No big improvements expected

This afternoon brings the release of the Monetary Policy Committee’s latest Monetary Policy Statement and OCR decision.  Most commentators expect the Bank to cut the OCR by another 25 points.  I’m more focused on what they should do than on what they will do – the two can diverge for quite a while a time –  and I’ve been consistently clear that the OCR should cut further.  If the MPC was wavering though, you’d have to suppose that they would want to avoid a second successive big surprise for markets which would –  rightly –  renew the focus on how poor their communications have been this year.

The last piece of data relevant to the decision was finally released by the Bank yesterday afternoon: their survey of the macroeconomic expectations of a few dozen supposedly somewhat-expert observers (of whom I’m one).   As I’ve noted already, this release once again gives the lie to the repeated Bank claims of how open and transparent they are: survey responses were due on 22 October, the Bank could easily have had them a couple of days later at most, and yet they held the information to themselves –  to no public benefit at all – until 12 November.  As for private benefits/costs, having the information in public on a timely basis might have spared poor Westpac from going out on a limb calling no change in the OCR, only to reverse themselves yesterday.   Market whipsawing, in the absence of data the Bank already had, serves no public benefit.

The expectations survey has been running, in one form or another (changing questions, big reductions in numbers surveyed) for more than 30 years now and provides a fairly rich array of data (although there are some important gaps –  eg immigration, the terms of trade – the Bank refuses to remedy).    We know that the surveyed expectations (mostly a quarter ahead, a year ahead, or two years ahead) aren’t in any sense accurate predictions about what actually happens in future.  But neither are the Reserve Bank’s forecasts (and that isn’t a criticism of anyone: forecasting is hard, shocks happen).   What they do provide is a useful read on how the somewhat-expert observer community sees things, in a reasonably internally consistent manner –  eg answers about GDP or unemployment are presumably done simultaneously with (recognising two-way influences) views on the future OCR or the future exchange rate).

The headline news –  well, only media coverage –  in yesterday’s release was the further fall in (mean) inflation expectations.  Two-year ahead expectations had fallen quite a lot in the previous survey, and there was no bounceback, just a further fall from 1.86 per cent to 1.81 per cent.   You wouldn’t want to make much of it –  dig just a little deeper and the median expectation didn’t change at all – but the absence of any bounce, especially coming on the back of the 50 point cut, explicitly linked to inflation expectations and a desire to keep them close to 2 per cent –  should still have disconcerted MPC members.

And these weren’t inflation expectations conditional on the OCR remaining at the current 1 per cent.  Instead respondents expect a 25 basis point cut today (median OCR expectation for the end of the year is 0.75 per cent) and a further cut next year.    And they still expect no recovery in medium-term inflation (and in financial markets themselves, the implied 10 year average inflation expectations –  the breakeven rate between indexed and nominal bonds – are still pretty close to 1 per cent, when the Bank’s target is 2 per cent).

Consistent with this, there is no rebound expected in economic growth either, whether as a result of things already in train or of those further expected OCR cuts.

expecs 19.png

No respondents expected a recession, although the lowest individual expected 2 year ahead growth rate was as low as 0.6 per cent.

There wasn’t much sign of an expected strengthening in the labour market either (although those series have been volatile and the survey was taken before last week’s labour market data were published).

What about overall monetary conditions?  The survey asks about assessments –  on a seven step scale – as of now, and expectations for (on this occasion) the end of March and the end of September 2020 (the latter roughly a year ahead),   “Monetary conditions” isn’t defined –  it is up to each respondent to factor in things considered relevant.   What was striking this time was the sharp increase in the proportion of respondents expecting monetary conditions to become “very relaxed”

mon con nov 19.png

I was left wondering what weight respondents were giving to tightening credit conditions (this chart from the Bank’s credit conditions survey, also released after the expectations survey was done)

credit 2.png

But whatever went into those “monetary conditions” answers, they weren’t producing an expected rebound in either growth or inflation.

In a speech a couple of weeks ago the Bank’s Assistant Governor ran one of his boss’s frequent lines bemoaning the risks central banks face if they simply follow short-term market prices (since those prices themselves include market implicit expectations of what central banks will do).  It was  –  and is – a real but overstated point.   But it is also where surveys of macroeconomic expectations are relevant and useful, not subject to the same critique.   This pool of respondents –  with no better or worse information on average than the MPC – expressed not just expectations for the OCR but for overall monetary conditions, and for economic activity and inflation.  So they factored in what they expect the Reserve Bank to do, and are (in effect) feeding back a collective assessment that it really looks, at best, like barely enough.  Who knows why: perhaps expected adverse world developments, perhaps more initial weakness here, perhaps a weaker transmission mechanism, but the data (expectations) are there for all to see.

Against that backdrop the MPC would really have to produce a quite compelling alternative narrative to justify not cutting the OCR further now, perhaps especially when there isn’t another review until February.

(As I’ve noted before, there is a rich amount of data in this survey not open to the public.  For example, on the OCR expectations question at least one respondent expected the OCR to be zero by September and another for it to be 1.25 per cent. It would be fascinating to see the –  one hopes consistent –  forecasts of each of those respondents and the stories that underpin them.  Reminding ourselves of the sheer uncertainty of the future, and the possible stories that might underpin such alternative outcomes, can be a useful discipline.)

Participation rates for older people: kudos to SNZ

In my post yesterday on labour force participation rates I included this chart

p rates old

There has been some increase in participation rates for those aged 70 and over, but the really striking movement has been in the 65-69 age group.   More than half of men, and almost 40 per cent of women, in this first NZS recipient age group, are still in the labour force. (Interestingly, the gap between male and female participation rates for this age group hasn’t materially changed over the 30+ years of the chart.)

I went on to observe, relevant to NZS policy, that (emphasis added)

If you are able to work and are financially able not to, that is almost entirely a matter of individual/family choice, but you (generally) shouldn’t be eligible for long-term state income support.  New Zealand’s experience suggests that the overwhelming bulk of those aged, say, 65-67 are well able to work (we don’t have the data, but presumably –  given what happens from 70 on (see above) –  participation rates of those 68 and 69 are materially lower than those for people 65-67).   Against that backdrop, there is something just wrong about having a universal pension paid to them –  well, me not that many years hence on current policy –  simply on the basis of having got to that age.

My post caught the eye of someone at Statistics New Zealand who dug out the data by each year in the 65-69 age range, and sent me the following chart.

alex snz 2

The standard errors on some of these estimates are quite large, so don’t pay much attention to the year to year changes in each series. But it was good to see a consistent monotonic pattern in which –  beyond the NZS eligibility age –  the older you are the less likely you are to be working.

Using the data she sent me, here are what the participation rates look like for men and women separately at ages 65 and 69 (also for September years).

65 and 69

So almost 70 per cent of men aged 65 –  almost all of whom will be recipients of NZS –  were still working (or, in small numbers, actively seeking work).  In some cases, of course, that work will be part-time only (being employed, in HLFS terms, means a minimum of an hour’s paid work in the reference week), but even a half-time minimum wage job would pay as much or more as a single rate of NZS.

As interesting perhaps is that even at 69 40 per cent of men were still active participants in the labour force.   Since women have a longer life expectancy than men, presumably the materially lower female number is a reflection of past cultural practices and expectations –  or perhaps even a  stronger preference to spend time with grandchildren or in community activities –  rather than physical incapacity.

I don’t often praise SNZ but today I offer only unmitigated kudos

(Well, perhaps mitigated only in this sense that if the annual data are readily available, and they are happy for people to use them –  as they told me they were –  why not make them routinely available on Infoshare?)

