Author: Michael Reddell

There is just so much wrong with this sentence

Michael Reddell Housing, Uncategorized

The latest version of the proposed Auckland Unitary Plan –  itself a phrase that leaves me slightly queasy each time I read it –  is apparently due out at 1:30.

Reading an article on it in today’s Herald I found this sentence:

“it will decide where and how Aucklanders will live, work, and play for the next 30 years”

Actually, I doubt even the most fervent advocates will claim all of that for it –  and almost certainly it won’t be what actually happens – but it is a sad reflection of where we have got to, in respect of freedom, property rights, individual choice (add in the sheer unknowability of the future) that a journalist can write a sentence like that and probably not even see anything unusual or controversial about his statement.

In a free society, Aucklanders would make those choices themselves, and Councils (as providers of basic infrastructure and public services) would fit themselves to those private choices exercised in a free market in land, and the ability of private landowners to contract with each other, to respect each others’ interests and property rights

Allow any land within 100 kilometres of downtown Auckland to be built on to a height of two storeys and we’d pretty soon see house and land prices a lot lower, and the market –  private preferences, private opportunities –  would sort out just where the new houses were built.

 

 

A former Prime Minister and Minister of Finance on immigration policy

Michael Reddell Immigration, New Zealand economic history

A couple of weeks ago we had a family holiday in the Bay of Islands. It was almost 20 years since I’d been that far north, to a part of the country suffused with New Zealand history.  It is also a part of the country where some of tensions and divisions are still pretty visible. The visible divide between prosperous, heavily European, eastern towns, and the poorer browner inland areas is one example, but I was also struck by how often I saw the 1835 United Tribes flag flying.  In a country where flags are flown much less often than in, say, the United States, it was hard to miss.

As we looked over the historical sites and talked to the kids about New Zealand history, it had me wondering again, rather uneasily, about Maori perspectives on immigration in New Zealand history.  Scholars can debate quite what mix of factors led various Maori leaders to agree to sign the Treaty of Waitangi, or what they thought they meant in doing so.  But by some mix of consent and proclamation in and around 1840, the British government acquired control of New Zealand, and international recognition of that new possession.  At the time, the European population was probably no more than 2 per cent of the total population of New Zealand.

Mass European immigration wasn’t a specific article in the Treaty.  Many of the Maori leaders probably welcomed some immigration –  which had brought, for many, trade opportunities, education, Christianity and so on (as well as law and order problems etc).  But I don’t suppose anyone signing the Treaty, or probably anyone associated with establishing colonial government in New Zealand for that matter, really thought much about how the numbers would eventually turn out.

But whether it was foreseen or not, the numbers quickly changed.  Even by the mid 1850s, it is estimated that Europeans and Maori were roughly equal in number, and the immigration associated with the gold rushes further skewed the numbers towards European dominance, especially in the South Island.  Since then, of course, the numbers have swung ever further against Maori –  complicated by intermarriage.  Whatever benefits there might have been from the immigration, it is hard not to avoid a conclusion that it has created a society in which Maori are marginalized –  in important respects – in what had been for hundreds of years their own land.  Things Maori have more prominence now than they did when I was young, but the way things are done in New Zealand today isn’t primarily a reflection of Maori culture.  And, in a sense, that is inevitable –  countries reflect the cultures of the people who inhabit them –  but I can’t help wondering what that means to Maori.  Immigration changes societies, and in largely irreversible ways, whether intended or not.

My real focus today though is the history.  In the North Island in particular, the process wasn’t without tension.  There had been the Northern War of the mid 1840s, and then the North Island land wars of the 1860s and early 1870s.  These conflicts were enormously costly, and involved really large deployments of British military forces (in the 1860s apparently the British forces in New Zealand were the second largest British military deployment –  behind India –  anywhere in the world).  But by the end of the 1860s the British wanted out, and wanted the burden of defence and security to rest with the New Zealand government.  At the time, the colonial government could barely be said to have a secure hold on most of the North Island, at least outside the major towns.

It was around this time that the huge debt-funded immigration and public works programme was launched, driven by Julius Vogel.  It was a key event in New Zealand history, and features in all the histories and economic histories. The scale of the population inflows, and of the debt that was taken on in the process –  bringing in migrants and building railways and other public works –  swamps (proportionately) anything in more modern times.  The net migration inflow in 1874 –  the peak year –  was around 10 per cent of New Zealand’s total population at the time. Last year, our population increased by 2 per cent.

What isn’t much discussed is quite what drove the immigration and public works programme.  Earlier in the year I had seen a passing mention that in the leading biography of Vogel, the author –  Professor Raewyn Dalziel –   had suggested there was evidence that an active desire to change the population balance, “swamping” the Maori population in the troubled North Island in particular, was a key factor.  Having just come back from Northland, I decided to should look up the reference (p 105 for anyone interested).

In his own contemporary statement on the policy, which Dalziel quotes, Vogel had written

“The one chance of gaining adequate control was to introduce such a system of public works and workmen into the North Island as would 1st give protection in case of need 2nd occupy to some extent the natives 3rd open up communications 4th keep the natives in touch with the colonists….It was a matter of life and death to secure its adoption.”

Dalziel also draws from a lecture Vogel gave in London in 1893.  That was some time after the policy was introduced, but only six years after Vogel had ceased being Colonial Treasurer (Minister of Finance, in today’s terminology).  It is perhaps no different to listening today to Ruth Richardson explain the thinking behind the Fiscal Responsibility Act, or Bill Birch on the Employment Contracts Act.  Retrospectives are often tinged with the benefit of hindsight, but such reflections also often offer valuable insights on just what was shaping policy thinking.

Fortunately, Vogel’s lecture is available on-line here, as part of Victoria University’s Electronic Texts Collection.  I found it fascinating reading on numerous counts.

In discussing the immigration and public works programme, Vogel begins with the British government’s decision to transfer defence and security responsibility to the New Zealand government.

Mr. Gladstone euphemistically describes the sudden imperative withdrawal of the Imperial troops in 1870, at a time when war with the natives was proceeding on both sides of the North Island. There is a modern phrase which more aptly describes what took place. “Scuttled” is the word that would now be used. That the Colonists proved equal to the task they had to undertake was no excuse for the way in which the obligation was flung upon them in the midst of a double warfare existing at the time. I have always felt grateful to the Maoris for the way they behaved at this crisis. Had they been possessed of less generous instincts, they would have taken advantage of the position. The North Island was sparingly peopled, the Colonists of the Middle Island, by far the most wealthy and populous, were profoundly discontented with the onerous call which had been made on their resources, by expenditure which they comprehensively regarded as cast upon them to fulfil Imperial obligations contracted by the Treaty of Waitangi. The actual means of the Colony at the time were not large, and any attempt to raise a war-loan would have been scouted. The North Island was not only scantily populated, but much of the interior was almost impenetrable to Europeans, whilst the Maoris could go from end to end and from side to side of the Island with great ease. It took General Chute, with a considerable force, a long time to penetrate to New Plymouth from the Wellington Province, and his able performance of the task was regarded as a great feat. Had Te Kooti and Titokowaru, who were respectively at war with the Europeans on the east and west coasts, joined their forces, and other great chiefs combined with them, the issues would have been very grave. This risk the Colonists were left to confront whilst Downing Street exhibited the most stoical disregard of the consequences of its own previous acts, and of the responsibilities it had specially contracted.

The Public Works’ Policy.

