Over the last few days I was reading John Gunther’s Inside Latin America.   For those who haven’t come across Gunther before he was an American journalist (and novelist) who really made his name with a series of these Inside books – the first was  Inside Europe in 1936 (he’d been a correspondent in numerous European capitals) – that are a mix of history, politics, key personalities and issues in the countries he visited (there is even, late in his career, a New Zealand/Australia one).  He appeared to have access to almost anyone and everyone.  They are period pieces, and that is their value.

Inside Latin America was published in August 1941, drawing on five months Gunther had spent visiting almost all the Latin American and Caribbean republics. It was well into World War Two, but at a time when the United States itself was still, at best, in a support role, and when it still seemed plausible to many –  notably in Latin America –  that Germany might yet win the war.  From the US side, one of the big concerns was German infiltration and influence throughout much of Latin America, and the perceived risk that if Germany had won the war in Europe many of the Latin American countries might adopt Nazi-sympathetic regimes, perhaps even in time posing some direct military threat to the US.  Certainly the Germans took Latin America very seriously indeed, spending heavily on propaganda and influence operations (actually, as I read it the parallels to the activities of the CCP/PRC kept springing to mind).  There is a lot in the book on the extent of German influence, and the countervailing steps most of the local governments were by then taking.

And there was a single reference to New Zealand, or more strictly to a New Zealander.   Perhaps some of you had heard of Lowell Yerex who was born in Wellington but moved to the US and was at this time the driving force, and main owner, of Transportes Aéreos Centroamericanos, at the time the largest freight-carrying airline in the world. I hadn’t.  He sounds like a fascinating character (there are apparently two books about him, one of which I now have on order, or if you google “erik benson, aviator of fortune, essays in economic and business history” you can download the PDF of a journal article that will give you much of the flavour).

But, of course, this is an economics blog.   And although Gunther is no economist, he does write quite a lot about trade and production –  both of which, at the time, were quite badly disrupted by the war.    And he was almost boundlessly optimistic about the economic potential of Latin America.   As, I suppose, many western authors had been since 1492 or thereabouts.

I pulled up the standard reference work for such comparisons, Angus Maddison’s collection of estimates of real GDP per capita, expressed in purchasing power parity terms.    For 1939 –  a year whose economic data was not materially affected by the war –  Maddison reports estimates for 15 continential Latin American countries.

gunther 1

Across all 15 countries, average real GDP per capita was 33.7 per cent of that of the United States. The average of the top four countries was 58.4 per cent of the per capita GDP of the United States.   Venezuela (with oil), Argentina, and Uruguay at this time all had GDP per capitas ahead of both Italy (from whence a large chunk of Argentines had come) and Spain (even looking back prior to the civil war, which only ended in early 1939).    Take a combination of no serious wars in Latin America itself and abundant natural resources and I guess one could see some reason for Gunther’s optimism.

That was then.  But how have things turned out since?  In summary, not that well.  Of course, all the Latin American countries are materially better off than they were in 1939, but for comparative purpose that doesn’t tell us much.

These days, there is per capita GDP data for a wider range of countries in Latin America (more independent countries as well).  But for this post, I simply looked at the same group of countries as Maddison reported data for for 1939, using the IMF’s WEO database.  Here is the same chart for 2019 (2018 for Venezuela).

gunther 2

There have been some changes in rankings among the Latin American countries: Chile and (the very large) Mexico and Brazil have done relatively well while, of course, Venezuela has been a self-destructed disaster.  But simply glancing at the graph is enough to tell you that the Latin American countries as a group have fallen further behind to the US over those 80 years.   Averaging across this group of countries, their GDP per capita was by 2019 only 22.5 per cent of that of the US, and even the average of the top-4 countries is now only 34.9 per cent of that of the US.    There are now three OECD countries in Latin America –  Chile, Mexico, and Colombia –  and the best of them, Chile, has real GDP per capita barely 40 per cent of that of the US.

And it isn’t as if the past 80 years have been glory days for the United States. I mentioned earlier that in 1939 the top-performing Latin American economies generated GDP per capita higher than those in Italy and Spain.  But from Maddison’s data there was a “top 10” group of western and northern European countries: in 1939 the average of Latin American economies had GDP per capita about 41 per cent of that of the top European grouping, and the top 4 Latin American countries averaged about 71 per cent of top European countries grouping.  Respectable enough I suppose.

But over the last 80 years, with all sort of interruptions (the war notably) Europe has really done quite well relative to the United States –  and, even more so, relative to Latin America.

Italy might be in a mess now, with little or no per capita GDP growth this century, but both Italy and Spain have real GDP per capita more than 50 per cent higher than the best of the Latin Americans (Chile).  And in comparison with those top-10 European countries (not including either Italy or Spain), the average for the Latin American countries has fallen to only 26 per cent of European GDP in 2019 (41 per cent for the group of four best-performing Latin American countries).

One finds a similar sort of Latin American decline if one compares those economies with Canada or Australia (Canada’s GDP in 1939 was only about 10 per cent higher than that of Venezuela).

But, of course –  and you probably knew this was coming –  if the Latin Americans don’t want to feel so bad about their economic performance, there is always New Zealand.

gunther 3

Across that whole group of 15 Latin American countries, since 1939 there has been a very slight lift (they were 34.3 per cent of New Zealand, now 35.8 per cent).   But the top-4 grouping (and recall that the composition of that group has changed, favouring Latin America in the comparison) they’ve actually fallen relative to us –  from 59.3 per cent to 55.5 per cent).

Our performance has been quite bad enough, but at least our starting point (1939) was second-highest GDP in the world.  The Latin American performance –  recall all that potential –  has been just dreadful.

Preparing this post prompted me to dig out an old post I wrote about Uruguay/New Zealand comparisons –  both small countries with temperate climates, lots pastoral agriculture, nice beaches (and Uruguay has been one of the more politically stable Latin American countries).

In that post I included a chart showing how much faster productivity growth had been in Uruguay than in New Zealand since 1990.   That improvement has continued in the last few years.  On Conference Board estimates Uruguay has the highest real GDP per hour worked of any of the Latin American countries, and now, on their estimates, is about about 76 per cent of that in New Zealand.

Unfortunately for them, “better-performing than New Zealand” is about all that they can really claim.   Real GDP per hour worked in Uruguay has improved only very slightly relative to the US in the last twenty years, and Chile –  with the second-highest productivity levels in Latin American –  is now further behind the US than they were in 1970 when Salvador Allende –  an up-and-coming man to watch when Gunther wrote – took office.




It is very difficult to get a good sense right now of how much excess capacity there is, here or other countries  In New Zealand’s case, part of that is about the gross inadequacies of our official statistics.  We are one of only two OECD countries without official monthly employment/unemployment data (the other is Switzerland) –  and if this has been a long-running deficiency, it seems more striking than ever from a government that amended the central bank act to highlight the focus it wanted on avoiding as much as possible excess labour market capacity.

Of course, there is a variety of less formal, or less fit-for-purpose, partial indicators.  We know how many people get the unemployment benefit but many people looking for work are not (rightly in my view) eligible for the unemployment benefit.  There is a new SNZ indicator using IRD data and providing a monthly employment indicator which should be quite useful in normal times, but isn’t when the government is paying firms to keep people notionally on the payroll, even if doing little or no work.   And although SNZ collects HLFS survey data steadily through the quarter, they seem uninterested in making even that partial monthly data available (larger margins of error as it would inevitably have).    We’ll only finally get the June quarter HLFS data in August.

There are other hints of excess capacity.  The wage subsidy scheme paid out in respect of some staggering share (around half) of New Zealand workers and the self-employed, but that is now very backward-looking since the bulk of the eligibility related to the severe regulatory restrictions on many/most business during the government’s so-called “Level 4” period, from late March to late April.     Most of the employees covered would not have been made unemployed even if no wage subsidy had then been on offer.

The new wage subsidy scheme comes into effect this week.  The rules were tweaked again last week, and although this scheme only covers eight weeks (rather than twelve in the original scheme), the expected cost (close to $3.5 billion) suggests a lot of excess capacity still exists, or is expected to exist.  Not, of course, that we have any official data on that.

Of course, other countries have also had the mix of regulatory restrictions (“lockdowns”), self-chosen reductions in social and commercial activity, and the impact of the sharp disruption to world economic activity.   Labour is generally not being particularly fully-employed at present.  But in most advanced countries, even those with monthly labour force survey data, this excess capacity does not really show up in the official unemployment rate at present –  after all, most other countries have deployed some form or other of fiscal support designed to keep workers attached to firms, even if for now they are doing little or nothing.   In most countries, the monthly official unemployment rate has risen this year, but mostly not by much (and there are vagaries in the statistics such that in Italy the official unemployment rate has fallen).

