Month: June 2024

A Sahm-type rule for NZ? I think not.

Michael Reddell Fiscal policy, Treasury

The Treasury yesterday hosted the first in their new series of guest lectures, under the broad heading “Fiscal Policy for the Future”. In introducing the series Dominick Stephens, Treasury’s chief economist, told us that the focus would be on three sub-headings: policy dimensions around fiscal sustainability, the potential stabilising role of fiscal policy, and ideas around value for money. Which sounds fine I suppose, but it perhaps wasn’t a great example of reading the times that the first lecture was about an idea that would, when it was used, involve the Crown simply giving away a lot more money (automatically).

The guest lecturer was the left-wing (a description she embraces) American economist Claudia Sahm. Sahm was formerly an economist at the Fed and these days seems to divide her time between consulting and being chief economist for a US funds management firm.

Sahm is best known for the Sahm rule US recession indicator

She didn’t develop the indicator simply for analytical interest but (as she reminded readers in a recent Substack) with a policy proposal in mind

The idea being that when the recession indicator threshold point is met, the IRS would mail out checks automatically, to lean against the incipient downturn by boosting consumer spending. It would be, in her words, a quasi automatic stabiliser

(The “automatic stabilisers” are the extent to which government budgets vary with economic cycle without any discretionary policy changes – you can think of unemployment benefits, but typically the tax side of things is much more important. We don’t have lump sum taxes, rather governments share in the gains/losses when wage bills, spending, and profits rise/fall. Relative to a lump sum taxes benchmark, the actual way we design tax systems – proportional and, in respect of income tax, progressive – tends to dampen economic cycles a bit.)

Ever since Covid Treasury seems to have been freshly keen on a more active role for fiscal policy (Stephens indicated yesterday that they are looking at making the stabilisation role of fiscal policy the topic for their next Long-Term Insights Briefing). I’ve written previously about a conference Treasury (and the RB) hosted three years ago, before it was really appreciated what a mess Covid macro management and associated misjudgements had wrought. At that point, Treasury people from the Secretary down were very upbeat, partly as a result of misapplying the hardly-surprising “insight” that if you forced people to stay home and, in many cases, not work, income support was going to be done a lot more effectively using income support tools than via monetary policy. As if it was not ever so – we provide income support to unemployed people using direct Crown payments too, rather than simply relying on monetary policy to sort everything out in the end. They were at again yesterday. Yes, there are plenty of things governments need to directly spend money on, but when it comes to macroeconomic stabilisation it is very much still “case not made”. But in fairness to Stephens, he did emphasise that if many people are Keynesians in foxholes (nasty recessions), rather fewer of them were keen on using fiscal policy to take away the punchbowl as the party was in danger of overheating. On yesterday’s showing, Sahm among them.

Anyway, that was all by way of introduction. Treasury seems to have been paying Sahm (over a period of several months) to develop her ideas in a way that might be applicable in New Zealand. If I was inclined to wonder whether this might not have been a potential budgetary saving (US macro consulting economists probably don’t come cheap), I actually found the lecture quite useful, mostly in shifting me more firmly into the camp of regarding the quasi automatic stabiliser idea as neither very workable nor very useful in the New Zealand specific context, using New Zealand macro data, and the experience of New Zealand recessions.

Sahm started by claiming that New Zealand had worse stabilisation challenges than many other (advanced?) countries, claiming that we had “really volatile output”. I wasn’t quite sure what she was basing that claim on, and just went back and dug out the OECD series of quarterly changes in real per capita GDP over the last 30 years (the period for which the data is fairly complete across the whole membership). New Zealand doesn’t really stand out – actually the median country for the variability of quarter to quarter changes over that period. What is perhaps more notable – and relevant here – is that the United States had the second lowest standard deviation of any of the OECD countries over that period. (It is also worth bearing in mind that many international comparisons, notably the OECD, use the expenditure measure of GDP, which used to be much more volatile than it has since become – an open question as to whether that is a reflection of changing reality or just better measurement by SNZ.)

Sahm is keen on the automatic stabilisers. She claims New Zealand’s are more effective than average, although in the past I’ve seen people reach the opposite conclusion (for the good reason that we have flat rate unemployment benefits rather than income-related ones, and that our tax system is not highly progressive, and our taxes as a share of GDP are not overly high). But whatever useful impact the “automatic stabilisers” have in dampening the extremes of economic cycles, it is important to remember that those features of the tax and transfers systems were put in place on their own specific individual merits, and any macroeconomic stabilisation benefits are at best nice-to-haves. We have unemployment benefits because we think people (and their kids) shouldn’t starve. We have progressive taxes because of conceptions of fairness, and proportional rather than lump sum ones for similar reasons. We have bigger governments in some countries than in others not primarily from macroeconomic stabilisation considerations, but because of differing conceptions – fought through political processes – about the role of the state.