The Government had but one resource, a policy of the utmost conciliation, until they could place themselves in a position of strength for the future. It was a most anxious period. The ‘Maoris were a fiery race, and any little dispute in any part of the Island might have occasioned a fierce and general war.

It has often been said and written that the Public Works’ Policy was the outcome of a speculative desire to obtain the expenditure of a large quantity of borrowed money for the gain that expenditure would bestow, leaving to chance subsequent consequences. I will tell you the real facts, and I think I may say there are only two or three men now living who can speak with equal authority. The Public Works’ Policy seemed to the Government the sole alternative to a war of extermination with the natives. It comprised the construction of railways and roads, and the introduction of a large number of European immigrants. The Government argued that if they could greatly increase the population of the North Island and open up the means of communication through the Island, and at the same time give employment to the Maoris, and make their lands really valuable, they would render impossible any future war on a large scale. They recognised that in point of humanitarianism there was no comparison between the peaceful and warlike alternatives. They considered also that, financially, it was infinitely preferable to spend large sums on permanent development, to expending equal, or probably larger amounts on issues of warfare.

…….

The Colonial Government dared not introduce the Public Works’ Policy as a measure to subjugate the natives to future peacefulness. To have done so would have involved the risk of exciting them to immediate hostility. The most that could be stated in that direction was contained in the following paragraph in the speech in which a declaration of the policy was made.

“I cannot close this branch of the subject without adverting to the effect which the promotion of railways and immigration must certainly have on the native question. The employment of numbers of well-paid natives on Public Works, to which in their present temper they will resort with avidity, the opening up of the country and its occupation by settlers, which will result from the construction of roads coupled with the balancing of the numbers of the two races by a large European immigration, will do more to put an end to hostilities, and to confirm peaceful relations than an army of ten thousand men.”

There was thus the necessity of bringing the measure forward on its merits, only as a colonising scheme. Pray do not think the Government had any doubt on the subject, but it was a bold departure for so small a community, and under ordinary circumstances it would probably have been proposed on a less ambitious and rapid scale. But the circumstances forbade anything of the kind. From what I have previously said it may be gathered that the South Island would not be willing to give its credit to benefit colonisation in the North Island without inducements applied to itself of a large character. Hence to really serve the North Island, it was necessary to frame the whole scheme on a scale sufficient to offer great advantage to the South Island.

What surprised me was that when I pulled other books off my shelves  –  political and economic histories of New Zealand –  there was almost no reference at all to this strand of argument.  There is plenty of discussion of the economic and fiscal impact of the immigration and public works programmes –  albeit nothing on what it might have done (good or ill) for per capita incomes in the longer-term –  but nothing at all on what seems to have a key motive for key figures in the government of the time, Vogel  –  former Premier and Colonial Treasurer – foremost among them.

I’m not sure why, but I can guess.  Among other things, it is pretty uncomfortable stuff for a European author –  or reader.  Conquest and displacement are, no doubt, the way of history, but it isn’t a comfortable thought about one’s own country, about events that are only 140 years or so in the past. It is a reminder of the fragility of many of the settler societies, and of how –  plausibly enough –  the New Zealand story could have ended quite differently.   Personally, I read it with a mix of conflicting thoughts and feelings: glad on the one hand that my own ancestors were all in the South Island, and  the comfort and familiarity of being part of a majority culture.  But on the other hand, more than a little uneasy about what it has all meant for the place of Maori in New Zealand –  and for all that the rest of us (rightly and reasonably) claim this place as home, it is the only home for Maori and their culture.

Quite plausibly, mass European immigration to New Zealand in the 19th century did raise per capita incomes here –  for Maori and for Europeans –  but it did so partly by operating on scale that substantially displaced the cultures and institutions that had been here previously.  Indeed, Vogel suggests that for the largest single wave of that migration, to do so was a matter of calculated government policy.

For many readers, there might be a “so what?” reaction to all this.  A family member’s response was “well that’s fine, but it happened and can’t be undone”.  And that is fine too – this isn’t directly about lessons for today, but for me anyway it prompts me to reflect afresh on how immigration –  and immigration policy – has shaped our country in the past, and in different ways continues to do so today.  And to wonder again about what it means for the relative and absolute place of Maori in New Zealand.

(On quite another matter, I was amused to see that the concept of value-added in exporting made the speeches of former Ministers of Finance even 120 years ago.  I’ve written here about how New Zealand performs pretty poorly on that score now.   Here is Vogel talking about value-added in exporting –  and the lowish proportion of imported inputs in New Zealand’s exports – back in 1893:

over the 40 years ending 1892 an exportation of articles produced in New Zealand equal to £14 annually per head of population. The United Kingdom prides itself on being a great exporting country. During the 16 years to the end of 1890, the annual value per head of population, of exports, the growth, or produce of the United Kingdom amounted to £6. 7s. 5d., against £14 per head in the case of New Zealand. But even this comparison does not give a full idea of the difference between the two countries. The New Zealand exports were entirely the growth and produce of the country, whilst one-half of the exports from the United Kingdom were merely preparations or manufactures of imports received from other countries.

For anyone with an interest in New Zealand history, Vogel’s lecture is fascinating stuff – an upbeat visionary politician’s take on what had been created in New Zealand over the previous 50 years, and what might yet be.)

A good feature of our tax system

Michael Reddell Housing, labour party, Taxation, Uncategorized

Yesterday I commented regretfully on the absence of any sign of much in-depth thinking from the Labour Party about reversing New Zealand’s ongoing relative economic decline.  I noted then that they had plenty of company in that failure.  As one illustration, I saw a piece on The Treasury’s website this morning outlining Treasury’s work programme, which is apparently organized around seven “strategic intentions”.  Each of them is probably fine in their own way, but none bears directly on reversing New Zealand’s decades of relative economic decline.  The standards of the modern Treasury seem to be  reflected in this quote from a related document, trying to recruit a new Chief Economic Adviser:

we are facing up to the challenge that economic actors operate in complex ways and not according to straightforward and predictable scientific models.  Moreover the days when improvements in living standards were measured exclusively by the increase in total production – GDP – are on their way out.

I just shook my head in weary despair.    I no longer have my Stage 1 economics textbook, but I doubt that even there anyone assumed that “economic actors” (people?) are other than complex.  No Treasury in my 30 years of working alongside them ever did.  And perhaps the Treasury could point us to cases where anyone ever thought that “improvements in living standards were measured exclusively by the increase in total production –  GDP”.  We conscripted labour in World War Two –  forced people to work even when they didn’t want or need to, and forced them to work longer hours than they preferred.  That provided a big boost to GDP, but no one thought it boosted living standards – it was a means to an end, defeating our enemies.   If they are really reduced to arguing against such straw men, it would be a very brave, or slightly deluded, person who took on that Treasury role.

But this post is, in part, about praising the Labour Party (and on this one, I suspect Treasury probably agrees with them).  The Herald has an article this morning on turnover taxes on real estate transactions.  They draw on this piece from a UK accountancy firm which looked at turnover taxes (on US$1m houses) in 26 countries.  New Zealand has no turnover taxes on property taxes and so ranks top of the table –  just marginally ahead of Russia, which levies a fee of US$30.45 on such a transaction.  Belgium, by contrast, which has always been known for its high turnover taxes charges US$113131 on a purchase of a $1m house.

