That was, more or less, the title of two events I attended at the University of Auckland last Thursday. With the help of generous funding from the Sir Douglas Myers Foundation (in particular), the university had been able to bring in a bunch of well-regarded overseas academics and prominent “public intellectuals” for several events focused on issues around the potential and actual disruption to economic globalisation as a result of overt political choices (notably, the tariff policies of recent US administrations). The key person driving the programme seems to have been Prasanna Gai, professor of macroeconomics at Auckland (and, of course, a member of the Reserve Bank Monetary Policy Committee, where he sets something of an example to his colleagues by actually being willing to deliver speeches and outline his thinking).
I gather there was a more technical academic-focused event on Friday, but the two events I attended were the full day workshop on “Geoeconomics and the Future of Globalisation”, and an evening public dialogue event “Geoeconomic Fragmentation: Challenges and Opportunities”.
The workshop was conducted on Chatham House rules so I can comment only on what was said and not who said it. Attendees were a mix of academics, market economists and the like, and public servants and people with official roles. I’m not quite sure why the presentations – mostly from academics – were non-attributable (several speakers drew on their published papers) but anyway, those were the rules.
The evening event featured two visitors, in dialogue (of sorts) moderated by Gai. The first was Andy Haldane, formerly of the Bank of England and now one of the great and good, whose op-eds on all sorts of interesting issues, and angles on those issues, pop up not infrequently in places like the Financial Times (one of those Brits you feel sure will end up with a knighthood or perhaps a peerage). And the second was Laura Alfaro, currently chief economist of the Inter-American Development Bank, on secondment from an academic position at Harvard Business School, and also a former minister in her native Costa Rica. I doubt I am seriously breaching the rules if I say that Haldane’s remarks at the evening event (see below) were very very similar to those at the earlier workshop.
The whole area of so-called geonomic fragmentation should be fascinating (indeed, one panellist went so far as to call it “the only topic”) After all, not only do we have Trump (and between his terms Biden, who didn’t exactly dismantle Trumpian protectionism from the first term), but issues around both the political and economic rise of China, the widespread use of unilateral US sanctions (a recent book on which I wrote about earlier in the year), and of course the intense efforts from some countries (including little old New Zealand) to use sanctions to put pressure on Russia and its ongoing war on Ukraine. In our own remote corner of the world, I presume New Zealand restricting aid to the Cook Islands over apparent geopolitical concerns won’t exactly be good for bilateral trade.
There were some interesting presentations. I particularly enjoyed a keynote address on global value chains and geonomics, and especially the way in which connections of individual firms are often more important to focus on than industries or countries per se (thus, the dependence of TSMC on single firms in Holland (ASML) and Germany (Zeiss)). We were also reminded that most firms that import buy a particular product from a single supplier, with little or no effective diversification, something extreme tariff uncertainty may change. This presenter also reminded us that up to 40 per cent of US trade now involves dual-use products where national security considerations can reasonably come into the mix. That lecture concluded with a reminder that trade policies will be shaped by whatever it is that governments want to maximise at a point in time, and there is no necessary reason why that goal should be maximisation of near-term GDP. National security considerations are to the fore much more than they were, or than was readily conceivable, in the 1990s and 2000s. But there was also a reminder that if private firms will never internalise all externalities, those same private firms will innovate quickly when the rules of the game change (thus China’s current chokehold on “rare earths” is unlikely to last long).
There were also useful reminders as to just how much the tariffs etc have changed trade between US and Chinese firms: China’s share of US imports has now dropped back to around where it was 20 years ago. And yet at the same time both Chinese exports and US imports in total have continued to grow. There was an argument made by several speakers that as yet there is little sign of overall globalisation having gone into reverse. In his evening address, Haldane was particularly strong on this claim, arguing that flows of goods, and people, and money (and even more so information) are at levels never before seen, and (more ambitiously) that the benefits of these flows were at least as large as economists like him had argued for (I was curious where he was going to find the evidence of the economic benefits of large scale immigration to his own country, it of the underperforming economy, but no one asked). Haldane argued that much of what was wrong with political tides, public mood etc, was that economists had underestimated the social and redistributive effects of globalisation. Count me rather sceptical, but Haldane – a technocratic social democrat – saw it as grounds for more and smarter government, to enable people to reskill, retrain etc. He was also openly championing industry policy – seeming to conflate legitimate national security issues with the rather more dubious of politicians and officials trying to pick winners (and wasn’t even that compelling on the national securituy side in suggesting a place for food protectionism). And if he was overall optimistic (self-described) he still saw risks of all falling apart, an unravelling of open trade, and risks around a crisis over high and rising public debt. Quite what the latter had to do with geoeconomics wasn’t clear to me.
Haldane was a funny mix. He seemed keen on international financial institutions leading the public dialogue on the benefits of globalisation (as if such agencies – IMF etc – commanded mass public trust…..), and also called on business to play a more prominent role (good luck with that). But when asked about the role of technical experts I thought he was to the point in asserting that they need to wear lightly what expertise they have, and be much more willing to own up to mistakes (“we all make them after all”). I don’t recall if he mentioned them specifically, but central banks seemed to be among those he had in mind. If you like citizen panels to deliberate on policy issues, Haldane too was keen. Quite what it had to do with the geoeconomic challenges wasn’t quite clear, although I think that he, like some other participants, were inclined to aa view that if only the public were made to see what was good for them normal service could be resumed (one speaker at the workshop was robustly, but shallowly, of that view regarding mass immigration). Quite how it took account of the activities of places like Russia and China wasn’t clear.
Of the evening speakers, I found Alfaro (from the IADB) much the more interesting, partly presenting work she’d done for a Jackson Hole paper a couple of years ago and in pushing back on some of Haldane’s enthusiasms (industry policy for example). Like many speakers she noted that the US protectionism was unlikely to dissipate quickly – that the political environment had changed, and that little about that was unique to Trump. She reported some results in which public respondents were very sceptical on trade, and retained that scepticism even when presented with apparently hard evidence of the benefits. She stressed the decoupling of trade between the US and China, but also argued that so far that had proceeded smoothly, often supported by banks to enable firms to reallocate business, and that there was little evidence of overall deglobalisation. As for whether the vaunted “rules-based-order” could re-establish itself, she placed considerable weight on the willingness, or otherwise, of the US to assume leadership in a multilateral context. I got the impression she was not optimistic.
There was quite a strong sense from speakers of hankering for a better time (perhaps 15-20 years ago). I was less convinced that this particular group of speakers had much to offer in thinking through the economics of geopolitics and associated fragmentation issues. No doubt they were experts in their own narrow fields, but perhaps those were more about “what are the effects and where do they show up” (interesting in its own right) rather than in how best, and when, to deploy economic policy instruments. China itself attracted very little attention – whether for example modern slavery issues and associated restrictions, political interference, alliance with Russia, threat to Taiwan, or whatever. Politics – geopolitics especially – just wasn’t the comfortable place for most of these presenters.
One speaker – who has a lot of published material in this area – was among those emphasising a standard result that if, say, the US imposes large tariffs on other countries they should not retaliate as doing so would only make the retaliating country poorer. On the assumptions in the model, of course that is sensible – overall, the cost of trade protection are mostly and ultimately borne by consumers in the country imposing the restrictions. But one of those assumptions – in fact a critical one – seems to be that trade policy retaliation does not then change, for the better, the behaviour of the original protectionist power. But there was no analysis of when and whether that might, or might not, hold. Alliances were mentioned a few times during the day, but never very systematically. One of the things that was striking to me back in March/April was the way countries seemed to make no effort at all to work together to push back on the rogue actor in Washington (in our part of the world, for example, Luxon and Albanese offered no vocal support to the Canadians). I have no idea whether a more concerted effort might have deflected Trump (perhaps it would have worsened things) but you might have hoped for more analysis of the issue.
It is easy for economists to simple wish that politics would stay out of the way, and derive results that assume it away. It is also easy to focus on GDP maximisation (or some less crude utility form of that), but – as above – much depends on what politicians actually want to maximise. No doubt modellers in August 1939 would have told us that retaliating against the next German aggression would only make us poorer – and of course, it did so dramatically, as massive cost of blood and treasure – but a handful of courageous countries (Britain, France, New Zealand, Australia, Canada, South Africa) concluded that it was a price worth paying for a better, but risky, outcome. No doubt when China invades Taiwan, modellers – and firms – will produce results showing that retaliation will only make the rest of us poorer. No doubt, but do we just sit by? Most of the West has chosen not to in respect of Russia even when, as in the New Zealand or Australian case, Russia poses little or no direct threat to us. In my view, we were right to do so. And then of course, which instruments work best, which risk being self-liquidating (eg concerns about US overuse of unilateral sanctions motivating innovative to reduce that exposure).
Finally, there was quite a strong sense that the workshop and dialogue were quite northern hemisphere focused. Amid all the upbeat reminders about the ongoing reach of globalisation I don’t recall anyone all day pointing out that, at least on trade in goods and services, globalisation in New Zealand has been going backwards for 20 years now, without anyone even consciously trying.
Lest I sound unduly negative, I enjoyed the day, caught up with people I hadn’t seen for a while, and appreciated the invitation. And surely the benefit of events like these is if attendees coming away thinking a bit deeper or broader themselves, even if a little orthogonally to the actual papers presented.
In a post last week I included this chart of the latest annual OECD data on labour productivity, expressed in PPP terms.
It was grim, in a familiar sort of way. New Zealand’s overall economic performance has long been poor (the halcyon days when New Zealand was in the top 3 in the world relegated to the history books, and stories the older among us might have heard from grandparents etc). These days more and more of the formerly communist central and eastern European countries are passing us (Romania – highlighted – will probably do so in the next five years or so).
But it reminded me of the Prime Minister’s State of the Nation speech back in January, which was full of fine rhetoric about the need to do (much) better. He told us that “2025 will bring a relentless focus on unleashing the growth we need to lift incomes, strengthen local businesses and create opportunity”.