 

Central bankers and climate change

Thirty or so years ago I was having a conversation with a fellow manager in the Reserve Bank’s Economics Department.  I’d learned that he was working on a submission on superannuation policy issues.  I was interested in the topic and so was he, but it wasn’t at all clear to me why we should be devoting scarce Bank resources to a topic that seemed well outside our mandate.  Ah, he responded, “but savings behaviour might affect the natural rate of interest and anything that affects the natural rate of interest must be something that matters to the Reserve Bank”.

I used the story, off and on, for decades in making the point that while, in principle, almost anything that affected the economy might be something the Bank should be aware of, it didn’t justify us weighing in on, or spending scarce research resources, on matters so far from our core responsibilities no matter how interesting we, as individuals, might find the topic or how important the policy issue itself might (be thought to) be.   “Stick to your knitting remains” sage counsel, perhaps especially for central banks who (rightly or wrongly) exercise significant discretionary policy power and need to build and maintain broad public confidence in their competence and impartiality in discharging those specific responsibilities.  Get very involved in other areas and people will reasonably begin to suspect you are using a public platform for private political ends.

The recent enthusiasm of senior central bankers all over the world for opining on climate change issues seems to fit that bill.     Whether it is about pushing personal political agendas or some desperate quest for relevance (as if macro stabilisation and financial stability weren’t quite significant enough challenges, especially as the world converges on the effective lower bound constructed by central bankers and their legislators) or (more probably, more commonly) some mix of the two isn’t clear.   What is clear is the generally tenuous nature of the case being made.

There was a conference on such issues held last week, hosted by the Federal Reserve Bank of San Francisco. Perhaps our Reserve Bank had someone attending.  I don’t really want to encourage this stuff, but if you are interested there are links to the papers here.   As just one example of the tenuous nature of the connections, I clicked on a paper –  forthcoming in a journal – with the promising title of “Climate Change: Macroeconomic Impact and Implications for Monetary Policy” by some Bank of England staff.    I haven’t read the whole paper but the Abstract told me as much as I needed to know

Climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary stability objectives. Climate change can affect the macroeconomy both through gradual warming and the associated climate changes (e.g. total seasonal rainfall and sea level increased) and through increased frequency, severity and correlation of extreme weather events (physical risks). Inflationary pressures might arise from a decline in the national and international supply of commodities or from productivity shocks caused by weather-related events such as droughts, floods, storms and sea level rises. These events can potentially result in large financial losses, lower wealth and lower GDP. An abrupt tightening of carbon emission policies could also lead to a negative macroeconomic supply shock (transition risks). This chapter reviews the channels through which climate risks can affect central banks’ monetary policy objectives, and possible policy responses. Approaches to incorporate climate change in central bank modelling are also discussed.

Note all the uses of “could”, “might”, “may” and not a mention that inflation – the key target for monetary policy –  is primarily a monetary phenomenon.   It all seems to boil down to something along the lines of “productivity shocks can affect potential output, and potential output is one of the inputs central banks often using in trying to gauge appropriate monetary policy.  Oh, and policy uncertainty –  in whatever areas –  can act to hold back demand”.   All that is true but (a) not obviously more true in respect of climate change than of numerous other innovations, positive and negative, and (b) shocks –  surprises –  are typically what creates problems for central banks and financial regulators, and yet a key theme of much of the rhetoric around climate change is the long-term, inexorable for some considerable time, nature of what is at work.   Markets tend to be better able to take such structural trends into account than for genuine “shocks” –  be they wars, financial crises or whatever.  It is also striking that nothing in this vein that I’ve yet read illustrates any of the argument by reference to the climate change we’ve already experienced over decades.

But the contribution to last week’s FRBSF conference that really interested me was the speech by Lael Brainard, a member of the Federal Reserve’s Board of Governors. She is a policymaker, not just a researcher.  Being the United States –  unlike secretive New Zealand where monetary policy decisionmakers are hidden away from scrutiny behind the Governor’s apron strings –  we get thoughtful speeches like this, even with the standard disclaimer that the views expressed are hers, not those of the Board of Governors collectively.  One doesn’t need to agree with her to appreciate the openness.

Brainard is a centre-left economist.  She was a senior political appointee in the Obama Administration (and slightly less senior in the Clinton years) and, as I gather it, pretty well regarded in those roles.  She has now been a Fed governor for five years or so.   And her topic was very much to the point: “Why Climate Change Matters for Monetary Policy and Financial Stability”.  So one might think she would make as good a case as anyone could for central bank involvement in climate change issues (smart, rigorous, policy-focused, not really the ivory-tower type).

But if it was as good a case as could be made, I didn’t find it convincing – or even challenging –  at all.  Perhaps it is what happens when you speak to the converted, but whatever the explanation, it only reinforced my sense that central bankers are typically getting well out of their lane when they start weighing in on climate change.  With the superfluity of researchers and senior officials the Federal Reserve system has, perhaps casting the net widely has fewer direct opportunity costs than it does for other, much smaller, central banks, but the reputational issues are just as real.  You might like the central bank weighing in on your pet topic, but you really won’t when they weigh in on some other issue or cause you don’t like.  Cumulatively it corrodes confidence in the system and in the operational independence of the central bank.

Brainerd steps through the possible implications for the Federal Reserve under various headings.  The first is monetary policy.  Here is the gist of her case.

To the extent that climate change and the associated policy responses affect
productivity and long-run economic growth, there may be implications for the long-run neutral level of the real interest rate, which is a key consideration in monetary policy.  As the frequency of heat waves increases, research indicates there could be important effects
on output and labor productivity.  A shifting energy landscape, rising insurance premiums, and increasing spending on climate change adaptations—such as air conditioning and elevating homes out of floodplains—will have implications for economic activity and inflation.  

As policies are implemented to mitigate climate change, they will affect prices,
productivity, employment, and output in ways that could have implications for monetary policy.  Just on its own, the large amount of uncertainty regarding climate-related events and policies could hold back investment and economic activity.

All of which really boils down to only two points:

  • relative prices change, neutral interest rates change and potential output changes,
  • policy uncertainty tends to be bad for economic activity.

And that, really, is it.    As it was, is now, and (no doubt) ever more shall be.  There is (rightly) no suggestion that climate change (or measures in responses) will impair the Fed’s ability to achieve its inflation target or even any suggestion that the target might need to change.  There is no sense in which she suggests the Fed’s instruments will be impaired.   All that is there is really economic forecasting –  and disentangling actual data to make sense of what is happening and why.  In that sense, climate change issues are no more (or less) relevant to the central bank than a myriad of other sources of policy or market change and uncertainty.  None of which is to suggest that climate change issues aren’t important, just that they aren’t something of particular relevance to a monetary policy central bank.

But what about the Fed’s financial stability role?

She starts this way

Similar to other significant risks, such as cyberattacks, we want our financial system to be resilient to the effects of climate change.

Which, at one level, is reasonable enough. We want our financial systems to be resilient, to all sorts of things, but there is no real attempt to demonstrate/illustrate that there is a significant systemic risk from climate change issues, or the associated policy responses.

She goes on

Although there is substantial uncertainty surrounding how or when shifts in asset
valuations might occur, we can begin to identify the factors that could propagate losses from natural disasters, energy disruptions, and sudden shifts in the value of climate exposed properties.  As was the case with mortgages before the financial crisis, correlated risks from these kinds of trends could have an effect that reaches beyond individual banks and borrowers to the broader financial system and economy.  As with other financial stability vulnerabilities arising from macroeconomic risks, feedback loops could develop between the effects on the real economy and those on financial markets.  For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy.  The associated declines in wealth could amplify the effects on economic activity, which could have further knock-on effects on financial markets.  Beyond these physical risks, policymakers in some jurisdictions are assessing the resilience of the financial system to so-called transition risks:  the risks associated with the transition to a policy framework that curtails emissions.