By contrast, what Sahm is proposing is a fiscal tool that would exist solely for macro stabilisation reasons. It really is a quite different beast. To be fair to Sahm, she argues that her tool isn’t necessarily a case of more total fiscal outlays in downturns, but different or better ones. But you get the sense that her personal politics leans in the direction of bigger government rather than smaller, and as we shall see – whatever might have been the case in her US calibrations – in New Zealand it doesn’t look as though it would have worked that way.

Her New Zealand starting point was to identify the agreed upon recessions, using the official New Zealand data.

One might quibble, but lets take that list and move on

She then trawled through the New Zealand data looking for a rule that would be timely, simple, easy to understand (and legislate), involving reliable data, and free from external influence. This is the proposed rule she came up with

You will quickly see that it is quite a lot more complex than her US rule (which has just one variable – the unemployment rate – to trigger similar sized (in aggregate) payments.

Who would be eligible? Her basic proposal was that payments (around $1000 a head [UPDATE altho I suppose larger if children were excluded; she didn’t clarify one way or the other]) should be made to the bottom 80 per cent of people by income (no doubt greatly welcomed by middle class kids doing after school jobs, their older siblings at university, and the retired). In her time working with Treasury she had, it seemed, been regaled with stories of the previous government’s “cost of living” handout, and she (fairly) noted that the advantage of pre-positioning an instrument is that you can sort out all/most of those sorts of issues in advance.

Where I started getting uneasy was with the consumption indicator (I wasn’t clear whether she was using private consumption or total but what follows is relevant either way). First, as she acknowledges, she is finding empirical regularities (data mining might be a bit unfair) not laws of nature, and it is over a sample of only five recessions, (two of which really ran into each other, one of which was very very unusual in nature). Perhaps the thing that most surprised me was that there was no sign she had done her analysis using real-time data – which is what any automatic instrument would have to be keyed off. She mentioned the point in passing, but surely between Treasury and SNZ they could have got her the real time (ie first contemporaneous release) data to check?

Those revisions matter. As just an example, on a very quick Google around the eve of the 2008/09 recession this was how the Treasury March 2008 Monthly Economic Indicators report saw the latest GDP numbers

That was production GDP, up by an estimated 1 per cent. The current official estimate for that series for that quarter is an increase of 0.13 per cent.

(In passing I would note that anything that is a legislated mechanical rule then puts a great deal onus on the processes and capability and integrity of the organisation producing the data. Their staff and management will know that a great deal may rest on one tenth of a decimal point in some circumstances. In years gone, I would probably have played that down as an issue in New Zealand, but…..SNZ has been in the headlines in the last 10 days or so for reasons that don’t fill people with confidence in their integrity or capability, and in recent decades SNZ has been run by generalist public servants from the SSC/PSC stable, not fierce statisticians. It wouldn’t be my biggest worry by any means, but….)

But much the biggest issue is that inflation line in the rule. I’ve not seen anything similar in her US proposal. The general idea is that if (core) inflation is high you really don’t want to be adding automatic stimulus to the fire (any more than discretionary bits, like the “cost of living payments”). As Dom Stephens pointed out, there is an argument the restriction isn’t tough enough even as Sahm expressed it: after all the Reserve Bank is supposed to be aiming at 2 per cent, and if inflation is above target overall macro policy is still supposed to be bearing down on inflation (although here I would note the lags, and if macro policy isn’t adjusted until inflation is all the way back to target midpoint it is almost certainly rather too late). But lets stick with Sahm’s version.

She presented this chart (Treasury sent out her presentation to attendees but hasn’t yet put it on their general website)…

…and claps herself on the back. Her fitted rule, she claims, triggers in all the recessions except the 1997/98 one (which had as much to do with drought and bad domestic monetary policy as Asia). Unfortunately, I think she has been misled by some of her data, and doesn’t have any real domestic context. As a starter, from the bottom half of her table (“technical recession”) the 1989 sharp fall in consumption was from a base quarter immediately prior to an increase in GST, so at very least you’d need to adjust the rule for such (easily observable) events.