At the time, I welcomed the rhetoric but rather doubted that the substance would come anywhere near matching it, pointing out that although in its first year the government had made some useful reforms (with productivity in view), in other areas they had taken things backwards. And they’d made no progress at all on fiscal consolidation which, while not in itself critical to productivity prospects, was not a great signal. Together with Don Brash (who’d chaired the 2025 Taskforce 15 years previously, when an earlier government’s rhetoric had briefly talked up closing those income and productivity gaps) I wrote an op-ed for the Sunday Star Times (full text in the previous link), lamenting the decades of aspirational cheap talk on the one hand and lack of realised progress (productivity gaps as large as ever or widening further) and ending this way.
We can choose to continue to drift, with just incremental reforms, as successive governments have done for 30 years even amid the fine talk. But if we do, more and more New Zealanders are likely to conclude rationally that there are better opportunities abroad, and for those who stay aspirations to first world living standards and public services will increasingly become a pipe dream.
It is a multi-decade challenge under successive future governments, but as the old line has it the longest journey start with the first step. We hope the Prime Minister’s bold rhetoric signals the beginning of a willingness to lay things on the line, to lead the debate on serious options, to spend political capital, for the serious prospect of a much better tomorrow for our children and grandchildren.
Where do things stand almost a year on? In cyclical terms, there isn’t much to show for the year. GDP growth has been on average weak (I’m assuming next week’s September quarter number comes out respectably), the unemployment rate has crept up a bit, business investment has been weak, and so on. But, for all the rhetoric and cheap attempts to either claim credit or cast blame, governments usually have little influence over short-term real economic developments, the more so in this era of operationally independent central banks. In our case, the weak economy mostly seems to have been the lagged effect of belated Reserve Bank actions to get inflation back under control, the Bank itself having previously misjudged (in tough circumstances) and let it get away on them. That, of course, doesn’t stop ludicrous government claims that falling interest rates have resulted from government actions and choices, or equally ludicrous suggestions from the left that somehow slash and burn fiscal policy accounted for the recent economic weakness. In short, there has been no fiscal consolidation. Don’t take it from me: I just use Treasury data and charts and the Secretary to the Treasury made exactly my point to FEC last week.
Good to see Rennie stating for the record what Tsy’s low profile analytical numbers have shown for ages about the last two budgets.
This year’s Budget was also (slightly) expansionary, increasing the structural fiscal deficit.
I noticed the other day a post from Don Brash in which he attempted an assessment of the government’s overall performance at the end of their second year. Don was interested in a wide range of areas, but it was the economic bits that interested me. (While noting the failure on fiscal policy) he scored the government reasonably well here.
Count me rather more sceptical. Overall, it looks to have been another year of a few useful reforms, some (modest) backward steps, and a much greater focus on attempting to gee up sentiment and activity (or appear to do so) before next October than any real drive to markedly lift New Zealand’s productivity prospects and performance over the coming decade (and thus, to the extent that good things are happening in schools, any overall economic gains are almost by necessity a decade or more away).
I’m a strong believer in much (and sustainably) lower real house prices (not just achieved by people consuming less house, less land) but, as Don notes, the Prime Minister isn’t. He claims to be keen on prices just rising less rapidly than they once used to. And although house prices have generally been falling in the last couple of years it still isn’t clear how much of that is more or less cyclical (unwinding the extraordinary 2020/21 surge) and how much might be structural. Productivity performance was pretty woeful a decade ago and real house prices now are no lower than they were then. Some economists believe that much lower house prices would themselves help materially lift productivity: I’m sceptical about that in our specific circumstances, and reckon improved housing affordability and responsiveness is mainly good (very good, if taken far enough) for its own sake. Young families on moderate incomes should be able to afford a basic house in our cities. It was so before and can be so again.
The government is tomorrow launching to great fanfare (huge lockup and all) its RMA reforms – one of the items the PM promised for this year back in January. We’ll see what that package looks like. In principle, reforms should be supportive of productivity growth. My story of New Zealand’s failure emphasises the apparently limited number of profitable opportunities here open to business (local or foreign) and if costly roadblocks can be removed the expected returns to opportunities will improve. More investment should follow.
But….it is a long road ahead. Whatever is announced tomorrow is not guaranteed to be what passes Parliament in (presumably) the dying days before the election next year. If there is a change of government (coin toss territory at present?), how likely is this particular package to endure? And, as we saw with the original RMA itself, what was initially seen as liberalising and enabling legislation turned into anything but, between the courts and successive lots of central and local government.
As for the government itself, we learned this year that the Minister of Finance had gone along with bizarre new Treasury schemes under which investment and regulatory proposals being evaluated by government agencies will use discount rates that are absurdly low and bear not the slightest relationship to the cost of capital. In the private sector, the government’s flagship policy in this year’s budget wasn’t about addressing the high tax rates on business income here but on subsidising firms to buy new capital equipment, with the biggest effective subsidy going to the sector (commercial buildings) they’d imposed a new distorting tax impost on only last year. So much for the efficient allocation of scarce resources, whether in the public or private sectors. Nor has there been any sign of top-notch appointments to any of the key economic agencies in the public sector – in the MBIE case, still no chief executive appointment at all. Small as such a reform might be, in an age of Trumpian tariffs the government hasn’t even gotten round to removing the remaining tariffs New Zealand has in place (including protection for the local ambulance building industry…of all things).
Looking back over the year it is a lot easier to be persuaded that what is driving the government – perhaps the Prime Minister in particular, and his “Minister for Economic Growth” is initiatives to grab a headline for a news cycle or two, with a focus mostly on next year’s election. We’ve had new film subsidies, new gaming subsidies, the taxpayer has been helping to buy a rugby league game for Auckland, and we’ve had the (laughable if it weren’t so bad) money thrown at the Michelin company to get their guide to cover New Zealand restaurants. Whatever you think of National’s new Kiwisaver policy, it isn’t going to shift the dial on productivity (where access to capital has never been the presenting issue, even if Kiwisaver changes ended up shifting national savings rates, itself questionable – to put it mildly). Headlines, and associated chirpy social media posts, seem to be where it is at, rather than a serious sustained reform effort, grounded in hardnosed analysis and New Zealand specific insights on just what has gone wrong here. What has seen us drift behind so many other countries.
It is one of those areas where I’d love for my pessimism to be wrong. There is a risk that after decades of failure it becomes too easy to be cynical about the latest efforts. But at this point, and two years into the government’s term, there is still little or no sign of things that are really set to turn out performance around. Inevitably a post like this has to be somewhat selective, but you could also look to the financial markets. Is there any sign, for example, of our stock market outperforming as investors markedly re-rate longer-term business (and profitability) prospects here? Not that I can see. And although our bond yields have been quite high by international standards for a long time – which is something one might also see if investment prospects were improving sharply – if anything those differentials are narrower now than they used to be.
The Prime Minister ended his January speech this way
But I’m afraid he and his Minister of Finance look as if they will slot in nicely with the sequence this old cartoon (which I first ran here almost a decade ago. Yes, there will be (may already be) a cyclical upturn, but the structural failings still lie largely unaddressed (and certainly unresolved).
Over the life of this blog there have been a few charts I’ve kept coming back to. There have been some of the obvious ones, for example around the persistent underperformance of the New Zealand economy on labour productivity. It takes a while for a fairly annual data to turn up on the OECD database, but here are the near-complete 2024 estimates.
Just two observations on that chart:
First, it would take a 74 per cent increase in average labour productivity in New Zealand to match the average across Denmark, Belgium, and Switzerland (3 small European countries, not heavily reliant on nature’s bounty – unlike, notably, Norway). That margin – the steep hill we have to climb – has slightly increased in the last decade.
Second, Romania isn’t in the OECD but back in 2017 I wrote a long post about Romania and suggested then that if the relative performance of productivity growth in the two countries over the previous decade continued in another 20 years they’d have caught us (the backdrop of course being the absolute mayhem left at the end of the Ceaucescu regime). On present trends now (last decade’s performance), Romania is likely to pass us in perhaps another five years.
Then there were the foreign trade charts I updated in a post last week.
In a somewhat related vein, every so often I’ve run a chart (first devised for New Zealand by the IMF) that is a rough and ready indicator of the split between the tradables and non-tradables parts of our economy (tradables here being the primary and manufacturing sector, together with exports of services).
This is the latest version
The dismal nature of the picture (and economy) is captured in that blue line. Not only has the pre-Covid level not been regained, but the per capita size of the tradables sector of our economy is way smaller than it was 20 years ago. Meanwhile, the non-tradables sector, after a Covid and overheated domestic economy interruption, seems to keep tracking upwards. It isn’t a sign of a healthy economy.
And finally in this brief update post, what about wages? Every so often I’ve included this chart.
People don’t seem to find it very intuitive, but when the lines are going up wage rates (captured by the LCI analytical unadjusted series) are rising faster than nominal GDP per hour worked. When I first did the chart, perhaps seven or eight years ago, of course what caught my eye was the (quite strong) upward trend over 15+ years from about 2000. I saw it as another way of casting light on real exchange rate or competitiveness issues, and as not inconsistent with the inward skew to the economy apparent in the previous (tradables vs non-tradables) chart. Whatever the causes, relative to the capacity of the overall economy to pay (or generate income), wage rates were holding up strongly.
The series is noisy (terms of trade fluctuate quite a bit, and the hours worked series is also a bit noisy quarter to quarter). But there is also no mistaking that the trend apparent up to the late 2010s, arguably right up to the eve of Covid, has changed since. Wages have actual fallen back relative to nominal GDP, whether on the private sector or whole economy wage measure. (And for those who insist on a partisan lens, it doesn’t appear to be a Labour vs National thing.) The fall back isn’t large, absolutely or relative to the previous rise, but equally it isn’t inconsistent with all those polls suggesting that “cost of living” is still the most front-of-mind public concern.
There is no overall intende message in this post, just that coming towards the end of another year it is worthstanding back and reflecting on the more structural aspects of how the New Zealand economy is doing (there will always be cyclical swings). In summary, not well.
