 10-15 years hence.. Oh, and there was lots of money being flung around, and to top it all off National is promising a Minister for Technology. Presumably, that will be just one more title some other Minister would add to his or her list and – for better or worse – MBIE would carry on providing policy advice much as it does now.

Much of the political rhetoric in this area is fuelled by the annual TIN (“Technology Investment Network) report, a collaboration between MBIE and some private sector groups with an interest in talking up the sector. I took a sceptical look at this report in a post back in 2017. They seem to be the source of the idea that “technology exports” are currently around $8 billion per annum – the sort of line that led former minister in the current government, Clare Curran, to suggest a year or two back that technology was now our third largest export.

But the $8 billion (or thereabouts) is not a measure of exports from New Zealand – and certainly not in the sense that any serious economic analyst or national accounts statistician would recognise. Rather, it is the total foreign sales of the group of companies the TIN report put on their list. Exports, by contrast, are things produced the country concerned. ANZ is an Australian-owned and controlled bank, with significant operations in New Zealand. Last year its total revenue in New Zealand was about $7 billion, but no one thinks of that – or counts it as – an Australian export. But that is the sort of thing the TIN people lead people to do – TIN themselves tend to draft a little more carefully, but in ways that they know will lead people to talk of this revenue as somehow New Zealand exports. Last time I looked, for example, both Fisher and Paykel Appliances and Fisher and Paykel Healthcare were on the list. The former is not even New Zealand owned any more and both companies have substantial overseas operations – Healthcare, for example, does much of its manufacturing in Mexico, selling into the US. That makes it a successful New Zealand business, but those sales from Mexico to the US are Mexican exports not New Zealand ones.

It is difficult to get any sort of precise sense of the scale of (what one might reasonably think of us) “technology” exports from New Zealand, not least because technology is embedded, to a greater or less extent, in so much that is sold, whether locally or internationally.

But in my earlier post, I took a couple of proxies to try and get a sense of trends. I’ve updated some of those.

In the TIN report, for example, many of the companies are in “high-tech manufacturing”. But here is a “elaborately transformed manufactures” have done as a share of New Zealand merchandise exports.

ETM

And from services exports I worked out the share of the total made up of

Services; Exports; Charges for the use of intellectual property nei
Services; Exports; Telecommunications, computer, and information services
Services; Exports; Other business services
Services; Exports; Personal, cultural, and recreational services

The latter because the largest component of it appears to be film and TV exports (Weta workshops, Peter Jackson etc). “Other business services” is going to be quite a grab-bag, but it does include (for example) research and development services.

Here is how those services have done as a share of total services exports

tech exports

That series seemed to be doing quite well for a while, but unfortunately the last few years have not been very impressive and the latest observations are lower than those for, say, 2009. (Of course, there was a surge in education and tourism exports for a while, boosting the denominator.)

So what if we combine these two series and look at them as a share of New Zealand’s GDP?

tech exports 2020

Perhaps I’m missing some important series. But I went looking and I couldn’t spot anything obvious. Perhaps you are thinking of Xero for example, but wherever any of its export revenues from New Zealand might have been, the category of services of exports that mentions “accounting services” has shrunk hugely in real terms over the last 15-20 years. I’m sure there must be some other items some would reasonably label “technology exports” but if they were game-changing they should be easy enough to find.

We can all name various individual successful technology-based companies founded by New Zealanders. Some are even still owned, controlled, and/or based in New Zealand. And there is plenty of technology embedded in many of other exports – including dairy, the one they all seem to hope to rival.

But the overall picture really isn’t very encouraging at all. That is most unlikely to be “fixed” by flinging more scarce public money at the industry, or more visas. And we can be pretty confident that appointing a Minister of Technology would make no difference at all. In fact, if we keep on with the economic policies with run for the last 20 years, perhaps the main role for a Minister of Technology might be to front up to Parliament to explain why transformational change still hasn’t happened, hand in hand with the then Minister of Finance explaining why no progress has yet been made – perhaps another decade on – in reversing New Zealand’s longrunning relative productivity decline.

Of course, there is something of hint that the political parties aren’t really serious in the scale of the promise. National talked of doubling “technology exports” in a decade, which is akin to an average annual growth rate of about 7 per cent. For any really serious technology success story that would be a derisorily low rate of growth. Who knows: perhaps those worldwide sales of the TIN companies will grow 7 per cent per annum over the next decade – when nominal GDP is probably forecast to grow 4-5 per cent per annum – but even if that happens, it is unlikely to be the makings of a seriously stronger New Zealand economy.

Productivity, and politicians who no longer care

Michael Reddell Immigration, Productivity

I was reminded again the other day both how (absolutely) poor even advanced countries were not that long ago, but also how (relatively) rich New Zealand was. I was reading a fascinating book on Ireland’s (rather shameful) history in World War Two and stumbled across a snippet suggesting that “there were nearly 170000 licensed radio sets in Ireland on outbreak of war”, in a country of almost three million people. On digging around a bit, I found that in New Zealand, then with 1.6 million people, we’d had 317509 licensed radio sets in 1939 (then, apparently, third highest in the world per capita). The licence fees in the two countries appear to have been very similar.

The standard compilation of historical estimates of per capita GDP – that of Angus Maddison – is consistent with my radio anecdote. In 1938/39 GDP per capita in New Zealand was more than twice that in Ireland, with New Zealand in the very top grouping (New Zealand, UK, USA, and Switzerland).

How times change. As even Irish official statisticians acknowledge the idiosyncracies of Ireland’s corporate tax system substantially distort Irish national accounts statistics, but doing whatever adjustments are possible (eg the Irish modified GNI measure) or looking at consumption statistics it is clear that these days Ireland is producing considerably better material living standards than New Zealand is. In terms of standard productivity measures – the OECD’s real GDP per hour worked data – they probably went past us in the mid-1980s.

The OECD productivity data go back as far as 1970. By then, we’d already had a couple of decades of relative decline – even though for most countries, including New Zealand, the 1950s and 1960s had seen really impressive absolute growth rates. Of the 23 countries for which the OECD has 1970 data – not all of them (including New Zealand) then part of the OECD – real GDP per hour worked here was just over 95 per cent of that in the median OECD country. We were a touch behind France and a touch of the UK. These days – pre-Covid – real GDP per hour worked is about two-thirds of the median for that same group of 23 countries.

By far our worst decade since these data start was the 1970s. In that decade we had, by some considerable margin, the slowest growth in labour productivity of any of the countries the OECD has data far. Unfortunately, since then there has never been any sustained period when we have regained ground relative to the OECD pack, and if anything the gaps have widened further.

Relative optimists might look at the New Zealand experience this century and observe that there hasn’t been any material slippage relative to the leading bunch of OECD countries.

But that shouldn’t really be any consolation when:

  • the absolute rate of productivity growth has been so poor (our average annual rate of productivity growth for the nine years to 2019 has been a bit worse than our dismal performance in the 1970s –  see above),
  • we’ve managed no catch-up relative to the leading bunch, even though their productivity rates  –  problems at the frontier –  have also been disappointing to say the least, and
  • our performance relative to other countries that aspired to catch-up has also been dreadful.

I first got systematically interested in New Zealand’s woeful record in a stint at Treasury from 2008 to 2010, in the course of which I was heavily involved with the then-government’s 2025 Taskforce – the one supposedly about catching up (in terms of material living standards) with Australia by 2025. I wrote most of the Taskforce’s first report in late 2009 and in doing so I noticed, and reported that, of the former Communist countries of eastern Europe, Slovenia had then just passed us in terms of real per capita GDP, that Slovakia had real GDP per hour worked approaching that of New Zealand.

There have been some data revisions since then, but if we look at current estimates of real GDP per hour worked, in PPP terms, for 2007, we find that Slovenia was indeed about 5 per cent ahead of New Zealand, although the gap to Slovakia was a bit larger (10 per cent) than those earlier estimates suggested. There are eight former Communist countries in the OECD. In 2007, real GDP per hour worked in New Zealand was already only 16 per cent ahead of the median of those countries, that margin have narrowed markedly in the previous decade. Perhaps that earlier catch-up wasn’t too surprising or alarming – if you stop hobbling your economy and get rid of the state-dominated Communist system, you are almost certain to bounceback to some extent.

But where are things now?

Real GDP per hour worked, 2019, $US PPP
Slovenia 45.2
Slovakia43.8
Lithuania42.5
New Zealand42.2
Czech Republic42.0
Poland41.0
Estonia40.8
Hungary37.7
Latvia37.0

Last year we were really just middle of the pack among these countries, and in another couple of years – on policies, practices, whatever in New Zealand and other countries – you’d have to assume we’ll be struggling to stay ahead of Hungary and Latvia for long. In terms of growth rates over the last decade, Hungary was the laggard of the former Communist countries – still grew faster than New Zealand, but not by that much – but it should be slim consolation if we just manage to stay ahead of Hungary.