All while offering no evidence at all that market pricing will not adjust –  never perfectly but more or less okay over time – to the changes associated with climate (as to all manner of other changes over the years).    One can always advance hypotheticals but (for example) serious stress tests need to be grounded in the real-world range of possibilities. In this case, as she goes on to note, it is hardly as if the private sector has been slower to get to these issues than central banks.

The private sector is focused on climate risks.  Private-sector businesses—
including insurance companies, ratings agencies, data companies, and actuaries—are actively working to understand climate-related risks and make this information accessible to investors, policymakers, and financial institutions.  Although this work is at an early  stage, thousands of companies around the world are now reporting climate-related financial exposures to the Carbon Disclosure Project (CDP) under the guidelines of the Financial Stability Board (FSB) Task Force on Climate-Related Financial Disclosures (TCFD).12  Based on these disclosures, the CDP estimates that the 500 largest companies by market capitalization are exposed to nearly $1 trillion in risk, half of which is expected to materialize in the next five years. 

That sounds like quite a large number, at least until one realises that the market capitalisation of (say) the S&P500 index is about US$26 trillion.

She ends her treatment of this topic thus

An essential element of our bank supervision and regulation duties is assessing
banks’ risk-management systems.  We expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks.  These risks may include severe weather events that can disrupt standard clearing and settlement activity and increase the demand for cash.  Banks also need to manage risks surrounding potential loan losses resulting from business interruptions and bankruptcies associated with natural disasters, including risks associated with loans to properties that are likely to become uninsurable or activities that are highly exposed to climate risks.  

Well, no doubt.  But where is the evidence of systematic problems –  ie ones large enough to actually matter for the health of the financial system?    We’ve seen no such evidence advanced in New Zealand –  for all the talk of a modest number of potentially uninsurable properties –  and Brainard advances none in the US.  Sure, you want your central bank to be alert to potential risks and posing probing questions, but given (a) the extent of structural change that occurs in any economy over several decades, and (b) the lack of any (apparent) severe adverse economic/financial effects from decades of climate change to date, the case for treating this as a high priority area for central banks seems weak, at least if they are doing their jobs, rather than advancing the personal agendas of their management.  Where perhaps there is a little more reason for concern might be around ill-considered or uncertain (in application) government policy responses –  a significant part of the cause of the last US financial crisis –  but even then the primary responsibility for advice, analysis, and policy choices around climate change rests squarely with other parts of government. 

I deliberately picked a US speech to write about, precisely because it wasn’t about New Zealand but also because it is calmly and moderately expressed.  But our own central bank has been out again more recently.  Perhaps reflecting the character of our Governor, their statements tend to be less calm and nuanced, and rather more crusading in nature.  All this from a central bank that (a) constantly tells us it is seriously resource-constrained and (b) which hasn’t been doing a great job in recent years in commanding confidence in handling things that are squarely its responsibility (whether monetary policy or financial stability).

I wrote last week about the seriously-flawed, highly ideological, report of the Sustainable Finance Forum.  The Governor, by contrast, put out a statement “commending” the report and, regardless of his own limited statutory mandate, burbling on about

enhanc[ing] our role in the greening of the financial system, and the managing of environment and climate related risks.

and seemingly uninterested in the fact that any mandate he has around economic performance is around short-term and cyclical issues, not long-term structural ones.

He then had one of his deputies –  one with no known expertise in economics, monetary policy, or financial stability –  publish a Herald op-ed (text also here) channelling the Governor and simply ignoring the specifics of the Bank’s mandate.  For example

Sometimes, we are asked why we are placing such an emphasis on climate change, and that’s easy for us to answer. In our assessment, climate change could lead to material economic and financial stability impacts. Managing major risks to the economy, such as climate change, sits squarely within our core responsibilities and like all of our functions, we do this with a long term view for generations to come.

On this view, every bit of economic and social policy, strategic defence policy for that matter, or the potential future eruption of Lake Taupo is a matter for the Reserve Bank (“sits squarely within our core responsibilities”).  It is simply nonsense and rather “imperial” in its overreach.   And if the Bank thinks it has the funds to do such things –  with no statutory mandate at all –  it is simply overfunded and should have its budget cut.

She goes on

Globally, there is growing recognition of the role central banks and regulators have in understanding, managing and quantifying climate-related risks. By being more visible in this space we hope to encourage the financial sector to focus on not only managing risks, but opportunities, such as responsible, sustainable investment with long-term benefits.

Is any evidence banks and insurers aren’t focused on the material risks that matter (two important qualifications, as no one has yet managed to identify major issues here).  Beyond, risk management the Bank veers very close to rank fiscal policy. It is not the responsibility – and should not be – of an independent central bank and prudential regulator to be trying to steer the direction of credit.  What matters is that there is a good prospect of the bulk of debts being repaid, whatever the purposes they were taken on for.

The op-ed burbles on through the Bank’s own carbon emissions to a new role of counsellor-in-chief

Climate change can feel overwhelming at times and leave people confused about what they should or shouldn’t do to help the situation, but that does not mean inaction, quite the opposite.

Perhaps (or perhaps not, since uncertainty is real) but what has any of this to do with the Reserve Bank.

All ending with this extraordinary paragraph

As financial system participants we all need to actively look for opportunities to ‘finance the green’ and help New Zealand firms as well as our own organisations transition to lower emissions practices, and ensure we are well placed for a net zero world. It’s heartening to see that there are many businesses who are already well advanced on this journey. We now have a ‘road map’ from the work of the Sustainable Finance forum to help us all navigate and focus our collective efforts and we look forward to playing our role.

The sort of thing one might expect from a politician or a lobby group, but not from a senior public servant, charged (quite narrowly) with managing short-term economic fluctuations consistent with price stability and the soundness of the financial system.  If is Ms Robbers and her boss think that Sustainable Finance paper is any sort “road map” we (and the Bank) are a lot more lost than most would think.

In that same  Herald  climate change supplement (31 October) another senior central banker was quoted, this time Christian Hawkesby, the Assistant Governor responsible for monetary policy and markets.    He also was championing the idea that it is the Reserve Bank’s business to try to steer business strategies in particular directions

‘Again, just using an analogy from the asset management industry, when I started in asset management eight years ago, ESG investing (environmental, social and governance investing) was seen as a real niche and — if anything — was seen as potentially a marketing tool to use for niche investors. That’s moved now from being absolutely and completely mainstream in the sense that fund managers know that why would you invest in a company that doesn’t have a long-term future over the next 20 to 30 years.

“So our challenge at the Reserve Bank is to encourage banks and insurers to have that same approach to their lending and their relationships and take a commercial view that it’s actually going to be in the long run a benefit that they take those environmental and climate change factors into account.”

Whatever you think of ESG, it simply isn’t an appropriate role for the Reserve Bank to e trying to shape what factors banks should take into account when lending.  Apart from anything else –  not having the mandate, for example –  they simply don’t have the knowledge or incentive to get things right, and bear none of the costs or consequences if they get things wrong.  And it is a diversion from the day job –  the one Parliament actually charged them with  –  of managing monetary policy consistent with price stability and promoting the soundness (not the wokeness) of the financial system.