UPDATE:
A commenter noted that in the first chart above NZ was just ahead of Japan. On this measure, we have been much the same as Japan for getting on for 20 years now.
I don’t want to say much about yesterday’s Monetary Policy Statement itself. It was the last before the MPC knocks off for their very long summer holiday and the last for the temporary Governor, the last of the old MPC who were responsible for the inflationary mess (and all those LSAP losses). A 25 basis point OCR cut seemed like it was probably the right call, but it was good to see some evidence of a range of views (in the form of one dissenting vote).
I didn’t watch the press conference yesterday (and the video of it doesn’t yet seem to be available). Someone who did watch it told me that Hawkesby had suggested that the dip in economic growth in the June quarter was mostly due to Trump and the extreme uncertainty about US tariffs policy (and, I guess, how other countries might respond). He is reported as having suggested that otherwise the recovery had been on track. Such a line would certainly be consistent with the very heavy rhetorical emphasis the MPC, and one of its members in speeches, has been putting on uncertainty in recent months, albeit the frequency of use of the term in the MPSs seems to be dropping back again.
I don’t know precisely what words Hawkesby used, so perhaps it wasn’t as stark as what was passed on to me (the MPS text itself is fairly non-specific, while correctly noting that the -0.9 per cent was almost certainly not representative of how deep the real fall had been).
[UPDATE: In fact both Hawkesby and his chief economist – the latter more expansively – ran this line, citing not a shred of evidence in support of their story.]
But I’m sceptical that the (very real) heightened uncertainty around foreign tariff policy had anything much to do with the overall performance of the New Zealand economy in the June quarter. There simply aren’t any particularly obvious channels by which there would have been such effects. We weren’t Canada (directly in Trump’s firing line for a while), we weren’t subject to unusually large proposed tariffs (and our government was fairly clear they didn’t support retaliation), we weren’t likely to be facing higher prices (if anything lower, if large scale trade diversion happened), and while uncertainty can be a killer for investment projects few/none will turn on a dime (in terms of actual real outlays) anything like that quickly. None of which is to say that Trumpian tariffs are anything but bad for the world, and us (and I’ve consistently agreed with the RB view that they are, if anything, a negative aggregate demand shock from the rest of the world to us).
And if there was a material tariffs-uncertainty effect on New Zealand in Q2, surely we’d expect to have seen such an effect across many other countries, and showing up to a greater extent in many of those countries (in April appearing to face much higher tariffs or more dependent on US markets – remember (my post yesterday) we don’t export much by advanced country standards)?
What then do the data show (bearing in mind that all recent data are prone to revisions)? The OECD has a database of quarterly real GDP growth for member countries. Here is how quarterly real GDP growth in Q2 compared with that in Q1 (I’ve left off the US itself – source of the issue – and Ireland where tax effects mean quarterly growth rates are all over the place.)
There is no consistent pattern, but actually slightly more countries saw higher growth (often only slightly) in Q2 than in Q1.
And here is another chart, this time comparing Q2 growth with the average growth rate for each countries over the previous four quarters. Still no consistent pattern (although this time slightly more countries had lower growth than higher growth).
They are the sort of charts you might have thought the MPC would think to stick in the MPS. It may be – well, it is to me – a little surprising that global economic activity has held up as well as it seems to have this year in the wake of the tariff uncertainty, but…..for now, that is where the data seem to point. Perhaps effects begin to cumulate from here, but whether that happens or not, it is just hard to see much sign of Q2 New Zealand growth having been materially adversely affected. If the departing temporary Governor agrees, so much the better.
Since I was putting together this post I will add in here, as much for ease of future reference as anything, a few charts I put on Twitter yesterday, mostly going to one of my multi-decade hobbyhorses (dating back to 1997) of doubts about the merits, and value, of central banks publishing forward interest rate forecast tracks (not many do still).
This chart shows the Reserve Bank’s OCR projections through successive MPSs since late 2020.
They really had no idea what was going to be required. To be clear, I am not here bagging the RB MPC specifically (I’m pretty sure similar charts from the other central banks that publish endogenous forward tracks would look much the same). It is an observation about the (very limited) state of knowledge any and all central banks (and outside commentators) have, especially when anything interesting is going on with inflation.
To illustrate the point with just one date, here are the MPC’s successive forecasts for the OCR in the final quarter of this year (daily average).
18 months ago they thought the OCR – which they set – would be around 5 per cent by now. Yesterday they actually set that rate at 2.25 per cent (and I could show you similar charts for various market economists, so again this is not about bagging our specific group of MPC members). Sometimes of course really nasty exogenous shocks happen: it would be unfair to look at MPC forecasts from early 2019 and compare them with what happened in 2020, since Covid was essentially unforeseeable (for central bankers in particular). But nothing very dramatic has happened in or to New Zealand in the last eighteen months. The Bank simply misread how much pressure would be needed to get core inflation near target.
You can also see that with this chart, showing the Bank’s successive estimates of how much excess capacity was going to be needed at peak to get inflation down. In the scheme of things – data uncertainty, revisions etc etc – those estimates have really been quite stable.
But – see the earlier charts – they had no real idea what monetary policy settings would be required to deliver.
As I noted in my post last week on the new Governor, she has talked about improving transparency, and if the Bank follows through then that would be a good thing. But there is distinction between things you can be transparent about – the views, arguments, votes etc in any particular meeting – and things where you can certainly publish numbers but really there isn’t much value at all. Now, to be clear, market economists pay attention to those future tracks because the MPC produces them, and – if things are anything like what they were in my day – large amounts of time and effort goes into producing them (precisely because the MPC will know markets look at the track because the RB publishes it). But there is no substantive value at all – the MPC just does not have any decent idea what will be required 12-24 months ahead. Often enough – as we’ve seen this year again – they often don’t have a reliable or consistent view on the next quarter. Much better to focus energies on this quarter and next, recognising that almost all the information new to the Committee each time it meets is about the (quite uncertain enough) recent past with just a few pointers to the very near-future. You need mental models to think about medium-term implications etc, and perhaps formal ones for research purposes, policy scenarios etc but….forecasting really is a mug’s game, and in a central bank context the medium-term forecasts, notably for the OCR, add very little value.
For years now it has been recognised that New Zealand’s foreign trade (share of GDP) is small compared to what one would expect to see in a small country. Small countries generally sell to and buy from firms abroad to a greater extent (relative to the total size of the economy) than larger ones. There is nothing surprising about that: there are simply fewer domestic opportunities in a small country than there are in a large one. The United States, for example (and well before Trump), has exports of around 11 per cent of GDP. But New Zealand’s foreign trade share is small by the standards of small countries, and actually not many large countries now have a smaller trade (exports or imports) share than New Zealand. I’ve done various posts on variations of this issue over the years.
But time passes and I hadn’t noticed that exports from Australia – a country with a population more than five times ours – are now about as large a share of GDP as those from New Zealand. I put this chart on Twitter yesterday, with the observation that Australia itself is hardly a stellar success story.
Even back in the bad old protectionist days, when New Zealand tended to have higher trade barriers than Australia did, the value of exports as a share of GDP was higher in New Zealand than in Australia.
The imports chart is not as stark, but the gap has been narrowing (Australia now has a current account surplus after some decades of having run substantial deficits like New Zealand).
And, of course, from a New Zealand perspective don’t lose sight of the fact that as a share of GDDP both exports and imports are now well below the peaks, themselves well in the past. It isn’t exactly a marker of a successful economy. I’ve made this point numerous times before but I’ll say it again anyway: it isn’t that exports are special, simply that in successful economies it is usual for domestically-operating firms to find more and more opportunities to sell successfully in the rest of the world. You’d certainly expect to see it in any economy that was successfully closing the gaps to the rest of the world. Which New Zealand isn’t.
Export revenues result from the mix of price and volume. By wider advanced country standards our terms of trade have been pretty good in the last couple of decades. But Australia’s terms of trade (export prices relative to import prices) have been much more favourable – although also more variable. In the near-term, terms of trade for commodity exporting countries are largely outside their control, but over the longer-run firms presumably invest in anticipation of a particular view of future average selling prices.
What about export volumes? Using the constant price exports series for each country, here is how the volume of exports per capita has unfolded in the two countries this century.
The two lines don’t materially diverge until the last decade or so,
as the massive Australian mining investment boom translated into materially higher export volumes (and revenues). New Zealand simply had nothing similar.
One sobering snippet I took from that export volumes chart is that New Zealand export volumes per capita are no higher now than they were in 2012, 13 years ago now. As a share of GDP total export revenues are now at a level first reached in 1977.
But the other sobering snippet from that volumes chart is Australian export volumes per capita haven’t grown now for almost a decade (and so the gap between the New Zealand and Australian lines isn’t widening further). But then, as I noted already, Australia isn’t a stellar economic success story – and productivity growth there in the last decade has been next to non-existent – just richer and more successful than New Zealand, and the easy exit option for our people.
Both the New Zealand and Australian economies are very heavily reliant on natural resources for their exports to the rest of the world, and that shows little or no sign of changing. If, as the Australian economy did, firms can bring newly to market a huge swathe of natural resource exports things tend to go better for you, as a very remote economy, than if you can’t or don’t.
I’ve never really been persuaded that it is a good idea for public servants to be giving speeches, unless perhaps they are simply and explicitly explaining or articulating government policy. If they are, instead, purporting to run their own views or those of their agency it is almost inevitable that we will be getting less than the unvarnished picture and more than a few convenient omissions. Public servants still have to work with current ministers after all.
The thought came to mind again when I read a speech given last week by Struan Little, now a “chief strategist” at the Treasury but until recently a senior Deputy Secretary (and actually Acting Secretary for a time last year). The speech was to some accountants’ tax conference, under the heading “The role of the tax system in addressing New Zealand’s intertwined fiscal and economic challenges”. All else equal, you might suppose that lower taxes would be more likely to be part of dealing with the productivity failings and perhaps higher taxes might have some role to play in closing the gaping fiscal gaps. It isn’t clear that Treasury necessarily sees it that way. They seem quite keen on raising taxes generally, especially on returns to capital.