Not once previously in the history of modern New Zealand has any of these countries previously had productivity or income per head performances to match those of New Zealand. They still lag quite a way behind the north-west European leaders – although the gap is closing. The standout isn’t them catching up, but us failing.

It isn’t just those former eastern bloc countries. At the turn of the century, New Zealand could console itself that if Korea was growing rapidly, real GDP per hour worked was still not much more than half that of New Zealand. On recent rates of growth, they will move ahead of us in another year or two. Or Turkey – with a history of unstable undemocracy, macroeconomic instability and so on. The old Ottoman Empire was the 19th century’s “sick man of Europe”. In 2017, for the first time in modern history, real GDP per hour worked in Turkey moved ahead of that in New Zealand.

But it isn’t all bad news I guess. If you really want to find advanced countries that have done less well than New Zealand – poorer/less productive and with a slower productivity growth rate – I can offer you Greece and Portugal. But falling on those sorts of comparisons is really head-in-the-sand stuff.

But….in the midst of an election campaign, occurring in probably toughest economic times for an election campaign since 1990, is there any sign that (a) any political parties, or leading figures in parties, care about this dire long-term economic performance, or (b) have either any serious ideas, or a commitment to getting and adopting serious ideas, about making a difference? If there are any such signs I must have missed them.

Presumably, if pushed and at some level, the people grappling for office must know that productivity really matters – here was my story why and how. It is about underpinning higher wages (without pricing people out of the market), about underpinning more leisure opportunities, improving access to better healthcare, underpinning improvements in life expectancy, and underpinning the consumption of the bits and pieces of consumer society that most of us seem to value. Perhaps if you are an extreme Green you might have an excuse not to care about productivity – or, at the other end of spectrum, a zealot for the New Conservatives – but for the rest it is hard to see, at least if they are serious about anything more than simply occupying office.

Perhaps one can find slight and partial excuses for our politicians. After all, it is not as if the government’s self-proclaimed premier economic advisers, The Treasury, have been firing on all cylinders, generating a steady stream of searching analysis and research with suggested solutions to our decades of economic failure. Then again, as things are set up why would they? Successive National and Labour (and even NZ First) Ministers of Finance have had no real interest: bureaucrats respond to incentives to, and the State Services Commissioners have played their part in appointing as Secretary to the Treasury people who weren’t likely to rock the boat.

But, at best, it is a partial explanation, not an excuse. Real political leaders set the agenda, with ideas of their own, drawing on the expertise of others, and demanding – or promising – much better from the public service. There is no sign of any of that at the top of either of our main parties (and, mostly, the others don’t really matter much, but they don’t seem any different either). I’m sure they are all nice people, but what are they doing – or promising – that might make a real difference, in reversing the decline in our relative material living standards, not just for the next year or two (borrowed money, redistributing a static or shrinking pie) but for the next generation or two (your kids and mine, our grand children etc). Short answer – on the evidence of years and years, and on the evidence of what parties are talking about and promising in this campaign – NOTHING. It is shameful. (And it is also not much excuse to suggest there is no huge groundswell of public anger, demanding something better: we don’t expect voters to engage on real GDP per hour worked, but don’t we hear again and again complaints about gaps in what productivity and growth makes more readily possible – health, housing standards and so on?)

Instead, any (expressed or public) concern seems to be limited to same predictably small group. There is me, here – and in a longer-form treatment here. There is Paul Conway, formerly of the Productivity Commission – where he led their work in this area, before frustration got the better of him – and now at BNZ, and there is Kerry McDonald, former economist, former head of Comalco, former leading company director. McDonald’s latest speech pulls no punches in its title, Our Economic Disaster and the Tragedy of NZ’s Political Leadership. And not much beyond that. The point isn’t that the three of us would agree of everything – we wouldn’t – but that our politicians and senior officials, our political parties, aren’t even engaged on the issue at all, let alone on serious options for making a difference.

One area where it looks as though there is some overlap in the policy prescriptions of Conway, McDonald, and Reddell is around immigration, and a sense – more strongly put at least in my case – that decades of high rates of non-citizen immigration, often not of people who are particularly highly-skilled, has not served us at all well in lifting productivity, even though the official case for high immigration to New Zealand asserted that it was a “critical economic enabler”.

I illustrated earlier in this post how the central and eastern European countries have been catching up and overtaking New Zealand. In this chart I’ve shown the populations of New Zealand and the median of these eight OECD countries this century, drawn from the World Bank/UN data.

e europe sept 20

Or this table of population growth rates this century

Population growth, per cent, 2000-19
Lithuania-20.4
Latvia-19.2
Estonia-5.0
Hungary-4.3
Poland-0.8
Slovak Republic1.2
Czech Republic4.0
Slovenia5.0
New Zealand27.5

All these countries have birth rates below replacement (generally lower than New Zealand’s) and all have had outward migration of their own citizens – us primarily to Australia, the Europeans mostly to western Europe. The big difference is that New Zealand – alone – has pursued rapid population growth as a matter of official policy, aggressively running one of the largest (per capita) official immigration programmes on the planet.

(As I’ve argued in numerous previous posts, rapid population growth isn’t necessarily inconsistent with rapid productivity growth, but rarely if ever has rapid population growth been a recipe for sustained rapid productivity growth – arguably the 19th centuries colonies of settlement, with abundant land may have been exceptions. Much depends on the opportunities, and locations matter. And yes, although Korea now has very modest population growth, Turkey’s population growth has been rapid.)

But, even amid the Covid disruptions – which could have been a great opportunity to stop and rethink – no political party seems interested in revisiting whether New Zealand’s large scale immigration policy has worked in the economic interests of New Zealanders as a whole, and all the media chatter is about getting going again with the supply of relatively lowly-skilled workers from abroad into the New Zealand labour market. There is no sign it has worked for New Zealanders for the past 25 years, and no obvious reason to suppose that will change for the better now.

But our political “leaders” show no sign of caring, at least about anything beyond the latest stories of firms in low-wage industries wanting a resumed supply of people willing to work at….low wages.

Perhaps there is an alternative credible model for thinking about how to reverse sustainably our decades of underperformance. But if so, you wouldn’t know it from listening to our politicians, or their officials.

PREFU thoughts

Michael Reddell Fiscal policy

The debt numbers in yesterday’s PREFU are, to me, almost the least concerning aspects of the pages and pages of numbers/charts The Treasury published. My preferred debt measure – net core Crown debt, including the government financial assets held in the NZSF – is projected to peak at just under 40 per cent of GDP. As I’ve noted previously, numbers like that at the start of this year would have put us in the less-indebted half of the OECD countries then. By no obvious somewhat-objective metric is net debt at those sorts of levels particularly problematic, even if bond yields (and eventually, we assume, the OCR) do eventually head back in the direction of more-normal historical levels. And I hope neither main party – whether at this year’s election or that in 2023 – is going to make a fetish of specific timebound numerical targets for a particular debt measure (governments in few other countries do).

That said, the fiscal picture is not a rosy one. And it isn’t just because of Covid one-offs or because of the recession itself. Treasury produces estimates of the cyclically-adjusted balance, and this time gave us numbers that also stripped out those Covid measures. This is the resulting surplus/deficit chart.

CAB ex covid

Treasury estimated that there was a modest structural surplus over the second half of the 2010s, but now reckon the structural deficit will be around 1.5 per cent of GDP once we emerge from the immediate shadow of Covid. A three percentage point deterioration in the structural balance isn’t ruinous in and of itself – and is smaller than the moves in the previous decade – but it isn’t something to be entirely relaxed about either. It is the result of specific choices about permanent spending/tax choices. One would want to be comfortable that spending choices were of a particularly high quality.

I’m rather more bothered by the overall macroeconomic story, and the apparent complacency of The Treasury in these matters – not just as principal macro advisers to the government, but given that the Secretary to the Treasury is a non-voting member of the Reserve Bank Monetary Policy Committee. In four years time, the unemployment rate is forecast to still be materially above the NAIRU (and the output gap materially negative), and inflation is barely getting back to the target midpoint. A standard view of the monetary policy transmission mechanism is that monetary policy works with its fullest effects over perhaps an 18-24 month horizon. And yet on these projections not only has fiscal policy largely done its dash already, but there is hardly any further easing assumed in monetary policy (90 day bill rates drop to 0.1 per cent, but the OCR seems never to go negative). We have macroeconomic stabilisation policy to produce better cyclical outcomes than that. It has the feel of an approach that is just fine with people not likely to lose their jobs – Treasury and Reserve Bank officials – but shouldn’t be counted satisfactory to the rest of the population (and voters). Macro policy can’t solve structural failings, but it can address sustained cyclical weakness. A serious Opposition might make something of this, and reflect on the capabilities and priorities of our macro policy officials, and indeed on those (in the Beehive) who appoint/retain them.