But what about the real recessions (top half of the table)? There is some ambiguity about the 87/88 event as her table says N to automatic payments but her text seems to say yes. But either way, there is absolutely no way that macro policymakers in early 1988 would have been wanting to add fiscal stimulus (automatic or otherwise). Inflation (headline and core concepts) was coming down but was far too high (for the Bank and for ministers), and every single one of the regular Reserve Bank reports in those days called for more fiscal consolidation to ease the pressure on monetary policy and the real exchange rate. Same goes for the 1991 recession. We were still trying to drive down inflation (it was too high relative to the new official target) and fiscal policy was all in a flurry by the averted threat of a double credit rating downgrade. Aggressive fiscal consolidation was the order of the day, both for fiscal reasons (primarily) but also to ease pressure on monetary policy),

Skip over 97/98 for the moment and we come to 2008/09. The sectoral model of core inflation – probably the best retrospective indicator of core trends – was well above 3 per cent all through 2008 and into 2009, so although I’m not sure what core measure Sahm is using in the table, inflation certainly wasn’t anything like acceptable to the Bank in the early days of the recession (Sahm’s focus). It was a year of fiscal expansion……but mostly because (a) Treasury misjudged the permanence of the high levels of government revenue at the peak of the boom, and (b) it was election year and the government was losing (and presumably preferred specific own-brand giveaways to mechanised ones). Even had the rule been in place, it probably wouldn’t have triggered before final Budget decisions were being made in April and early May 2008.

As for Covid, if I was trying to design an automated rule I’d just take the Covid period out of my sample. The (discretionary) wage subsidy – which might have been too generous, but did its job – was put in place in late March 2020, months before the Q1 consumption data were available. Not only would the rule have been far too late to trigger, but in the specific circumstances it would have been too small to be relevant (swamped by the size of the wage subsidy). And, as it turned out, the last thing that was needed in 2020 was more encouragement to people to spend…..when the overall policy response helped generate the worst breakout in inflation for decades.

She calls the current episode a “technical recession”, but the unemployment rate has risen already by more than a full percentage point and per capita GDP is down as much as it was in 2008/09 (and consumer spending has been very weak). So it feels like another downturn when the rule triggered but payments would not sensibly have been made because…..inflation.

It was Dominick Stephens who pointed out recessions are sometimes the solution (to inflation) not the problem to be resisted. And I think that does mark our experience out at least somewhat from the US – notably we went into the severe 2008/09 recession with a pre-existing inflation problem, and they did not.

So, curiously, what we are left with is that I can think of only one episode in the last 37 years (the data sample) when triggering the rule and making payouts might have been helpful (and I stress “might” because she isn’t modelling responses, or comparing alternatives), and that is the one of her real recessions where payments would not in fact have been made: the 1997/98 episode. Which seems a bit awkward for the proposal.

And that is before we start on the other problems with the scheme.

For example, if one could identify a new and reliable rule – for indicating that the economy was probably in recession – why not just (a) advertise it widely, and (b) pass it on with a strong commendation to the central bank MPC. If it is a great and reliable rule (a) the Bank would be likely to use it in some form or other, and (b) the markets and the public would recognise that conditions were likely to ease, and respond accordingly. And to turn things on their heads, if there is a preloaded fiscal response, doesn’t that make it more likely that the central bank will be even slower than usual (this isn’t personal to the RB, central banks generally tend to be too late) to react, relying in part on the coming fiscal hit to buy them a bit more time to wait and see? A realistic assessment of such a policy proposal would need to make allowance for those sorts of interactions.

And then there is politics. Why would any political party or coalition want to preload lump sum handouts, rather than (a) look to the RB to do its job, and (b) keep the fiscal fuel for its own spending or tax cutting priorities (and perhaps again this is a difference to the US: here the government automatically (by construction, having supply) has a majority for its own budget plans? And why would much of the public think that big handouts to beneficiaries, high school kids, the retired etc would be a great idea at a point in the cycle where – again by construction – the unemployment rate is perhaps only a little off cyclical lows – and some of those lows (as recently) may have been quite extremely low. (This is, incidentally, one of the conceptual problems with the rule – which is just based on empirical regularities. Unemployment rates do drop below sustainable levels, well below at times. There is no good reason to think that additional policy stimulus is required just because the unemployment is finally heading back towards some sort of NAIRU.)

Monetary policy isn’t perfect. Our central bank these days is certainly anything but. But the case for looking beyond monetary policy for cyclical stabilisation just hasn’t really been made convincingly, and – particularly here in the New Zealand case – a simple automated rules looks to have been as unfit for purpose as was the idea (touted a bit in the US) of having the Fed mechanically implement a Taylor rule.

Oh, and then there was the profound asymmetry. There is nothing in this sort of rule – or even a readily conceivable alternative one – that could credibly operate on the other side of the cyclical; pulling money out of the system according to some rule. It really is easier to give money away than to take it back. Much better to keep fiscal policy doing what it does best, and leave cyclical stabilisation efforts to the central bank (a case that, admittedly, would be more compelling in New Zealand were the central bank and its key public faces not so egregiously bad, and unwilling ever to admit or learn from inevitable errors).