(To be clear, I’ve been on record for some time picking that whoever is in government over the next few years the GST rate will rise, but that is prediction not prescription – and I’m not a senior official. Somewhat oddly, in his speech Little claims that “there are no simple options to raise substantial merit over the shorter term” when, whatever the merits of such a policy, raising GST is certainly simple.)
Now, I guess it was a tax conference, but it was slightly odd that not even once was it mentioned how much spending has increased in the last few years. Core Crown operating expenses were 28 per cent of GDP in the last full pre-Covid year (to June 2019) and in this budget were projected to be 32.9 per cent of GDP this year (25/26), slightly UP on last year. The current structural deficit, from the same budget documents, was projected to be about 2 per cent of GDP. I guess officials always need to have tools to hand if politicians want to go the higher tax route but it isn’t obvious that the scope of expenditure savings has been exhausted (or even much begun perhaps outside core departmental operating costs, which generally isn’t where the big money is).
Remarkably also, there is no mention at all in the speech that New Zealand’s company tax rate is among the highest in OECD countries. In the literature, the real economic costs of company taxes are generally found to far exceed those of other main types of tax. There is no mention either that New Zealand has long taken one of the highest shares of GDP in corporate tax revenue.
That chart is a few years old now but the OECD data are very dated and the most recent I could find on a quick search was for 2020 (when, unsurprisingly, we would still have been well to the right on this chart).
Instead what we got is a straw man discussion, claiming that life (and literature) have moved on and that now everyone agrees the tax rate on returns to capital should be positive. In practice no one has seriously argued in the New Zealand debate that capital income should generally be taxed at zero, notwithstanding some literature suggesting that on certain assumptions a zero rate might be optimal. Where there is debate is a) how high that rate should be, and b) what should count as taxable (capital) income.
Now, to be fair, on a couple of occasions Little suggests that we need to cut taxation on returns to inward foreign investment (because of our imputation system the company tax rate falls most directly on foreign investors), but then never addresses the issue as to whether or why our income tax regime should treat foreign investors more favourably than domestic investors and what the implications of that might be.
Treasury has, of course, long been keen on the idea of a capital gains tax. Little repeats an estimate from the Tax Working Group some years ago suggesting that such a tax might raise 1.2 per cent of GDP per annum but then never bothers engaging with the fact that the largest source of (real) capital gains in recent decades has been in housing, and that the reform programme of the current government is supposed, at least according to the Minister responsible (if not to his boss) to be lowering house prices, and (presumably) making sustained and systematic real capital gains on housing/land a thing of the past.
Little champions the somewhat-strange Investment Boost subsidy introduced in this year’s Budget, and yet (of course) never notes that the biggest returns (by a considerable margin) to that subsidy are for investment in new commercial buildings. The very same sector that the government (perhaps over Treasury objections) increased taxes on last year, when it barred tax depreciation on commercial buildings. Where is the coherence in that? Or in the fact that Investment Boost offers a subsidy to rest home operators but not to providers of rental accommodation? But I guess Treasury wouldn’t really want to comment in public on any of that. The Minister would certainly not have been keen on them doing so. He never offers any thoughts either on why subsidising a specific input – as if capital goods are some sort of merit good – is preferable to lowering the tax rate on returns to whatever combination of inputs firms find most profit-maximising.
We also get the same (now decades-old) line about housing being tax-favoured while never noting either a) that the story of New Zealand in recent decades has been too little housing (& urban land) not too much, or b) that the largest tax advantage by far in respect of housing is to the owner-occupiers with no debt. Perhaps Treasury favours taxing imputed rents (with suitable deductions including for mortgage interest) but if so there is no hint of it in the speech (something for which the Minister would no doubt be grateful).
And there are tantalising but concerning lines suggesting Treasury might favour rather arbitrary distinctions between returns to different types of capital. Thus, there is mention late in the speech of possibly in future reducing tax on “productive capital investment” (which then does Treasury regard as “unproductive” ex ante), there is a reference at one point to taxation on “physical capital”, without being clear as to why physical capital returns should be treated differently than returns on intangible capital. And perhaps potentially most concerningly there was this line: “a coherent approach would not necessarily mean taxing all capital [returns to capital?] at the same rate, since not all capital is the same”. What, one wonders, does Treasury have in mind there? After all, not all human capital is the same either (you are different than me) but our tax system treats all financial returns to it much the same anyway (or so it seems to me; perhaps I’m missing something).
There are some fair points in the speech. Little notes that our system “penalises certain types of saving when inflation is high”, which is true but understates the point: even 2 per cent inflation results in such distortions, and they apply to borrowing (when interest is deductible, which it generally is for business) and depreciation, not just to returns on fixed interest assets. These distortions have been known for many decades, and yet there seems to be no momentum – political or bureaucratic – to address them, whether by changes to the tax system or to the inflation target.
And there was a paragraph late in the speech that I very much welcomed.
I’ve long been keen on a Nordic approach and it was an option noted by the 2025 Taskforce back in 2009. But what chance is there that the bureaucrats might support such a change? When I was involved in tax debates IRD was quite resistant to any cuts to business tax rates arguing (with little or no evidence) that many taxable profits were rents – returns above the cost of capital – and that taxing them came at little or no cost. And if by some chance a new generation of officials has emerged, what chance ministers (whichever main party is in government) being that bold. Another growth-supportive option that might have warranted mention in that paragraph would have been work on the possibility of a progressive consumption tax.
As I noted at the start of the post, I’m not sure senior officials really should be making speeches other than to represent the policy of the government of the day. They simply can’t add much, or any sort of unconstrained perspective. The free and frank advice has to be for ministers. That said, perhaps at some point it would be useful for Treasury to publish some research/analysis outlining what sort of tax structure would, in its view, be most conducive to supporting a much faster rate of productivity growth in New Zealand. It is unlikely that tax system changes could ever represent any sort of panacea but insights into the mental models of the government’s premier economic advisers could still be useful. Since it isn’t impossible that the answer might be much lower taxes (and thus spending) than at present, you could even put some constraints around the exercise: if you (or your political master) needed to raise 27 per cent of GDP in tax, which mix of taxes and tax rates would be most consistent with helping enable a materially faster rate of productivity growth.
A couple of months ago the Minister of Finance announced that Anna Breman had been appointed as the next Governor of the Reserve Bank. Breman takes office on 1 December, conveniently (and sensibly) just after next week’s final Monetary Policy Statement for the year. Given the very long summer holiday the MPC gives itself, it does give her plenty of time to get her feet under the desk, get to know staff, get a bit familiar with the New Zealand data and issues before she gets to chair her first MPC and deliver the first Monetary Policy Statement on her watch. (Quite where the bank capital review is getting to isn’t clear: there was talk of publishing decisions before the end of the year, which could mean either before 1 December (in which case she has no formal say) or afterwards in which case she and rest of the Board will be making important decisions within weeks of taking up the role, in a field in which she doesn’t seem to have any particular background.)
Just a few days after the position became vacant in March I noted
Having noted that there seemed to be no ideal or compelling candidate in any of the lists of domestic names that had started to emerge, that remained pretty much my view in the abstract through the many months it took for an appointment to be made.
When Breman’s appointment was announced I was overseas on holiday. A few media outlets asked me for initial comments, including Radio New Zealand’s Morning Report who I tried to put off but eventually agreed (“live from Ravenna” – former capital of the western Roman empire – had a certain wry appeal to me). The comment I’d made to them that it was 43 years since an internal person had been appointed Governor appeared to have piqued their interest. The interview and associated report is here.
I noted that while on this occasion it was clearly necessary to go for an outsider, it was a poor reflection on the Bank, its board and senior management, over decades that it had been so long since the last internal appointment (Dick Wilks in 1982 who was then pushed into an early retirement by Muldoon), and that one dimension of successful organisations (anywhere) tended to be the development of talent and succession planning such that most (not all by any means) top appointments came from within. Among central banks, the Reserve Bank of Australia is a striking contrast. I also noted that, for example, two successive foreign appointees as Secretary to the Treasury (very unusual appointments in themselves) had not exactly proved to be stellar success stories.
There were reasons for each outside appointment as Governor – and I’m not debating the merits of any of them individually here – but the accumulated track record should be concerning. (And one of the challenges for Breman and the Bank’s board over the next few years will be building a strong second tier such that in five years time there is at least one, ideally more, credible internal candidates if Breman decided, whether for professional or family reasons, it was time to return to Europe.)
But if that backdrop is a concerning structural issue, my more immediate issue picked up the same concern I’d raised in abstract back in March: going offshore for a Governor who has no background or familiarity with New Zealand was a risky call. And if I’d contemplated a possible foreign Governor back in March I guess I’d probably have mainly thought in terms of someone from culturally and politically similar countries (Australia, Canada, UK), and Sweden is at an additional remove.
In terms of the technical side of monetary policy that isn’t an issue – Sweden has been a longstanding inflation targeter (I still have and use the nice glass plate a visiting Swedish parliamentary delegation gave me when they came to learn about the way we, who pioneered formal inflation targeting, did things decades ago) and the independent review of monetary policy done almost 25 years ago was conducted by Lars Svensson, a leading Swedish academic and later a member of Riksbank’s Executive Board (who made himself unpopular by openly expressing minority monetary policy views, which were – in my assessment – largely right). But monetary policy doesn’t operate in a vacuum – there is the context of the specific economy, of the specific political system, and of the place and record of the central bank itself. Perhaps as importantly, these days monetary policy is only one limb of what the Bank does. Much of its staff resources are now devoted to financial regulation and supervision, and that doesn’t appear to be a field in which Breman has any particular experience (for example, the Riksbank is not responsible for those functions).
So from day one it seems quite a risky appointment. I might be less worried if (a) the Reserve Bank were a high performing stable institution, b) there was a strong and respected second tier in place (who for some reason didn’t want to be Governor or who weren’t quite ready, and/or c) the appointee was a star.