But the Hawkesby comment that took me more by surprise was his response to a question about bank capital

Asked if banks and borrowers would get capital relief for sustainable lending if the central bank is serious about climate change, Hawkesby responded: “That’s not in the plan at the moment. But that is very well something we could move to. At the moment, the onus is on really getting banks and insurers to focus on the issues and look at it from their own commercial incentives.

Glad to hear it isn’t “in the plan” at present, but it shouldn’t be now or ever.  We’ve just endured a year of the Governor and his acolytes trying to convince us that the financial system is in peril if he doesn’t hugely increase capital requirements, and one of his senior offsiders now won’t rule out capital requirement discount to advance the Governor’s environmental whims.

“Stick to your knitting” remains sage advice for central bankers –  and probably for all senior public officials with any sort of independent role.  There is a nice column along those lines in this morning’s Australian newspaper, citing RBA Governor Phil Lowe’s line from a recent speech

“I want to emphasise that the discretion we have and our broad mandate to promote the economic welfare of the Australian people do not constitute a licence for the Reserve Bank board to pursue or advocate economic policies outside our area.”

As Judith Sloan points out, Lowe isn’t very good at following his own advice, but wouldn’t it be nice to hear such words of restraint, actually practised, by our own Governor and his senior staff?

After all, those day jobs –  the ones we actually pay them to do –  haven’t done so well that they really command the sort of respect that might invite occasional restrained and judicious comments on other matters.

Instead, we are left only to presume they are using a public pulpit for private ideological ends, and for advancing causes favoured by their allies in the Beehive.  There should never be able to be such a suspicion of a central bank that actually values its independence.

 

Participation rates

A passing comment in a post the other day about the labour force participation rates of older people prompted me to pull down the fuller data and see what we could see about various participation rates over the decades since the HLFS began in 1986.   As it happens, the unemployment rate in 1986 averaged 4.2 per cent, exactly the same as the current unemployment rate, so cyclical factors shouldn’t materially mess up long-term comparisons.

Here are the quarterly participation rates (employed plus unemployed as a percentage of the working age (15+) population.

p rate q

From which I’d make only three quick observations:

  •  how stable the male participation rate has been since the end of the 1980s (even through a couple of very nasty recessions),
  • the strong upward trend in the female participation rate, and
  • while there is some modest cyclicality in the overall participation rate, it isn’t a stable or reliable cyclical indicator (eg the peak in the 00s was a year after the recession started, while the 90s peak was a year or so before the recession started).

But aggregates can mask a lot of interesting patterns, and around participation rates that has been particularly so for men (the female participation rates are just dominated by the strong upward underlying trend).   From here on, I’m using annual data (years to September), as there is less noise and more data reliability for some of the small age groupings.

Here is the data on participation rate for what you often see referred to as “prime age” people, those aged 25-54.

prime age total

Prime-age male participation isn’t back to where it was in the 1980s but over the last couple of years it has been higher than the 2000s peak.

What about the two youngest age bands?

partic youth

In the 1980s (until 1989), people could leave school at 15, but I was interested –  and a bit surprised –  in the further step down in the participation rates of the 15-19 year olds ver the last 15 years or so.  Presumably there is some mix of factors at work: kids being less likely these days to have after-school jobs that was once the case, minimum wage changes, and……  Given the cost of tertiary education now (relative to say the 1980s) it still surprises me though.

Perhaps the bigger surprise though (at least to me) is that only around 80 per cent of 20-24 year olds are in the labour force.  You only need to have done one hour’s paid work in the reference week, or to have actively looked for work, to be included in this measure.

What sparked the post initially was participation rates of those in the older age groups.  Here are those for the 55-64 age.

p rate 55-64 Participation rates for this age group are much higher than they were for both men and women.   When the data start, the full rate of New Zealand Superannuation was available at age 60 (at, if I recall correctly, a higher rate relative to wages than is the case now).  I was a little surprised to note the dip in participation rates in the last couple of years: for this group of women the latest observation was lower than in any year since 2013.

And what about the participation rates of those 65 and over, almost all of whom have been eligible for NZS throughout?

p rates old

There has been some increase in participarion rates for those aged 70 and over, but the really striking movement has been in the 65-69 age group.   More than half of men, and almost 40 per cent of women, in this first NZS recipient age group, are still in the labour force. (Interestingly, the gap between male and female participation rates for this age group hasn’t materially changed over the 30+ years of the chart.)

And here is the comparisons between those aged 60-64 and those aged 65-69.

p rates NZS transition

In my post last week, I noted that the participation rates of those now aged 65-69 were higher than those for people aged 60-64 when the survey started, at a time when the NZS eligibility age was still 60.    I see this as a fact buttressing the case for raising the NZS eligibility age now (to, say, 68, and life expectancy indexing beyond that).  By some mix of revealed preference to work, and of need, large proportions of the population went on working for some years after being eligible for a universal pension, suggesting not only that they were physically capable of doing so, but that many of their peers who chose not to work would also be physically capable of doing so.

However, the comparative story over time is complicated at least a little by changing norms and expectations around female participation.  In 1987 under 20 per cent of women aged 60-64 were in the labour force: these were women born in the 1920s, (mostly) mothers of the first baby boomers at a time when female prime-age employment wasn’t that common.  Now almost 40 per cent of women 65-69 are in the labour force, almost as high a share as for the 60-64 year old males in the late 80s.    The increase in participation rates among males – today’s 65-69 year old compared with 1987’s 60-64 year olds is real, but less dramatic  –  up from just over 40 per cent to just over 50 per cent.

And just to end, a couple of international comparisons charts re participation rates for those aged 65-69.

Here is the participation rate in 2018

partic rates OECD 65 to 69.png

It really is an astonishing range.   It isn’t correlated with prosperity (there are poor performers at either end of the chart) or, that I could see, with life expectancy or health status.  I suspect –  but haven’t checked –  it is pretty strongly correlated with the abatement regimes (if any) around state pension.   One of the best things about the New Zealand system is that although NZS provides an income effect encouraging people to think about stopping work, there is no relative price or substitution effect: as an older person you can work as much as you like and it doesn’t affect how much NZS you receive.  In many countries, the rules aren’t like that; it often isn’t economically attractive to go working.

And what about the change over time in the proportion of those 65-69 in the labour force?  The OECD has complete date only since 2002 so here is the change since then.

chg in partic rates 65 to 69

What I found interesting about that statistic for New Zealand is that that further large increase in the 65 to 69 participation rate has been exclusively in the years since the NZS eligibility age got to 65 (in 2002).  You can see in the chart above that our participation rates for those 60-64 also increased markedly over that period.

I’m not one of those inclined to celebrate (paid) labour for labour’s sake. I don’t think I was when I was in the paid workforce and I’m certainly not now.  But when the alternative is state income support then I do take a harder line view.  If you are able to work and are financially able not to, that is almost entirely a matter of individual/family choice, but you (generally) shouldn’t be eligible for long-term state income support.  New Zealand’s experience suggests that the overwhelming bulk of those aged, say, 65-67 are well able to work (we don’t have the data, but presumably –  given what happens from 70 on (see above) –  participation rates of those 68 and 69 are materially lower than those for people 65-67).   Against that backdrop, there is something just wrong about having a universal pension paid to them –  well, me not that many years hence on current policy –  simply on the basis of having got to that age.

Fans of a Universal Basic Income will, of course, not agree.  I am not a fan, having both practical and moral objections to a UBI.