Only three OECD countries are reporting really large increases in their official unemployment rates.  These are percentage points changes this year to date.

Canada                                                  +8.1

Colombia (new to the OECD)           +9.5

United States                                       +9.8

The US numbers came out on Friday night.  There is some controversy about the monthly change, but all the caveats (including those from the BLS themselves) suggest that the “true” or “underlying” number is even higher than the reported number.

I’m not putting much weight on Colombia (knowing almost nothing about it), but we have every reason to suppose that the dislocation of the economy in New Zealand over recent months in New Zealand was at least as large as those in the US and Canada (whether one looks at a regulatory restrictions index, mobility data, or stylised indicators like the degree of dependence on the labour-intensive foreign tourism sector).  Forecasts of the drop in June quarter GDP are higher for New Zealand than for most other advanced countries.

The “true” increase in excess capacity to last month (the US and Canadian data are for May) in New Zealand is almost certain to have been at least as large as those in the US and Canada.    One might think in terms of an unemployment rate equivalent of at least 13 per cent, which would be (by some margin) the worst New Zealand had experienced since the 1930s.

One can debate the merits of the wage subsidy scheme –  and even more so the extended version, which seems focused on tying workers to firms that are least likely to recover any time soon, if ever – but without it we would have a much clearer sense of just how severe the labout market excess capacity actually is.  (Even if, as I have favoured, one took a more generous approach to individuals facing serious income loss this year.)    Perhaps even when all the wage subsidy schemes have passed the official unemployment rate will be “only” in the high single figure range –  although if the schemes expire in September I’m still sceptical of that –  but for now it is all but certain that the excess capacity in the labour market, that needs reabsorbing one way or the other, is well into double-digit percentages.  And political debate about what needs to be done should operate with those sorts of numbers in mind.

On which note, I’ve been reflecting over the last few days on what it takes to see full employment restored.   It isn’t like, for example, everyone simply coming back to work after the summer holidays.   Everyone –  individuals and firms –  planned on summer holidays and planned on returning.  By contrast, even in New Zealand with (for now) almost no Covid, that isn’t the parallel at all.  The income lost over the last couple of months – probably well in excess of $20 billion, relative to normal expectations – isn’t coming back.  The border is still largely closed. The virus still stalks the earth, with associated heightened uncertainty.  The world economy is in a severe recession and (rightly or wrongly) almost all forecasters think it will take several years for activity levels to get back to normal.  So if wealth has taken a hit already, and some significant sources of external demand are either restricted (by regulation) or impaired, where is the demand going to come from to quickly reabsorb workers who are either already displaced, or who are hanging in some temporary wage-subsidy limbo.

You see occasional talk of people “doing their bit” for New Zealand businesses by going out and spending more than usual, but it is a bit hard to envisage it happening on any significant or sustained scale.  I tried some introspection.  My household hasn’t been materially adversely economically affected by Covid shocks, and there doesn’t seem to be any material employment risk.  And yet we aren’t spending any more than usual, possibly a bit less.  Why would it be otherwise?   We’ll have a break in the school holidays, but then we always do (and when we booked the other day it was a bit shorter than it might have been, Auckland Museum having had to cancel/postpone the exhibition we hoped to see). Many shops are still a pain to go in to.   And I find myself still slightly shell-shocked after the last few months and a bit more cautious and abstemious than otherwise.  And if I thought about “doing my bit” on any serious scale – there are always jobs around the house than could be done –  then I’d contemplate the dramatic change in the fiscal position.  I’m not suggesting some full-blown Ricardian effect here, but (whether I approved of the scheme or not) it seems rather less likely than it was a few months ago that my kids will get fees-free tertiary education, and even if a centre-right government were to be elected  tax cuts seem less likely than they did.  And even prospects for the kids to get part-time jobs don’t seem what they were (and there are probably people needing the jobs more anyway).  Oh, and I’m conscious that another round of Covid restrictions, and economic dislocation, isn’t impossible or even unlikely.

Perhaps you are different.  Perhaps you are energetically contemplating spending more aggressively.  But I suspect most people won’t be, even those (notably in the public sector) fairly confident of keeping their jobs).

In a typical serious recession, changes in incentives (relative prices) do quite a lot of the work.   Lower real interest rates ease pressure on the most-indebted but (more importantly) they draw spending forward.  Often those changes in real interest rates have been rather large.  Sometimes, tax rates (income or consumption) are cut.  And, particularly in countries with a fair bit of foreign debt and not typically treated as international safe-havens (or home bases for pools of savings), the exchange rate falls a lot, drawing demand (from locals and foreigners) towards New Zealand.  Oh, and of course sometimes the government itself does a lot more direct spending on goods and services.

(Oh, and of course there is always pro-productivity and pro-investment micro reforms but…….this is modern New Zealand.)

The key point is that if, at some like current real wages, we are to get back fairly quickly to full employment (which, in my view, should be a high policy priority, given the dreadful scarring effects sustained periods of unemployment can have on some individuals) it needs quite a lot of people to spend quite a bit more than they otherwise would, to replace the demand that has (for now at least) disappeared or been somewhat impaired).

Of those mechanisms:

  • real interest rates have barely changed.    The Reserve Bank can huff and puff all it likes about possible portfolio balance effects etc from its LSAP programme, but if they don’t change prices in ways that encourage more spending than was happening at the start of the year (and they haven’t) it is really little more than sound and fury (and, just possibly, having stopped things getting worse),
  • the exchange rate is now about the same level it averaged last year,
  • consumption tax rates haven’t changed, and although there have been some business tax changes (a) most of the effects will be intra-marginal (flowing to people who woin’t change their behaviour, and (b) uncertainty is very bad for business investment (ie even if the effects are in the right direction, they are likely to be very weak for now)

The government is, of course, spending a lot.  Most of that isn’t direct spending on goods and services  (consumption and investment) but income transfers in one guise or another.  Even there however, the largest and most concentrated spend has already happened over the last three months (with some more in the next couple of months).

From the “fiscal hawk” side of the debate, one hears quite a bit of worry about fiscal excess and heavy future burdens.  I come and go on how sympathetic I am to those complaints and warning, but mostly I end up not being that sympathetic (and I noticed over the weekend a centre-right UK think-tank, Policy Exchange, taking what appeared to be a similar stance, of for different reasons).  And why?  Because if we are concerned at all about getting people back into work faster than simply allowing nature to take its course –  recessions will heal themselves eventually, but it could take quite a few years (perhaps tourism will be back to normal levels in 2025?) –  someone (many actually) have to be willing to spend more now than they were otherwise planning to.  I’d much prefer that monetary policy were doing its job –  not just here, but in Australia and most other developed countries –  because I think much lower interest rates and a much lower exchange rate would do a lot (as they did after 1933, 1967, 1991, 1998, and 2008/09), by changing relative prices/incentives, but it isn’t.   And with a hole this deep –  and borrowing costs this low (which don’t make fiscal policy a “free lunch”) and on-market borrowing this easy – it would imprudent for fiscal policy to be doing no more than just letting the automatic stabilisers work.  And, in truth, at least on the domestic interest rate leg, letting monetary policy do its job also involves people taking on more debt now than they’d otherwise planned to (voluntarily chosen and all that, but debt nonetheless).

If we are starting from (effectively) perhaps double-digits effective rates of unemployment, it is far from clear that anything like enough macro policy stimulus is being done.  If fiscal policy hasn’t reached its political limits –  it is nowhere near the market limits, but neither should we test those –  it must be much closer than it was and, on the other hand, monetary policy is doing almost nothing.  That is really inexcusable, If Orr and the rest of the MPC want to take on themselves some sort of mantle of Hayek or Mellon (as caricatured) as do-nothing liquidationists, Robertson, Ardern Peters, Shaw (and, it seems, Muller and Goldsmith) shouldn’t be standing idly by, by default offering their imprimatur.

(The post was headed “Recovering”: unfortunately, I am doing so only slowly from some bug I’ve picked up, so posts this week may continue to be patchier than I’d like.)

Small economies

The Productivity Commission last week released a report done for them by David Skilling on “frontier firms”.  That is the topic of the Commission’s latest inquiry, handed to them by the Minister of Finance.  Personally, I reckon the topic is mis-specified and will tend to drive people to focus on symptoms more than causes, but I’ll come back to that in more detail at some point.

Skilling was formerly Executive Director of the former (somewhat centre-left) New Zealand Institute and these days runs a consultancy, based in the Netherlands, with a focus on small advanced economies.  I’m a bit under the weather today so in this post, I wanted to touch on only two points from his report.