But, as I say, I found it useful to think hard about Sahm-type rules in the specific context of New Zealand and its experiences in recent decades.

PS. Finally, I thought I’d take a look at the US Sahm rule indicator. It isn’t yet indicating that it is time for additional stimulus (0.5 is the threshold). But then the market doesn’t think the Fed should be cutting yet either. And when it is time for taking the foot off the brake, if I were an American taxpayer contemplating huge debt and deficits, I think I’d prefer to see the Fed do the stabilisation action.

PPS Sahm did not that a tool like this might be more useful when monetary policy was constrained (ie at a lower bound). But since there are ready technical solutions to lower bound issues – that don’t cost taxpayers billions of dollars – perhaps it would be better for central banks (chivvied along by Treasurys if necessary) to final fix the lower bound issues and leave monetary policy free to do its job, imperfectly (in the nature of human institutions).

UPDATE 13/6 Thinking a little more about Sahm rule types of proposal, they seem best suited to a world in which the economy is routinely running at or around capacity and then a demand-shock recession arises out of the blue (and thus an increase, even a modest one, in the unemployment rate might reasonably indicate a case for policy stimulus). But that isn’t often the case (probably generally, but certainly not in New Zealand in recent decades). As just one example, around two thirds of OECD countries had their lowest unemployment rates in the period 1995 to 2007 in 2007 itself, often in the December quarter, the very eve of the recession getting underway,

Foreign direct investment, the Governor, and governments

Michael Reddell Uncategorized

(Post refers to my Saturday post on recent reported comments by the Reserve Bank Governor)

Who said this?

The world is awash with savings yet New Zealand does not provide a gateway that makes it easy for that capital to enter the country.

Well, that was one Christopher Luxon on the campaign trail three months out from the election last year.

At the time, Labour was in office. This was how their Minister of Finance had articulated the Labour government’s general attitude to foreign investment, in an official directive letter required by statute and addressed to Land Information New Zealand which runs New Zealand’s overseas investment regulatory regime

He went on to outline some caveats, and no one could accuse the 2017 to 2023 governments of being unequivocally keen on all and any foreign investment (they were, after all, the government of the ban on foreigners buying houses here).

But what of the Governor of the Reserve Bank? Normally, one might expect Governors to keep any opinions on FDI to themselves (once upon a time the Reserve Bank administered the relevant legislation, but no longer) or at very most to articulate something close to government policy. It isn’t, after all, their area of responsibility (debt inflows might be a different matter).

But this was what he told his Queenstown audience a couple of weeks ago, in a speech delivered in his official capacity

Our central bank Governor seems to be saying that there is something wrong with having so much foreign investment in New Zealand, and that it is somehow related to what holds back productivity growth in New Zealand?

As I noted in Saturday’s post, it really isn’t clear what he is on about or what he is basing these quoted comments on.

It isn’t, after all, as if New Zealand has a particularly large stock of inward foreign investment.

In fact, among OECD economies we are in the bottom third, expressed as a percentage of GDP (the chart doesn’t show Ireland, Luxembourg or Netherlands which are off the scale to the right on account of company tax regime distortions – although the “true” level of FDI in each country will be quite large).

And New Zealand is well known for having a not-exactly-welcoming regulatory approach to foreign investment

People debate quite what the New Zealand number really means in substance, but our governments don’t go out of their way to make it easy.

What about the current government? Well, as it happens, the Associate Minister of Finance with responsibility for the Overseas Investment Act issued a new one of those directive letters to LINZ just a few days ago. In his press release he noted:

And in the official directive letter he wrote

That seems pretty clear (although a shame about that absurd foreign buyers ban that is still in place).

But it seems to be utterly at odds with the public views, expressed in his official capacity, of the Governor of the Reserve Bank. Not only do Orr’s comments seem out of step with most conventional economic analysis and advice (I guess there is always the Greens and Bill Sutch of dubious memory on the other side), but – on a area in which he has no policy responsibility – quite out of step with the government. He has always been free to resign and run for Parliament or establish a think-tank. But for now he is a senior and very powerful official delegated huge powers (which, as it happens, he hasn’t even exercised well).

The Governor often likes to cite the, mostly meaningless (because it simply explains what the point of having the Bank is, and nothing about powers or specific goals), purpose clause in the Reserve Bank Act

Both governments he has served under have stated that they see foreign investment as having an important role in helping lift prosperity etc. But not, it seems, the Governor.

Look, if at a private dinner party with close friends or over a beer with his mates Orr wants to muse in some neo-Sutchian or Green Party way then who are we to object (although even then good central bank Governors should be very guarded about what they say to anyone), but this was in an official speech in his official capacity. And if he reckons the ODT’s journalist has quoted him badly out of context, the onus should be on him to clear things up (but he is only likely to do so if journalists start asking him hard questions, of which there is no sign so far).