The Herald found a local economist, Shamubeel Eaqub, who (in the sub-editors’ words) “frets on tax ranking” and who thinks, in his own words, “it would be a very good thing for New Zealand to tax property purchases”.  To his credit, Labour’s housing spokesman Phil Twyford disagrees noting that “stamp duty is a relatively inefficient tax” and stating that Labour did not advocate stamp duty –   no if, no buts, no suggestions of referring it to a working group.  Stamp duties on property purchases are just bad policy.  In some places (eg Australian states) they have been used when revenue options aren’t available to that particularly authority, but from either tax policy or housing policy perspective, let alone fiscal or labour market considerations, they have almost no other redeeming features and we should be grateful that we are free of such taxes.

The UK accountancy firm that wrote the piece fretted that high turnover taxes might make it hard to recruit overseas senior executives or rich foreign investors.  I’m not sure that the latter concern in particular will really have much resonance among electorates anywhere.  We should worry much more about what turnover taxes mean for the functioning of the market for ordinary people.  Moving cities is expensive enough as it is, without slapping an additional heavy tax on people whose job opportunities mean it is necessary for them to move.  Stamp duties on property transactions bear no relationship to ability to pay or any of the other usual desirable features of a tax system.  At the margin, they impede labour mobility, undermining the effectiveness of the labour market.  And, almost certainly, they reduce housing turnover.  Some might see that as a good thing, since high housing turnover is often associated with rising prices –  but it isn’t the turnover that generates the higher prices, it is the underlying boost to demand that lifts turnover and prices together.   Structurally reducing the level of housing turnover would simply reduce the choices people face when they do come to the market.  And where it might make good practical sense, on account of changing family circumstances, to move house, such taxes will simply encourage more people to alter and extend an existing house instead.  There is no obvious welfare gain from that.

And, of course, there is no sign that the presence or absence of a turnover tax plays any part in explaining cross-country variation in house prices, or price to income ratios.  Belgium’s houses certainly aren’t cheap, Australia and the UK both have quite material turnover taxes and house price problems as severe as ours, and in the US places fast-growing places with very affordable housing co-exist with highly unaffordable cities all in a regime with very low property turnover taxes

I’m also very uneasy about property taxes tied to turnover – whether stamp duties, or realisations-based capital gains taxes (which all real world CGTs) are –  because of the fiscal risks they create.  When times are good property turnover is higher than usual –  often quite a lot higher than usual.  Tax revenue floods in –  not just 10 per cent higher than GDP when GDP is 10 per cent higher, but multiplicatively so (housing turnover per capita might double or treble from bust to boom),  If the boom runs for several years, the fiscal authorities –  officials and politicians –  come to treat the higher level of revenue as normal, and perhaps even sustainable.  Even if some boffins in Treasury keep sounding the alarm, politicians have elections to win and abundant revenue encourages even-more abundant spending.  This is a problem even when tax systems draw almost entirely on income and consumption –  our own Treasury finally caved in in 2008 and conceded that the higher levels of revenue built up during the boom of the previous few years was sustainable,  just before the severe recession blew to pieces all those assumptions. It was much m0re of a problem in Ireland, where property-based revenue had hugely flattered the fiscal picture in the years leading up to the crisis.  It is fine to talk about clever schemes to limit these risks –  fiscal rules or separate funds –  but they rarely work well.  And there is no good tax policy or housing policy case for turnover taxes in the first place.

I’m not so keen on the rest of Labour’s housing tax policy –  extending the quasi capital gains tax for investment properties, or “axing” so-called negative gearing –  but credit to them for having no truck with pure turnover taxes.

(UPDATE: I noticed that Treasury recently released some material on the – rather limited –  work they had been doing on the possibility of a stamp duty –   turnover tax –  for residential property).

 

 

Labour on New Zealand’s economy

Michael Reddell labour party, New Zealand economic performance

It is probably only about 14 months until the next election.  We have a government that has presided over eight pretty-mediocre years of economic performance –  not all of it their fault, as there are global factors at work –  with no real idea what they should or could do to reverse New Zealand’s decades of staggering relative economic decline.  Often enough, it seems that the current government doesn’t even really care, so long as they can successfully persuade enough of the public that things aren’t too bad, or (worse) that our problems are actually marks of some sort of success.

Of course, our key economic agencies –  Treasury, MBIE, and the Productivity Commission –  show no real sign of offering the sort of quality advice that takes seriously the specifics of New Zealand’s situation and offers solutions that might make a material difference.  I’m not really sure why.  For them individually  –  and maybe for senior politicians too – perhaps it doesn’t matter very much.  For the upper tier of New Zealand, life is pretty comfortable.  And it isn’t always clear that politicians want hardheaded advice that seriously addresses New Zealand’s problems.  The Muldoon government wasn’t that keen on robust Treasury advice in the early 1980s either, but it didn’t stop the agency investing in capability and offering the best professional advice they could.

But this post is about politicians, and particularly about the Labour Party.  12 months out from an election, eight years since they last held office, at a time when no one would really claim the economic situation is particularly rosy, one might have hoped that the main Opposition party would be offering a pretty compelling alternative narrative: a diagnosis of what has gone wrong economically and the outlines of a rather different approach to policy.  I’m not suggesting that they should have all their policy detail published this early, but surely there should be enough to leave floating voters –  or potentially detachable voters –  with a sense that the main Opposition party was offering a different path, that would make a material difference?

I watched Grant Robertson’s interview on Q&A yesterday and was as unimpressed as ever.  There are occasional glimmers of recognition of some of the symptoms.  As he notes, per capita GDP growth has been very weak, and to the extent there is growth in total real GDP most of it is just based on the demand effects of a rapidly rising population.  He knows house prices are a problem, and I was pleased to see reference to the idea that house price to income ratios of around 3 might be a more normal level.  There was at least a hint that the economic performance of the non-metropolitan regions has left quite a lot to be desired –  although no apparent recognition that per capita incomes in Auckland have grown more slowly than those in the rest of the country for the last 15 years.  And last week he usefully drew attention to the very weak dairy price forecasts from the OECD.

But that was about it.  I heard two fairly specific proposals.  One  was to ban offshore buyers from the housing market. And the second was to revise the Reserve Bank’s monetary policy mandate.  Reasonable people can differ on the merits of a (non-resident) offshore buyers ban  –  and I happen to agree that we shouldn’t be ruling out even daft future policy options in preferential trade agreements that try to tie the hands of future Parliaments –  but it must be a pretty peripheral issue.  After all, Australia bans offshore buyers purchasing existing houses, and Sydney and Melbourne house prices are if anything more ruinous than those in Auckland.  And offshore buying seems unlikely to be a material phenomenon in the New Zealand second tier cities where price to income ratios are still far above 3.

And as for changing the Reserve Bank Act and the Policy Targets Agreement, it is all very well to say that the mandate is “broken”, but Labour has shown no signs of offering an alternative that would make any material difference to our real economic performance.  They offered a reasonably sophisticated attempt at a redraft in 2014.  I argued at the time inside the Bank, and subsequently, that the alternative wording –  while not necessarily objectionable –  would not have made any very material difference to the conduct of monetary policy, let alone to New Zealand’s longer-term economic performance.  As a readers know, I do think the Reserve Bank Act needs substantial reform, and I would probably favour some changes to the PTA and the related provisions of the Act, but they aren’t in any sense “the answer”.  I guess we’ll have to wait and see what specific proposals in this area Labour will campaign on in the next election.  But we should never expect that different monetary policy arrangements will make much difference to a nation’s longer-term prosperity.