The first was to draw attention to footnote 10

10 The one policy foundation setting that I identify as having had a meaningful impact on New Zealand’s productivity performance and the development of frontier firms is with respect to immigration (or more precisely, the absence of a strategic migration policy).  The substantial net migration inflows that New Zealand has received over the past 25 years has been a strong source of support for headline GDP growth, but has created a series of distortions and pressures in the New Zealand economy: infrastructure and cost pressures, greater residential real estate demand (with implications for allocation of investment capital), downward wage pressure that deters business investment, as well as upward exchange rate pressure.  An explicit immigration policy that was focused on quality and filling skills gaps, with lower gross inflows, would create a more supportive environment for higher levels of international engagement by New Zealand firms (although the transmission mechanism to outcomes is more indirect than those discussed in the body of this paper).

There isn’t much about policy that I agree with Skilling on  –  and find it strange that in a 30 page report with an emphasis on the tradables sector, this is the only mention of the exchange rate –  but, as you can imagine, I agree with much of that.

And the second was about this chart

Forbes 2000

of which he observes

This seems to be the case in small advanced economies also.  One of the striking characteristics of successful small advanced economies is their reliance on large firms, with a disproportionate representation of small economy MNCs in measures such as the Forbes Global 2000 (Exhibit 6).

I wasn’t particularly familiar with this listing, so went and had a look.  But I also had a look at a wider range of countries.  For his paper, Skilling uses the IMF classification of advanced economies, focusing on those with a population under 20 million.   However, that grouping leaves out the central and eastern European countries (the Baltics, Hungary, Czech Republic, Slovakia, Slovenia) that are both OECD and EU members, and which are either catching or already overtaking New Zealand in terms of labour productivity (all but Hungary have had faster productivity growth than New Zealand since, say, 2007 – just prior to the last recession).

I’m not really going to dispute what I take to be one of Skilling’s propositions, that a successful New Zealand would probably see more large and internationally successful firms.   Nonetheless, it is perhaps worth noting a few things:

  • the Forbes listing is of public companies.  That’s fine; it is what it is.  But the implied market capitalisation of Fonterra makes it large enough that were it be tomorrow transformed fully into a listed company, it would almost certainly make the list (five Greek banks, with a combined market cap less than Fonterra make the list).  If anything, Skilling is too kind about Fonterra –  which has woefully underperformed the marketing pitches of 20 years ago –  but big and international it still is,
  • while we are the only advanced country in Skilling’s chart not to have a company in the list, none of the Baltics nor Slovenia nor Slovakia has an entrant either.   The Czech Republic and Hungary (both about twice our population) have one and two  respectively, in the Czech case a power company that appears to have a market capitalisation not much larger than that of Meridien,
  • Iceland and Luxembourg are both small successful advanced countries; the former has no entrants on the Forbes list, and the latter quite a few (more per million than any of the countries shown).
  • Portugal and Greece are not that successful small advanced countries, and both have several entrants on the list.

I guess A2 and Xero are increasingly not New Zealand companies, but appear large enough that they could well have shown up on a listing like this.

There are always going to be pitfalls in any illustrative indicator –  this one simply happened to catch my eye –  but if I agree with Skilling that it makes sense to pay attention to other small advanced economies in trying to make sense of the New Zealand story (and of our constraints and policy options), starting from where we are now, it is probably at least as useful to think about the central and eastern European countries –  and Israel, which does quite well on various of Skilling’s indicators but has productivity very similar to ours –  as the more traditional western European ones.

queen 4


Regional economies

Some months ago, when all was coronavirus, Statistics New Zealand released their regional GDP data for the year to March 2019.  I didn’t even open the spreadsheet at the time, but went looking for some data the other day and remembered I hadn’t written about the regional GDP numbers this year.

SNZ has been publishing the regional GDP data, by regional council area, for some time now.  The first data are for the year to March 2000, meaning that we now have 20 annual observations.

Here is how per capita (nominal) GDP for each of the regions relative to national (nominal) GDP per capita has changed since 2000.

regional GDP 20 yrs

I suppose it is convergence of sorts.  Even in the very poorest region –  Northland – per capita GDP has increased very slightly relative to the national average, while the three highest GDP regions (Auckland, Taranaki, and Wellington) have all dropped back relative to the national average.    The gap between the South Island and the North Island has more than halved and –  if one is to believe the numbers –  GDP per capita in Marlborough now isn’t much behind that in Auckland.

I’ve discussed previously the relative underperformance of Auckland.   There aren’t many OECD economies where the biggest city has per capita GDP only about 12 per cent above the national average (let alone where that gap has narrowed this century).  But it is only fair to note that Auckland had been staging something of a recovery. Here is the time series chart of Auckland’s per capita GDP relative to the national average.

auckland GDP

Population surges and associated building tend to be good for Auckland –  but there is no sign of productivity leadership, when per capita incomes in Auckland are still a bit lower (relatively) than they were 20 years ago.  I think it was the economist Andrew Coleman who suggested, only slightly tongue in cheek, that the business of Auckland was building Auckland.  Here is construction as a share of GDP for Auckland (these data lag another year behind).

auckland construction

Having said that, I was a little surprised to stumble on this chart.

akld popn

Of course, if the Auckland economic performance this century has been underwhelming –  especially relative to the rhetoric and political capital invested in talk of our “one global city” (the one just a bit smaller than Columbus, Ohio) it is as nothing compared to the relative decline of Wellington, despite all the puffery from the Wellington City Council, its “economic development” agencies, and the like.  Here is GDP per capita for the Wellington Regional Council area (largely greater Wellington).

Wellington GDP

Recessions might be good for Wellington’s relative position –  not many public servants get laid off in downturns (including the current one) – but otherwise it is a pretty stark and consistent decline.   Wellington’s share of the national population has also been falling steadily – albeit perhaps more slowly than the decline in per capita GDP might suggest was warranted.

At least if you live in Wellington, one often hears talk of the Wellington IT sector and, of course, the heavily-subsidised Wellington film industry.  The regional GDP breakdowns don’t show either directly, but the red line in this chart remains somewhat sobering.

wgtn sectoral

Last year SNZ decided to discontinue its annual screen industry statistics –  claiming (no doubt fairly) budgetary pressures, although it must have been convenient for the government (this one, like its predecessors) keen to talk about the alleged economic benefits of their massive subsidies to the film sector, even as what evidence there is rarely offers much support for their claims.     The last such data came out a year ago for the 2017/18 year.  Here is a snippet from the gross revenue table, by region.

gross film revenue

And here is the same snippet for 2012 and 2013.

gross film rev 2012

So gross revenues of Wellington production and post-production facilities/services –  mostly feature films (unlike Auckland) in the most recent year were not even three-quarters of what they’d been in 2012.

(There is a longer series of earnings for jobs in the total production and post-production sector – including the domestic-oriented bits – of the screen industry: relative to GDP it was no higher at the end of the period than when the series started in 2005. And estimated number of jobs in the sector has gone from 20400 to 20300 over the same longer period.   It looks like a classic infant industry  –  remaining infant and kept going by massive subsidies that keep the rest of us poorer.)

All this is, of course, against a backdrop in which national-level productivity growth remained very weak, and New Zealand continued to drift behind more and more countries that, not too long ago, we never even thought of as relevant comparators.

queen 4


Economic fortunes of Her Majesty’s realms

We mark today the official birthday of our head of state, Her Majesty, Queen Elizabeth II, queen of New Zealand and of her other realms and territories.   Her actual birthday was 21 April 1926, when her grandfather George V was on the throne.

When she was born, the United Kingdom and the Dominions (as they were then called) were still among the most prosperous countries in the world.    Using the Maddison compilation of real GDP estimates (and averaging across 1925-27, on account of some considerable year to year volatility in some of the series), here is how things looked at about the time the Queen was born.

Queen 1

At the time, Newfoundland was an independent dominion (for which there is no data, but presumably it was a bit poorer than Canada), and South Africa was also still a domininion.  Maddison has no data for South Africa in the 1920s, but what data there is suggests real GDP per capita might have been about a third that in New Zealand.

But the core grouping –  the UK, Australia, New Zealand and Canada –  took out four of the top eight places.

The Queen ascended to the throne on 6 February 1952.  By then, Ireland had become a republic, Newfoundland had been absorbed into Canada….and there was data for Sout Africa.

queen 2

You get a sense of the growing importance of oil (Venezuela, Trinidad and Tobago –  then still a British territiry –  and Gabon), but the core group of Her Majesty’s realms still occupied four of the top eight places.   There are all sorts of other ranks/comparisons in that chart that caught my eye, but today is Queen’s Birthday.