As a reminder, the Associate Minister of Finance making those foreign investment comments wasn’t just the minister actually responsible, but also the leader of the ACT Party, a senior Cabinet minister and someone who will be Deputy Prime Minister a year from now. He is also the author of a letter to the then Minister of Finance – who was required by his own new law to consult other parties in Parliament – strongly opposing the reappointment of Orr as Governor (page 15 here). There is no sign Orr has changed for the better (Seymour objected under three headings: Poor Leadership, Poor Outcomes, and Poor Focus – and you’d have to think Orr’s weird and unsubstantiated FDI comments fall smack within that third category).

It was always a bit staggering that Grant Robertson, having passed a law himself requiring that the other parties in Parliament be consulted on the appointment of a Governor (one could argue this was an amendment with merit, consistent with the idea that even if people didn’t always agree with a person serving as Governor at least it should be someone who commanded pretty wide-ranging respect across the political spectrum) went ahead and reappointed Orr over the explicit written objections of the two largest opposition parties, knowing that the law made it very difficult (probably rightly so) for him later to be dismissed if the government changed.

But Orr has shown no signs of buckling down and acting in a disciplined way that might command grudging respect from those who had been openly sceptical in his first term, even though that was the sort of line the egregious Reserve Bank Board chair used to make the case for reappointing his man

We’ll see a new, different and better Orr next time round seemed to be the suggestion…..

Orr was back on form a couple of weeks ago with his abuse of banks and of the New Zealand Initiative, when the Initiative (a body to which the main banks belong) had the temerity to disagree with and criticise the Governor and his policies. He just doesn’t get the idea that reasonable people might differ from him, let alone that as a very powerful regulator he has particular responsibilities to operate in a restrained and disciplined manner, not by implication opening the possibility of taking out on regulated entities his vengeance for daring to openly disagree.

Fortunately perhaps, the ACT Party is not an entity regulated by the Governor. On their official Twitter account I spotted this 10 days ago

Now, Todd Stephenson may be not much more than a backbencher BUT (a) he is actually a PPS to David Seymour, so not exactly marginal within ACT, and b) this statement (“he is temperamentally unfit as a steward of banking regulation”) is posted on the official Twitter account of a party that is a full member of the coalition government, a party headed by an Associate Minister of Finance no less. And, 10 days on, the post is still there (clearly wasn’t some junior staff’s fit of excess enthusiasm quickly pulled down by the powers that be).

It really is extraordinary that we have a central bank Governor:

  • openly articulating views on foreign investment (something he has no responsibility for) apparently at odds with views of successive govts,
  • attacking private entities for having the temerity to disagree with him, and implicitly holding over  bank members of that body a reminder of all the regulatory power he wields over them,
  • being openly attacked as unfit for office by a political party that is a component of the current coalition government, whose leader is an Associate Minister of Finance.

And all this with a Minister of Finance who seems not to care a jot.  A week or so ago when that NZ Initiative story broke she was at pains to try to disclaim any responsibility, but the Act is quite clear that responsibility for the Governor and Board rests squarely with her (the one person in the process accountable to Parliament and the public)

(I don’t think it is plausible to use these powers to sack the Governor – I don’t think behaviour since March last year (his reappointment) rises safely to that level, and any attempt could be judicially reviewed, in a very messy and disruptive way, but……Orr is her problem, and she so far displays no sign of any interest.)

I might suggest it was all rather Third World, but that might be unfair to them. But it is rather unsatisfactory all round, and really needs sorting out (like so many aspects of our failing public sector). Journalists with access asking hard questions might be a good start.

The Governor said what?

Michael Reddell Uncategorized

I’m sure there are more important issues right now amid the spiralling decline in New Zealand public institutions. One could argue there are even more important matters around the Reserve Bank (you know, the body that lost $11-12 billion for taxpayers’ in its reckless Covid interventions, gave us the worst core inflation for decades (still outside the target range several years on), and still has outstanding billions of dollars of concessional loans to banks (this even as the Governor openly bags banks for being too profitable for his tastes)).

But this one caught my eye.

Just before the last MPS a few weeks ago the Bank sent out a routine advisory about post-MPS engagements senior managers would be doing. It included this snippet

Quite probably no one much outside Queenstown and lakes area gave it another thought. The clear implication was that there’d be nothing new or newsworthy in what the Governor was saying.

But I happened to be in Dunedin a couple of days later, where I stumbled on this article in the local paper

which made it quite clear that even if Orr had been using presentation slides from the MPS that hadn’t come even close to being the limits of what he’d said.