What else was there in the interview?  There was talk of using government procurement policies to support New Zealand businesses –  which is probably illegal under our existing trade agreements, and in any case sounds mostly like old-fashioned protectionism, which rarely makes sense anywhere, and particularly not in a small country.  There was talk of investing in infrastructure and education.  Within limits, the infrastructure point is probably reasonable –  rapidly rising populations need more infrastructure –  but there was no hint of how this might lift trend productivity or per capita income performance.  As for education, it always sounds good to offer to spend (“invest”) more on it, but such proposals rarely seem to engage with the evidence suggesting returns to tertiary education in New Zealand are already among the lowest in any OECD country.  If anything, there are hints there of a possibility that too much is being spent, not too little –  at least if one thinks of education as an investment item, rather than just another part of consumption.

There was talk of “building wealth from the ground up”, and of “working with our farmers to get more value-added products” (as if, somehow, government officials and politicians are better able to make specific dairy product choices than their own managers and owners), but nothing remotely specific.  And there was not a single mention of the exchange rate –  even though ours has spent the last decade or so 20 per cent higher in real terms than in the previous decade.    And even on housing, where Labour has shifted ground in some important areas, Robertson was about as feeble as the rest of the political class –  he wants housing to be affordable, but doesn’t want house prices to fall.  It is easy enough to say “lets raise incomes and undermine those price to income ratios that way”, but it is just words without any suggestion of a strategy that would materially lift the rate of growth of per capita incomes.

Labour has been heard to suggest that something should be done about immigration.  Of course, I agree that something should be done, but I’ve been watching for months for any sense of how Labour is actually thinking about the issue.  The most I’ve seen has been occasional talk about “temporary pauses”, which mostly seems like a substitute for hard-headed thought or engagement with the issues.  It isn’t as if immigration policy is much different now than it has been in the past 15 years –  including the period when many of Robertson’s colleagues were ministers and he was ensconced in the Prime Minister’s office.   Chopping and changing immigration policy on the basis of this year’s pressures, or last year’s, doesn’t seem a particularly sensible approach –  there are lags in the system, and such short-term policy  reversals would create huge uncertainty for all parties concerned (potential immigrants and people here). And they simply can’t deal with the long-term challenges.  There is a respectable case that New Zealand’s high target levels of non-citizen immigration are good for New Zealanders.  But is that the case Labour wants to make, or isn’t it?  There is a respectable alternative argument that our approach was a not-unreasonable policy experiment that has failed.  Is that the case Labour wants to make?  We just don’t know.

I’ve been keeping an eye on the Labour Party’s website for some months –  and even, on occasion, trawling through the tweets of senior Labour Party economic spokespeople  –  to see what issues they are engaging on in public.  Robertson is the finance spokesperson so one might reasonably expect the most from him.  But there just hasn’t been much all year.  The flagship event was the Future of Work conference which, whatever one might think of it in a longer-term context, didn’t really seem to be addressing today’s issue, where labour force participation rates have been quite high and total employment growth has been faster than in almost any advanced economy.  The challenge for New Zealand hasn’t been finding enough jobs, but generating sufficiently high returns to the inputs of labour and capital to provide first world incomes for New Zealanders.  Robertson hasn’t been offering anything of real substance there.

Labour also has spokespeople on immigration and economic development, both apparently ranked in the upper half of Labour’s caucus.  I assumed –  or at least hoped –  I would find something from those people on how Labour’s thinking was developing.  Iain Lees-Galloway is the spokesperson on immigration, and since his leaders have talked on several occasions about how something should be done about immigration, I hoped to find something from him.   He seems to have put out 15 press releases this year, but only two of them look to have been around immigration issues –  dodgy dealings around Indian students and something about seasonal horticulture work.    Even if Labour doesn’t yet want to release the details of its policies, one might have hoped for a scene-setting speech on how Labour is thinking about immigration policy, costs and benefits etc etc, looking to shift the ground where the debate is taking place.  But there is simply no sign of anything of the sort. Perhaps lots of intense thinking and deliberations are taking place in private, but it really isn’t that long until the election.

David Clark is Labour’s economic development (including regional development) spokesperson.  According to the Labour website, he hasn’t put out a press release at all since April, and there is no sign in any of his statements this year as to how he or Labour are thinking about reversing New Zealand’s economic decline.   Perhaps a whole new wave of serious policy thinking and efforts at reframing the narrative are just about to be launched.  But I’m not really that hopeful.

I find it pretty depressing –  as if people (bureaucrats and politicians) have simply given up and decided that it is all too hard.    It is we and our kids who will pay the price of that failure.

Young UK voters and the EU: then and now

Michael Reddell Uncategorized

Since the successful Brexit vote on 23 June, there has been a great deal of (mostly rather disdainful) attention paid in some quarters to the demographic breakground of the support for Leave and Remain.  Among aggrieved Remainers there has been a particular focus on the fact that –   at least among those who bothered to turn out to vote –  young voters had fairly strongly favoured Remain.  In Lord Ashcroft’s exit polls, the Remain/Leave split among voters aged 18 to 24 was 73 per cent in favour of Remain, and 27 per cent in favour of Leave.  Among the (much larger group of) voters aged 65 plus, 60 per cent favoured Leave and 40 per cent favoured Remain.   Here is the graphic from the Ashcroft polls.

The rising generation favoured Remain and only the old really wanted Leave (although the margin in favour of Leave was pretty clear cut among all those aged over 45).    This led some more fevered critics to suggest that old people should be deprived of the right to vote altogether –  although it was never clear what age threshold they had in mind.  But a similar sentiment was evident in an op-ed in the FT the other day from Nick Clegg, former Deputy Prime Minister, former Liberal Democrat leader (and champion of the EU).  According to Clegg

the status quo cannot last. A country that has taken such a momentous decision about its own future against the wishes of its own younger generation is not on a stable path.

Which might be a sort of plausible argument if the views today’s young held could be counted on to remain unchanged for the rest of their lives, or if (somewhat equivalently) today’s old had been those staunchly opposed to the UK entering the EEC in 1973.     Of course, even if today’s young still do feel the same in 20 years time, and they manage to command a pro-EU majority then, there is nothing to stop a future UK government seeking to rejoin the EU (if it is still there).  Neither Parliaments nor referenda today bind future Parliaments and governments.

My instinct had been that one couldn’t count on such preferences remaining stable throughout life.  For most of us, it only takes a brief moment of introspection to recall views we held staunchly decades ago that no longer reflect our views today.  And, after all, today’s UK young have known only Britain in the EU.  Once Britain leaves, they –  and next cohort of young people –  will have different experiences.  Exit might work out well, or badly, or be simply hard to tell, but different data will be available to future voters (and responders to opinion polls).

In the course of pottering around secondhand bookshops in Northland and Auckland last week, I stumbled on a fascinating book, published in 1973 by an Oxford political science academic, called Diplomacy and Persuasion: How Britain Joined the Common Market. I have not read it yet, but flicking through it my eye was immediately drawn to the statistical tables and charts, with data on support for, and opposition to, joining the EEC.    In the early 1960s, British public opinion had been strongly in favour of joining the EEC,  but by the late 1960s and early 1970s –  as entry actually became possible, once de Gaulle had departed the scene – public opinion had reversed.  In one major poll in 1971, where the same questions were asked in the UK and  in each of the six EEC countries, public opinion in each of the six was strongly in favour of Britain joining, while British opinion was strongly against.    Foreshadowing future tensions, public opinion in each of the six strongly favoured a move towards a United States of Europe, while British public opinion was opposed (even conditional on the UK actually joining).