One issue I’ve hammered on about here over the years is New Zealand’s rather woeful foreign trade performance. At the high tide of the latest wave of globalisation, we spent this century to date with the value of exports and imports shrinking as a share of GDP.

Treasury only produces volume forecasts for exports and imports in the PREFU. They aren’t pretty. Of course, (services) exports and imports are currently taking a large hit from closed borders, but Treasury assumes borders are reopened by the start of 2022.

Over the last economic cycle (2007/08 to the end of last year) the volume of New Zealand exports more or less kept pace with the growth rate in real GDP. But on Treasury’s forecasts over the full five years to 2023/2024, real GDP is projected to have risen by 8.4 per cent, while the volume of exports is projected to have risen by only 1.7 per cent. And whereas the volume of imports – things we consume, and use to produce – ran ahead of the growth in real GDP (quite significantly, as real import prices fell), even the latest forecast period to 2023/24 import volumes don’t even manage to keep pace with the subdued growth in real GDP.

As the prices of both exports and imports tend to grow more slowly than general prices (CPI, GDP deflator etc) and since Treasury projects the exchange rate goes nowhere over the next five years, these projections will be consistent with exports/imports falling to around a quarter of GDP. At the turn of the century they were around a third. And yet (growing) trade with the rest of the world is a key element in almost any country’s economic success – particularly for small countries.

The bottom line is perhaps expressed in lost GDP. We could do a simple comparison and look at nominal GDP for the years 2019/20 to 2023/24 from the Treasury’s HYEFU late last year and yesterday’s PREFU. Over those five years, Treasury now expects the value-added from all production in New Zealand will be $140 billion less than they thought just nine months ago. (For what it is worth, there is another $200 billion lost in the following five years, a period Treasury does not forecast in detail). These are really large losses, and on the Treasury numbers the associated wealth is never being made back. Nominal GDP matters for various reasons, including that most public and private debt is expressed in nominal terms.

But, of course, there is also plenty of focus on real GDP per capita. Over the last economic cycle (2007/08 to the end of last year), real GDP per capita. increased by about 1 per cent per annum. That was pretty underwhelming growth, reflecting the poor productivity performance and limited outward-oriented opportunities in turn reflected in weak business investment.

But here is rough comparison between the Treasury projections and a scenario in which we’d continued to stumble along at 1 per cent per annum growth in real per capita GDP.

scenario PREFU

On a rough estimate, the difference between the two lines is just over $100 billion – lost and never coming back. And although the two lines look as though they will eventually converge, my understanding of the Treasury projections beyond the official forecast period is that they don’t. Not only have we lost wealth upfront (that $100 billion) but our real annual income will always be a bit less than we previously thought.

None of these scenarios/numbers looks particularly unrealistically pessimistic to me. If anything, Treasury seems a bit more optimistic than I would be about the wider world economy – given how little has been done with monetary policy, the approaching political limits of fiscal policy, and the way that all societies look to be materially poorer than they would have thought just a few months ago, it is difficult to be very optimistic about the likely pace of sustained economic rebounds anywhere. And while Treasury assumes that we keep on in the medium-term with our modest productivity growht, it isn’t obvious even how that is going to be achieved – it is not as if either political party has any sort of serious economic plan. It doesn’t take aggressive fiscal consolidation here or abroad to think that private spending growth (consumption and investment) is likely to be really rather subdued for quite a long time to come.

Much of the political debate tends to turn on how much more debt governments have taken on, how much more public spending has been done. And there are important issues there, that deserve ongoing scrutiny, but at least as important is just how much poorer we now look likely to be than we thought just a few months ago. Fiscal policy redistributes among people in New Zealand, but even with all that fiscal support, as a country we are in aggregate so much poorer than we expected to be. And that will influence behaviour, choices, appetite for risk etc in the years ahead.

(Oh, and finally, I don’t have space to labour the point, but isn’t there something shameful when The Treasury reckons that – with no new fiscal or monetary stimulus – current structural features of the housing market (land use, immigration and whatever else) mean that they expect 7.4 per cent house price inflation in 2022/23 and a further 8.5 per cent the following year. That, not whether prices fall a bit this year as ,eg, unemployment rises, should be getting a lot more attention that it seems to be.)

Productivity and GDP

Michael Reddell pandemic, Statistics

Tomorrow morning we finally get Statistic New Zealand’s first guess at June quarter GDP. If I’m being critical in that sentence, it is through the use of the “finally” – emphasising just how long (unusually long internationally) the delays are in producing national accounts data – rather than in the word “guess”. I don’t suppose SNZ will use the term itself, but I think everyone recognises just how difficult it has been for statistics agencies to get an accurate read on what went on in the second quarter this year, when so many economies were so severely affected by some mix of lockdowns and private cboices to reduce contacts/activities. There are likely to be big revisions to come, perhaps for some years to come, and most likely we will never have a hugely reliable estimate – scholars may continue to produce papers on the topic for decades to come. That is also a caveat on the inevitable comparisons that will be made tomorrow, in support of one narrative or another, about how well/badly New Zealand did relative to other advanced countries. Most/all of them – and their statistical agencies – will have had similar measurement and estimation problems.

We do, however, have some aggregate data on the second quarter, including estimates from the Household Labour Force Survey (HLFS) and the Quarterly Employment Survey ((QES) on, respectively, hours worked and hours paid. Each of these surveys – one of households, one of firms (in sectors covering most of the economy) – had their own challenges in the June quarter.

Over time, the growth in hours worked and hours paid tend to be quite similar (unsurprisingly really). From 2014 to 2019, the quarterly growth in hours worked averaged 0.74 per cent per quarter, and quarterly growth in hours paid averaged 0.65 per cent. From quarter to quarter there is quite a lot of variability, which also isn’t surprising given the way the data are compiled (as an example, my household was in the HLFS for a couple of years and I would answer for all adult members of the household: for hours, I’d give them a number for my wife’s hours that broadly reflected my impression of whether she’d had a particularly taxing time in the reference week or not, but it was impressionistic rather than precise). Partly for that reason, when I report estimates of quarterly growth in labour productivity, I use both an average of the two measures of GDP and an average of the two measures of hours.

But in the June quarter there was a huge difference between HLFS hours worked (-10.3 per cent) and QES hours paid (-3.4 per cent). Some of that will be measurement problems and natural noise. But quite a bit of it will, presumably, reflect the wage subsidy scheme. The wage subsidy scheme ensured that most people who were employed stayed employed during the June quarter – although by the end of the quarter the unemployment rate had risen quite a bit – but many of those whose incomes were supported by the wage subsidy may have been doing much reduced, or barely any at all, hours actually worked during the reference week (when they were surveyed). For some components of GDP the QES series had typically been used as one of the inputs, which would have been quite problematic for the June quarter (and, to a lesser extent) in September.

Statistics New Zealand has published a guide to the sorts of adjustments it is going to make to produce its first guesstimate of GDP tomorrow. They seem to be making a significant effort in a number of areas, and presumably this information – and direct contact with SNZ – is what has led private bank forecasters to converge on predictions that GDP will (be initially reported to) have fallen in the June quarter by something like 11-12 per cent (by contrast, in its August MPS the Reserve Bank expected a fall of 14.3 per cent, and that seemed to be a fairly uncontroversial estimate at the time).

I don’t do detailed quarterly forecasts so I do not have a view on what the initially reported estimate of the GDP fall will be, let alone what the “true” number towards which we hope successive revisions will iterate might be.

I have, however, long been uneasy – and think I wrote about this here back in April – but how, for example, SNZ were really going capture the decline in output in the public sector. Output indicators for the core public sector are a problem at the best of times, but there are plenty of stories of government departments that didn’t have sufficient laptops for all staff, or didn’t have server capacity to enable staff with laptops to all work from home simultaneously. And that is before the drag reduced effectiveness and productivity – if it were generally so productive everyone would have done it already – and the inevitable distraction/disruptions of young children at home. All these people were paid throughout, and were no doubt recorded as “working” – in an hours paid sense – but skimming through the SNZ guide I see no indication of any sort of adjustment for this sector. And in respect of public hospitals – much less busy than usual, with elective surgeries cancelled etc – there is also no sign of a planned adjustment to the measured contribution to GDP.