Again, there were a few things that caught my eye.

First, there was that weird – but not new from Orr – suggestion that “price setters” might choose to alter their behaviour to help out the Bank. Rather odd really. Not only do those firms have shareholders to whom they owe legal duties, but next time inflation undershoots the target midpoint should we expect the Governor to be urging firms to make a bit more profit by helping him out and raising their prices? Charitably, I guess that probably wasn’t what he had in mind, but whatever his intent he feeds a narrative in which core inflation is anyone’s responsibility other than the Bank’s and MPC’s.

Then there was that crass line about “you’ll see one chubby former ginger dancing in the streets of Wellington when that number [inflation under 3 per cent] is reported”. I’m guessing those whose businesses were closed down, those whose jobs were lost in the process, probably won’t be sharing in the Governor’s jubilation.

Look, I’m quite sure the Governor will genuinely be pleased when inflation is below 3 per cent – hopefully, even more so when it gets near the 2 per cent midpoint he is required to focus on – but this is the same Governor who has never expressed even a shred of contrition for his part in the inflation (let alone those huge, utterly unnecessary losses – which would have paid for many many (eg) cancer drugs). It was the sort of juvenile line one might expect from a junior official. From a Governor one might have hoped for a little more gravitas. Yes, even from Orr.

But what really prompted me to write this post was those comments on productivity, immigration, and related issues. Remarkably – and they really are quite remarkable comments from a long-serving advanced country central bank Governor – they’ve had no other coverage anywhere, and seem to have sparked no follow-up comments to (for example) the Minister of Finance, the person who is responsible to Parliament and public for the Reserve Bank and the Governor.

He is reported as having said that “New Zealand’s productivity record was the OECD’s lowest” in the last couple of years. I’m not sure quite which data he is using. but our productivity growth (or lack of it) has been pretty bad. In fairness so has productivity growth in a bunch of other OECD countries (the US tends to stand out at the other end of the scale). And this is, it seems according to the Governor, due to our immigration policy. Big news if true, especially when it comes from…..the Governor of the Reserve Bank (even if it is a matter for which he and the Bank have had no responsibility whatever). He goes on – and here we get quote marks – “if we have a problem, we pour more people into it”. Look, I have been quite vocal over the last decade or more on the way I think immigration policy has been systematically harming New Zealand’s (and Australia’s for that matter) longer-term productivity performance) but a) I’m just a private commentator, while he’s the Governor, and b) I don’t think even I’d be quite that reductionist, especially in a formal setting (like a speech from the central bank Governor).

And then he is reported as going on: “Until we get capital deepening going on in the economy, we will remain in this space” [presumably meaning low productivity growth]. Which is all rather mechanistic and not very insightful at all. There aren’t just lumps of capital that some central planner decides to allocate more of, but firms in markets, making profit-maximising choices against the backdrop of the opportunities they perceive and the regulatory etc environment governments impose.

And, to save you scrolling up and down, here is the crowning set of quotes

Not entirely clear who “we” is here, but presumably he means businesses operating in New Zealand taken as a whole. And note that his comment is about reinvestment, not investment per se (as it happens, total investment as a share of GDP has been higher in New Zealand most of the last 15 years than the median of the IMF grouping of advanced countries), so quite what is he on about? We know that New Zealand has a corporate tax system (dividend imputation) that does not generally double-tax profits earned by companies with New Zealand shareholders, and so – like Australia – tends to have quite high dividend payout rates. But what is the Governor’s beef? Is he seriously arguing for a more distortionary tax system, to stop companies distributing profits as readily? You might have thought that if he was going to weigh in on such issues he might have highlighted that we (and Australia) now have one of the highest company tax rates in the world, and company tax rates really bit on foreign investment (since foreign investors can’t use imputation credits).

But no. In fact, what we get from these comments is that the Governor isn’t very happy about the foreign investment we do have. In fact, unlike almost every serious economic commentator (and in fact the government), he seems to think there is too much of it, falling back on that rank populism beloved of the Greens, the left wing of the Labour Party…..oh, and the marketing department of TSB Bank (my photo from a few years ago). Oh no, the dividends are going to…..well, the people that provided the capital.

As it happened, when I looked up the detailed balance of payments data, there had been $21.4 billion of reinvested earnings by foreign-owned companies operating here in the five years to March 2023. Quite probably some of it was more or less compelled by Orr’s own OTT additional requirements for bank capital (the staggeringly expensive insurance policy that was never subject to a proper cost-benefit analysis) – and the banks are the biggest foreign investors (collectively) in New Zealand. But you are left wondering quite what Orr is on about, and based on what. Just more of the unedifying Australian bank-bashing that he has become known for (recall how keen he seemed when those capital proposals were around for one of the Australian banks to divest and throw their business on the tender mercies of the NZX).