The British government of the early 1970s had undertaken to join the EEC only if there was clear majority in favour, in Parliament and in the country.  That simply didn’t happen before Britain entered the EEC on 1 January 1973 –  key parliamentary votes were very close, and in the run-up to entry date public opinion (as captured in the polls) never got beyond being evenly split between those favouring joining and those opposed.

But what particularly interested me was the demographic data the author reported.  He reports detailed results for 21 different polls from early 1971 to late 1972.   The age breakdowns are a little different than in the Ashcroft polls above, but in every single poll the over 65 age group were opposed to the UK joining the EU (typically by very large margins), and the 16 to 24 age group was either in favour of joining or much less strongly opposed.

Here are the average results from the five 1972 polls that are shown in the book, with all results shown in net balance terms ( a positive number means a net balance of that demographic in favouring of the UK joining the EEC).

By age

Net support for UK joining EU
Overall 16 to 24 25 to 44 45 to 64 65+
0.2 5.6 10.4 0.8 -20.2

Overall, the population was split, but young people were much more inclined to support joining than old people were.  But the 1972 20 year olds are today’s 64 year olds – people on the brink of joining the group most strongly now in favour of leaving.

And here are the results by social –  or occupational –  class

Net support for UK joining EU
AB C1 C2 DE
50 19.8 -10.2 -27.2

The divide between the more-educated higher status groups is somewhat similar to that now (see the Ashcroft table above), but it is perhaps notable that for all the disdainful talk now about how the educated favoured staying in the EU and the uneducated wanted out, the gap between the views of these occupational groups is much less marked than it was in 1972.  In 1972, overall public opinion was evenly divided, but with huge margins in favour among the AB group –  professional and semi-professional occupations –  and substantial opposition among the working classes.  Working class opinion now is similar to what those polls captured in 1972, but “elite” opinion is much more evenly split (57:43 in favour of Remain) now than it was then.  Joining the EU was always an “elite” project, and Britain is now leaving because enough of the “elite” groupings have lost confidence that the EU is the best option for Britain.

I don’t suppose anyone took very seriously the idea of depriving the old of the right to vote.    But why we would suppose that 1972’s 16 to 24 year olds were better placed then to make a decision on the best interests of their country, themselves, and their children and grandchildren, than today’s 60 to 68 year olds are now?  They are, after all, the very same people.

(For anyone interested, there has also been a lot of coverage of the fact that a majority of Scottish voters favoured Remain in this year’s referendum.   By 1972, there was not much difference in the poll results by region, but I was interested to find that in every single one of the 16 1971 polls, Scottish opinion had been more opposed to joining the EEC than opinion in the rest of the country.)

 

Another example of the Reserve Bank’s approach to the OIA

Michael Reddell OCR leak, OIA, Uncategorized

Regular readers will recall the OCR leak at the time of the March MPS.  A month or so later, when the Reserve Bank reluctantly recognized that there had in fact been a leak, and that their systems needed to change to reduce future risks, they released what purported to be a report undertaken for them into the leak by Deloitte.

In fact, subsequent material released by the Bank in response to an OIA request confirmed that what had been released then was not the actual report but a short-form “public” version.  I’m not sure what they had to hide, but decided to ask for a copy of the full report, partly out of genuine interest in its contents (as I had been the subject of a significant portion of the short-form “report”) and partly on the principle that leak inquiry reports, paid for by taxpayers’ money, should be made public as a matter of course.  In particular, the public should not be misled into believing that they were being given a full report, when in fact they were being given only a convenient summary.  When the initial release was made on 14 April, there was no suggestion at all that what was being released was a summary report only.

Anyway, I lodged the request several weeks ago, and this afternoon received this response.  How it can take more than 20 working days to decide whether or not to release a single report (that they already claimed to have released), which they themselves commissioned, and which they must have expected to be requested, and which deals only with their lock-ups etc is beyond me.  It seems like just another excuse for delay, another opportunity to simply ignore the principles of the Official Information Act.

(UPDATE: A reader points out that the Bank has given itself almost twice as long to consider the release of a single easily accessible administrative document as it allows for citizens to make submissions on its own proposals for further far-reaching regulatory interventions around housing finance.)

22 July 2016

Dear Mr Reddell

RE: OIA REQUEST FOR FULL DELOITTE INQUIRY REPORT

On July 4 2016 you made a request under the Official Information Act for:

“…. a copy of the full Deloitte inquiry report (as distinct from the “summary” – Graeme’s description in the Board minutes – or “public” version that was released on 14 April”.

The Reserve Bank is extending the time limit for decisions on your request to 10 August 2016, as permitted under section 15A(1)(b) of the Act, because consultations necessary to make decisions on the request are such that a proper response to the request cannot reasonably be made within the original 20 working day time limit.

Under section 28(3) of the Official Information Act, you have the right to complain to the Ombudsman about the Reserve Bank’s decisions relating to your requests.

Yours sincerely

Naomi

Naomi Mitchell

External Communications Adviser | Reserve Bank of New Zealand (Auckland)

205-209 Queen St, Auckland 1010 | P O Box 5240, Auckland 1141

  1. +64 9 366 2643 | M. +64 27 294 3900 | F. +64 9 366 0517

www.rbnz.govt.nz

Monetary policy and the exchange rate

Michael Reddell Exchange rate, Monetary policy, Uncategorized

The Herald‘s Claire Trevett was perhaps being just a trifle unfair yesterday in commenting on the Reserve Bank’s “consultative” document on the latest iteration of the increasingly unpredictable LVR restrictions

The Reserve Bank’s definition of “consulting” appears to be akin to North Korean President Kim Jong Un’s

The Governor on the exchange rate tends to bring to mind parallels with the (misremembered) story of King Canute.   Canute was trying to deliberately demonstrate to his courtiers how little command he actually had –  none over the tide and the seas.  But the Governor loftily –  or perhaps plaintively – decrees that “a decline in the exchange rate is needed”, and the market really doesn’t pay that much attention.  The exchange rate did fall a bit yesterday, and has pulled back some way over the last 10 days or so, but the exchange rate today is perhaps only a couple of per cent lower than the average over his whole term to date.  For almost his entire term, he has been lamenting the strength of the exchange rate.

I’ve noted previously that I entirely agree with the Governor that a successful transformation of the New Zealand economy’s growth prospects is likely to require a sustained and substantial fall in New Zealand’s real exchange rate –  a substantial fall in the prices of non-tradables relative to the prices of tradables.  But nothing the Reserve Bank does, or could do, has anything much to do with bringing about that sort of change.  It isn’t some fault or failing of financial markets either.  Rather, responsibility for the persistent pressures on domestic resources that have given us a real exchange rate persistently out of line with our deteriorating relative productivity performance rests squarely in the Beehive.  The choices successive governments make –  and both major parties still defend – explain the bulk of our underperformance.   Here is a chart I ran a few weeks ago.  If anything, I suspect – but of course can’t prove formally –  that we need the exchange rate to fluctuate below that 1984 to 2003 average for a decade or two, not the 20 per cent above that average we’ve had for the last decade and more.

real exch rate

But in the shorter-term (perhaps even periods of several years) monetary policy choices make a difference.  Sometimes quite a large difference indeed.  Notice the big fall in the exchange rate following the 1990s boom.  The TWI briefly fell almost as low, in real terms, as it reached following the 1984 devaluation –  and for the economic elite in 1984/85, one of the big challenges then was felt to be “cementing in” that lower level of the real exchange rate.