What about now?  Here are the OECD country data (news to me today was that Colombia has just been admitted to the OECD)/

queen 3

There is data for some more (very small) advanced countries.  Then again, Singapore and Taiwan aren’t in the OECD, and they both have real GDP per capita now higher than any of that core group of the Queen’s realms.    Use the IMF listing, which also adds in the oil-producing countries, and that core group rank 19, 20, 27, and 32 –  a far cry from the position when Queen came to the throne.

(Of the former Dominions, Ireland –  here shown, as the Irish do, using the modified GNI measure – ranks well, but not exceptionally so.  As for South Africa, in 1952, its real GDP per capita was not far behind that of the USSR.  These days – IMF rankings –  South Africa is 96th and Russia 50th.)

I used the OECD numbers in the previous chart because the OECD also had productivity data.  Here is real GDP per hour worked (same adjustment for Ireland) for 2018.

queen 4

New Zealand and Australia tend to have high hours worked for capita, so the GDP per capita rankings are not as bad as those for GDP per hour worked.

Quite a portrait of relative decline.   Her Majesty –  and her Governors-General –  appears to have been poorly advised on matters economic by her minister and officials in all four of these countries.

The Queen is also monarch of a variety of other countries –  12 others directly, plus the Cook Islands and Niue by right of her position as Queen of New Zealand.  (There is a fascinating chart here of how the number of countries she has been monarch of has changed over the years.)   Sadly –  especially for them –  none of those other countries has put in a particularly compelling performance either.  On the other hand, there is a range of UK/Crown territories – Falklands Islands, Bermuda, Isle of Man, Gibraltar and Guernsey –  that now do better than any of the UK, Canada, Australia, or New Zealand.

Not in narrow seas

That’s the title of a new book, published this month, by veteran economist and commentator Brian Easton.   The title is borrowed from a collection of poems, published in 1939, by New Zealand poet Allen Curnow,  but presumably also keys off the author’s previous book published in 1997, In Stormy Seas: The Post-War New Zealand Economy.

The full title of the new book, published by Victoria University Press, is Not in Narrow Seas: The Economic History of Aotearoa New Zealand.      It is a curious title in a number of respects.  First, there is that reference to the place –  so beloved of public servants and the Wellington liberals –  that is no place: New Zealand is the name of the modern country, and there was – so far as we know –  no collective name for what went before.   Then there is the definite article “the” – not “a” –  suggesting a definitive treatment that just isn’t on offer, even in this big (655 pages of text) book.   And then there is the suggestion that it is an “economic history”.

When I saw the title of the finished volume last month I was reminded of hearing Brian telling people –  the book has been many years in the making –  that it wasn’t going to be a conventional “economic history”, but something different, more of a “history of New Zealand from an economic perspective”.   And it is somewhat reassuring that, however the publisher has chosen to present the finished book, the author still seems true to  his earlier vision –  he begins his final chapter thus “This is a history of Aotearoa New Zealand, centred on the economy”.     Six years ago, seeking a new funding grant, he told interested parties

Not in Narrow Seas, as its title, suggests is an ambitious history of New Zealand . It is written from an economic perspective.

In fact, an extract from that document, written when the book was two-thirds done, probably gives you a good flavour of what is covered

As such it covers many issues which are often neglected by most general histories. These include:

– the interactions between the environment and the economy (and society generally); the book starts 600 million years ago at the geological foundation of New Zealand;

– the offshore origins of New Zealand’s peoples and the baggage they brought with them;

– there are seven chapters on the Maori plus further material in numerous other chapters;

– there is a whole chapter on the development of the  Pacific Islands (after the proto-Maori left)  in preparation for the account of the Pasifika coming to New Zealand;

– there are specific chapters on the non-market (household) economy in preparation for an account of mothers entering the earning labour force (one of the radical changes in the 1970s);

– there are five chapters on the evolution of the welfare state;

– the book pays attention to external events and globalisation;

– it could be argued this is the first ‘MMP history’ of New Zealand because it looks at how people voted as well as electoral seats won. (If this seems odd, it is rarely mentioned that when Coates lost power to Ward in 1928 his party won far more votes but fewer seats);

– this is not yet another history of the ‘long pink cloud’. It takes a critical view of the more extreme versions from this perspective, in part because it puts a lot more weight on the farm sector as a progressive force (albeit with its own kind of progressiveness);

– it synthesises the rise of Rogernomics with the events before, showing both the continuities and the disruptions;

– while not a cultural history, it integrates culture and intellectual activity into the narrative.

And, of course, there is a fair amount of more-conventional “economic” material as well.

Easton was economics columnist for the late lamented Listener for decades (I think I saw a reference to 37 years, a remarkable run) and you don’t hold down a slot like that without being able to write in a clear and accessible way, and make comprehensible what sometimes some economists almost seek to make imcomprehensible.    That carries over to this book.  If one were looking for straight economic history you might expect lots of tables and charts, but there is only a handful of either (by contrast, around 100 tables and charts in the much shorter In Stormy Seas).   And breaking the text into 60 chapters means bite-sized chunks.    For a serious work of non-fiction it is a relatively straightforward read (and, for better or worse, there are no footnotes).    For those who don’t know much about how the story of New Zealand fits together, especially with an economic tinge, it is a useful introduction –  especially when one recalls that the last comprehensive economic history of New Zealand, that by Gary Hawke, was published in 1985 (and had gone off to the publisher before any of the reforms of 1984 and beyond were even initiated).

But talking of “tinges” note that line in the extract above “this is not yet another history of the ‘long pink cloud’ “. He notes

Much of our history has indeed been written from a leftish perspective. However, the pink cloud obscures the total story of New Zealand’s development.

And he has some useful correctives to perspectives offered by other “leftish” authors, but make no mistake this is a book from the liberal-left as well.   If he occasionally has positive things to say about National governments, for example, it is largely when they initiated things – ACC as an example –  that were radical for their time.  His is a “progressive” vision in which, to a first approximation, things have only got better and better as they’ve approached today’s state of affairs –  even while there is still some way to go to get to the desired “progressive” end.

I always find it interesting to read the Acknowledgements sections, perhaps especially of New Zealand books.  Easton has well over 100 names listed, some of people long dead (such as Bill Sutch). I recognised only half or two-thirds of them but the great bulk were people of the liberal-left (plus Winston Peters).  That isn’t a criticism; just an observation about where the author’s central Wellington milieu is.   In some respects, the book may be best seen as a distillation of Easton’s decades of thinking and debating about New Zealand (not just its economy).

I’m not going to attempt a full review of the book –  I’d say that I’d leave that to the New Zealand Review of Books, except that that publication too has now passed into history –  but I wanted to highlight just a few scattered points that struck me as I read.

First, in his earlier history of the post-war economy (mostly up to 1990) there was much to like.  One of the key areas I disagreed with him on  – I’ve dug out a published review I wrote at the time  – was around macroeconomic policy since 1984.   He reckoned the conduct of monetary policy, and in particular the handling of the nominal exchange rate, played a big part in explaining New Zealand economic underperformance.  Here were my 1998 comments.

easton 1998

In the new book, although less space is devoted to it, this continues to be Easton’s view.   I continue to think his case isn’t compellingly made, but then this is one of those issues where I’m closer to the New Zealand conventional wisdom than on most (I reckon macro management –  fiscal and monetary policy – has been among the better bits of New Zealand economic policy in recent decades).

Having said that, one line in the new book that got a big tick next to it was his observation that the real exchange rate was probably the most important relative price in New Zealand (arguably the terms of trade).   In that regard, I was a little surprised that with the benefit of another 20-25 years, there was nothing in the new book about the extent to which New Zealand’s real exchange rate had –  over decades now – moved (risen, stayed high) in ways inconsistent with the productivity performance of the New Zealand economy, even adjusted for the improvement in the terms of trade, and the associated decline in the relative significance of the tradables/exportables sector of the economy.    It is the same curious de-emphasis we now see from our officials and ministers faced with a really major adverse economic shock and apparently unbothered that a key stabilising relative price –  the real exchange rate –  has barely moved at all.   Since one of the key elements in Easton’s economic history of New Zealand is the collapse in the wool price in 1966 –  at the time wool was a third of our exports –  it is all the more surprising.