 

Unserious defenders of NZ national interests

Our government finally made sufficient obeisance and secured a modest upgrade to its preferential trade agreement with the People’s Republic of China.  That included New Zealand agreeing (page 4) to take twice as many PRC-funded ideologically pre-screened Mandarin Language Assistants in our schools (rather than, say, properly funding language learning in schools ourselves).   The values-free cheerleaders for New Zealand deference and subservience to Beijing were all out praising the deal, and if the shameless National Party trade spokesman Todd McClay –  the one who last year was defending the PRC brutality in Xinjiang as being no more than a few vocational training schools and really none of anyone’s business –  was a bit carping and critical, he and his party were probably only critical that the current government does not (quite) do the full kowtow (they did actually sign that 22 country letter on Xinjiang, even if not one of them –  not an official, not a Minister, certainly not the Prime Minister –  will say a word about it).

Remarkably, for a pretty secretive government, sometimes one gets more coverage from the PRC government side than from our own.  The PRC Embassy here often has interesting statement or commentaries on its website.  There was such a commentary this week about the Prime Minister’s meeting with Li Keqiang in Thailand, including the prefential trade agreeement update, although for some mysterious reason I couldn’t see it on the PRC New Zealand embassy website but only on the PRC US embassy website.

Two lines caught my eye. There was this from the Chinese side

The Chinese side is committed to creating a market-oriented, and law-based international business environment, and hopes that the New Zealand side will create a level playing field in New Zealand for Chinese companies to invest and start business.

(One might scoff at the first half of that, but my interest was the second half)

and this describing the New Zealand government’s response

The New Zealand side is willing to provide a non-discriminative environment for companies from all countries investing and starting business in New Zealand.

Others noticed it to.  Here was the Executive Director of the China Council, the government/business propaganda arm of the New Zealand/PRC relationship

Pretty predictable (anything for the PRC, if only we – they – can get some more deals in the short term, is pretty much the China Council stance), but pretty unfortunate too.

The government is, or at least says it is, reviewing the Overseas Investment Act.  It was September last year when they issued terms of reference for the review.    There was a consultation document released in April this year, with a very short period for submissions, because –  according to the Cabinet paper released under the OIA – they wanted to ensure they had legislation passed this parliamentary term.  And yet here we are, now getting on for mid-November and nothing more has been heard.  They don’t seem to have even published the submissions yet.

National security was one of the dimensions covered (albeit superficially) in the consultation document.    Now ‘national security’ is one of those catch-alls that can be grossly abused –  see Trump’s grounds for steel tariffs on Canadian imports –  but the fact that it can be abused does not change the other, rather more important fact, that national security is an important issue, there are real threats (actual/potential), and one of the key roles of any government is to protect national security.    And, on the other hand, business interests have no particular concern for national security, especially if it gets in the way of their activities.

The worry here –  as the Prime Minister’s commitments are reported by the PRC –  is that neither does the government.    We seem to have governments more interested in enabling New Zealand businesses abroad, than in protecting the security, values, and integrity of New Zealand.

I generally have a pretty open approach to foreign investment.  It is often economically helpful and generally mutually beneficial.  Among firms and individuals from free and open societies, sharing similar values, and where companies are free to pursue their interests not those of their governments that is a pretty strong starting proposition.  Perhaps even more so when it involves investment from companies in countries near the frontiers of economic performance and productivity.  Personally, I’d favour removing pretty much all restrictions on such investment from abroad (perhaps preferably reciprocally, but the benefits to New Zealand mostly arise from opening up ourselves –  rather like removing all New Zealand tariffs (something successive governments refuse to do) would benefit New Zealand consumers).

I wrote about this briefly some months ago when I was lodging my own submission to the Overseas Invesment Act review, including how we should think about investment from the People’s Republic of China  and why treating all countries similarly simply does not make much sense (since neither the opportunities nor the risks are the same).  Here is what I wrote then

These days, New Zealand does not get much foreign direct investment –  and especially not much in the way of greenfields new developments.  I don’t think the screening etc regime is the main reason –  mostly, I suspect, we don’t have that much foreign investment because (a) there are few opportunities here, and (b) for the same sorts of reasons business investment generally has been weak for decades (high cost of capital, high real exchange rate, high taxes on business profits –  in that case, especially for foreign investors).  But I’d generally favour a more liberal environment, for almost all industries and for investors of almost all countries.

It is also worth recognising that most of any benefit (to productivity in New Zealand for example) from foreign investment will come from investment by firms based in rich and advanced countries.  Of course, there might be rare exceptions –  a firm based in Zambia, Laos or El Salvador –  but they will be exceptionally rare (the best ideas, technologies, management systems etc) will be in the rich countries –  part of why they got, and stay, rich.  So I’d favour a pretty-much open slather approach to foreign investment –  existing assets or new –  for investors based in rich countries (the OECD membership might be a decent starting point, and one could add in places like Singapore and Taiwan.

For most of the poorer or smaller countries, I really don’t care much what the rules are.  Probabilistically, there is almost nothing at stake (at least in economic terms) in maintaining restrictions on Zambia, Laos, El Salvador (or 100 others) if that is what the political process demands.  But, equally, there isn’t much risk or downside to opening up to them either, especially if one is focused on the benefit of New Zealanders being (generally) able to sell to the highest bidder.

There are various odious regimes in the world.  Most them don’t matter much to New Zealand at all (thinking places like Equatorial Guinea).  But the PRC does and in my view we should –  while the regime remains as it is – be treating investment from there quite differently, for various reasons.    One is a straightforward economic one.  Almost any large PRC firm is either an SOE or has a significant element of state/Party control to it.  We spent years here trying to reduce the hand of the state in direct business operations in New Zealand.  State entities typically don’t run businesses well, don’t allocate investment efficiently, and so on.  There is no more likelihood (to put it mildly) that PRC state-controlled companies will do so than the New Zealand government ones will –  and at least the New Zealand government ones are ultimately answerable to New Zealanders.  Such investment is likely to be a net negative for New Zealand even if the price paid to the initial New Zealand vendor is higher than that vendor could have got from another –  private –  purchaser, whether from New Zealand or another country.

But the deeper reason is that the PRC is a big and powerful totalitarian state, that has repeatedly displayed aggressive intent, which has values antithetical to those of most New Zealanders.   Individual PRC buyers may well be perfectly decent well-intentioned people –  as plenty of 1930s Germans were too –  but a totalitarian state has, and repeatedly demonstrated, its leverage over its own people, by fair means and (too often) foul.  We would simply be ill-advised to allow PRC-associated interests to have significant investments in many sectors in New Zealand.  One could think of media or telecom companies, or tech firms.    The PRC banks operating here should be a matter of concern, especially if they get materially larger than they are now.   But the concern should range wider.  For example, the greater the control PRC interests have of elements of the dairy industry, the more difficult New Zealand might find it to be handle the sort of economic coercion the PRC has attempted to engage in re various countries in recent years.

And, of course, to circle back to my earlier point, it is not as if the PRC is one of the world’s advanced economies.  Productivity levels languish far behind even New Zealand’s modest levels, and everyone recognises the dependence the regime has had on industrial espionage.  Deep pockets aside –  with a mix of market and non-market motives –  how much genuine benefit to New Zealanders is there likely to be from PRC foreign investment over time?

It is possible that this sort of restrictive regime could come at some economic cost, in terms of lost productivity opportunities for New Zealand. My sense is that it would probably be quite a small cost, but we can’t be sure.  Perhaps more importantly, many precautions have a cost –  whether it be a national defence force, Police, anti-virus software, or a lock on your front door.  The PRC is a threat to New Zealand and countries like us, and we need to be willing to spend some resources (perhaps sacrifice some short-term opportunities) to establish some resilience to those threats.