And this note from the guide

  • The method for school education will not be changed. Activity is assumed to be unchanged, with remote learning assumed to be a direct substitute for face-to-face learning.

didn’t strike me as entirely consistent with (a) changes to the requirements for getting NCEA passes this year (reduced number of credits students are required to achieve, (b) reports of the difficulties many students had (or the fact that the government was still trying to dish out free routers to poor households – allegedly mine – as recently as a couple of weeks ago, or (c) my observations from my kids about how relatively little many of their teachers seemed to do during the period. Some kids – including a couple of mine – have even have learned more during time at home than time at school but (a) I doubt that generalises, and (b) it certainly won’t show up in more NCEA credits, since schools actively reduced the number of credits they offered.

So those are just a few straws in the wind that leave me suspecting that whatever is published now is probably something of an overestimate of value-added in the June quarter.

I’m also a bit uneasy when I think about what sort of monthly track (implied) is required to have generated “only”, say, an 11 per cent fall in GDP during the June quarter, bearing in mind that real GDP had already fallen 1.6 per cent in the March quarter as a whole.

There was a pretty strong view back in April/May that during the so-called “Level 4” restrictions economic activity was likely to have been reduced by almost 40 per cent below normal (the Reserve Bank’s 37 per cent estimate was here, and I think The Treasury’s estimate was even weaker).

But even if one assumes that in May and June economic activity was right back up to the level prevailing on average during the March quarter (in much of which there must have been little or no Covid effect, even though by the last few days of the period the “lockdown” was in place), April (almost all of which was in lockdown) must have been no weaker than 67 per cent of the March quarter average level to generate an 11 per cent fall for the quarter as a whole.

And that just doesn’t really ring true. We know, for example, that there were no foreign tourists arriving in the June quarter, and levels 2 and 3 restrictions were in place for quite a while. We know too the firms that swore they met the legal requirements for the extended wage subsidy.

If instead, and for example, we assume that May and June were back up to 95 and 97 per cent respectively of March quarter levels of economic activity – which sounds more or less plausible – then April has to have been no weaker than 75 per cent of the March quarter to generate an 11 per cent fall for the June quarter as a whole. And that doesn’t really square with any contemporary estimates about how binding the so-called Level 4 restrictions were. Perhaps they were all wrong and things just weren’t so badly constrained at all, but count me a bit sceptical for now. We’ll see, but in and of itself tomorrow’s release may not shed much light we can count on.

And on the other hand, there is the question of the implied change in labour productivity (defined as real GDP per hour worked). Assume that the HLFS is a somewhat reasonable representation of hours actually worked during the quarter and one is working with a reduction in hours of 10.3 per cent.

Suppose then that the bank forecasters (I looked at ANZ, Westpac, and ASB) are right and GDP is reported to have fallen by 11-12 per cent. That would produce a “headline” – well, there are no headlines, because SNZ does not report this measure directly – drop in labour productivity of perhaps 1 or 1.5 per cent for the quarter.

That might, on the surface, sound plausible. All sorts of things must worked less efficiently under voluntary or regulatory restrictions around the virus. If anything across the range of sectors that normally involve extensive face-to-face contact it might sound like a reasonable stab – albeit perhaps on the small side – as a representative drop. Remember that even in places where gross output was maintained, often slightly more inputs will have been required to keep up output.

But what do we see in other countries? Finding quarterly productivity estimates for most other countries isn’t easy. The UK publishes an official whole economy series, but with a fair lag (so the Q2 estimates are not yet available, even though they publish monthly GDP). Australia does publish official estimates of real GDP per hour worked in the same release as the GDP numbers. The initial ABS estimate is that real GDP per hour worked rose quite sharply in the June quarter.

aus covid productivity

The US does not report official whole economy productivity, but labour productivity in the non-farm business sector is estimated to have risen by 10.1 per cent. In both cases, output fell, but hours worked fell even faster. Canada also reports a significant rise in average labour productivity in the June quarter even as real GDP also fell sharply.

What is going on here? It isn’t that Covid is suddenly making everyone, or even whole swathes of industry, materially more productive – the longed-for elixir of renewed productivity growth. Almost certainly what is going on is compositional change: the people who were working fewer hours (or not all) will have tended to be disproportionately in relative low wage/low labour productivity sectors/roles. One can think of bar staff, waitresses, office and motel cleaners, barbers and so on. On the other hand, a fairly large proportion of higher-paying jobs could be done, more or less effectively, with little or no face to face contact. And in Australia, for example, the hugely capital intensive resources sector will have been hardly affected at all by the Covid restrictions. Most individual sectors/roles might have maintained – more or less – their productivity, but for many lower paying ones the effective demand (and output) was just no longer there. Averaging those who were still producing/working one ends up with higher average productivity even if no individual is any more productive than ever.

Each country’s restrictions, and underlying economic structures, were/are a bit different. But on the face of it, it is a little hard to construct a story in which average labour productivity hardly changed in New Zealand when in other advanced economies it rose a lot. We were very stringent on shops and cafes/restaurants/bars. We had a large tourism sector that was very hard hit, and typically isn’t a hgh paying sector.

Now perhaps that HLFS estimates of hours worked (-10.3 per cent) is itself all wrong – although presumably other countries must have had similar issues – but if GDP comes out tomorrow with a reported fall similar to the reported fall in hours worked, it will be just another puzzle to add to the mix – and to hope for some significant revisions down the track. Of course, if (a) HLFS hours is a reasonable guide, and (b) other countries’ productivity estimates are a reasonable guide, then all else equal one might have expected a fall in GDP even less than the one those private forecasters are picking. And – even amid the great uncertainty – that really would be a surprise.

What difference did lockdowns make?

Michael Reddell pandemic

I’ve written a couple of posts over the months drawing on work by Waikato economics professor John Gibson. Back in April there was this post, and then last month I wrote about an empirical piece Gibson had done using US county-level data suggesting that government-imposed restrictions in response to Covid may have made little consistent contribution to reducing death rates (in turn consistent with evidence suggesting that much of the decline in social contact, and economic activity, was happening anyway, in advance of government restrictions).

Fascinating as I found that paper, I was never entirely convinced how far the point would generalise, It seemed implausible, for example, that government restrictions and “lockdowns” would never make much difference – even if, in practice, the particular ones used in US counties might, on average, not have. After all, at the extreme, if a population (wrongly) regarded the threat from a particular pandemic as fairly mild, and yet some megalomaniacal government nonetheless banned all cross-border movement and ordered that no one was to leave their home for six weeks it is quite likely that – gross over-reaction as the government’s reaction might be – fewer lives would be lost from the virus under extreme lockdown than with no government restrictions. Then again, if the public was right and the government was wrong, such a lockdown would not save any material number of virus deaths, but would come at an enormous cost, whether in economic terms or personal and civil liberty.

That earlier paper also used only US data, and although there is an enormous richness in US data – since restrictions were imposed at state and county level – there is the entire rest of the world, even just the advanced world, to consider. As it happens, Professor Gibson has now done another short paper looking at (much of) the OECD countries – most of the advanced world. Here is his abstract.

A popular narrative that New Zealand’s policy response to Coronavirus was ‘go hard, go early’ is misleading. While restrictions were the most stringent in the world during the Level 4 lockdown in March and April, these were imposed after the likely peak in new infections I use the time path of Covid-19 deaths for each OECD country to estimate inflection points. Allowing for the typical lag from infection to death, new infections peaked before the most stringent policy responses were applied in many countries, including New Zealand. The cross-country evidence shows that restrictions imposed after the inflection point in infections is reached are ineffective in reducing total deaths. Even restrictions imposed earlier have just a modest effect; if Sweden’s more relaxed restrictions had been used, an extra 310 Covid-19 deaths are predicted for New Zealand – far fewer than the thousands of deaths
predicted for New Zealand by some mathematical models.

Professor Gibson does not seem at all taken with the Prime Minister’s “go hard, go early” catchphrase. He argues that the New Zealand government went hard, but actually rather late. He begins the paper with this chart, comparing restrictions in New Zealand and several other advanced island countries (ISL being Iceland).

Gibson 1

And observes

Up until mid-March the New Zealand response generally lagged the other countries in Figure 1. Moreover, the initial response, from 3 February, required foreign nationals arriving from China to self-isolate for 14 days. In late February, this extended to travelers coming from Iran. Subsequent genomic sequencing of confirmed cases in New Zealand from 26 February until May 22 shows representation from nearly all the diversity in the global virus population, and cases causing ongoing local transmission were mostly from North America (Geoghagen et al. 2020). Thus, aside from self-isolation being poorly policed, restricting travelers from certain countries (for example, China, Iran) is ineffective at keeping the virus out, unless all countries in the world simultaneously impose the same restrictions. Without such coordination, the virus can spread to third countries, from whence it can enter New Zealand. It is like bolting one door on a stable with many exterior doors, with horses free to roam around inside so that a smart horse (aka ‘a tricky virus’) can escape through any of the other doors.