Relatedly, I was quite surprised by how little mention there is in the book of the continuing relative decline in New Zealand’s productivity and material living standards over many decades, to today.  Brian is well-known for asking hard questions about just what official statistics are actually measuring, so perhaps he doesn’t think we’ve continued to drift far behind –  but I doubt that is the explanation (he explicitly highlights data for the late 30s that suggests that at that time our material living standards were still among the highest in the world).  On the one hand, he seems to work with a model in which government policy doesn’t really make much difference –  unless it is messing up “Rogernomics” and associated macro policy – but even if that is his model, he doesn’t make clear what he thinks is driving our relative decline (let alone –  and perhaps one can’t ask for this in a history – what might make a difference). I wonder too if there isn’t an element of the point I’ve suggested over the years, that the powers that be in Wellington (political, bureaucratic, and other) finding our structural economic performance too hard to explain prefer no longer to talk about it much?

In passing –  which is more or less how he treats it here –  it may be worth noting that Easton here (as in the previous book) seems less than persuaded by the notion that large scale immigration to New Zealand since World War Two has done anything beneficial for the productivity or material living standards of New Zealanders.  Here, as I’ve noted before, he stands in continuity with earlier authors on New Zealand economic history.

And two final points.

The first relates to the Productivity Commission.  Commenting on developments this century, he notes of the Clark government

Curiously the government often reappointed or promoted those closely associated with Rogernomics, and they did little to create institutions to provide alternatives to neo-liberalism. By contrast, the National-ACT Government established the Productivity Commission, one of whose members was not only a “Rogernome” but had stood as an ACT candidate [former Treasury secretary Graham Scott].

and moving a decade on, he notes

…the Key-English Government, nudged by the ACT Party, established a Productivity Commission to help pursue its economic objectives. This agency remained in existence under the Ardern-Peters government.  More generally, the Ardern-Peters Government had followed its predecessor’s habit of assuming a milder version of the neoliberal framework.  Like the previous Labour Government it gave important jobs to former neoliberal enthusiasts.

I imagine one of the people Easton has in mind here is the current chair of the Productivity Commission, Murray Sherwin, who was head of the International Department of the Reserve Bank back in the days of the float of the exchange rate –  an issue Easton has long written about and strenuously challenged how things were done –  and, of course, a key figure at the Bank in the years when price stability was becoming established.  I guess he must be almost the last of the people who held reasonably significant positions in those reforming days to still be in public office.  But his term expires early next year, and it will be interesting who the government (I’m assuming Labour leads the next government too) chooses to replace him, and telling about the interest (if any) the government has in addressing longstanding economic failures, and how.  [UPDATE: Brian tells me he didn’t have Sherwin in mind.]

But, to be blunt, if the Productivity Commission is the institution for the propagation of continued “neo-liberal excess” (my words, not Easton’s), those on the left wouldn’t seem to have that much to worry about.  In addition, of course, to the fact that the “Key-English Government” seemed to have no serious structural “economic objectives” –  do you recall them fixing the urban land market, addressing productivity underperformance etc? –  the Commission itself has increasingly tended to reflect the same sort of “smart active government”, technocratic wing of the European social democratic movement, that we see in –  notably –  the OECD.   Since governments appoint the Commissioners, the Commission will over time tend to reflect the preferences of governments of the day –  and we’ve seen that already in the rather different tinge of appointments under this government.  The Commission is certainly nearer in inclination –  if better-resourced –  to the old New Zealand Institute (former executive director, David Skilling) than to, say, the Business Roundtable or the New Zealand Initiative.  To survive –  as always a peripheral player, and rather small –  I guess they have to meet the market one way or another.

Economists are renowned –  sometimes fairly, sometimes not –  for acting as if they believe that economics is some sort of universal discipline without which almost everything and everyone is poorer.  But one rarely sees it quite so breathtakingly expressed as on page 75 of the book, discussing 19th century New Zealand, when Easton observes

Perhaps most of the settlers did not have well-formed opinions –  economics was then a new discipline, even among the well-educated.

In summary, almost everyone reading the book will learn something, and perhaps on a few points be challenged to think a bit differently.  It is fairly easy to read, but it isn’t “the economic history” of New Zealand.   Then again, it doesn’t really aim to be.  I noticed that back in 2014 Easton talked of wanting to have these appendices available on the publisher’s website (I presume the numbers refer to word count)


I. The Course of Population                            3850

II. The Course of Prices                                  4200

III. Measuring Economic Activity                  2100

IV. The Course of Output: 1860-1939           3250

V. The Course of Output: 1932-1955 2700

VI. The Course of Output: 1955-                   3400

VII. The Structure of the Economy                4050

VIII. The Course of Productivity                   1450

IX. Patterns of Government Spending           4850

X. Transfers                                                    5650

XI. Debt and Deficits                                     3300

VUP doesn’t seem to have been receptive to that. I hope that in time Easton might be able to make this material available on his own website, and past such notes (including appendices in the 1997 book) were useful and interesting to the geekier of his readers.




Two charts

….on unrelated matters.

One of the objections sometimes raised to my advocacy of a deeply negative OCR is along the lines of “it will only lift asset prices”, with the implication –  and sometimes directly stated –  that that is what has happened in the last decade or so, even as policy rates in most of the advanced world fell from materially positive numbers to somewhere near zero.   In 2007, policy rates in the US and the UK had been over 5 per cent, in the euro-area 4 per cent, and in New Zealand and Australia higher than all those rates.   Only Japan was then in the extreme low interest rate club.

The asset price that tends to attract most attention in New Zealand is house prices (really house+ land).  The Bank for International Settlements maintain a nice quarterly database of real house prices for a large group of advanced and emerging economies.

Here is what has happened to real house prices for the largest advanced economies, and for the advanced economies as a whole, over the 12 years from the end of 2007 to the end of last year.

house prices to end 2019

Very little change at all.

The aggregate advanced economy measure only starts in December 2007, and for quite a lot of countries the data starts getting thin for earlier periods.   But for the UK, the euro-area, and the US, I had a look at the previous decade –  over which period policy interest rates hadn’t changed much at all (ups and downs of course during the period) – and in each case real house prices increases were much more rapid in that period than in the more recent (extremely low interest rate) one.   The US had experienced a 53 per cent increase in house prices –  and they had already fallen back from peak by the end of 2007 –  and the euro-area a 40 per cent increase.  In Japan –  very low interest rates throughout –  real house prices had fallen substantially over the 1997 to 2007 period.

Of course, within these aggregates for the last decade or so there is a lot of cross-country variation.  We all know real house prices in New Zealand and Australia have risen a lot.   In some other countries, they’ve fallen a lot.    But even in New Zealand, Australia and Canada, the rate of increase has been less in the last (low interest rate) 12 years than it was in the previous decade.

That shouldn’t really be a surprise.  After all, in principle, houses are reproducible assets (some labour, some timber, some concrete, some fittings) and in few countries is very much of land built on.   Moreover, interest rates aren’t where they’ve been as the result of some toss of a coin, or a draw from a random number generator; they reflect underlying changes in savings/investment imbalances, which central banks adjust policy rates to more or less reflect.

When a wide range of countries have had fairly similar interest rate experiences (and inflation outcomes; the check on whether monetary policy is out of step), and yet have had very different house price experiences, it probably suggests that some non-interest rate factors have been at work.   Of course, in some cases, that might just mean working off past crises –  although if you want to cite the US there (a) recall that by the end of 2007 real house prices had already fallen by 15 per cent from peak, and (b) that in the boom years nationwide real house prices in the US never rose as much as they did in, for example, Australia and New Zealand.

A more plausible story is that some combination and land-use restrictions and population pressures continue to explain a lot about differential house prices performance in the years since 2007.   In New Zealand and Australia, for example, we have had tight planning restrictions and rapid population growth.    I don’t know much about planning rules in central and eastern Europe, but there isn’t much population growth (deliberate understatement here) in countries with strong economic growth such as Bulgaria, Romania, Slovenia, Slovakia and the Baltics.   It isn’t a simple one-for-one story, but taken across the advanced economies as a whole it just doesn’t look as though low interest rates are a credible part of the house price story –  house prices, in aggregate, not having done much at all.

Of course, had central banks completely ignored the market signals re savings/investment pressures and simply held policy rates up then no doubt house prices would have been lower.  Then again, we’d also have had persistent deflation and (more importantly) unemployment rates that stayed much higher for longer and more persistent losses of output.

On a completely different topic, I found myself yesterday on an email exchange with some fiscal hawks, very worried about the future level of public debt.

I’ve noted previously that on the Treasury budget numbers our ratio of net debt to GDP in 2023/24 would still be sufficiently modest by international standards that if we had had that high a debt ratio last year, we’d still have been (narrowly) in the less-indebted half of the OECD.