During this period around the turn of the century, the NZD/USD exchange rate was below .5000 for almost three years.  At the trough in late 2000 it was around .3900.   What else was going on?

In New Zealand, it was the first year of the new Labour-Alliance government, and the business community did not like the policies, or attitudes, of that government one little bit.  I was head of the Reserve Bank’s Financial Markets Department at the time, and used to go along to Board meetings each month.  One particularly prominent and vocal member constantly wanted to get me to say that the weak exchange rate was all a market judgement on the new government.  I usually pushed back quite strongly.

And here is why.

int rates us and nz

This chart uses OECD short-term interest rate data for 1994 to 2004.  During that period from mid-late 1998 to the start of 2001, New Zealand short-term interest rates were at or below the level in the United States.  It is the only time in the whole post-liberalization period when that has been so.  The respective central banks judged that that was where their own interest rates needed to be to keep inflation at or near target (a formal target in the New Zealand case, and an informal target back then in the US).

It isn’t a mechanical relationship by any means.  Apart from anything else, expected interest rates tend to matter at least as much as actual short-term rates –  ie the expected future path of policy.  And other expected returns mattered too.  Even after the NASDAQ had peaked in early 2000, there was still an important theme around markets of “new economies” (with the tech boom) and old economies.  The NZD and AUD –  not seen as currecies of high tech “new economies” – were very weak in response.

The Governor can’t change the structural fundamentals that influence savings and investment preferences in New Zealand.  But he has our OCR in his personal control.  If he were to cut the OCR to 1.5 per cent, there would still be quite a large margin over US interest rates –  unlike the situation in 1999 and 2000 –  but that gap would be quite materially narrower than it is now.  Perhaps the OCR might even be able to go below 1.5 per cent –  after all, it is not as if the resulting margins to world interest rates would be unprecedented –  but we’d have to see how the data unfolded.

The Governor can’t just set the OCR on a whim.  Instead he is required to deliver on an inflation target.  But we know that New Zealand’s inflation rate has been persistently very low relative to the target the government set for the Bank.   Among the OECD countries where the central bank still has some material monetary policy discretion –  say, a policy interest rate still above 1 per cent –  our inflation rate has also been falling away relative to the median in those other advanced economies (a sample which includes Australia).  Inflation just isn’t a constraint at present –  if anything, it is the absence of enough inflation that is the problem.  And is the economy under mounting pressure?  Well, by contrast with the United States where the unemployment rate is almost right back  to where it was prior to the recession, in New Zealand –  even on the latest SNZ revisions –  (and in the median of those other higher interest rate OECD countries) the unemployment rate is almost 2 percentage points higher than it was prior to the recession.

U rates us and nz

There is simply no sign that the real economy could not cope with materially lower policy interest rates – if anything, the evidence is pretty clear that it could do with the boost (or rather with the inappropriately restraining hand of the Reserve Bank being eased up).

The gap between New Zealand and US long-term interest rates has “collapsed” in recent months –  the gap between 10 year nominal bond rates is now only around 65 basis points.  That suggests that markets actually think quite a bit of policy rate convergence is coming. But they can’t be sure when, as the Governor remains so reluctant to cut the OCR and has been prone to inconsistent communications.  The economic case for a 50 basis point OCR cut next month, foreshadowing further cuts to come, is reasonably strong. I don’t expect the Governor to adopt that policy, but if he is serious about getting monetary policy out of the way of the exchange rate  adjustment he seeks, it is exactly the policy he should adopt.

No doubt, some at the Reserve Bank will continue to cite their estimates of neutral interest rates being around 4 per cent –  as the Assistant Governor apparently recently told FEC.  If you asked me where I though global real interest rates would converge back to over the next 20 years, I too might talk in terms of a 2 per cent real interest rate (so with inflation targets centred on 2 per cent, perhaps something around 4 per cent).  But that is simply not a meaningful basis for making monetary policy today.  We don’t know where “neutral” interest rates are now, but most of the external evidence suggests monetary policy isn’t particularly accommodative at all – rather it has sluggishly adjusted towards whatever has changed in the real economy.  In New Zealand’s case, that failure to adopt a practically accommodative policy is holding the exchange rate higher than it needs to be –  higher than the Governor himself would like.  To that extent, the solution is in his hands.

 

 

The Reserve Bank’s update

Michael Reddell Monetary policy

I don’t have a great deal to say about the Reserve Bank’s statement this morning, which seemed to conform to my interpretation of the Governor’s “reaction function” over the last 12-18 months.  He really doesn’t want to cut interest rates at all –  after all, he keeps stressing just how “accommodative” monetary policy already is –  but he cares enough about the inflation target that if there is a heightened risk that inflation might stay below 1 per cent for too long then he will, reluctantly, act.

On process, I think the fact of today’s statement helps illustrate why the recent change in the Bank’s OCR announcements timetable is not particularly helpful.  On the old timetable, there would have been an OCR announcement itself this week or next.  Even though it is only now three weeks until the next MPS the Governor clearly felt things were important enough that he needed to make a signal now, rather than waiting until they had gone through the full forecasting process.

There has been a two month gap between the June and August MPSs.  But look ahead to the release calendar, and there is a three month gap between the November MPS and the February 2017 MPS, with no OCR reviews scheduled over that period.  Yes, we all know that New Zealand shuts down for a few weeks from late December to mid January, but a great deal can happen in three months at any time of the year.  Data keep on being published locally, commodity prices and exchange rate change daily, and the economies of the rest of the world keep on as normal.  Two months is often going to be too long between OCR reviews, but three months will usually be too long –  whether the Bank is in a tightening or an easing cycle.  It risks jerky OCR adjustments and miscommunications and misunderstandings (of which there have been more than enough recently anyway).

It was also a shame that the Bank chose to release its update this particular morning.  The Bank’s survey of expectations is an important input into the monetary policy process,  and especially the measures of medium-term inflation expectations.  But that survey was being taken yesterday and today, meaning that some respondents will have answered before the Governor’s statement and some after it.  That will, to some extent at least, muddy the waters when the expectations survey data are released on 2 August.

In terms of substance, I guess we should be thankful for small mercies.  The Bank is explicitly recognizing that it is getting harder to meet its inflation objective –  a target it has failed to achieve for years now.  But I remain rather uneasy about the heavy focus on the  exchange rate, and on tradables inflation.  Perhaps there is a little more reason than usual to focus on headline inflation –  and the impact of short-term fluctuations in tradables prices –  given that inflation has been so far below target for so long.  There is a real danger that people are coming to think of something around 1 per cent as a normal rate of inflation, not the 2 per cent the Bank has been mandated to focus on.  But in general, central banks are better advised to focus on core pressures on domestic non-tradables inflation –  something the Bank itself has often highlighted in the past.  Nothing of those sorts of ideas is apparent in today’s statement at all.  If anything, the Bank continues to assert that capacity pressures are ‘rising’ –  on what measures, or supported by what indicators, they don’t say.  And for all their apparently growing unease about the rest of the world they seem reasonably upbeat on domestic economic activity – even though there has been very little per capita GDP growth at all in the last year.