And goes on to note that

The evidence in Figure 1 is open to at least two criticisms. First, different comparator countries may allow alternative interpretations. Secondly, comparing with responses of other countries may not be the right metric. Sebhatu et al (2020) find a lot of mimicry; almost 80 percent of OECD countries adopted the same Covid-19 responses in a two-week period in midMarch: closing schools, closing workplaces, cancelling public events and restricting internal mobility. These homogeneous responses contrast with heterogeneity across countries in how widely Covid-19 had spread, in population density and age structure, and in healthcare system
preparedness. One interpretation of this contrast is that some governments panicked and followed the lead of others, rather than setting fit-for-purpose Covid-19 responses that reflected their local circumstances. So another approach to study policy timing is to compare policy responses with the spread of the virus in each country.

Gibson adopts an approach of working back from data on Covid deaths – imprecise as that it, it is generally regarded as better than direct estimates of case numbers, which are hugely affected by just how much testing has been done – to estimate when there must have been a turning point in infection numbers to be consistent with the observed deaths data. That involves using an estimate, informed by experience, of the lag from infections to deaths (he mentions a couple of papers estimating lags of three to four weeks). Gibson produces results for 34 OECD countries, although unfortunately (for New Zealand comparisons) not for Australia.

The results in Table 1 show that the inferred inflection date in infections ranges from February 23 to 4 June, and for the median OECD country occurred on 23 March. For New Zealand, the approach in Figure 2 suggests new infections peaked on March 16, over a week before the strictest restrictions began on 26 March. Even if a shorter lag from infections to deaths is assumed, the peak in new infections in New Zealand still will have occurred before the Level 4 lockdown began. New Zealand is amongst 17 countries whose peak policy stringency occurred after the likely turning point in infections. So based on comparing policy
timing with likely progress of the virus, the ‘go early’ claim seems untrue.

He argues that it matters

It matters that policy restrictions are applied too late. Over two-thirds of variation in Covid-19 death rates (as of August 18) across these 34 OECD countries is due to baseline characteristics: deaths are higher in more populous countries, with higher density, higher shares of elderly, immigrants and urbanites, and fewer hospital beds per capita and having land borders (Table 2). If the country-specific mean of the OxCGRT policy stringency index is included it provides no additional predictive power. However, if the time-series of policy stringency is split at the inflection point in infections for each country (based on Table 1), prepeak policy stringency is negatively associated with Covid-19 death rates while post-peak policy stringency has no statistically significant effect on death rates. A similar pattern is apparent if the (likely) dates of peak new infections are controlled for, or if the maximums of the stringency index are used rather than the means. Thus, it seems to matter more to ‘go early’ than to ‘go hard’.

Gibson goes on to deal with concerns about endogeneity, re-running tests looking at policy responses relative to those of other nearby countries. Doing that tends to confirm the thrust of the earlier results.

there is a precisely estimated negative elasticity of death rates with respect to the policy stringency that was in place prior to the peak of new infections and an insignificant effect of policy stringency after the inflection point in infections has occurred.

But even then the effects appear to be quite small

gibson 2

And what of New Zealand?

gibson 3

or, in the slightly less-loaded framing from the abstract

if Sweden’s more relaxed restrictions had been used, an extra 310 Covid-19 deaths are predicted for New Zealand – far fewer than the thousands of deaths predicted for New Zealand by some mathematical models.

Of course, all those 310 would have been people, with grieving families, but on this model, we would have had a rate of deaths per million still in the lower half of OECD countries (rates akin to many eastern European countries, and Norway) not to those of (most of) northern Europe, including Sweden.

Having read and reflected on the paper, and engaged on a couple of points with Professor Gibson, I thought there were still several points worth making in response:

  • unlike his earlier paper, this paper makes no claims about what was known, or not known, by New Zealand and other countries’ governments in mid-late March. Even if the true number of new infections had started to decline even prior to the New Zealand “lockdown” policymakers could not have used this methodology at the time (since the deaths – the foundation of the timing estimate – had not yet happened). Reviews with the benefit of hindsight are not without their considerable uses – most real-world reviews are of that sort – but it is important to be clear that that is what this paper is. Politicians, of course, use their own take on hindsight to reinforce their preferred narratives,
  • the results may depend quite a bit on the correct specification of the model, and in particular on whether the other variables included (country population, population density, elderly share of the population, foreign-born share of the population, per cent living in urban area, available hospital beds per capita, and the presence/absence of a land border) have a robust foundation. The one I was particularly sceptical about was country population, as I could not see a good reason for it to affect Covid death rates. I asked Gibson about it and he re-ran the model without that variable and in summary “the basic pattern of results in terms of the policy variables stays the same, and particularly the contrast between pre-peak and post-peak stringency”. As it happens, this variant produces a lower estimate of New Zealand deaths with Swedish-level restrictions than the models reported in the paper itself. (Gibson, however, continues to think a population variable has a sensible structural interpretation.)

If we take Gibson’s results at face value they seem pretty appealing (and, in many respects, not that surprising, since we know – from papers since released – that officials in mid-late March were not recommending a lockdown of anything like the stringency of what the government actually imposed).

That said, it isn’t clear to me what the nature (and quantification) of any tradeoffs around economic costs and loss of liberties might be. There is a reasonable argument – and it is the stance I take myself – that the extreme restrictions on economic activities and liberties should be counted as a very large cost, justifiable (if ever) only in the face of the most severe and near-certain threat. What sort of society are we when we tolerate a government banning a swim in the sea, banning funerals, banning any public celebration of Easter, banning utterly safe economic activity (a sole practitioner going to his or her place of business)? But perhaps there is a counter-argument if maintaining the sort of moderate death rate Gibson envisages also required that we kept Swedish-type restrictions in place right through the last six months? It is possible – but needs for work, more modelling – that the total economic costs might have been similar or even higher. But then should one put a higher price on the most extreme episodes not just weight all losses equally? Perhaps there is a clearer-cut argument there in respect of restrictions on liberties than on the narrower GDP effects, perhaps especially when we recognise that different people value different things, different freedoms, different obligations in different ways. And that arbitrariness and unpredictability of use of extreme controls should itself be represented as carrying, and imposing, a heavy cost.

My position all through has been that the government over-reacted in adopting the full extent of its so-called “Level 4” restrictions. But the issues in my mind then was a difference between a New Zealand “level 4” and the somewhat less severe approach adopted in Australian states. With the benefit of hindsight, a paper like that of Professor Gibson poses more questions – and the sort of the questions that need to be posed, since the virus hasn’t gone away and (for example) we see Israel being forcibly locked down again. I hope his paper gets some scrutiny from, and engagement with, some of the more thoughtful of the champions of the New Zealand government’s approach. Perhaps he is quite wrong and his conclusions just aren’t sound, but they look like results that should warrant serious engagement, perhaps even a question to the Minister of Health, the one who the other day was trying to pretend the government does not (implicitly or explicitly) put a dollar value on human life in making its spending/regulatory decisions.

More facts

Michael Reddell New Zealand Initiative, NZ politics

I’m not sure that the people at the New Zealand Initiative really have much time for New Zealanders. I was inclined to suggest that perhaps that is why they are always keen to trade us in for more immigrants, but I don’t think their stance is in anyway unique to them or to New Zealanders. Instead, there is a class of geeks, often academics, particularly found in the US, who continually lament, and even deplore, what they regard as the “ignorance” of the general public. The public, you see, don’t know the facts the geeky teenagers (and a whole class of us older versions) know.

And yet somehow they get through life. Somehow, for all its faults, New Zealand is mostly peaceful, and moderately prosperous too. And at least by some benchmarks – those of the liberals at the NZI I imagine – these might even be thought of as the best of times in all human history.

This post is, of course, mostly going to be about the new report the Initiative released overnight, complete with some headline-grabbing opinion poll results about what people knew (or thought) about some questions on New Zealand politics and the political system.

But it was only a few months ago that the Initiative used a similar approach – headline-grabbing poll, illustrating the “ignorance” of the public – to back their report calling for more of a knowledge focus in our education system. It was a cause I was fairly sympathetic to – and probably only get more so as my children progress through NCEA – but I wrote a fairly sceptical (perhaps even scathing) post about what weight we might reasonably put on their survey results.

facts

Or

And is it particularly useful to know the antibiotics are about bacteria not viruses?  I did know that, but it isn’t particularly useful to me.  Instead, when I go to the doctor I typically take his advice, and when he prescribes something I try to follow the prescribed instructions.  It probably matters rather more –  in term of keeping antibiotics useful – that (a) doctors don’t over-prescribe and (b) patients follow instructions.  Or so I’ve been told, and I’ll operate of those rules of thumbs (especially the latter) for now.