Another way of looking at things is to take the government at their word and assume that by the end of the forecast period the Budget is more or less back to balance, such that the nominal level of debt stabilises at the level forecast for the end of 2023/24.

If that were to happen that what happens to the debt ratio depends on how much growth in nominal GDP the economy manages in the years ahead.   If we assume that the terms of trade is stable (or that the only safe prediction is that we don’t know, so assume no change), then there are three components to the rate of growth of nominal GDP.    As an illustrative experiment I jotted down a range of possible average outcomes for each.

Average annual growth
Low High Average
Population 0 1 0.5
Productivity 0 1.5 0.75
Inflation 1 2 1.5

So I’d assume growth in nominal GDP averaging 2.75 per cent over the decades beyond 2024.  Of course, there will be booms and recessions in that time, but this is just an average.   And then I’ve taken two alternative scenarios –  one in which nominal GDP growth averages 2.25 per cent, and one in which it averages 3.25 per cent.   Those aren’t extremes, and one could envisage even higher or lower numbers.

But this is what a net debt chart looks like out to 2064.

net debt scenarios

Even on the worst of these scenarios this (exaggerated, because it excludes NZSF assets) net debt measure is back to 30 per cent of GDP by 2050.   That doesn’t seem too bad to me for a one in a hundred year shock (as the government likes to claim) or –  less pardonably –  a one in 160 year shock as the Reserve Bank Governor was talking up the other day.

Of course, fiscal hawks will say, “but what if another really nasty shocks happens in the meantime?”.  Well, of course we would have to face that if it comes –  and it could –  but, as I noted, our net debt at peak is not high by pre-crisis international standards, and isn’t even high by our own longer-term historical standards.

Governments might choose to lower the debt faster, although if real servicing costs remain low it is difficult to see why one would, since faster consolidation involves either higher taxes than otherwise (with real deadweight costs) or less spending than otherwise (and while each bit of spending has its own antagonists, there is a case to be made for most of it).   There is precisely no evidence that anything important would suffer if our net public debt took a trajectory something like the central scenario in that graph.

(Of course, it is a purely illustrative scenario, and the composition of nominal GDP growth does matter to the budgetary implications –  eg faster population growth means more infrastructure demand, faster inflation might mean some unanticipated inflation tax, faster productivity is more like pure gain –  but there is no reason to suppose that if governments can get back to balance (as they repeatedly have now for decades) that we will need anything much beyond that.  Getting back to balance will require discipline and focus –  and a strong credible recovery would help –  but since most of the fiscal measures to date have been avowedly temporary, doing so should not be beyond our political system, whichever group of parties happens to be governing by then.

Doing more

I had a long chat yesterday to a reader who’d read a forward-looking piece I’d written recently and was concerned that in the halls of power there might be insufficient appreciation of just how serious the economic situation is.  My caller was just about to lay off a fairly large chunk of the staff in his company.

I was inclined to share his view –  although it is hard to know what ministers/officials really think, as distinct from the official happy-talk – and have been uneasy that, for example, official forecasts of the unemployment rate getting to, perhaps 7 or 9 per cent were giving some a sense that really things weren’t so bad, and that more or less enough was being done at a policy level.  After all, actual headline unemployment rates are much higher in some other countries (US and Canada), and the unemployment rate here was higher than those forecasts back in 1991/92.  Just this morning on RNZ, the Governor of the Reserve Bank seemed to be suggesting that everything was in hand, and not much more needed to be done by policymakers as a whole.

I went straight from that call to a Zoom seminar put on by the Law and Economics Association on economic policy responses to Covid-19.   There were three economists speaking, none of whom I would usually associate with calls for a more active and interventionist state –  Eric Crampton (New Zealand Initiative), Andreas Heuser (Castalia consultants, and formerly Treasury), and Richard Meade (of Cognitus, also consultants).  The slides for all three presentations are here (and I think they said they are planning to put the video up as well).  None seemed remotely comfortable with the current situation or content that what needed to be done had been done.

I found it interesting that all three were advocating more-liberal state-sponsored/provided access to interest-free credit.

Heuser’s focus was on business credit, noting the risks (of widespread insolvency) that our more onerous lockdown (relative to Australia) had created and the lack of success of the government’s business loan guarantee scheme (and that the new interest-free scheme is available but offers meaningful amounts only for quite small businesses).  He seemed to be arguing for more generous bank-administered schemes (in which, for example, any government credit is more directly subordinated).

Eric Crampton’s focus was mostly on other aspects, but he repeated his enthusiasm for the scheme the Initiative was proposing a couple of months ago, allowing individuals to borrow from the state quite readily.  Repayments would then be made over many years through the tax system –  akin to the way student loan repayments are done – with borrowings to be interest-free up to a reasonable threshold (linked to your past taxable income) and carrying an interest rate for amounts beyond that.

My main interest, though, was in Meade’s proposal, which has apparently been around for a while but which I’d not noticed previously.  He starkly puts the problem this way

meade 1

And goes on to note that both firms and households rely on each other, and (in the large) none could really be confident of their own viability if they cannot be confident of the other’s.  He argues that the numerous support measures rolled out since mid-March have been too scatter-gun and selective to provide any widespread confidence or (thus) willingness to spend.   And they do this, on his telling, even as they rack up a huge fiscal costs, which will be paid (directly, or through foregone options) by generations to come.

His proposal has these features.

meade 2

(Note that his second line means big businesses and existing beneficiaries/public servants would not be eligible.)

As Meade notes, in an ideal world, such a framework would have been put in place three months ago, so that as we headed into the worsening Covid downturn everyone would have had much greater clarity about the buffers that would be in place.  But not having done so then does not mean, so he argues, that it should not be adopted now.

It is an interesting proposal, and among its features Meade sees these

Importantly, they replace government-imposed qualifying criteria and favoured cost lines with “self-selection criteria” and “self-prioritised cost lines”:

– They are “incentive compatible” in that taking out loans is a choice to personally pay higher taxes, which protects against over-borrowing (likely a lesser evil anyway);

– They otherwise rely on households using their private information to determine how much “income insurance” they need to remain able to pay their priority bills, keep their house(etc), and obviate the need for bluntly targeted subsidies.

Relative to the status quo, what Meade is proposing has some appeal, especially around certainty.  If you can’t know what the wider economic environment will look like, at least you can have a sense of what buffers you might have available, and those your customers might have available to them.

But I don’t see what Meade is proposing as viable, in least in the way he proposes (as a substitute for really big additional fiscal outlays).

The first reason is that while he presents it as “ex post income insurance”, it is really nothing of the sort.   When you buy income insurance –  whether privately or through ACC –  you pay your premium along with everyone else and hope you never collect on the policy.  If you do have to collect on the policy, the cost is covered a little by your previous premia, but mostly by the premia of the people who will never claim.

By contrast, Meade’s suggestion isn’t income insurance, but simply “liquidity insurance” –  as he notes, anti-slavery laws mean you can’t generally borrow secured on your future income, but Meade’s scheme ensures you can borrow if your income takes a sharp hit (his concern here is mostly for people for whom the welfare system provides a very low income replacement rate). But you, and only you, will pay every cent of the amount you borrow –  secured, through the tax system, secured against your estate, so really only written off in extremis.    

And he wouldn’t even make it available to big companies, even though big companies employ lots of people, make lots of investment choices etc etc.

And although his aim is to support confidence and demand  –  by giving everyone a sense that everyone else has access to liquidity and, thus, spending power –  I don’t think it would have done that very effectively (even relative to the policies the government has adopted), particularly note for households.  Lots of people –  having just lost their job, or fearing doing so –  would be very very reluctant to take on lots of new debt in the middle of a crisis, and instead would choose to cut their spending to the bone –  precisely what Meade hoped to avoid.    For small and (particularly) medium businesses, what Meade proposes is better than what we have, but still suffers from the weakness that (a) many firms probably won’t be coming back, and there is no particular public interest in them doing so (one motel in Rotorua is much the same as another, and so on) and (b) many businesses simply will not support more debt.

And the political system would just not be willing to stand by and say “well, you are on your own –  you had the option to borrow and chose not to do so”.  It would intervene with grants as well (as it has done, is doing).   That is actually more like (although still not close to) what a risk-pooling insurance scheme looks like –  those of us lucky enough not to lose our jobs help fund the support for those who did lose theirs (in, as Meade puts it, an “unprecedented correlated shock” where people find themselves in deep strife (again in his words) “through no fault of their own”.   (I could also note that many households –  any with significant equity in their house –  have significant borrowing capacity anyway, without a new scheme).

I wrote about Meade’s scheme for two reasons.