But just what, substantively, was the Governor on about? And how did he conclude that it was his place – charged with delivering price stability (oops) and maintaining financial system stability – to be suggesting, and it does seem to be the implication, that really we’d be better off with less foreign investment? This the same Governor who in the same speech seemed (see above) to be lamenting the relative lack of capital investment in New Zealand.

The account in the ODT ends with a couple of rather cryptic comments. The first (“that is a fundamental thinking change…”) seems to relate to his lament about foreign-owned firms paying investors dividends – which is presumably what they do when they don’t have great investment opportunities presenting themselves here. But, according to Orr, somehow the answer lies there: on this count “the more that productivity story is thought about the easier it is”. What, we should discourage foreign investors and somehow prevail on those who remain to invest here even when it isn’t financially attractive to do so? I can’t imagine that that is really what he means, but it is certainly what it sounds like.

And then an old favourite of Orr’s – with almost nothing whatever to do with his actual responsibilities – is all that talk about needing “intergenerational investment”. One supposes that perhaps he had in mind really long-lived infrastructure projects – things New Zealand entities, many of them government ones, seem woefully bad at executing in a cost-effective way – but actually depreciation (whether of the market value of new ideas, or of physical capital) means that most investments anywhere are much shorter-lived than “intergenerational”. And if the Governor thinks he can be confident about what ‘intergenerational” opportunities are out there that private firms might sensibly lay hold off, perhaps he might reflect on his own state of knowledge about the things he’s actually responsible for. That inflation, for example, wasn’t exactly something he set out to deliver.

It really is woeful stuff coming from the Governor of the Reserve Bank. If one of his junior managers had gone off reservation with such thoughts at a briefing far from home one might put it down to youthful enthusiasm and inexperience. But this is one of the most powerful government officials in the land, the long-serving Governor of our central bank. And, sure, it no doubt wasn’t a fully scripted speech, but…..he was apparently on-the-record (and even if he wasn’t central bank Governors are supposed to speak guardedly, perhaps especially about things that aren’t their responsibility)….and the onus is on him when he speaks to speak well and not just throw out glib populist lines.

But it seems that – once again – there is no price to pay. The ODT journalist who wrote the story even had her email address in the article, so it would have been very easy for specialist political or business journalists to have followed up on these loose comments (and who knows what else he might have said – ODT readers probably having a limited appetite for reports of the Governor), but apparently not. No one seems to have challenged the Minister of Finance, about whether it was really appropriate for the Governor – who hasn’t been doing his day job well – to be masquerading as some sort of Green Party economic nationalist stand-in (but then just a week ago the same Minister told the press the Orr was not her responsibility – even though the Act explicitly says otherwise).

What does the rest of the world (markets and RB watchers) make of it? I guess if they didn’t happen to read the ODT they’d not have known.

Once again, it really isn’t good enough. Another government agency head still in place after failing badly (my 20 reasons why Orr should never have been reappointed, not then including the inflation numbers). And a government that seems to barely care (in Orr’s case, there is still no sign of any attempt to clip his wings – eg foreshadowing deep budget cuts, letters of expectations, forcing the MPC to be more open, appointing a Board chair who make actually represent the public interest etc; really just nothing).

There was an old line of Alan Greenspan’s that “if you think I have been particularly clear you have probably misunderstood what I said”. Orr, by contrast, straying beyond his bailiwick seems quite troublingly clear. Is there any other advanced country central bank Governor who is on record in recent times lamenting (simultaneously) the lack of investment in his economy, and the presence of too much FDI?

Comparing Treasury and Reserve Bank forecasts

Michael Reddell Fiscal policy, Monetary policy, Treasury

I put a range of charts on Twitter late last week illustrating why, from a macroeconomic perspective, I found the government’s Budget deeply underwhelming. I won’t repeat them but will just show two here.

The first is the Treasury’s estimate of how the bit of the operating deficit not explained just by swings in the economic cycle change from 2023/24 (which was largely determined by last year’s Labour Budget) to 2024/25 (influenced by this year’s Budget choices)

On both these Treasury metrics, things are expected to be a bit worse in 2024/25 than in 2023/24. Not a lot necessarily, but things are heading in the wrong direction: a larger share of the groceries are being paid for by borrowing. And, sure, the projections have the deficits eventually tailing off and returning to surplus eventually – as they have for each of the last few years – but those numbers rely on more fiscal drag and rather arbitrary indications of what future Budget operating allowances might be. Perhaps they will deliver, or perhaps not. We don’t know and neither really do they. At this stage, anything beyond 24/25 is little than aspirational vapourware.