But this time the Initiative has turned to our political etc system, with a slightly odd mix of 13 questions, in a public opinion survey conducted in January. To establish my geek bona fides, I would have answered – with the odd caveat (and even the Initiative had one in its footnotes) – all the questions the approved way. I tried it on two of my teenage kids: the younger one got about three-quarters right and the older one – not yet eligible to vote – got them all right but posed caveats I hadn’t initially thought of, but each of which was quite fair (and he’d done no civics classes at school).

I’m going to step through the questions quickly.

facts 2

I thought the results for the first question were pretty good. Recall that these surveys are presumably done over the phone, out of the blue, not giving people half an hour with pen and paper. It is easy to miss one item in a instant-recall quiz. Note that geeks will have noted the presence in Parliament of Jami-Lee Ross who does now lead/represent the Advance NZ party, although (a) in Parliament he was formally an independent, and (b) the survey was done in January and Advance NZ appears only to have been launched in April. Also, I presume I would have been marked incorrect had I listed the CCP among my answers, even though in some respects it was certainly true.

As for the second question, you’ll see that even the Initiative has a footnote to some other technically correct answers. But even though the Initiative whips the public for not understanding MMP, isn’t it plausible that at least some people had in mind “well, it asks about parties gaining seats, but actually constituency MPs are elected as individuals?” Quite possibly some respondents – perhaps new migrants, unlikely to vote – just weren’t familiar with “MMP” as a label. The answers might have been a little different if the question was “in the New Zealand electoral system…”?

facts 3

To be honest, I was really surprised by the David Parker result. Then again, I’ve been a political junkie for 45+ years, was a public servant for 30+ years, am married to a senior public servant, and devote a fair chunk of my time to writing about New Zealand public policy issues. We ran a little poll last night on a wider family group, and not one of them knew who the Minister for the Environment was – a PSA delegate, an academic, the owner of a provincial law firm, a couple of housewives, and a semi-retired national administrator and director. And as I reflected on that I thought “why would they need to, or want to, know?” In what way, if any, does it affect their individual lives, or probably even their vote (Parker being a list MP and votes primarily being for parties). Nerds remember the difference between Environment and Conservation, but to many “Environment” will sound like something Eugenie Sage might have been minister of.

As for Hipkins, yes lots of people have kids in school, but why would most people pay any particular attention to who happens to be Minister at the time. If you have concerns about schooling for most people the presenting face is likely to be the child’s teacher, the Principal, and perhaps – at a pinch – the chair of the board of trustees (I could not name chairs of trustees of either school my kids attend, but I could find out easily enough).

I guess the survey was run in January, but looking at this question yesterday I paused for a moment before answering.

facts 4

But for most people I imagine a more honest answer would have been “who cares?” (there were zealots on either side, and many of the zealots on the left actually suggest the bill doesn’t amount to much of substance – but geeks like process systems and bills).

Then we get some odd questions, to which (surely) there are not right or wrong answers – even if one’s own views happen to align with the Initiative (and the majority).

facts 5

After all, on the second of those questions, as the report notes Pharmac does make independent decisions. The NZI is keen on Pharmac (as am I) and also notes – carefully avoiding expressing any opinion on it – the Reserve Bank. But it is quite a complex question, and since we all know that even if independent decisionmakers are given criteria against which to decide, individual preferences enter into their decisionmaking, I can imagine those who generally favour a bit more of a role for “experts” (reasonably) giving a non-approved answer to this question.

As for the final sentence in that block, there is a small minority of CCP-linked very-politically-aware people in New Zealand who probably think Xi Jinping is just the thing, and really a pretty good model. I don’t agree, but it is a value not a fact.

Then back to something closer to factual.

facts 6

To the first, of course I can trot out the “correct” answer to the first question, but it is a US-framed question (and there is even some dispute among geeky people in the US as to whether it is the best framing). But what of New Zealand? Is the New Zealand Parliament really a “branch of government”? Personally, I think “the government” is accountable to Parliament. And what if someone had said “the Queen (or Governor-General), the Cabinet, and the public service”? NZI would have scored them incorrectly, but as “government” is used here it is arguably more accurate. And are courts part of “government”? Well, our courts have a different role than, say, the US Supreme Court – which really is the final arbiter of law in the US – and the courts guard very jealously their independence from the government. More generally, the very question is a geeky political science type question that – framed that way – hardly anyone needs to know.

(Oh, overlooked the courts question. Most people got the “right” answer, and yet some people will be aware that courts will often look to the intentions of Parliament in passing a law, and others will be aware that courts – on matters of judicial review etc – tend to be highly deferential to the preferences and judgements of the executive.)

And finally, foreign relations

facts 7

I was pretty impressed – well, surprised – that 38 per cent of people answered the Five Eyes question correctly. Pretty much no one had even heard of the Five Eyes (a colloquial term, even though here it is capitalised, and isn’t “agreement” or arrangement” more accurate than “alliance” anyway – and they describe it more accurately in their own text?) for decades, and if it has had a bit more coverage in recent years it impinges directly not at all on the life of almost anyone in New Zealand.

But the Initiative had fun – lets laugh at the plebs – with the question about the UK, jeering that perhaps the UK government may want to know about, as it were, the invincible ignorance of the colonial peasants, And yet, and yet….

When I posed this question to my son, who is planning to study international relations next year, he said “but don’t we have some sort of partnership agreement with NATO, and the UK is part of NATO?” Personally, I didn’t think that really counted – even if the NATO Secretary-General not long ago described New Zealand as one of NATO’s closest partners, and we have worked under NATO auspices in Afghanistan where the UK had a significant presence. But he dug a bit further, and pointed out to me something called AUSCANNZUKUS which led us on to ABCANZ, to AFIC, and to the CCEB (all described here – I think the army version of this we only joined formally in 2006).

Perhaps more tellingly, there was the Five Power Defence Arrangements between New Zealand, Australia, the UK, Singapore and Malaysia,

whereby the five powers are to consult each other “immediately” in the event or threat of an armed attack on any of these five countries for the purpose of deciding what measures should be taken jointly or separately in response.

People can stand on precise points about what “alliance” means – does it mean a binding commitment or not? – but frankly anyone who answered “yes” to that question – whatever they had in mind – can’t really be judged to have been incorrect.

The other weird aspect about the NZI treatment of this question is that it assumed that any such “alliance” was about UK aid to New Zealand, and that stupid New Zealanders think the UK will defend us. That seemed odd to me. Every New Zealand military involvement post- World War Two – whether under formal alliances, under UN auspices, or whatever – has been about us helping out others, typically much larger and more powerful countries, partly because it is “the right thing to do”, partly to buttress multi-dimensional relations with these countries. Those countries have often included the UK. I have fond memories of our assistance to the UK during the Falklands War – not under any formal military alliance, but because it was a good thing to do, to help out our friends in a time of need (and, at the margin, may have helped keep the UK onside in EU access dealings). So that even if you (correctly) think there is no more-formal mutual and reciprocal security guarantees between the UK and New Zealand – neither were there in 1939 – many people probably have in mind a relationship richer and deeper.

So that was all rather picky, warranted really only by the fairly dismissive tone the Initiative took to the public’s answers to their quite specific questions. In the end I’m not really going to disagree with them that the level of general public knowledge of details of our political etc system is pretty low. And one can be endlessly picky: in an exchange on Twitter this morning with Matthew Hooton he posed the question of who scored the first try in the 1987 Rugby World Cup. Apparently the first individual (“who”) to score a try was Michael Jones, and yet the first try was actually a penalty try.

But, as regards our political system, I’m still in the “in what way does any of this really matter?” camp. The people who really care about the Zero Carbon Bill will know the answer and – political geeks aside – most other people won’t, at least with any great accuracy. I think of my family members who didn’t know that David Parker was Minister for the Environment. I have absolute confidence in all of them as citizens and voters, and people who contribute to making families and societies what they are.

And was the level of “ignorance” of these details not ever thus? In the end, we mostly elect governments, and then – in time – we toss them out again. If I look back over 100 years of New Zealand history, it is hard to see too many times when the public acting collectively got it wrong (even though many of those times personally I might have voted with the minority). It is impossible to know counterfactuals, but the collective (as if) decision that it was time for Muldoon or Clark to go wasn’t ever likely to be dependent on a detailed sense of statutory interpretation or which parties voted for what specific piece of legislation (how many acts of Parliament could most people even name).