As has become increasingly clear as this year has gone on, neither a) nor b) held, and (for all his faults and limitations) the departure of Christian Hawkesby only highlights how weak the top tier Breman is inheriting will be. There are two key second tier policy roles – Hawkesby’s day job (financial stability) is filled by a low profile acting person, and the macro/monetary policy side which is overseen by Karen Silk, who has such a limited background it is almost inconceivable she could have held such a role in any other modern advanced country central bank.
But nor is there any sign at all that the incoming Governor is a star. She sounds as though she probably has the temperament for the job (a person who knows her spoke quite highly of her on that score) but beyond that it isn’t clear that she is much more than a boilerplate MPC-member economist, without (it appears) that much executive management/leadership experience (let alone change management and institutional transformation). And, of course, there is no background in financial stability or regulation. She seems to have had a perfectly respectable career in the Swedish Ministry of Finance, a few years running the economics group of a Swedish bank, and then six years on the Executive Board, all against an academic background that, again while perfectly respectable, wasn’t focused on macroeconomics, financial markets, financial stability and regulation etc. She didn’t seem to have had particularly high visibility in international central banking or monetary policy circles.
One of the great things about the Riksbank is how transparent they are about monetary policy – materially more so than the Reserve Bank of New Zealand MPC, and arguably a touch beyond the optimum. Not only do Executive Board members seem to give a fair number of on-the-record speeches but all their contributions to the formal monetary policy deliberations are published verbatim. So when I got back from holiday I took some time to read pretty much all I could find from Breman. Since I didn’t previously know much more about her than her name I was genuinely curious. Some top-notch people, with distinctive perspectives, have served on the Executive Board over the years (with people brought in for full-time roles, such that it is more feasible to have mid-career people appointed than to our part-time non-executive MPC roles).
I was particularly interested in how she had contributed to monetary policy deliberations through the Covid and post-Covid inflation periods. It was a real test for central bankers, and frankly most did not show up well (which is why most – but not all – advanced economies ended up with the worst outbreak of core inflation in decades). As regular readers will know I have also long championed accountability for central bankers – real accountability with consequences, the quid pro quo for the considerable delegated power MPCs (and similar entities like the Riksbank Executive Board) wield. Other people got things wrong too, but central bankers took the job (and attendant pay and prestige) to stop outbreaks of inflation happening. If things go really badly – and they did – there should be, at very least, a strong presumption against reappointment. In fact, things went worse in Sweden than they did here – with core inflation peaking in excess of 9 per cent
And what were Breman’s contributions during this period? They were solid workman-like pieces (& her speeches were probably better than the – very few – Reserve Bank ones) but there were no interesting insights or angles, and no material (let alone votes) suggesting that her instincts or mental models were better than average – in a central bank that delivered a core inflation record worse than the average advanced country central bank. (And it doesn’t even look as though they got out the other side any better than we did – the Riksbank’s latest negative output gap estimate is very similar to the Reserve Bank’s for New Zealand.)
And so, at least on the monetary policy side, it looks like a case of a boilerplate central banker failing upwards – not at home, but promoted to the top job in an underperforming remote area of the world. Is it like being banished to the colonies in days gone by? Perhaps she’ll do just fine as MPC member and chair, but nothing in that record back home suggests we are getting, for example, a policy leader or distinctive thought leader. And is there really no price for failing so long as you are in good company?
Aside from being an outsider, it really isn’t clear what strengths she brings to the position. Perhaps under the previous government her evident enthusiasm for central banks wading into climate change issues might have been a selling point (she was last year a member of the steering committee of that central bank talk shop the Network for the Greening of the Financial System). The Riksbank apparently even puts restrictions on holding Australian state government bonds in its reserves portfolio on climate change grounds. But one had hoped that under this government they’d have been looking for a strong focus on the core statutory functions of the Bank.
One point of hope might be her expressed commitment to transparency. At the press conference she held with Nicola Willis – which featured some odd lines, including Willis claiming “we are opening a new chapter in New Zealand’s history” – there was the superficially encouraging line about how she (Breman) intended that “transparency, accountability, and clear communication will guide all the work we do”. On the monetary policy side we might look for some serious moves towards greater transparency. It isn’t her call alone, but she will over time control the appointments of the executive members of the MPC – and an earlier test will be what she does there – and it is clear that at least one non-executive member, Prasanna Gai, favours greater transparency. The Swedish experience, which she spoke positively about in a speech earlier this year, should be one of those considered seriously.
Her instincts then may be broadly sound, but a) there is no sign that she is a star, b) the culture of defensive non-transparency (transparent when it suits, obstructive when it doesn’t – I’m still engaged with the Ombudsman over charges the RB made for releasing information several years ago that should have been released – was in scope – in 2019) appears to have become quite deeply entrenched in the organisation over the last couple of decades. And much about the Reserve Bank is controlled not by the Governor but by the board – which never used to matter much but has been in the driving seat since the new legislation came into effect in 2022.
Which brings me back to the title of this post. One might have more basis for initial confidence in a little-known outsider if that person was selected/nominated and appointed by people who themselves commanded respect and had developed a track record of building (or requiring) a high-performing, lean, open, transparent, and accountable institution. But this appointment was made by Willis who had displayed spectacularly bad judgement in reappointing Neil Quigley as board chair last year, who did nothing about the board’s very bad budget calls last year (she and her officials seem not to have been aware for months), and who stood by for months while the board obstructed any clear sense of the circumstances surrounding the resignation of the previous governor. How much confidence can anyone have in a person nominated by the Quigley-led board, selected when the board was at is embattled and defensive worst, and when that board has shown no sign of having regretted anything about the way they’ve done things? The same board that really really cannot stand critical scrutiny – who instead of engaging or replying were responsible for management’s insistence to an overseas magazine that published an article critical of the Board’s record that the magazine should withdraw it and apologise for having published it. Whose acting chair – of a public agency, allegedly committed to transparency and accountability – celebrated (in writing) when the article was taken down. We are supposed to believe that these people share the incoming Governor’s stated commitments on those scores? Or to have confidence in the Minister who has sacked none of the board members, and has still not replaced Quigley as chair? They are albatrosses around Breman’s neck, no matter how good she might actually and eventually prove to be.
Way back in those RNZ remarks in September I noted “She could prove to be an excellent call. Time will tell.” We must all hope she is. The rebuilding of the Reserve Bank matters and we deserve better than we have had. Senior Reserve Bank officials have gone on record as (belatedly) recognising that confidence and trust in the Bank has taken a hit – a pretty severe one in my view. But rebuilding is going to be a tall order, the more so with such a discredited board – and would be so even for someone with excellent credentials and connections. How much more so for Breman.
For the first six years of the newly-created statutory Monetary Policy Committee the external members were conspicuous by their silence. While their charter (agreed with the Minister of Finance) allowed them to speak openly we heard almost nothing from any of the three of them (and of course no disclosure of views or thinking in the minutes of the MPC either). The contrast with models like the central banks in the United States, Sweden, and the UK was stark.
This year there has been some sign of progress, albeit only from one of the members (whose approach may not be terribly popular with his MPC colleagues or – though they have very limited say – the Reserve Bank Board). The member in question is Prasanna Gai, a professor of macroeconomics at the University of Auckland and someone who spent the early part of his career at the Bank of England (and has had various other central banking involvements since). On paper he appears by far the strongest of the externals (and probably more so that at least of the internals), even if there is something less than ideal about having someone serving at the same time as an MPC member and on the board of the Financial Markets Authority. We also know nothing directly about his view on the state of the economy or much about his thinking about policy reaction functions etc, although we can deduce from his two recent speeches that he is probably the key player in the rather heavy (over)emphasis on uncertainty from the MPC in the last six months.
I wrote a few months ago about Gai’s published views (to be clear, from before he became an MPC member) on how Monetary Policy Committees should be functioned and governed. That post was shortly after his first speech
But in the last few weeks there have been two more sets of (fairly brief) remarks, and things have improved somewhat. In their email notification of upcoming speaking engagements, Bank management has noted that the two events were coming up, and the texts of the two sets of remarks are on the website (although you get the impression the Bank might be unenthused because they have not emailed out links, leaving people to remember to go and look for them, or otherwise to stumble over them).
The first of those sets of remarks was about uncertainty (mostly in the light of the US tariff situation), delivered to (it appears) an academic audience in Melbourne a few weeks ago. In those remarks, which were expressed reasonably abstractly, Gai could most reasonably be read as suggesting that the trade policy uncertainty was having a material macroeconomic effect on New Zealand and that fairly bold monetary policy responses were appropriate. I put some comments about those remarks on Twitter, which are in a single document here
While welcoming the fact of the speech, I was a bit sceptical of the argument. But then the good thing about policymakers laying out their thinking is so we can scrutinise, challenge, and engage with those arguments.
Gai’s most recent set of remarks was to some forum run by the Ministry for Ethnic Communities (one of those entities whose continued existence casts severe doubts on government rhetoric about cost-savings and lean efficient bureaucracy – but that isn’t Gai’s fault). There is more about uncertainty (in fact the remarks carry the title “Navigating the Fog – A Tryst with Economic Uncertainty”) although he takes the issue rather wider than the US tariffs stuff. I still wasn’t entirely persuaded, especially by the sentence I’ve highlighted.
Faced with the unknown, and already in the midst of a downturn, economic actors hesitate, delay investments, and reduce engagement. We see this in NZ surveys like the QSBO. Paradoxically, this cautious behaviour, while individually sensible, creates a self-fulfilling cycle. Caution reduces economic activity, which deepens uncertainty, leading to even more caution. Economists call this the “uncertainty trap.” It locks the economy into stagnation. By avoiding risk, we inadvertently create the very uncertainty we seek to avoid. This cycle of inaction feeds into a broader macroeconomic malaise, where growth stagnates, prices become sticky, opportunities are missed, and innovation slows. When everyone waits, nothing moves.