And consistent with that, the Treasury’s fiscal impulse measure – designed to measure the overall of fiscal activity on aggregate demand (with the central bank in mind) – is just slightly positive. Fiscal choices for the coming year aren’t estimated to ease pressure on demand and interest rates at all.

When the starting point is quite a large structural deficit, that seems, shall we say, less than ideal. Perhaps the more so when history (and common logic) suggests that the first year of a new government is usually by far the best time for a government to make tough fiscal choices and adjustments. (I dug out some old Reserve Bank estimates the other day and way back in 1976, the first Budget of that new government had a fiscal impulse of around -6 per cent of GDP. Muldoon had inherited a bigger mess than Luxon/Willis did, but…..a deficit is a deficit, and inflation and interest rates have been a problem.) If the 24/25 Budget wasn’t the year for hard choices, which one will be?

But for this post, I was more interested in comparing some of the Treasury macroeconomic forecasts in the Budget documents with those published by the Reserve Bank the previous week. Here I should stress an important difference: the Treasury economic forecasts were finished on 5 April and the Bank’s weren’t finished until a few days prior to the MPS. But my impression is that there wasn’t much in the way of crucial or very surprising domestic economic data in that period.

First, compare the outlooks for real GDP per person of working age (the RB doesn’t publish per capita projections, so this is the basis on which we can do a comparison).

Neither line represents a particularly rosy outlook. Even Treasury has us just barely back to the 22/23 level of GDP per working age population by 2026/27, but over that full period the difference between the two sets of forecasts builds to something quite substantial (a gap of 1.7 percentage points by 2026/27).

After the MPS I wrote here about how there seemed to be nothing robust behind the recovery the Reserve Bank was forecasting for next year (given that interest rates stayed high, lags were long, net immigration was declining etc), but I think one important difference between the two sets of forecasts is nearer in time.

There are really striking differences in how The Treasury and the Reserve Bank see excess demand having evolved over the last couple of years. Output gaps aren’t directly observable, but the most recent hard GDP data is still for December last year, but whether for that quarter or the estimate for the March quarter the difference in the two estimates is almost 1 per cent of GDP. On the Treasury numbers there was a significant negative output gap – posing a powerful drag on inflation all else equal – while the Reserve Bank reckons that output gap was only around zero.

Perhaps Treasury would have revised their thinking after the CPI if they’d had been able to incorporate those numbers in their forecasts, but there is nothing in the BEFU document that seems to suggest so.

If inflation has been a problem and you think that the economy has recently been only at around capacity then it isn’t too surprising that you have rather weak real GDP forecasts for the period ahead (especially the coming year). Both agencies build their forecasts around inflation eventually getting back to target midpoint; the difference is about what doing that will take.

The Reserve Bank reckons the OCR next June quarter will no lower than it is now, and may have gone higher in the interim. The Treasury forecasts the 90 day bank bill rate, and they reckon that will already be a lot lower (4.5 per cent) by next June. Quite who is closer to right (or least wrong) will matter.

As I say, perhaps the difference mostly come down to timing – the Reserve Bank had the CPI and Treasury did not – but frankly it seems too large a difference to be explained by a single inflation number.

One uncertainty is quite how fiscal policy affects the Bank’s picture. As they noted, their numbers didn’t include the Budget numbers themselves, but Westpac has noted – presumably from something the Bank has said – that the MPC had been briefed on the broad direction of fiscal policy (as you would hope, since it is one of the reasons for having the Secretary to the Treasury as a non-voting ex officio member of the MPC), and speculated that perhaps the Bank’s hawkish tone might have been explained in some sense by that understanding of the fiscals. I’m not sure what to make of that, and after all, the Bank’s chief economist was then at pains to play down the apparent hawkishness in the days following the MPS, with his weird line that somehow it was all just “model output”. More generally, the Bank has been taking a weird approach to fiscal policy over the last year, since that awkward 2023 expansionary Budget, ignoring conventional conceptions of the fiscal impulse and trying to focus attention on real government consumption and investment (in turn very different from either total government spending or a deficit/surplus measure). But for what it is worth, as the chart above shows the fiscal impulse for 2024/25 is estimated to be very slightly positive, and at the time of the HYEFU it had been estimated to be about -2.5 percentage points negative.

At very least, whatever was in the Budget simply wasn’t any help in easing pressure on demand and interest rates. Quite where too from here is going to depend a lot on just how much disinflationary pressure was already building up in the system from a now fairly prolonged period of contractionary interest rates. Given how weak last year was, and how weak things like business surveys still are, my sense would be quite a lot. But time will tell.