In their report the NZI make much of the importance of knowing who is to blame for what. It is a point that has some force in the United States – federal system, enumerated powers, written constitutions etc – but much less so in New Zealand. Here, to all intents and purposes, all powers rests with the executive or Parliament and – given the financial veto – no legislation can be passed without the consent of the executive. Even local bodies exercise only powers delegated to them from the centre. Events are either bad luck – exogenous – in which case we react partly to how governments handle them, or they are the direct responsibility of some or other branch of the executive. So mostly we vote “keep them in” or “toss them out” on some mix of judgements of competence, judgements of character/conduct (NZI doesn’t seem to approve of them), values, ideological branding, and so on. Most people don’t need much very specific factual knowledge – of the political geek variety – to make those choices.

And, on the other hand, as someone who answered all the questions “correctly”, who knows a fair amount about policies (and attribution of responsibility), I’m sitting here still currently planning to not cast a party vote at all. A fair chunk of factual knowledge doesn’t, in the end, help much – at least among those for whom a core value seems to be “but you have to vote; it is the only right thing to do”.

Of the specific NZI proposals, I’m all in favour of the regulatory structure being changed in ways that allow the return of ipredict, killed off by the Ministry of Justice and Simon Bridges. It was great….for political geeks and junkies. I’m sceptical – as they mostly seem to be – of civics classes in schools (in addition to their reasons, one would expect them to become a platform – another one – for teachers to engage in mild politicial indoctrination of their students). And I’m not convinced at all by the argument for putting financial incentives in place for factual political knowledge – rewarding kids for passing tests is generally regarded as a bad idea and I’m not convinced political system tests would really be much different. Same goes for offering big prizes to the knowledgeable listener when a radio station calls out of the blue with a political knowledge question: it would be great for introverted teenage political geeks, but would make almost no difference among the populations where (I presume) NZI thinks it would matter.

For all this, I’m not some starry-eyed optimist about New Zealand, democracy or whatever – in fact, I’m much more negative on New Zealand outcomes than the Initiative’s authors seem to be. But I think the issues and challenges run much deeper, and reflect more poorly on the “elites” and “establishment” of society than on the wider public.

I’m often reminded of these words of (later) US President John Adams written in 1798

Because we have no government, armed with power, capable of contending with human passions, unbridled by morality and religion.  Avarice, ambition, revenge and licentiousness would break the strongest cords of our Constitution, as a whale goes through a net.  Our Constitution was made only for a moral and religious people.  It is wholly inadequate to the government of any other.

Many readers won’t necessarily agree (including with the wider claim that successful stable democracies probably need an enduring shared worldview, morality, religion –  not just weak agreement on procedural matters – but as I ended my post on the previous NZI report

The (narrow) facts just don’t get you far.  I’d rather people “knew” that Communism has been, and is, a great evil than that, say, they knew the geography of Hong Kong or the biochemistry of plastic.

Or, right now, a sense that CCP interests are so much deferred to in New Zealand politics –  even if some will dispute this –  matters much more, including to the enduring strength of our system, than answers to most of the NZI’s latest specific questions.

LSAP, deposits, bonds, house prices etc

Michael Reddell Housing, Monetary policy, pandemic

There has been a flurry of commentary in the last couple of weeks about the (alleged) impact of the Reserve Bank’s Large Scale Asset Purchase programme. Much of it has seemed to me really quite confused. I don’t really want to pick on individual people – none of whom, as far as I’m aware, is a macro or monetary economist – although, for recency if nothing else, Bernard Hickey’s column yesterday is as good an example as any. But the Reserve Bank itself has not helped, tending to materially oversell what the LSAP programme has actually done.

There is, for example, a complaint (there in the headline of Hickey’s article) that “printed money being parked, not invested or spent”. But this seems to completely ignore the fact – it isn’t contested – that really only Reserve Bank actions affect the stock of settlement cash. All else equal, when the Bank buys an assets from someone in the private sector, that purchase will boost aggregate settlement cash, and only some other action by the Reserve Bank will subsequently alter the level of settlement cash. When private banks lend (borrow) more (less) aggressively, that may change an individual bank’s holding of settlement cash, but it won’t change the system total. Some of my views and interpretations may be idiosyncratic or controversial, but this one isn’t. It is totally straightforward and really beyond serious question. For anyone who wants to check out the influences on the aggregate level of settlement cash balances, the Reserve Bank produces a table – only monthly and too-long delayed in publication – detailing them (table D10 on their website). I’ll come back to those numbers.

Now, of course, the transactions that give rise to changes in settlement account balances aren’t always – or even normally – primarily with banks themselves. If the Reserve Bank bought a government bond I was holding, that would increase – more or less simultaneously – (a) my balance in my account at my bank, and (b) my bank’s balance in its account at the Reserve Bank. And because the government banks with the Reserve Bank, the same goes for (say) government pension payments: all else equal, they add to the recipient’s own deposits at his/her bank, and also to that recipient’s own bank’s deposits at the Reserve Bank (in normal times, the Reserve Bank does open market operations that roughly neutralise these fiscal flows – revenue or spending).

Much of the coverage of the LSAP purchases suggests that there has been a big net transfer of cash (deposits, settlement cash) from the Reserve Bank to private sector bondholders in recent months. Thus, we get stories and narratives about what “rich people” and other bond holders are (and aren’t – often the point) doing with all the cash they are now holding. But it simply isn’t a narrative relevant to New Zealand over recent months. The Reserve Bank publishes a table showing holdings of government securities (Table D30). Again, it is only monthly and we only have data to the end of July. But over the five months from the end of February to the end of July, secondary market holdings of New Zealand government securities (ie excluding those held by the Reserve Bank and EQC) increased by around $10 billion. It simply is not the case that funds managers, pension funds and the like (private bondholders generally) are suddenly awash with extra cash. In fact, collectively they have more tied up in loans to the Crown than they had back in February.

None of which should be really very surprising. After all, the government has run a massive (cash) fiscal deficit over the last six months – a reduced tax take and programmes that put lots of extra money into the accounts of businesses and households.

We can get a sense of just how large from that Influences on Settlement Cash table (D10) I referred to earlier. In the five months March to July the government paid out $23.8 billion more than it received. There is some seasonality in government flows, but for the same period last year the equivalent net payout (“government cash influence”) was $4.5 billion (and $4.9 billion in the same period in 2018). That is a lot of money put into the accounts of firms and households – the largest chunk will have been the wage subsidy payments, but there was also the corporate tax clawback, and various other one-offs, as well as the effect of the weaker economy in reducing the regular tax-take.

Over those five months the government has also issued, on-market as primary issuance, a great deal of debt (bonds and Treasury bills) offset by maturities (and early repurchases of maturing bonds by the Reserve Bank). Over the five months, the net of all these on-market transactions was $34.4 billion – as it happens, a whole lot more than the cash deficit for that period.

Now, of course, we know that the Reserve Bank – another arm of government – has been entering the secondary market to buy lots of government bonds. For the five months, the cash value of those purchases was $27.2 billion.

Take those two debt limbs together and issuance has exceeded RB LSAP purchases by about $7.2 billion.

And those are almost all the main influences on aggregate settlement cash balances. Other Reserve Bank liquidity management transactions can at times have a significant influence, but over these five months the net effect was tiny, at around $300m.

So broadly speaking, over the five months from the end of February to the end of July, the total level of settlement cash balances increased by about $16.4 billion (to $23.8 billion at the end of July). Roughly speaking, a cash deficit (also, coincidentally) of $23.8 billion, and net debt sales by the NZDMO/RB combined of $7.2 billion. And a few rates and mice.

Another way of looking at it is that the $23.8 billion “fiscal deficit” has been financed by $7.2 billion of net debt sales to the private sector, and by the issuance of $16.4 billion in Reserve Bank demand deposits (another name for settlement cash balances).

(And thus the biggest effect of the LSAP programme itself has really just been to change the balance between those last two numbers – consistent with the line that I keep running that to a first approximation the LSAP is just a large-scale asset swap, exchanging one set of low-yielding government liabilities (that anyone can hold) for another set of low-yielding government liabilities (that only banks can hold, while banks themselves assume new liabilities to their own depositors).

But taking the private sector as a whole what has happened over the last few months is that the fiscal policy choices (spending and revenue) have put lots more money in the pockets (and bank accounts) of firms and households. And the government as a whole (NZDMO/RB) has offset the settlement cash effects of that in part by (net) selling really rather a lot (by any normal standards) of net new bonds to private sector investors/funds managers etc. They, in turn, have less cash. Firms and ordinary households have more (at least than they otherwise would).