No doubt we can all agree in wishing away a fair amount of avoidable uncertainty (probably most people in New Zealand would count the US tariff uncertainty – regime uncertainty from day to day – in that category) but uncertainty is a part of life and always been. Perhaps it is greater in the short to medium term in democracies and market economies (absolute dictators can, although perhaps rarely do, provide greater certainty about some things over those horizons) so it seems a bit odd to suggest that people dealing with uncertainty is somehow problematic, or even creates uncertainty itself. There is more stuff along these lines in the remarks.
But my main interest in this set of remarks was the section headed “What Can Policymakers Do?”. He seems to think they can and should do a lot. I suspect he is far too ambitious (including on fiscal policy where he observes “At the same time, fiscal policy must step into its own strategic role — by investing through uncertainty and setting the stage for deep microeconomic reform. Where private actors hesitate, public action creates space — catalysing investment in innovation, skills, infrastructure, and housing8. And, like monetary institutions, fiscal policy must be guided by intellectual clarity, coherence, and long-term commitment.”)
But again, my main interest is monetary policy. He writes
In other words, central banks must set the tone for the economic conversation. Their words, emphasis, and structure condition how millions of decisions unfold. They must illuminate the path ahead, not merely comment on the prosaic.
Transparency – describing the macro-landscape by publishing monetary policy statements and modelling scenarios – is helpful, but not enough. What really matters is the capacity to guide expectations. This requires intellectual rigour, deep technical expertise, and the agility to challenge conventional thinking. How we think, rather than who said what, is the essence of credibility when uncertainty is high.
It is important to remember that central bankers wield unelected power7. Direct engagement—through public speeches and testimony before Parliament—brings clarity to uncertainty. Speaking directly about how we think, and what would change our minds, provides analytical accountability that complements procedural channels that chronicle debate – such as meeting records and monetary policy statements. When we open the doors of our policy reasoning to scrutiny, the fog clears and trust builds.
There is good stuff there (and in that footnote 7, which I’ve not reproduced, he refers readers back to the paper he wrote pre-appointment (see above), observing “some of those lessons are relevant for New Zealand”).
He is clearly laying down a marker here advocating for a materially greater degree of transparency from the New Zealand Monetary Policy Committee. The incoming Governor – about whom I will probably write later this week – went on record at her appointment announcement as favouring greater monetary policy transparency (unsurprisingly given that the Swedish central bank has substantively the most transparent monetary policy decision-making etc model anywhere). But you have to suspect it is going to be an uphill battle in an institution with a deeply rooted culture (not specific to any particular Governor) of favouring transparency only when it suits, whereas real transparency and accountability are about openness even when it hurts).
I’m all in favour of much greater transparency (and the new Bank of England MPC model looks as though it could provide a good model). But there is an important distinction between transparency that makes a difference to macroeconomic outcomes and that which largely supports heightened accountability. Perhaps the two should overlap but they rarely do. It isn’t obvious, for example, that the central banks that are much more open, including about differences of views and models among members, or whose MPCs had deeper stores of technical expertise among their membership, did any better at all – in terms of inflation outcomes – through the dreadful inflation resurgence of the early 2020s than, say, the Reserve Bank of New Zealand’s MPC did. But in those countries with greater transparency we know a lot more about the views of individual members and their thought processes and are thus better positioned to assess whether perhaps some are less guilty than others. Individual accountability is, thus, a serious possibility.
My impression is that Gai is much more optimistic about the scope for enhanced transparency to make a macro difference. In a sentence before the block of text I quoted he says “when uncertainty is high and the channels of transmission are weak, communication takes on greater importance”.
Well, perhaps, but only if the central bank has something meaningful to say, otherwise it just ends up as cheap talk. No doubt we can all agree that central banks should always and everywhere indicate that if (core) inflation looks like going off course they will respond accordingly. That is a (much) better place than we (advanced world fairly generally) were in 50 years ago, but it isn’t really much help in grappling the high levels of uncertainty firms and households actually face at times, most of which isn’t about monetary policy. Central banks can’t add much of any use on where US trade policy may go, let alone how other countries might or might not respond. Or whether (let alone when) the AI stock market surge will prove to be a bubble that will burst nastily. Or whether China will invade Taiwan. Or, to be more pointed and winding the clock back five years, what would happen to policy regimes around Covid (lockdowns, border closures etc) – surely the most extreme, perhaps inescapable, example of policy uncertainty in recent times. Central banks generally couldn’t get the macroeconomics right even when the policy uncertainty began to diminish (see inflation outcomes and generally very sluggish interest rate responses). The ability to “illuminate the path ahead, not merely comment on the prosaic” seems very limited in practice in most circumstances. (I think back, for example, to the early days of inflation targeting in New Zealand: we aimed then to be very transparent, and had a Governor who was a strong retail communicator, and yet if we consistently held out a vision – sustained low inflation and a fully-employed economy – we had no certainty to offer as to what it would take or when the payoff would be seen. Bigger central banks that went through similar dramatic disinflations generally found themselves in the same boat.)
But to conclude, it is great to have an MPC member putting his thinking on record (even in this case it is still mostly about processes/structures than the specifics of how the economy and inflation might unfold). Perhaps some journalists might ask him about the speech and seek to tease out his ideas. We all benefit when those wielding power – unelected power in this case as he rightly notes – put their ideas out for information, scrutiny, and debate. Perhaps some other MPC members might think of taking up speaking opportunities that come. Perhaps Gai, who has dipped his toe in the water with a couple of brief sets of published remarks, might consider a fuller version at some point?
When it comes to Long-term Insights Briefings (LTIBs) I sympathise with the public service, I really do. The requirement to produce these documents was introduced by the previous government in fiscally expansive times (core government agency staffing growing rapidly). Even then, it was a fairly flawed idea but if agencies were awash with cash I guess they might as well try to do some analysis. These days, even if the fiscal deficit is not being cut, core government department spending is under considerable pressure, and we have a track record in which the LTIBs that have been produced have rarely added much value. I gather the current amendments to the Public Service Act will eliminate the requirement to produce LTIBs but…..for now government department CEs and acting CEs still have to comply.
A year or so ago MBIE and MFAT decided to get together and produce a joint LTIB this time round. As the law requires they consulted on the proposed topic
I put in a short but fairly sceptical submission on the topic
Anyway, the bureaucrats have beavered away and last month come up with a draft LTIB (on which submissions close next Monday). They must have refocused their efforts somewhat following consultation on the topic as it is now presented this way.
Having made a submission last year they’d included me on their general email inviting submissions on the draft. I’ve been away and otherwise busy and hadn’t really intended to even look at the thing, but there was another reminder yesterday so I took an initial look. It was the “accelerate the growth of high productivity activities” that prompted me to look a little further: the focus apparently was not economywide productivity and policy settings but the sort of “smart active government” stuff MBIE has long championed, involving clever officials and politicians identifying specific sectors to focus on and specific interventions to help those sectors. And, of course, lots of preferential trade, investment, etc agreements (the ones MFAT likes to call Free Trade Agreements). On a day when the dysfunctions of our public sector were on particularly gruesome display it seemed even less appealing and persuasive than usual. In a month when the government had been a) buying a rugby league game, b) increasing (again) film subsidies, and c) subsidising expensive New Zealand restaurants (via the Michelin corporate welfare), all in the name apparently of “going for growth”.
So I decided to sit down and read the draft document after all. It isn’t that long (45 pages or so excluding Executive Summary, glossary, references etc), reflecting no doubt the fact that LTIBs are a compliance cost for agency CEs rather than really core top priority claim on resources. Before reading it I heard on the grapevine last night of a smart person who had opened the document, read the first page, rolled their eyes, and closed the document again. But I persevered….and there is 25 minutes of my life I won’t get back.
Sadly, but perhaps not surprisingly, the draft report is unlikely to be any use to anyone looking for illumination rather than support (the old two uses of a lamppost line).
On New Zealand, we get a fairly long list of symptoms of our relative economic failure, but no serious attempt at analysis of the causes. If you don’t understand the causes, including the roles (positive or negative) of past policy interventions/choices, it is really difficult to see how you tell a compelling story about solutions, unless the document is just a prop for a longstanding predetermined narrative and set of policy preferences.
They then introduce a series of four small advanced economy “case studies” – a page each on Denmark, Finland, Ireland, and Singapore. Not only do they not engage with a really important difference between New Zealand and these countries – ie extreme remoteness – but there is no attempt to understand what drove the successes of these economies either. In each case there is a list of types of interventions that have been or are being used in these countries but no effort at all to assess what role (positive or negative) these interventions have played in contributing to medium-term productivity growth. It certainly isn’t impossible that some might have been helpful, some will almost certainly have been harmful (just consider the range of interventions our governments have tried over the decades), and perhaps many will have just been ornamental or redistributive – not really making much difference at all to the productivity bottom line. And I’m pretty sure that not once in the entire document is there any suggestion of the possibility of government failure, capture etc.
Then the draft report moves on to four domestic case studies (this time roughly two pages each), looking at the dairy industry, space and advanced aviation, biomanufacturing, and the Single Economic Market (mostly Australia but also beyond) with a focus on sector-specific interventions. None of it seems to display any scepticism, only a sense that we (governments) haven’t been sufficiently focused or willing to persist with particular sector supports. Strikingly, in the dairy “case study” there is no mention of the rather large role the government played in enabling the creation of Fonterra, and how the results have, to put it mildly, not exactly lived up to the promised hype.
And the whole document ends with a question that shouldn’t even be being asked by government departments.
But perhaps it is all music to the ears of governments that like specific announceables from week to week? (Whether MBIE or MFAT like those specifics is another matter – quite possibly not, but their mindset and fairly shallow analysis in documents like this helps provide cover for governments more ready to paper over symptoms, toss out some cash to favoured firms/sectors, and avoid insisting that the hard structural issues are identified and addressed).
And this sort of stuff helps keep lots of officials busy and feeling useful.