The first is that I was struck by the fact that all three speakers at yesterday’s seminar favoured interest-free loans, including to businesses.  Meade’s was the most developed model presented, and encompassed both households and businesses.  The government seems to agree that zero interest is about the right rate at present –  that is the rate it is lending at to those SMEs borrowing under its latest facility, and these won’t be the safest conceivable borrowers around.    So these market-oriented –  perhaps even “right-wing” – economists reckon zero interest makes sense at present, and the centre-left Minister of Finance seems to think so too (his revealed preference). The one person who doesn’t, of course, is the Governor of the Reserve Bank, who was heard on RNZ this morning  saying that retail rates were “about right at present”.    We all have a pretty good idea of where mortgage rates are at present –  nowhere near zero –  but check out’s table of the multiplicity of business lending rates.     We are in weird position where, faced with a huge deflationary adverse shock, the central bank’s Monetary Policy Committee is holding interest rates, for existing and new customers, well above where they should be.

The second reason for highlighting Meade’s scheme is that it gives me an opportunity to champion again my own proposal, first outlined in mid-March, which was designed to achieve quite a lot of what Meade was looking for.    That was the proposal that the Crown would guarantee 80 per cent of last year’s net income for 2020/21, for individuals and for firms.  Unlike Meade’s scheme, it would be quite costly to the Crown –  although I believe no more costly than the scattergun approach currently being rolled out will end up costing –  but it also offers genuine insurance, in which over time all chip in to cover some of the losses of those who were most severely adversely affected.

The most recent write-up of that proposal was in this post.   That was a while ago now.  I still reckon the basic framework remains the best option for conceptualising assistance (I saw other assistance as, in effect, credits that would be netted off against the “income insurance entitlement”).

In the spirit of ACC, if I were devising the scheme from scratch now, I might consider capping the payout at 80 per cent of individual incomes of up to $150000, with no compensation for losses on the income above that threshold.  I might also consider guaranteeing not 80 per cent of last year’s net income for companies, but guaranteeing company net income at zero (or last year’s reported loss) –  in other words, insuring that hitherto profitable companies did not go deeply negative, while recognising that profit variability is a much more natural phenomenon –  every business every year – than labour income extreme variability.  Each of those refinements would save money, but they would also complexify the system in ways that would have to be carefully considered if any government were to think the broad approach had merit.   The broadbrush simplicity and certainty of the scheme –  not playing favourites, not distinguishing large and small, simply buying time and providing some certainty –  was the appeal of the scheme.

Of course, many of these schemes  –  and the government’s own interventions – are focused on the immediate situation, stabilising things in the short-term.  But a year from now it is most unlikely that the economy –  ours, or those in other advanced countries –  will be anything like right again.  There won’t be huge new fiscal capacity –  not because of technical limits, or market constraints, but the realities of public tolerance –  and that is where monetary policy should be doing its job.  Much lower interest rates now aren’t mostly about boosting demand/activity now (the lags are simply longer than that) but about putting in place the right price signals –  cost of domestic credit, returns to domestic depositors, and (perhaps most importantly) the exchange rate –  that will support bringing private demand forward, and drawing private demand towards New Zealand producers, to get as back to full employment just as quickly as possible.

A mixed bag

The Reserve Bank’s Financial Stability Report this morning was something of a mixed bag, to say the least.

I’ll deal with the positive bits first. the discussion of stress tests of bank balance sheets, in the face of the very severe adverse economic shocks (of the sort we are seeing now –  whether the more optimistic takes of official agencies, or rather more severe economic loss/slow recovery scenarios).

Here is their summary take

Stress tests

Which is good, both the prominence of the discussion (this clip is from the cartoon summary) and the bottom-line conclusion.

The Bank discusses three scenarios

stress 2

And here was the summary commentary

stress 3

As they note, these conclusions – now in the midst of an actual unfolding event –  are not dissimilar to those from past stress tests. In at least one of those, house prices falling almost 50 per cent and unemployment staying around 12 per cent for several years didn’t create too many problems.  And it is a combination of a deep, reasonably sustained, fall in house prices AND a substantial sustained rise in unemployment that gives rise to substantial losses on residential loan books.  If just house prices fall, people will usually keep on paying their mortgage (including because few can effectively just walk away), and if just unemployment rises (and house prices fall only say 10 per cent), people might be in trouble, but banks can still recover most of their money.

So all of this is good –  the discussion, and the robust banking system.  It was the standard message the Bank used to tell people.  But then it became inconsistent with the other “causes”.  Wheeler wanted to put on LVR restrictions, for which stress test results were inconvenient.  And then the new Governor got a bee in his bonnet about wanting banks to have much more capital in their overall funding mix.  So for a year or more, while he tried to make his case for much much higher effective bank capital ratios, the stress test results –  consistent over years –  were played down, and often almost dismissed.

Then, of course, reality interjected itself, and now the Governor is quite content to run lines about how sound and robust our banking system is –  in the face of such a savage shock –  and how enlightening stress test results, preliminary as the current ones are, can be.

I would encourage people to believe the Governor on this one.  But changing your tune so dramatically, when it also happens to suit –  central bank Governors and supervisors will always want to play down risk once a crisis looms – isn’t that great for your longer-term credibility.  If the Board and Minister were doing their jobs, it is an issue they would take note of, and seek to remedy.

That was the good bit of the FSR.

There was also lots of spin.  It is old ground and I’m not going to repeat it all here.  Suffice to say that they continue to claim that monetary policy has done a lot, both through the OCR and the LSAP.   That means they are keen to emphasise the current level of the OCR, but not how little it has changed since the economic situation changed –  surely the only relevant metric, even in their modelling.  They talk about falls in interest rates, but never once mention the drop in inflation expectations, which means real interest rates haven’t changed much at all.  And they continue to hype the benefits of the LSAP, far beyond anything a careful reading of the data will support.

And then there was the notable omission.   Despite “efficiency” appearing in all their governing legislation as a consideration in shaping and applying prudential policy, there appeared to be no mention at all of the huge and persistent margin between retail term deposit rates in New Zealand and rates on other domestic liabilities with the same credit risk.  I discussed the issue at some length in a post last week.

retail and wholesale margins

(Yes, it was a little embarrassing to end that post suggesting that the Bank look again at its Core Funding Ratio requirement, only to learn shortly after that they had already done so quietly in March.  I should have remembered that, although in my slight defence I had checked on the Bank’s Core Funding Ratio page which then –  and still today –  does not mention the reduction, suggesting that the CFR is still 75 per cent.)

There appears to have been a further fall in term deposit rates overnight.  But if ANZ –  offering the lowest rates of the main banks at present –  is offering 1.8 per cent here for 6 month term deposits, six month bank bill rates are about 0.25 per cent. one year swap rates are also about 0.25 per cent.    And at the same time, ANZ in Australia is offering 0.9 per cent for six month AUD term deposits.   Here is chart using data from the RBA website.

RBA retail

Over the last decade, retail rates have been very close to wholesale rates, and although there is a gap at present, it is far smaller than the comparable New Zealand gap.  (And, of course, Australia’s inflation target is higher than New Zealand’s, so if depositors treated that target as credible, retail deposit rates in Australia (inflation target midpoint 2.5 per cent) would be deeply negative, while even with those new ANZ rates New Zealand’s would be barely negative at all.)

Given that the Reserve Bank has eased the CFR it is a bit puzzling why such a large wedge endures: it cannot be an sustainable equilibrium market outcome for instruments of identical credit risk (and at the margin, retail term deposits may have less credit risk than wholesale, given that bailout probabilities range from very high to almost certain).

In the circumstances one might have hoped for some analysis of this issue from the Bank in the FSR –  it being relevant both to the efficient functioning of the financial system, and to the effective stance of monetary policy (given MPC’s refusal to cut the OCR further).  It cannot be about credit ratings or ratings agency insistence (given that these are the same banking groups).  Perhaps there is some small element of customer resistance to lower rates here, but that doesn’t really stack up given how far retail rates have fallen over the years in Australia.

One possibility is that the Bank’s cut in the OCR is not being treated by the banks as credible relief for any material period of time.  The easing was announced at the height of the mid-March panic, and no timeframe was put on it.  There is still no timeframe, and no discussion in the FSR of how banks’ funding managers and Board might treat such indeterminant regulatory relief.  If, for example, banks thinks the Reserve Bank might snap the CFR back to 75 per cent once offshore funding conditions ease –  and a chart in the FSR suggests that might not be too far away, at least in price terms –  they’d be very hesitant about changing their entire funding, and marketing, strategy, and risk alienating customers they might need to court very soon.  I don’t know if that is the explanation, but it would certainly be consistent with what we’ve seen (movement not seen) in markets.  If the Bank was serious about closing these gaps –  and perhaps it isn’t  –  the sort of multi-year commitment to a lower CFR –  as I proposed in last week’s post –  would be a better approach to take.  As it is, we seem stuck with this gross inefficiency in our markets, and with retail interest rates well above those in (notably) Australia, despite the very difficult economic times and (on the Bank’s own telling) below-target inflation outlook.