There have been strange arguments – and the Reserve Bank Governor sometimes feeds this silly line – that banks are not “doing their bit” by lending more to businesses, even though – we are told – they have so much more settlement cash. But this is a wrongheaded argument, because systemwide availability of settlement cash has rarely, if ever, in recent times (last couple of decades) been a significant constraints on bank lending. Aggregate settlement cash balances barely changed over the previous decade and plenty of lending occurred. In a severe and quite unexpected recession, it would generally be more reasonable to suppose that lack of demand from creditworthy borrowers, some caution among banks as to quite what really is creditworthy, and sheer uncertainty about the economic environment would explain why there wasn’t much new business lending occurring. In fact, sensible bank supervisors would typically welcome that outcome. And remember my point right at the start, even if banks were doing lots of new business lending, it would not change the level of settlement cash balances in the system as a whole by one jot.

So then we get to the question of house prices. Many people – me included – expected that we would have seen house prices beginning to fall already. Severe recessions and considerable uncertainty tends to have that affect. Often, tighter bank lending standards reinforce that. So what did we miss? I can’t speak for anyone else, but for me:

  • I have not been surprised by the extent of the fall in retail interest rates.  That fall has been small in total, and modest by the standards of significant past recessions.  When people idly talk about lower lending rates driving up house prices, they seem completely oblivious to the way –  whether over 1990/91, after 1997/98, or in 2008/09 –  falling interest rates initially went hand in hand with flat or falling house prices.  Interest rates were, after all, falling for a reason in the middle of a recession.  One can argue that trend lower interest rates are raising trend house prices (I don’t think so, but that is for another day) but there isn’t really a credible story that this modest fall in interest rates –  amid a big and uncertain recession –  is raising house prices now, in and of itself,
  • we also know that people who usually hold bonds are not suddenly finding themselves at a loose end, unable to invest their cash in government bonds and having to fall back on buying a house instead.  The aggregate figures tell us instead they are holding a lot more bonds than they were (and as a trustee of super funds that do have substantial bond exposures, I know our advisers have not come and urged us to sell out and buy houses).
  • but we’ve also had a highly unusual combination of events that together probably do explain why, to now anyway, house prices are holding up in most places, perhaps even rising.  
  • we’d never previously gone into a recession with binding LVR limits in place.  The Bank removed those limits when the recession began –  sensibly enough –  for a flawed policy –  and consistent with the way they’d always talked of operating, enabling some people who regulation had forced out of the market to get back in.  Regulatory credit constraints were eased.
  • We also had the mortgage holiday scheme, which had two legs to it.  The first was that banks generally agreed to show forbearance to people who would have otherwise had trouble servicing their mortgage over this period, allowing them to defer to later payments due now.  Mostly that was probably pretty sensible, and banks might done something along those lines for most customers even with no heavy-handed government involvement.  But then the Reserve Bank engaged in questionable regulatory forbearance, telling banks that even though the credit quality of their residential loan books had deteriorated –  people unable to pay, even if perhaps just for a time, but with threats of rising unemployment –  they could pretend otherwise, at least for the purposes of the capital requirements the Reserve Bank imposes on locally-incorporated banks.
  • And, third, we’ve had an unprecedented series of fiscal support measures, putting lots (and lots) of taxpayer money into the accounts of businesses (mostly, directly) and households, to offset to a considerable extent the immediate substantial loss of market incomes and GDP.

My approach then is to reason from the counterfactual.   Suppose these actions had not been taken, what then would we have expected to have seen in house prices?

I reckon it would be a safe bet that house prices would have fallen.  Sure, retail interest rates would still have come down, but as I noted earlier that happens in almost every recession, and the falls are typically larger than those we’ve seen this year.   But even just suppose the virus had done as it did, here and abroad, and that the anti-virus choices (policy and private) were as they were.  There would have been a huge increase, almost immediately, in unemployment, and a large number of households would have been thrown onto no more than the unemployment benefit, and many of those that weren’t would have running very scared.  The cashed-up might still have been interested in buying, at low interest rates, but there would have lots of sellers –  whether forced by the bank, or people just needing to cut their debt urgently –  and that wave of desired selling would have fed doubts that would have left buyers more wary than otherwise.    But it was the fiscal policy choices that put additional money in the pockets of those who might otherwise have been rushing to sell.

The thing is, that for all the moans and laments about house prices rising a little, no one seems to have been arguing that we should not have taken a generous approach to supporting households through recent months.  Given the logic of the LVRs, probably most people think it reasonable that those restrictions were suspended.   Few people think banks should have been more hard-hearted (even if a few geeks like me might be uneasy about the capital relief the RB provided). 

And it is those that are the choices that really mattered.  (They are also why I remain sceptical that any strength in the housing market will last much longer, given that the fiscal support is rapidly coming to an end, unemployment is rising (and is expected to continue to do so), the world economy looks sick, we’ve been reminded afresh of virus uncertainty, and deferred debt has not gone away.  Time will tell.)

Now none of this is to suggest we should be at all comfortable with the level of house prices in New Zealand.  They are a disgrace, and the direct responsibility of successive governments of all stripes, and of their local authority counterparts.    But given that all of them refuse to address the real issues –  opening up land use on the fringes of our towns and cities in ways that would bring land prices dramatically down – they can’t really be surprised by where we are now.

And it is has nothing whatever to do with the LSAP programme:

  •  which has not put more money in the hands of people who buy houses,
  • has not made any material difference to wholesale or retail interest rates over the relatively short-term maturities most New Zealand borrowers borrow at (even if there is a case that the might have a material difference to long-term rates, benefiting really only the government as borrower),
  • may have actually held short-term interest rates up a little, if the Reserve Bank is being honest in its claim that it preferred using the LSAP to cutting the OCR further this year,and
  • which has not enabled, empowered, or encouraged the government to run any larger deficits than it would otherwise have chosen to run (which could readily have been financed on-market, except perhaps in the torrid week or two in late March when global bond markets were dysfunctional.   Government deficits put money in the pockets of people.  Most people –  me included –  think they were right to do so (even if we might quibble about details).

Observant readers may have noticed that the government issued much more debt over those five months than the deficits it ran.  Without the LSAP, these transactions in isolation would have tended to drain the level of settlement cash.  But that would not have happened in practice.   Either the NZDMO would have spread out its issuance a bit more, or the Reserve Bank would have done (routine for it) open market operations to stabilise the aggregate level of settlement cash balances at levels consistent with their target level of short-term interest rates.

Other observant readers might wonder how the LSAP can be so relatively unimportant (in many ways almost as unimportant as the MMT authors might suggest).  A key issue here is that the yields the (whole of) government is paying on bonds is very similar now to the yield (the OCR) it is paying on unlimited settlement cash balances.   One could imagine a different world in which things would work out differently.  It used to be common for settlement cash balances to earn either zero interest, or a materially below market rate.  So if, say, the Reserve Bank was buying bonds at yields of 10  per cent –  where they were in the early 1990s –  and paying zero interest (or even a significant margin below market) on settlement cash balances, each individual bank would be very keen to get rid of any settlement cash building up in its account.  They still couldn’t change the total level of settlement cash balances but they could, for example, bid deposit rates down aggressively, which would (among other things) be expected to materially weaken the exchange rate.  But on current policy –  only adopted in March –  the Bank pays the full OCR on all and any settlement cash balances.  25 basis points isn’t a great return, but it is probably high enough –  relative say to bank bill yields – that banks aren’t desperate to offload settlement cash.  The transmission mechanism is then muted, as a matter of policy choice.

Finally, note that –  because of the inadequacies of the Bank’s data publication (influences on settlement cash really should be daily, published daily, in times like this) – all my numbers refer only to the period to the end of July.  But note that since the end of July the level of settlement cash balances has fallen further ($19 billion as of last Friday).  I haven’t tried to unpick what specifically has gone on in any detail, but my guess is that the cash fiscal deficit has diminished, while heavy bond and bill issuance by DMO has continued.  The Reserve Bank has stepped-up its own purchases but the bottom line remains one in which (a) if anything the Bank is draining funds from banks, although in doing so not really constraining any one or any thing, while (b) it is fiscal choices –  pretty widely supported ones –  that have still been putting money in the pockets of people who might, for example, be holding houses (and owing the attendant debt).  Unsurprisingly, bank deposits have risen in recent months, exactly as one should have expected.

And there endeth the lecture,  My son (doing Scholarship economics) asked about this stuff the other day and I ran him through most of this material.  My wife suggested I’d had my best schoolmaster’s voice on at the time.  I suspect the tone of this post is somewhat similar.  I hope the substance is some help in clarifying some of the issues.