With trends in the underlying measures of inflation so low, I think OCR cuts are clearly warranted –  and have argued since mid last year that something nearer 1.5 per cent was warranted –  but the Bank’s continued reliance on headline inflation arguments suggests that they still “don’t really get it”.    The core trend in inflation remains too low to be consistent with the Bank’s target (and, not incidentally, the unemployment rate suggests ongoing excess capacity).  There has been some sign of stabilization in core inflation measures, and perhaps even a very slight increase, since the Bank finally realised it needed to be cutting rates not raising them, but there is a long way still to go.  And that would be so even if the TWI was at 72.     As a reminder, despite the persistently weak inflation rate –  surprising the Bank more than anyone –  the real level of the OCR is still no lower (and most likely actually higher) than it was two or three years ago before the Bank started its ill-judged and unnecessary tightening cycle.  New Zealand interest rates are typically well above those in the United States, but there is nothing in the relative cyclical performance of the two economies suggesting we need an OCR even 175 points above the US policy rate.

Of course, there is an alternative perspective.  In the Dominion-Post this morning, Pattrick Smellie asserts that “it’s not the Reserve Bank’s fault that monetary policy as we knew it is broken”.  He argues “how realistic is it to think that cutting rates further will revive domestic inflation when we’re importing the absence of inflation from the rest of the world?”  There are certainly some common global factors at work, but we need to recall that (a) most advanced countries have exhausted conventional monetary policy capacity, while we haven’t, and (b) New Zealand has had an inflation rate that has been undershooting the target by more than in the case in many –  not all –  other advanced economies (eg Australia, the US, or Norway).  It isn’t a case that the monetary policy model is broken in New Zealand, so much as that the Reserve Bank Governor has been reluctant to give it a try –  reluctant, that is, to do his job.  Put the OCR quickly to, say, 1.5 per cent and –  absent a big new adverse global shock –  I think we can be reasonably confident that future inflation would be tracking much closer to 2 per cent than seems likely (even to the Reserve Bank) on current policy.

As a reminder, here is the New Zealand (headline) inflation outcomes over the current Governor’s term.

wheeler inflation

On current reckonings there is little chance of headline inflation even getting briefly to the target midpoint at any time in the Governor’s five year term.  Not a record to be proud of, especially as the Governor himself championed the case for a focus on the midpoint.

 

 

It is good to know there is diversity of views at ANZ

Michael Reddell Financial stability, Housing

The Australian head of ANZ’s New Zealand business, David Hisco, was out last night with an article in the Herald headed Housing and New Zealand dollar overcooked.

Hisco is gung-ho on LVR limits.  Here are two of his list of “things that should be done”.

Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust.

Voluntary tightening of lending criteria by banks. Since the GFC banks have been more conservative than ever on lending. But the current situation will see ANZ implement even tougher criteria for investment loans as house price inflation spreads from Auckland to other regions.

I have no problem at all if the management and Board of ANZ Bank want to adopt tighter lending standards.  They run a private business, in a competitive market, and must make their own choices about what risks are worth it, for their shareholders, to run.  Bureaucrats and politicians are fond of second-guessing those choices, and we all know that banks have made mistakes in the past –  as businesses in all sectors do –  but there is rarely much basis offered by the bureaucrats and politicians for thinking their assessments of what risks private lenders should run are better than those of the bankers.  Actually, Australasian bankers have had a pretty good record over many decades –  and when things did go wrong in the late 1980s, it had as much to do with bureaucrats and politicians as with bankers: repress an industry for decades by regulatory fiat, and inevitably it will take everyone a while to learn how to lend (and borrow) well in a much different environment.

It is the first of those paragraphs above that I have a problem with.  If Mr Hisco really thinks it would be imprudent –  they couldn’t make a positive expected risk-adjusted return from doing so –  to lend to anyone wanting to buy a potential rental property with an LVR over 40 per cent, he probably has the delegated authority to make that change himself.   Today.  He is paid a great deal of money by ANZ, and his board –  and superiors in Australia –  presumably think highly of his ability to manage the bank, including its credit risks   It simply doesn’t need a bunch of bureaucrats telling him to do his job.

But his paragraph seems stronger on the rhetorical flourishes than on the analysis.  After all, where have nationwide nominal house prices ever fallen by 60 per cent?  And even if they did fall 60 per cent –  or even more –  in Auckland to perhaps bring price to income ratios down to a more sensible 3 (rather than the current 10), such falls seem exceptionally unlikely in much of the rest of the country, where real house prices have barely changed in almost a decade.  Can bankers really not make money lending to landlords in Oamaru or Invercargill at LVRs of even 50 per cent?  If so, they must be a lot less good at their jobs than they would typically have us believe?  If so, one might reasonably hope for the emergence of new entrants to the new mortgage lending market – preferably non-bank lenders beyond the reach of the Reserve Bank’s controls.   One can always worry about extreme hypotheticals, but if one did no bank would ever lend money to anyone for anything –  which would rather defeat the point of setting up in business as a bank.

But I don’t suppose we will actually see ANZ move to ban all mortgages for residential investors with LVRs in excess of 40 per cent.  Instead, Hisco wants the Reserve Bank to do it for him.    That would enable him to tell his Board that he simply had no choice, and provide cover when profits fell below shareholder expectations.  That should be no way to run a business in a market economy –  although sadly too often it is.  It is good illustration of the distinction between pro-business and pro-market policies: the former too often involve politicians, bureaucrats and big business people in each other’s pockets, providing cover for actions that work against the interests of citizens.  We already see this  happening to some extent with the Reserve Bank and the banks: the Reserve Bank adamantly refuses to release submissions made by banks on its regulatory proposals.

If Hisco followed his own analysis and banned all investor mortages with LVRs above 40 per cent, no doubt ANZ would lose a lot of market share.  If Hisco was fundamentally right, and in another year or two house prices nationwide did fall 60 per cent, he’d be vindicated as presumably ANZ’s loan losses would be much lower than those of other banks who didn’t follow his lead (unless of course he’d taken the capital that would have funded investor mortgages and used it on something that proved even riskier, if currently less visible).  It is all very well to invoke the old Chuck Prince (ex Citi CEO) line about “while the music goes on one has to stay on the dance floor”.  But top executives are paid to be a bit ahead of the game in how they position their own businesses.  Of course, they aren’t always rewarded –  as often in life –  for being too far ahead, but nothing stops Hisco making his case to the Board and shareholders for pulling lending standards in even more than the Reserve Bank requires them to. If the shareholders decline, and in good conscience he cannot bring himself to undertake such lending, he could consider other career options.

As it happens, his own economics team doesn’t seem to agree with him.  Of course, they aren’t the people setting credit standards for the ANZ, but it was interesting to see their note on Tuesday shortly after the Reserve Bank had released its new proposals. It concluded.

To us, the case for requiring investors to have a 40% deposit is not overly
strong. This is particularly considering the RBNZ’s own stress tests and the fact that most investor lending was already done at sub-70 LVRs anyway.

There must be some interesting conversations going on at the ANZ.  It would be very interesting to see the ANZ submission on the Reserve Bank’s proposals, and if the Reserve Bank won’t release it, there is nothing to stop ANZ itself doing so.  I’ll be surprised if they do, and even more surprised if the submission recommends limiting all investors throughout the country to LVRs not in excess of 40 per cent.