But, of course, our elected “leaders” and business establishment figures have no interest in any of this.  For them, it seems, the character of the regime matters not a jot, it demonstrated track record at home, abroad, and in New Zealand matter not a jot.  There are deals to be done, donations to be collected, and  –  if there are any risks –  well that will be someone else’s problem another day.  And in the process they’ve allowed our political system to become corrupted, indifferent to the character of the regime, indifferent to the values of New Zealanders.  But their “friends in Beijing” are no doubt happy.

I didn’t post a link then to my short submission, but I will do so now.

Submission on. reform of Overseas Investment Act May 2019

Some excerpts.  First, the liberalising proposal

As a general proposition, I suggest that the government should look at a model which more clearly distinguishes between countries which, broadly share similar values, interests, legal systems and approaches to business and remove all (or almost all) restrictions on foreign investment originating from such countries. A starting point for such a list might be the OECD countries plus Singapore and Taiwan. If the beneficial owners of a potential investor are predominantly from these countries, it isn’t obvious that the net benefits from screening would outweigh the costs, including deterrence of investment, of such a regime. Much of world cross-border foreign investment originates from these countries (and the countries at or near productivity frontiers are included in this group), and to the extent that there are prospective economic gains from liberalising the regime, those gains are likely to arise in respect of these countries.

And on the other hand

And at the other end of the spectrum should be a small list of named countries from which we should simply not welcome foreign direct investment, and where the presumption should be against granting approval for any but the smallest and most innocuous of investments. Such a list might include countries subject to United Nations sanctions (notably North Korea), mostly for global good-citizen reasons, and membership of the list might change over time – Germany might have appeared in the late 1930s, the Soviet Union and its satellites during the Cold War – but the key country that should feature on any such list today would be the People’s Republic of China.

In other words, the issue is not specific countries for all time, but specific assessments of the character of regimes, their control over business, and the nature of any threat.

The consultation document makes every effort to be neutral as between countries. But that is a mistake. It is right to recognise that the source of potential threats can change over time, but unless the government is willing to openly confront the nature of specific potentially-threatening countries, it is difficult to build a regime that will serve well both the national security and economic interest imperatives, and provide a clear framework for potential investors (and potential vendors).

What of the PRC?

The issues around the PRC are twofold. First, many of the larger potential foreign investors are state-owned enterprises (or state-controlled ones). We moved to reduce the role of state-owned companies in our economy, for good sound efficiency reasons, and we should establish a presumption in our foreign investment regime that foreign state-owned enterprises (especially ones that cannot operate at a genuine arms-length from government ownership/control) are unlikely to offer potential efficiency gains for the New Zealand economy. And second, because the People’s Republic of China is a regime (a) in which no one can operate fully at arms-length from the authorities (Party or state), (b) has a demonstrated record of not operating as a market economy, (c) shares almost none of the values of New Zealanders, and (d) represents a clear potential threat to the integrity and security of other countries, including in any future period of conflict. The fact that there may be many good, well-intentioned, investors from the PRC should simply not be relevant here, any more than the presence of decent well-intentioned Germans in the late 1930s should have left countries relaxed about German foreign investment at the time. The issue isn’t the individuals, but the authorities to which they are subject.

The risks around foreign investment from the PRC are not restricted to more-obviously sensitive assets (eg major media outlets or telecommunications systems) but apply more generally, partly because of the importance of PRC state-sponsored industrial espionage, but also because of the pervasive use by the PRC system of all sorts of potential sources of influence or connection. For example, vertically-integrated production and supply chains (including in the dairy industry, or the tourism sector would more difficult to withstand PRC attempts at economic coercion of the sort seen in various other countries in the last decade Investment from PRC sources represents a different and, generally, much more severe set of risks than that from Singapore, South Korea, Ireland or Canada.

More generally

The issue can be thought of in terms of a 2×2 matrix: there are benign countries large and small, and more troubling countries large and small. It is the larger and more troubling countries our restrictions should be focused on, and with regard not just to the current situation and immediate threats, but to maintaining resilience over, say, a 10 or 20 year horizon.

And to revert to the PRC

It is possible that such a near-complete ban on PRC-sourced foreign investment could come at some – likely modest – economic cost, the character of any such cost should not be seen as much different in kind to the price we pay for national defence and security systems. Without that expenditure, private consumption could be higher now – and potentially for decades to come – but we choose not to take that option because the recognise that there are risks and threats.

In this, as in other areas of public life, we shouldn’t be afraid to name the potentially hostile state and act accordingly, even as we would welcome such a state back into the fold when if the character of the regime changes. Germany and Japan were once our greatest threat, and are now close allies. They changed their regimes, systems, and strategic intent. When and if the government of China does, we should welcome foreign investment from there, commensurate with the values and practices of the new system. For now, however, we allow our system and society to be corroded from within to the extent we open our economy to significant PRC foreign investment, whatever the apparent short-term gains to individual vendors might be. It isn’t, by any means, the only (or perhaps even most important) set of PRC risks and threats but it is the one that is the subject of this consultation.

Businesses won’t care.  Governments should.  Ours appears not to.  The focus always –  be it on defence, the political system itself, or whatever (foreign investment, Confucius Institutes) – seems to be to minimise the issues, do as little as possible, try to pretend to the public there really isn’t an issue or potential threat at all.  That is pretty shameful and inexcusable.  That is our Prime Minister (and, of course, her chief rival has form suggesting that if anything he’d be worse on this score).

Talking of long-delayed inquiries, the Justice Committee’s inquiry into foreign interference –  the one the government didn’t want to open for public submissions at all –  has still not reported, and no reform legislation has been presented to Parliament either.   The big issues here are less about legislation than about will and mindset.  But again all the evidence points in the direction of big political parties preferring to minimise the issues to the very greatest extent possible.  Jian Yang, and the National and Labour Party “friends in Beijing” will be happy.

Long-term fiscal choices

Fifteen years ago now Parliament passed an amendment to the Public Finance Act requiring that every four years or so

the Treasury must prepare a statement on the long-term fiscal position

There is nothing in the Act as to what these long-term statement should cover, just a minimum time horizon” “at least 40 consecutive financial years”.

This wasn’t a pathbreaking fiscal reform by New Zealand.  By the time our amendment was enacted a fair range of other OECD countries had somewhat similar requirements (see table on page 4).

Fifteeen years ago I probably thought this new requirement was a good thing.  I’m much more sceptical now  It is unlikely that such reports do much harm, but:

  • they cost a lot to do (at least as Treasury typically does them –  the legal requirements could probably be met with a two page report),
  • come around much more frequently than any underlying issues change, and
  • there is little sign that long-term fiscal management is any better for them existing.

There are fiscally reckless countries and fiscally cautious countries, and there were both types before and after the introduction of long-term fiscal reports.  It isn’t obvious which country has switched sides (or moved much at all) as a result of these sorts of reports.  New Zealand, after all, introduced the requirement when our own fiscal surpluses were around an all-time high already.

What is more, the underlying issues are really pretty obvious to blind Freddy.   Here is what I wrote when the last Long-Term Fiscal Statement was released in late 2016

The Treasury yesterday released its latest Long-Term Fiscal Statement.  These documents, in some form or other, are now required under the Public Finance Act to be published at least every four years.  I was once a fan, but I’ve become progressively more sceptical about their value.  There is a requirement to focus at least 40 years ahead, which sounds very prudent and responsible.    But, in fact, it doesn’t take much analysis to realise that (a) permanently increasing the share of government expenditure without increasing commensurately government revenue will, over time, run government finances into trouble, and (b) that offering a flat universal pension payment to an ever-increasing share of the population is a good example of a policy that increases the share of government expenditure in GDP.  We all know that.  Even politicians know that.  And although Treasury often produces an interesting range of background analysis, there really isn’t much more to it than that.  Changes in productivity growth rate assumptions don’t matter much (long-term fiscally) and nor do changes in immigration assumptions.  What matters is permanent (well, long-term) spending and revenue choices.   