To any MBIE/MFAT readers, no I won’t be submitting, but I’m sure you get the gist. The sooner the LTIB requirement is removed from the law the better, but eliminating that won’t change the mindset. As far as MBIE is concerned, my ongoing unease was only reinforced when on the page with the consultation document on it, this was the list of tabs/items down the side of the page under the heading “Economic Growth”.
We were away for a month and it has taken time to work through the backlog that inevitably builds up over such a mid-year absence. In the meantime, a fair bit more detail has emerged about the Orr/Quigley/Willis saga, between various OIA responses to me, one I’ve seen to another person, a bit more on the Bank’s extravagant new Auckland premises, the Bank’s Annual Report, and the pro-active (but very belated) detailed disclosures about the Orr golden payoff (other OIA responses are still being slow-walked by the Bank). And, of course, we’ve had the announcement of the new Governor and the, perhaps predictable and certainly appropriate, notice of resignation by the temporary Governor (and substantive Deputy Governor). I may eventually get to writing about some of that material, but I have updated my timeline of the Orr/Quigley/Willis saga where relevant.
The Reserve Bank isn’t exactly, in the jargon, a “learning organisation”, but more akin to one determined never to acknowledge a mistake (in a field in which, with the best will in the world, uncertainty means mistakes are pretty much inevitable). The last of the old guard – the Orr team – was at it again last week. Orr may have gone months ago, but Christian Hawkesby (who was the DCE responsible for monetary policy throughout the Covid period itself) is serving out his last few weeks, the other foundation MPC member (Bob Buckle) left just a few weeks ago, and no one expects the manifestly unqualified Karen Silk, the Orr DCE responsible for monetary policy for the last few years, to survive much longer. (There is the old and problematic board too, but monetary policy isn’t their field.) But the face of the latest effort in defence was the chief economist, another Orr groupie, Paul Conway (among many, the line that sticks with me was his closing remarks at the Bank’s early March conference, about having “lost a much-loved Governor”). Time is moving on but they seem determined to defend the Orr legacy, in which they’d all played greater or lesser parts. Specifically, the hugely expensive and risky LSAP.
There were a number of pieces released last Wednesday (links to them all here), headlined by a speech in Australia by Conway, supplemented by some comments from Conway in a Herald article on the Bank’s case (that really the LSAP paid for itself and, what’s more, it is really hard to assign any blame). Of the Bulletin article, “Pandemic lessons on the monetary and fiscal policy mix” by a couple of staff economists I haven’t got much to say: it is wordy and despite 10 pages of references offers little or no insight on the issues or the institution. Perhaps the only line in it that really caught my eye was a heading that claimed that fiscal and monetary policy “Coordination is an intricate and dynamic challenge”, a claim which not only seemed quite wrong, but also at odds with the thrust of Conway’s comments on that issue in his speech (where he seemed, rightly in my view, to be suggesting that what was needed was independence in operations, but keeping each other informed, and exchanging views on what works, what limitations there might be etc). As it ever was, but perhaps now institutionalised in that the Secretary to the Treasury is a non-voting member of the MPC. (Of course, the Treasury is also charged formally with monitoring the performance of the Bank, but the last 18 months suggests how hopeless they’ve been in that role.)
The centrepiece of what the Bank released last week is an Analytical Note by some of their researchers and some IMF staff which uses a model developed at the IMF to attempt to show that really the LSAP was a great success – macroeconomically and that it paid for itself (notwithstanding the $11 billion or so of direct losses incurred). It is a more elaborate version of the framework used by the IMF in a brief early note attached to their 2023 Article IV report (and talked up at the time by the former Governor as offering the “proper story” not some “piecemeal accounting story”), a piece whose claims I unpicked in a post at the time (link a couple of lines up).
So much money has been lost by central banks in the Covid QE interventions – in countries across the advanced world – that too many of those institutions, and their institutional allies (places like the IMF), now seem determined to try to prove a very weak case, that it was really all worthwhile (a case only made harder given the inflation mess that many advanced countries then went through, and which we are still living with the aftermath of). The effectiveness of generalised QE in government bonds – as distinct from specific interventions in dysfunctional markets – has been debated for 10-15 years now but my prior going into Covid was pretty much that of the eminent UK economist Charles Goodhart who in a Foreword to a book I reviewed some years ago (book completed just prior to Covid) opined that in his judgement:
“the direct effect on the real economy via interest rates, with actual or expected, and on portfolio balance, was of second-order importance, QE2, QE3 and QE Infinity are relatively toothless”.
It seemed to be pretty much the Reserve Bank’s approach then too (see this substantive interview with Orr in August 2019, and even just prior to the launch of the LSAP the then chief economist was quoted as playing down the likely impact of such policies), with an explicit preference from the Governor to use negative interest rates (as in Europe and Japan) instead.
I don’t want to bore readers with an interminable critique of all the papers (having already run various posts – eg here in response to some of their earlier claims – over the years of my scepticism that this big asset swap – all it was – made much useful difference to anything, to justify the risk and losses the Bank incurred for the Crown).
So I’m going to work backwards, responding to some of the easier-to-rebut assertions, and only at the end coming back to specific concerns about the particular model they are using in support (recall the distinction between support and illumination).
First, some Conway claims reported in the Herald article
“Conway said it was difficult to isolate the impact of a single tool the Monetary Policy Committee used at a time the Reserve Bank and Government were throwing a lot at the economy to keep it buoyed. He also recognised the collective response caused prices to soar. However, he cautioned against people assuming money printing was largely to blame for the economy overheating.”
You might easily forget reading that that the way our system is set up the Reserve Bank moves last. If the economy overheated – and on everyone’s reckoning it did (both IMF and Reserve Bank positive output gap estimates were very large) – it is the MPC’s fault. It is their job to, as far as possible, lean against the economy overheating (or the opposite) and keep core inflation near the target midpoint. They failed, and that is on them not on the government of the day (which might have run bigger deficits than many were comfortable with, but those deficits weren’t kept secret – most especially from the MPC). Whether or not the LSAP made much difference to demand (Conway believes it did), the responsibility clearly rests with the overall package of monetary policy measures – OCR setting, LSAP, and the Funding for Lending programme (that went on offering cheap loans to banks until the end of 2022). There is no sign in his speech, press release, or interview that Conway – and presumably his bosses – ever really accept that responsibility/blame. Nor is there any real mention of what was actually at the root of the problem: an egregious forecasting failure. Like many/most other forecasters – but unlike them actually wielding power and responsible for outcomes – the MPC badly badly misread the state of demand and resource pressures through Covid, and the result was the inflationary mess that followed. It was hard to get right – few did – but when you take the role you need to take the responsibility. All too few central bankers have. Conway wasn’t there when the worst mistakes were being made, but he now speaks for the institution (and, currently, specifically for Hawkesby, who held the critical role of DCE responsible for monetary policy when it mattered).
But if the forecasting mistakes were pretty common and widespread (inside and outside central banks, here and abroad), the most evident costly failure is purely on the Reserve Bank itself. This is from Conway’s speech
In other words, even granting for the moment the Bank’s view that the LSAP did a lot of good to justify the large losses, really they would prefer not to have used it at all, because a modestly negative OCR would have achieved the same (claimed) benefits without the massive financial risk and actual $11 billion in losses to the taxpayer. Last week’s papers use quite a bit of the passive voice, suggesting that the inability to use negative rates had been something quite out of their control, perhaps something banks were to blame for. Someone, anyone, no one…but certainly not the Bank.
Actually, it was all on the Reserve Bank. An internal working party in 2012 had recommended (I chaired it) that the Bank ensure our own systems and those of banks were able to cope with negative rates should they ever be needed. The then Governor accepted those recommendations, but it seems that nothing happened until it was far too late (it wasn’t until Covid was almost upon them that the Bank realised nothing had been done and some banks – apparently it wasn’t even all – weren’t operationally capable). It is all the more extraordinary because in the second half of the decade the Bank had clearly been doing preparatory thinking for coping with the next severe downturn – there was a thoughtful Bullletin article on options in 2018, and of course that serious interview of Orr’s I’d linked to earlier. But no one seems to have done the basic engine-room sort of work, reviewing with banks their ability to cope with an instrument used in other countries for many years by then. There was turnover at the top – Orr came on board in March 2018, Hawkesby in March 2019 – but it isn’t as if in mid 2019 these should have been remote issues (the OCR had been cut to its then lowest ever level of 1 per cent, and it wasn’t going to take a particuarly savage shock to put zero in view). And yet nothing was done and – on the Bank’s own telling – the cost to the taxpayer was the full $11 billion or so (since they themselves now say they could have had the macro benefits they claim without the risks/losses if only they – Orr, Hawkesby, the 2019 MPC – had ensured basic operational readiness). That was on them, and only them. (Incidentally, the Bank reckone that by Q42020 those issues were sorted out, and yet they went on taking additional LSAP risk – and then incurring further losses – well into mid 2021.)
A learning organisation, the sort that acknowledges mistakes and learns from them, would be quite open about the cost of their own failure. The Hawkesby/Conway Bank, not so much.
All that was on the assumption the Bank was right and there were huge gains achieved through their monetary policy efforts, notably including the LSAP purchases/punt.
And that rests on two propositions. The first is that there were substantial boosts to GDP, and second that government tax revenue was permanently higher as a result.
Conway used this chart (from the Analytical Note modelling effort)
(No, they aren’t saying tax revenue got to 42 per cent of GDP; it is just an illustrative device).
In principle, if there had been a very deep hole in economic activity which monetary policy choices had closed much quickly than otherwise, there’d also be a windfall gain in tax revenue. (That was the scenario for the highly questionable little IMF exercise in 2023 linked to earlier.)