Hisco seems to have some form as regards bold calls.  Digging around, I stumbled on this piece from October 2014, less than two years ago.  It was full of all sorts of calls for interventionist active government, but not a mention of LVR limits or bank lending standards.   Back then –  21 months ago, and not that much has changed since then –  it was all about supply.

The housing affordability issue is a housing supply issue, pure and simple. In 1974 there were 34,400 new homes built. Last year there were 15,000 – less than half. It’s no wonder houses doubled in price in under a decade in Auckland.

The solution is simple – urgently build more houses. To do that in places like Auckland we need to build more suburbs and allow intensification in existing areas.

In his latest piece, he hasn’t totally abandoned the supply arguments, but has rather markedly backtracked.  It doesn’t appear in his five point list of things we should do now, and there is just this

The Leader of the Opposition says we need to build more homes faster. That makes sense, too, if we have the resources and approvals to do it.

And yes I did notice his comments about immigration.   This is what he says about that item in his five point plan

Review immigration policies. Immigration has been great for New Zealand. We are a harmonious, diverse and inclusive society. But Auckland’s housing, roads, public transport and schools are struggling to cope. Let’s have an honest and sensible debate about immigration using facts rather than prejudice to see if we should push the pause button.

Debating using “facts rather than prejudice” seems a good idea in most areas of life, but his approach doesn’t really seem to offer much.    There is little evidence (“facts”) to suggest that immigration has been “great for New Zealand”, but on-off immigration policies seem about as undesirable as unpredictable regulation in any other area of life.

 

 

This is what good policy formulation looks like now?

Michael Reddell Financial stability, Reserve Bank

I’ve now read the Reserve Bank’s consultation document on the latest iteration of their ever-extending, but highly unpredictable, LVR restrictions, and also the issue of the Bulletin they released yesterday Financial stability risks from housing market cycles.  Neither document seemed remotely convincing: just a series of the same old material, now twice-over lightly, that mostly doesn’t stand up to much scrutiny.  It was particularly striking that in the Governor’s mad rush to put yet more controls on banks and yet more potential borrowers, he never stops to reflect on any lessons from the fact that this is the third iteration (the Third Coming, as Gareth Vaughan puts it) of these controls in less than three years.  Does this not raise any questions in the Governor’s mind –  or those holding him to account –  about the Bank’s ability to set these sorts of controls effectively and provide a stable climate for private businesses and households?

But I’ve been tied up with other stuff today, and even on the Governor’s rushed timetable there are still a few days left to think harder about the Bank’s analysis.  (It is noteworthy that, despite the Bank’s commitment only a few months ago to longer consultative period, there is no attempt in the consultative documents to make a case for why action is so urgent that the new –  welcome –  standard is just tossed out the window.  Various critics suggest the Governor has bowed to political pressure, but I don’t believe that is the explanation).

So today I wanted to focus mostly, and quite briefly, on this table from the Bank’s consultative document.  As the Bank itself puts it, this table summarises the discussion “through the lens of a cost-benefit analysis”.

It looks like no cost-benefit analysis I’ve ever seen. I could commend to the Governor and his staff The Treasury’s guide to undertaking cost-benefit analysis.   Agencies simply cannot get away with calling a short list of possible costs and benefits, painted with the broadest possible brush and with not a number in sight, a cost-benefit “analysis”.  How could anyone look at a table like this and conclude with any confidence that what the Governor is proposing is in the national interest?  Perhaps he is right, but this table simply doesn’t show it.

Everyone knows there is a great deal of uncertainty about many of the possible costs and benefits, but one of the key arguments for disciplined  numerical cost-benefit analysis is that it forces agencies to write down numbers, make the case for those numbers, and illustrate the sensitivity of the resulting bottom line to a reasonable range of alternative assumptions.  Everyone knows bureaucrats and ministers game the system to help produce the outcomes they want, but the discipline of writing down the numbers is part of enabling others to scrutinize what is being proposed.  As a reminder, this is a consultative document –  a proposal for scrutiny and external comment –  and the Governor is legally required to have regard to submissions that are made. The law isn’t supposed to allow the Governor to simply rule by decree.

It is also striking that nowhere in the document, or anywhere in the cost-benefit so-called “analysis” is there any sense of the distributional implications of the proposed policy.  Who gains and who loses is often as important as the aggregate assessment of national costs and benefits? It isn’t clear that the Bank has given that any thought whatever.  That shouldn’t be good enough: Treasury, the Board, and  relevant parliamentary select committees should be questioning the Bank about the inadequacy of what it has rushed out yesterday.

What should be doubly disconcerting is that the Bank also shows no sign of having thought, in a disciplined way, about the distinction between private and social costs and benefits.  For example, take the very first “benefit”.    Loan losses are not a loss for the country as a whole, they are simply a redistribution of wealth among people within the economy.  Banks might be glad to have lower loan losses at some future date, but then banks –  private businesses accountable to their shareholders –  are able to adjust their lending practices themselves. Indeed recent evidence –  banks reining in, or cutting altogether, lending to offshore borrowers –  illustrates that they do just that.  What is that gives the Governor confidence that he is better able to make those judgements than the private businesses he is regulating?  We simply aren’t told –  even though this is his third attempt to get it right.

And why is a temporary reduction in house price inflation –  the second “benefit” –  a national gain.  Again, it redistributes gains/losses among players in the economy –  providing slightly cheaper entry levels in the near-term for those not directly affected by the controls, at the expense of those who are directly affected.   How do we value this alleged “gain”, especially if the fundamental distortions in the housing market –  yet more regulations –  aren’t changed.

I could go on.  There is, for example, no attempt to justify the proposition that it matters less if potential landlords are squeezed out of the market than if potential owner-occupiers are squeezed out.  And from a financial system efficiency perspective one could reasonably argue that an upsurge of non-bank lenders would  actually be a net gain, given that the controls are being put on at all.  But in any case, there is not a single number in sight.

These are highly intrusive controls, being imposed in a sweeping manner, and there simply isn’t much to underpin them.  Perhaps it won’t matter much to the Bank.  After all, the Prime Minister, the Labour Party Finance spokesperson, and even the former leader of the ACT Party seem to be in favour.   But citizens deserve much better quality policy formulation than what we have here.

I noted yesterday that it wasn’t clear quite why, even if one granted the need for some controls, we needed to effectively prohibit purchases of rental properties in places like Wanganui and Gisborne with LVRs above 60 per cent.  I half-hoped the consultative document might shed some light, but no.  Simply nothing.

As a reminder, real house prices in New Zealand as a whole are almost unchanged from the levels in 1987 –  and since those in Auckland are so much higher, those in the rest of the country  as a whole must be lower.

qv house prices since 2007 peak

We didn’t have a domestic financial crisis after 2007.  And I’m quite sure that anyone borrowing in those cities to the right of the chart, and anyone lending to them, is very conscious that house prices can go down as well as up.  The case for this regulatory imposition just isn’t made.

As ever, if the Bank is determined to rush ahead and do something more (perhaps on the  maxim that “something must be done by someone, and the Bank is ‘someone'”), the much less distortionary, and less knowledge-intensive, approach would be to increase capital requirements, either more generally or specifically on housing lending.  Doing so would provide bigger buffers, at minimal cost to banks and borrowers (since the financing structure shouldn’t materially affect the overall cost of capital).  The Governor talks complacently about longer-term reviews of capital requirements, but higher capital requirements could be imposed now.  I doubt there is a good economic case for doing so, but it is much less bad case than what we’ve been presented with in this latest consultative document.