And if there was no discussion of how banks might behave when given no timeframe (re the CFR) , I could also see no discussion of how banks might respond when there is a timeframe.  The Bank has removed the LVR restrictions for a year, and delayed the commencement of the higher capital requirements for a year.  In Covid-time, a year might seem an awfully long time, but it really isn’t if you are running a business like the big banks.    If the Governor is really going to insist next year that minimum bank capital requirements have to start rising again, that will very soon –  if not already –  be affecting bank behaviour, pricing, and so on.

The Governor has made much of buffers, and leeway, (all supported by no specific calculations), but if he is determined to stick with 2019’s plan, just delayed a year, that will impede credit availability to support the recovery.   Again, given the Governor’s confidence about stress tests etc, it would be far better to simply scrap the higher capital requirements –  perhaps keep a few useful detailed refinements –  and suggest the Bank will take another look in  five years’ time.  If the Governor is right about the stress tests, in a really savage adverse shock, those proposed higher capital requirements will prove never to have been needed.  And if he is wrong, the next five years will be spent working through loan losses and gradually rebuilding capital ratios to current levels –  much higher ones still can wait quite a few years (by when, on current government plans, new legislation will have provided a better governance framework for bank regulation, and removed the Governor’s sole power to pursue regulatory whims).

Just how little interest rates have fallen

There was a little flurry of media coverage over the weekend about the latest set of cuts in retail mortgage interest rates.  But it is worth keeping these changes in some perspective.

The Reserve Bank publishes monthly data for the “special” rates advertised for new borrowers (or those moving to another bank) and we can get a read of current rates from bank websites, as summarised in the tables on

So how much have residential mortgage rates fallen since the coronavirus slump began?  As it happens, rates had been pretty stable for several months up to February, so this chart compares the latest rates on offer with the average for the period November to February.

special mortgages

For most maturities, that’s not nothing.

On the hand, these are nominal interest rates.  And we know that the expected future inflation rate has fallen.   There is a variety of measures, survey-based and market.  The one the Reserve Bank has typically paid most attention to is the two-year ahead measure in its quarterly Survey of Expectations.  On that measure, inflation expectations have fallen by 0.62 percentage points since the pre-crisis period (the one year ahead measure shows a larger fall, the ANZ one year ahead measure a smaller fall).

Apply that fall in inflation expectations to those “specials” and the real –  inflation-adjusted – version of the chart now looks like this.

specials 2

I guess there is still a slight reduction in longer-term real rates, but…..not many people in New Zealand fix for four or five years.  The market is concentrated on the shorter-term fixed rates (at present, it appears, the 18 month term) and there has been no reduction in real interest rates there at all.

Term deposit rates have come down a bit more too.  But here is how the chart of those rates looks if we compare current rates with those around the turn of the year.  I’ve shown the nominal rates and real rates (using the same drop in inflationn expectations as above) on the same chart.

TD may 20

Pretty much across the board, real term deposit rates have risen slightly since the crisis began (including at what appears to be the most competitive part of the market, for terms of 6-12 months).  It is an odd response to a really serious economic slump.

Don’t blame the banks, or depositors for that matter; this is about choices made by the Reserve Bank Monetary Policy Committee – the prominent ones (Orr especially) and those faceless unaccountable external ones (Buckle, Harris, Saunders), all appointed by the current Minister of Finance.

The Governor keeps talking about getting interest rates as low as possible.  But they clearly aren’t – term deposits are mostly still a bit above 2 per cent (and far higher than in Australia) –  and yet the MPC has pledged, and repeatedly reiterated its dogmatic commitment based on no published analysis, to not cut rates any further until at least next March, still 10 months away.

And yet this is a really serious downturn.   Everyone seems to agree on that.  All the unemployment predictions –  even with the temporary cover (keeping people out of the official statistics) of the wage subsidy scheme –  involve higher peaks than we saw in the 2008/09 recession.  Even with big fiscal commitments, nominal GDP is expected to be way lower than previously expected, and the Bank expects to undershoot the bottom of its inflation target for a couple of years (for which there was nothing comparable in 2008/09).

How, then, did retail rates (real and nominal) behave over 2008/09?  Recall that that was an event that had its foundation in financial system problems, and even if the credit concerns weren’t specific to New Zealand the problems affected our banks’ access to funds, pricing etc.

The data are bit thinner for that period.   The Reserve Bank was only publishing “standard” mortgage rates, and single (six month) term deposit rate.  Oh, and it is a bit less clear when to date comparisons from.  Retail rates had gone on rising into 2008 (with the Bank’s acquiescence) as offshore funding costs were rising, and at the other end, shorter-term rates kept dropping further into 2009 than longer-term fixed rates did.    Inflation expectations also fell during that recession, on the Bank’s two-year ahead measure perhaps by about half a per cent.

But this is what happened from the end of 2007 to April 2009. (Changing start or end dates changes some of the numbers –  either way – by up to perhaps 50 basis points, mostly small on the scale of this chart.)

0809 retail

In other words, falls in retail rates (at the horizons where most of the business was written) of hundreds of basis points.   And that, in the Bank’s view (correctly as it turned out) was consistent with keeping inflation in the target range, even if not quite as high as they would have liked).

The Governor keeps claiming that his Large Scale Asset Purchase programme –  buying huge amounts of government bonds now yielding less than 1 per cent, in exchange for issuing huge amount of Reserve Bank deposits currently yielding 0.25 per cent –  is hugely effective and a fully adequate substitute for choosing not to do more with the OCR.    One can get down in the weeds of detailed arguments about what the LSAP may or may not be doing at the margin to bond rates or swaps rates, but whatever those effects may be –  and I reckon we are pretty safe in concluding that they are mostly small –  the rates that firms and households are actually receiving/paying is the bottom line.

In real terms, the household rates shown above have hardly moved at all, and there is little or nothing to suggest that picture facing businesses will be materially better (eg headline SME rates have fallen no further, and many larger businesses have facilities on which they pay a fixed margin over bank bill rates.  Bank bill rates have fallen by about 1 per cent since the start of the year, so in real terms a fall of perhaps 0.4 percentage points.  The contrast to 08/09 remains striking.

Of course, there is also the exchange rate.  The Governor claims to be successfully influencing it as well.   It is always difficult to know where to date comparisons for exchange rates, but here I’ve shown the fall in the exchange rate in the last two recessions:

  • for 08/09 the average in April 2009 relative to the average for the second half of 2007, and
  • for the current event, yesterday’s TWI relative to the average for the second half of 2019

TWi recessions

Monetary policy just is not doing its bit, even once all the fiscal support is factored into the projections.  That is a pure choice by the MPC.

We don’t know why they’ve just chosen not to do their job –  aiming for 2 per cent inflation and, as much as they can consistent with that, supporting a speedy return to full employment.  Last year, MPC seemed to embrace their mandate with some gusto. Now they appear like stunned animals caught in the headlights, uninterested in doing what they are paid for –  all while their spokesman keeps claiming to be doing a lot.

It is pretty reprehensible, and I find it quite remarkable that the MPC –  all of them, not just the Governor –  have not been asked harder questions about their failures.  Instead, much of the media seem to treat their acknowledged failure to ensure that banks’ operational systems etc were ready for negative rates as just “one of those things”, as if it could happen to anyone –  never for example drawing the contrast with Y2K, when the Bank proactively ensured it and the banks were ready, with contingency plans as well.   And notwithstanding that all of the data in this post are readily available, none has been yet heard to ask the Governor –  and his MPC –  why they are content with such trivial changes in real interest rates even when, with all their avowed enthusiasm for it, in combination fiscal policy and monetary policy in combination still have the Bank quite openly acknowledging that inflation will undershoot, and apparently not very bothered about the unemployed either.

Of course, the Minister of Finance bears responsibility for all this, and for all the individuals involved. Perhaps an Opposition that wanted to ask hard questions about the government’s stewardship at present –  even perhaps flag a different more pro-active approach –  might ask him just why he thinks it is appropriate for real interest rates to have hardly changed at all (and the real exchange rate not much more), even as he is willing to lend to the weakest business credits are far lower rates than his central bank’s monetary policy would support more generally.