There really isn’t much more to it than that.

That statement was released in November 2016, which means –  time flying as it does –  the next report is due next year.   A Treasury that wanted impact might reasonably be expected to publish before the election, and if they do that they need to be sufficiently early in the year not to be caught up in the immediate highly partisan pre-election period.

As it happens I went to an event at Victoria University the other day at which one of Treasury’s researchers was presenting some modelling results of work done for the next Long-Term Fiscal Statement.  I can’t tell you about those results, but it did get me thinking about some of the past Statements and wondering how they looked with the passage of time.

In my excerpt above I referred only to spending on New Zealand Superannuation which, on current policies, will rise indefinitely as a share of GDP so long as life expectancy keeps increasing.  But the other big issue –  which sage Treasury officials will sometimes suggest is really the bigger one – is health spending.  There are new technologies and drugs, rising public demand, not much productivity growth (at least in the health sector in New Zealand), and an ageing population itself seems likely to create additional cost pressures.

This is the sort of chart The Treasury likes to show, from the background papers to the 2009 Long-Term Fiscal Statement.

health 09

On those numbers, health would be a simply huge fiscal pressure, and the case for higher taxes might be hard to resist.

I’ve always been a bit more sceptical that health is quite the issue it is sometimes made out to be.  That is mostly because there are so many more dimensions on which government health spending can be adjusted than there are around NZS (for the latter, one can play with the age of eligibility, the rate, and the indexation formula, all of which get a lot of attention) and the societally-accepted boundaries are fuzzier (whose GP visits should be free or heavily subsidised, how much should be spent on drugs, how much other rationing should there be).

Anyway, on that 2009 Treasury chart, the projecting forward of historical trends (as Treasury did it) would have had government health spending by now (year to June 2020) well in excess of 7 per cent of GDP (eyeballing the chart suggests about 7.3 per cent).  Here is a chart from a recent post including budget numbers for the current (to June 2020) year.

cc2.png

Government health spending now is sitting just on 6 per cent.  It was about 6 per cent in the year to June 2008 (just prior to the recession) and not much below 6 per cent forty years (note that period –  the LTFS statutory focus) ago.

Now, quite possibly there is a totally unsustainable huge shortfall in government health spending at present.  But if so, none of the political parties is making that case (notwithstanding the rhetoric from Labour in the last campaign) or doing anything very much about, and since the issues around fiscal policy are really political in nature (how easy/hard is it to make decent choices in a timely way) it does suggest that the margins are more fluid, the fiscal outlook more readily malleable, than the quadrennial publications from The Treasury are sometimes taken as suggesting.   The system copes, and adjusts, perhaps less elegantly than officials might like, but that it does so nonetheless.  That is consistent with, now, 30 years of fairly sensible, often quite conservative, fiscal management by governments led by both main parties.  Adjustment rarely, if ever, occurs in response to projections 30 or 40 years ahead, but to pressures that become apparent within much more near-term windows.

As for NZS itself, personally I’m not overly interested in arguing the case for reform on fiscal grounds but on a rather more moral ground.    Even if we could afford it, even if there were no productive costs from the deadweight costs of the associated taxes, there just seems something wrong to me in providing a universal liveable income to every person aged 65 or over (subject only to undemanding residence requirements).    45 per cent of those 65-69 are now in the labour force –  suggesting they are physically able to work –  which is substantially greater than the 30 per cent of those aged 60-64 who were in the labour force 30 years ago when NZS eligibility was at age 60.

I don’t consider myself a welfare hardliner.  I think society should treat quite generously those genuinely unable to work, especially those who find themselves in that position unforeseeably.  Old age isn’t one of those (unforeseeable) conditions, but personally, I have no particular problem with something like the current flat rate of NZS, or even of indexing it to wage movements (which would be likely to happen over time anytime, whether it was the formal mechanism from year to year), from some age where we can generally agree a large proportion of the population might not be able to hold down much of a job.  I don’t have a problem with not being overly demanding in tests for those finding work increasingly physicallydifficult beyond, say, 60.   But what is right or fair about a universal flat rate paid – by the rest of the population – to a group where almost half are working anyway?  It is why I would favour raising the NZS age to, say, 68 now (in pretty short order) and then indexing the age in line with further improvements in life expectancy, and I’d favour that approach even if long-term fiscal forecasts showed large surpluses for decades to come.    At the margin, I’d reinforce that policy change with a provision that you have to have lived in New Zealand for 30 years after age 20 to be eligible for full NZS (a pro-rated payment for people with, say, between 10 and 30 years of actual residence).  Why?  Because in general you should only be expected to be supported by the people of New Zealand, unconditionally, in your old age, if most of your adult life was spent as part of this society.

Reasonable people can, of course, debate these suggestions.  But they are where I think the debate should be –  about what sort of society we should be, what sort of mix between self-reliance and public provision there should be, even about what mix of family support and public support there should be, or what (if any) stigma should attach to be funded by the taxpayer in old age –  not, mostly, about long-term fiscal forecasts.

Threadbare analysis and ideological causes

Last week a group calling themselves the Sustainable Finance Forum –  itself a creation of the self-selected left-wing environmental/political lobby group The Aotearoa Circle –  published an interim report.   The report is 70 pages long, but don’t let that deter you as there really isn’t much there.

Of course, this is not just any lobby group.  On the board of the Aotearoa Circle, for example, sits Vicky Robertson, chief executive of the Ministry for the Environment, and supposedly an apolitical public servant, advising ministers of whichever political stripe.  Oh well, never mind those old conventions…..   And one of the two co-chairs of the Sustainable Finance Forum is Matt Whineray, chief executive of the New Zealand Superannuation Fund, and supposedly an apolitical public servant charged with managing a large pool of taxpayers’ money from one government to the next.   Somewhat surprisingly (but welcome) the Reserve Bank Governor isn’t a full participant in this body –  although we’ve been left in no doubt of his ideological/political colours –  but the Bank (together with the FMA and the Ministry for the Environment itself) is described as an observer.

Of course, the participants aren’t all (or even mostly) public servants.   Woke left-wingery isn’t confined to the public sector and the second co-chair is a senior manager at Westpac, a bank which goes out of its way to advertise its enthusiasm for all such modern “worthy causes”.  There is a “technical working group” of 33 people and probably 85 per cent of them are employed in the private sector (it does seem rather a large technical working group for a report with only about 50 pages of text).

What there isn’t is much substance or much rigour.  There are dozens and dozens of grab-bag factoids –  some real, some not –  but little context.   There is no sense, for example, that these people have any real understanding of how our current levels of prosperity were achieved.  Perhaps more concerningly, given their breathless enthusiasm for stuff to be done, is that they demonstrate no awareness of the limitations of knowledge, the pervasiveness of uncertainty, or of the well-demonstrated capacity for governments to get things badly wrong.  There isn’t much sign either that they have read any economics beyond Kate Raworth.  And there is no sign either that they’ve engaged with Chesterton’s fence

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

Perhaps the zealots are right and the end of the world is nigh, all that we have known must be up-ended etc, but it would be more reassuring if they showed signs of actually understanding why things are as they are.