Unfortunately, while in 2020 the Bank thought there was such a hole (eg as late as the November 2020 MPS the Bank thought there was a negative output gap of about 2.5 per cent, which would persist around those levels for the whole of 2021), they are now quite clear in there view that there was no such hole. In their most recent projections, they estimate that even in the September quarter of 2020 (ie straight after the first and longest severe lockdown) the output gap was (barely) positive. And in the real world monetary policy actions (starting from late March) just don’t have such large and immediate real effects as to have made a big difference to activity as soon as mid-August (ie halfway through the September quarter). With hindsight – albeit only with hindsight – monetary policy choices, including the LSAP if it had real effects, were driving the economy further away from a balanced position (ie into a substantially positive output gap, now estimated to have peaked at almost 4 per cent of GDP, and the associated surge in core inflation).
And this is where the Bank’s package last week gets borderline dishonest. Conway uses this chart
which a casual reader might think was all gain. But the chart ends just around the point where the output gap crosses into negative territory, and thus completely – and deliberately (we must assert for a senior policymaker) – ignores the more recent period, in which the Bank estimates that we are now in a materially negative output gap, and will in time have had three years of a negative output gap (ie GDP tracking below potential, with government tax revenue consequences). Pretty much all observers ascribe that negative output gap to the necessary working off of the earlier, marked, RB-allowed/enabled overheating (ie dealing with the inflation). Any honest reckoning of the fiscal consequences needs to take into account the entire period. There probably were some fiscal gains from the Bank’s monetary policy choices – surprise inflation reduced the real debt burden, and resulting fiscal drag picked up some extra revenue – but I doubt the Bank really wants to claim credit for that inflation they weren’t supposed to be aiming for and did not forecast.
Most likely, over the full period, there were modest – but largely unsought and undesired – revenue gains (achievable, see above, with conventional instruments if only the Bank had done its preparatory job – and for central banks, like airport fire brigades, preparation for crises is a core part of the job), but large and easily identifiable losses from the risky punt made on the LSAP.
But all that assumes that the LSAPs made a material difference at all. That has long seemed quite unlikely to me. You can – as the Bank and IMF staff have done – construct a stylised model in which the LSAP makes a material difference, but that model doesn’t really seem to fit very well what was going on, here and abroad, and the LSAP simply isn’t necessary to explain almost everything that did go on.
To be clear, I think most economists will agree that if the LSAP worked it wasn’t as (in the Herald’s unfortunate term) “money-printing”. The volume of settlement cash created – all reimbursed at the OCR – was simply not a material channel. If the LSAP made a difference it did so by one of two (perhaps mutually reinforcing) mechanisms: altering market interest rates in ways that had macro consequences (this is the Reserve Bank’s own story going back to 2020), and/or reinforcing market convictions/views that the OCR will be kept extraordinarily low for a protracted period.
This is from the model Conway hung his hat on, in which he
cites the modelling exercise – not an empirical estimation but a stylised representation – in which the choice not to use the LSAP (in New Zealand) makes at peak about 150 basis points of difference to long-term government bond rates (relative to the counterfactual in which only the actual OCR cut was done) and a 20 per cent difference to the exchange rate. In this modelling exercise we are told that most of the work is being done by the exchange rate adjustment (itself responding to changing interest rate differentials), noting that long-term interest rates themselves aren’t a material part of the New Zealand domestic transmission mechanism.
But we are also told that the LSAP was roughly equivalent in its economic impacts to a 100 basis points cut in the OCR. And we’ve had plenty of swings in the relative policy rate spreads of 100 basis points or more (including since 2021) and none of them has resulted in a 20 per cent change in our exchange rate (which has been astonishingly stable over the last 15 years or so).
Another chart from Conway’s speech is this
where you’ll see (red bars) that New Zealand’s use of government bond purchases was one of the largest among advanced countries (similar to the UK and Canada). But you will also see quite a group of countries to the left of the chart that seem to have done little or no QE over this period. Korea, for example, also cuts its policy rate by 75 basis points, but is there any sign of its real exchange rate rocketing upwards because they did no QE? Well, no. And one can run through the other countries and you will search in vain for such large effects (and yes each country has its own idiosyncrasies). Australia did no material QE until the end of 2020 (for much of the year they relied on policy rate cuts and an announced target for a three year rate) and there isn’t any sign of the AUD appreciating sharply against the NZD (where our central bank was actively pursuing QE).
And there are similar problems with the long-term bond yield story. Eyeballing that chart Conway cited, you’d have to think that advanced countries that did no little or QE in government bonds would have seen their long-term government bond yields rise sharply (and, to be clear, the New Zealand OCR was about middle of the pack for how much advanced country central banks cut in 2020). But again, evidence of such effects is sparse indeed. Take Korea again, their long-term bond yields didn’t fall as much as New Zealand’s did, but they certainly didn’t rise in 2020. Nor did Norway’s or Iceland’s – or, indeed, any advanced country. I don’t find it implausible that the scale of New Zealand’s LSAP might have made a bit of difference to longer-term bond rates, but eyeballing the cross-country experiences something like 20-40 basis points looks more plausible – eg our long-term bond rate did fall more than Australia’s in mid 2020.
And that is for a 10 year bond. What matters in the domestic economy is mostly 1 and 2 year rates (including through the mortgage lending and refinancing channel). And so the important question is likely to be whether the LSAP did anything much – directly or by signalling reinforcement effects – to affect those short-term rates. And there I think champions of the effect of the policy will find themselves on the backfoot. Those shorter-term bond and swap rates certainly fell very low (some were briefly slightly negative for a few weeks around September 2020, although by the end of 2020 all the short-term bond yields were at or above the 25 basis points that was then the OCR), but is there good reason to suppose those rates would have been much different absent the LSAP (or with an LSAP brought to an end in say December 2020)?
What else was going on? By late 2020 the Reserve Bank told us the operational issues around negative rates had been sorted out. In the Survey of Expectations (semi-expert respondents), the December quarter survey remarkably – looking back now – had the mean expectation for the OCR a year ahead at -0.16 per cent (with inflation two years out nonetheless still expected to well undershoot the midpoint). The MPC itself had pledged back in March 2020 (rashly) not to change the OCR for a year. And what of the Bank’s own forecasts? With all the stimulus already built in the Bank in the November 2020 MPS was projecting that inflation would stay at or marginally below the bottom of the target range through 2021 and 2022, and that the output gap would remain deeply negative at least through all of 2021. The Bank published “unconstrained OCR” numbers – where the OCR would go if deeply negative OCRs were possible, to get inflation back towards target – getting down to -1.5 per cent by the end of 2021. The fact that those forecasts and expectations were deeply wrong – as we know now – is irrelevant to the fact that that was the air people were breathing (and markets were trading) in late 2020. The prospect of any rise in the OCR any time soon seemed remote, and cuts couldn’t be ruled out (remember that only the MPC pledge to March 2021 had ever prevented the OCR being cut to at least zero).
Is it plausible that the LSAP had some effect on these rates? Well, perhaps. I wouldn’t quibble if someone was suggesting 20 or 30 basis points but…..short-term rates were always going to be much more heavily influenced by expectations of future OCR moves, and – independent of any LSAP announcements – the macro forecasts at the time were very very weak (as actually they were in Australia – check the RBA November 2020 inflation projections).
What of the stylised modelling results themselves? Well, I’d take them with a considerable pinch of salt. You might have hoped that someone in the Reserve Bank with an instinctive feel for NZ business cycles etc (surely there are still one or two of them) might have interjected and asked at some point how it was that this model posited near-instantaneous real economic effects from a change in the real exchange rate (the usual stylised view has been that those lags are particularly long, longer than those for interest rate effecs)
Or someone might have asked how it was – so very convenient – that the model produces only helpful effects on inflation from the LSAP (with no LSAP and a higher exchange rate perhaps direct price effects hold up inflation in 2020), and no unhelpful ones, despite the large positive impact on the output gap. And, as a reminder, it is the standard view that the real economic effects of monetary policy take more like 6-8 quarters to be substantially seen in inflation. If the LSAP made a real and material difference, it should have made one also to inflation – exacerbating the problems – in mid-late 2021, but this exercise somehow manages to tidy away any such effect.
Who can know quite what is driving the people at the top of the Reserve Bank. Perhaps they genuinely believe all this stuff, but I guess if you’d been a prominent part in the loss to taxpayers of getting on for $11 billion you’d have a fairly strong incentive to convince yourself it had all really been worthwhile. And I guess with the current more-moderate personalities at least we’ve moved on from those claims Orr used to make that the benefits had actually been multiples of the cost.
But whatever now drives them, these are lessons I think you should take away:
had the Bank done its basic crisis preparedness job in the years leading up to Covid, LSAP would probably never have been deployed at all (or used only on a much smaller and briefer scale – the Bank also likes to claim they helped settle markets in late March 2020 although the evidence suggests any effect was small and entirely incidental to the Fed addressing problems at source). Orr’s instincts on preferred policy instruments (effective and with much lower financial risk) were correct,
ultimately the major failure was a forecasting one. On the path of forecasts as they were in 2020, 2021 and early 2022, the Bank would still have wanted to be providing lots of monetary policy stimulus for a long time (that is what forecasts of very low inflation and large negative output gaps tell central banks to do – and contrary to Conway’s claim, this had nothing to do with the 2019-2023 specification of the Bank’s target; it would be the same today). Thus, the path of inflation would have been very much as we actually experienced it.
but at least if we were going to experience the consequences of a major macro forecasting failure, the taxpayer wouldn’t have been facing almost $11 billion of losses in addition (to the inflation and the dislocation, still being experienced, in getting rid of it).
responsibility for the substance rests with those in office over 2019-2021 (Orr, Hawkesby, Bascand primarily – and the rest of the then MPC)
responsibility for the spin now rests with Hawkesby, Conway, and (presumably) Silk. Who knows if the rest of the MPC even saw this stuff before it went out. It would be interesting to hear perspectives from some of them – not involved over 2019 to 2021.
Finally, in fairness one might note that central banks generally have not been great at acknowledging failure and mis-steps. But being in bad company really is no defence. Recall that the quid pro quo for central bank operating autonomy was supposed to be serious transparency and accountability, built on demonstrable expertise. All appear to have been lacking at 2 The Terrace.
croaking cassandra 