The bottom line goal seems to “the transition to a sustainable economy” and yet this goal is simply not defined.   Since these peope are from the financial sector, they talk a lot about a “sustainable financial sector”.   In the media coverage of the report there was some coverage to the factoid that 95 per cent of respondents believed that the current financial system was not sustainable.  I was one of the people interviewed as part of the project and I was one of the 5 per cent –  partly perhaps because I was taken aback by the question: what on earth did “a sustainable financial system” actually mean?    As the financial system didn’t seem likely to fall over (even the Reserve Bank used to tell us that before the Governor when chasing capital whims), it had been with us in much the same form for a long time, and had proved adaptable as market demands and regulatory structures changed, it seemed a pretty obvious answer to me.   But clearly I wasn’t part of the inner sanctum, because in the report itself defines “a sustainable financial system” rather idiosyncratically as one that serves the ends favoured by the authors:

The aim of the project is to produce a Roadmap for Action on how to shift New Zealand to a sustainable financial system – from one which focuses primarily on (often shortterm) financial wealth creation, to one that supports long-term social, environmental, and economic wellbeing and prosperity for all  New Zealanders, protecting natural resources for future generations.

Strangely, there is no mention of the fact that –  relatively poor as New Zealand’s performance has been –  material living standards here are hugely higher than they were 100, let alone 200, years ago, and for most people the day-to-day experience of pollution is also much less serious than it was 100 years ago.  Technology, innovation, and finance have all contributed to those outcomes.   There is lots and lots of talk in the report about Maori perspectives and ways of thinking –  a better economic model we were told, one with no externalities apparently……. – but no apparent recognition –  or concern –  that Maori systems and worldviews (pre Western contact) had not exactly been tending towards the sort of high material living standards, and functioning financial system, that we take for granted today.

None of which is to be cavalier about where we stand now.  There are outstanding issues around water, for example. But it isn’t obvious what role the financial system has to play there –  regulatory issues around pricing, definition of property rights, access etc provide the backdrop against which borrowers/investors raise funds and other provide them.    And, of course, there is a climate change, but if anything is characterised by uncertainty it has to be that area.  One of the bugbears of the SFF (and the Reserve Bank Governor) is the (alleged) short-termism of the financial system, but they never seem to grapple –  including in this report –  with the fact that a relatively short-term approach is a prudent response to the risks created by uncertainty.

Pretty much every left-wing cause of the decade gets reference in the report.  Inequality is a big one for them, but with no substantial analysis one is left with the impression that it is mostly for effect, and mood affiliation.   Early in the report there was a referenced claim, for example, that  “New Zealand’s income inequality gap has impacted GDP by more than 15%”, but when I looked up the reference it was to a North and South article which itself claimed –  without a citation –  that

OECD researchers have suggested our gap has hobbled GDP by more than 15 percentage points in recent decades, largely because of disadvantaged families bailing out of education.

Well, perhaps….but since OECD statistics also show that New Zealand employee skill levels are among the very highest in the OECD it seems unlikely.  Oh, and returns to education in New Zealand appear to be quite low.  And what it had to be with a “sustainable financial system” wasn’t clear at all.  Being, apparently, a bunch of lefties they want a “comprehensive response to inequality” but what they mean, or what (if anything) it has to do with the financial system is left totally unspecified.   It was the feelings that mattered apparently.   They do claim the “current financial system” is contributing to “growing inequality”, but make no effort to justify either limb of that claim.

We got similarly feeble references to the so-called “gender pay gap”.  There was a whole page on modern slavery and labour exploitation, some of which was interesting, some of which was fair, but none of which had any discernible relevance to the New Zealand financial system.  Hard to disagree, I suppose, with the banner quote on that page that “a financial system cannot be sustainable if it undermines the basic human rights we all hold dear” but even if true –  and I’m thinking of exceptions as I type –  it isn’t overly helpful or offer any great insight on how the financial sector should adjust/evolve.

At the very front of the document the Aotearoa Circle told us about their vision which includes

They aim to achieve this by reversing the decline of our natural resources.

Which also seems pretty incoherent. I get the impression they have waterways in mind –  which is fair enough I suppose, within limits (the benchmark can’t be say pre-1000AD conditions) –  but natural resources include coal, gold, oil and gas, timber, ironsands and so on.  Did they not notice?   Are they proposing to put the coal back in the mountains –  the same coal burned in the process of generating the living standards we have now, and the potential to move towards newer (cleaner) technologies?    It is a small point in a way, but it is the sort of thing that is likely undermine any good a report of this sort might do among those who aren’t uncritical “true believers” to start with.

There is all the talk about rising sea levels and what this might mean.  That partly involves using scary numbers about the value of affected buildings, but without any reference to the twin facts that (a) the dates they are quoting are mostly many decades away, and (b) existing structures depreciate.   And then, of course, there is the talk about access to finance and insurance.  Which are real issues no doubt, but they don’t unfold overnight –  they are some of the better-foreshadowed risks companies have ever faced –  and no reason (identified in the report) why existing market participants (and perhaps new entrants) can’t/won’t respond and adjust, in response to their own incentives, as they’ve always done.     Same goes for wider climate change issues: the report claims ‘financial markets in New Zealand..are still largely misaligned with climate change and other sustainability imperatives”, but they offer no evidence for this –  not a shred.

These people also have a bunch of other ideological causes.  They appear to champion the Living Wage as a policy response to New Zealand’s poor productivity.  Not only is that incoherent, but there is no obvious connection to the financial system (“sustainable” or otherwise)     They rightly lament the high cost of housing –  although never point out that were these government-driven distortions ever to be reversed and the market able to function well that housing finance would be a much much smaller part of bank balance sheets in future.  Oh, and they are dead keen on Australia’s compulsory private superannuation system –  but I guess we should mostly just put that down to (consciously or unconsciously) pure self-interest (it is a great system for financial industry service providers, while our own retirement income system generates very low rates of elderly poverty with a pretty modest fiscal burden).

And we get the best part of a full page on the Reserve Bank/FMA crusade around bank culture and conduct, all of which skated over the fact that when those agencies reported back (on their largely ultra vires activities) the bottom line was that there was little evidence of any sustained problems.  But I guess that wasn’t the narrative these left-wing crusaders wanted to channel.

Buried amid the blather there are probably a few sensible paragraphs on a few specific regulatory issues, but what might be valuable is largely lost amid the rhetoric, and the rhetoric itself is of much-diminished value because there is so little hard-headed substance.  We know for example that the Orr/Whineray NZSF could get away with making a big active punt on climate change, and so mask the punt that we can never properly hold them to account for it.  But that is the weakly-accountable government for you.  Most investors, most savers, want more than idle calls for the financial system to work for the “good of society”, however ill-defined that may be.    All manner of chancers and opportunists  (public and private sector) will tell you their project, their plan is “the one”.  The challenge of anyone –  especially anyone investing other people’s money –  is to be able to recognise the good from the bad, manage the risks etc.  And none of that is easy.  None of us knows what the economy will look like 30 years hence, let alone this time next century.  Not even Whineray and Silk.

There is an opportunity to submit on the interim report (link here). I’m not sure I’ll even bother.  It is so bad (and so ideological) they’d really be better off ripping up the report and starting from scratch with a much more hard-headed approach to thinking through the issues and challenges, constraints and opportunities, including demonstrating a thorough understanding of the strengths and weaknesses of the current system   But I guess that wouldn’t suit their mates in the Labour and Green parties, for whom reports like this help provide cover, even when largely devoid of substance, insight, or sustained robust argument.