Keep the focus on monetary policy

As we approach the OCR decision this afternoon and as some market economists are now talking about the possibility that the OCR could be below 1 per cent before too long, there has been more and more talk about whether fiscal policy should be brought to bear, to stimulate demand and (in some sense) assist monetary policy in its macroeconomic stabilisation role.  Just this morning there was an editorial in the Herald, a column on Stuff, and a comment from Bernard Hickey at Newsroom.   Some of the discussion is about what should be done now, and the rest is about contingency planning –  what happens when the next serious recession happens if the OCR is still constrained.

Much of the discussion seems to stem from people on the left who aren’t that happy with the government’s fiscal policy.  As someone not on the left, it has always seemed strange to me that Labour and the Greens pledged themselves to keep much the same size of government (and much the same debt) as National –  especially when, at the same time, you were running round the country talking about severe underspending on this, that, and the other thing.   I’m also of the view that structural budget surpluses are a bad thing, in principle, when net government debt is already acceptably low (on the OECD measure of net general government financial liabilities, New Zealand is now about 0 per cent of GDP, which seems like a nice round number – an anchor – to target).  There is an argument there –  whether from left or right – for some fiscal adjustment (taxes or spending), which might have the effect of a bit more of a boost to demand.

But those arguments really have almost nothing to do with the situation facing monetary policy.    They are fiscal and political arguments that should be made, and scrutinised, on their own merits: the arguments would be as good (or not) if the OCR was still 2.5 per cent as they are now, and you can be pretty sure that people on the left would have been making them then anyway?   The Governor of the Reserve Bank, for example, (a pretty staunch representative of the centre left) seemed keen on more infrastructure spending a year ago.  I guess he is a voter to so is entitled to his opinion, but it really doesn’t have much to do with monetary policy.

The general arguments that led countries around the world to adopt monetary policy more exclusively as the primary stabilisation policy tool have not changed.  Monetary policy can be adjusted quickly (to ease or tighten), operates pervasively (gets in all the cracks, without making specific distributional calls), is transparent, and so on.  If we had a fixed exchange rate –  as individual euro area countries largely do –  it would be a bit different (individual countries don’t have the monetary policy option any longer) but we have a floating exchange rate system which, mostly, works well for New Zealand.

To the extent that there is a monetary policy connection to the current calls for fiscal policy to be used (or the ground prepared to use it), it has to do with the looming floor on nominal interest rates.  International experience suggests that, on current laws and technologies, short-term nominal interest rates can’t be reduced below about -0.75 per cent without becoming ineffective (as more and more people shifted from other financial instruments into physical cash).  We don’t know quite where that floor is, as no central banks has been willing to take the risk of going further, but there is a fair degree of consensus (and it has long been my view too).

But that still means that in a New Zealand context there is 200 basis points of OCR cuts that could be used if required.    That isn’t enough for a typical New Zealand recession (rates have often been cut by 500bps), but is still quite a degree of leeway if what we are entering were to turn out to be a fairly mild slowdown in New Zealand.  It could (I’m not hedging here).   That capacity should be used energetically, not timorously.   So the issue –  monetary policy needing “mates” deployed now –  is not immediate.  It is about preparing the ground.

And there, the best macro stabilisation option remains the one the Reserve Bank –  and other central banks –  have done nothing active about, but really should.  Authorities (and it probably needs political support to do so) should be moving to make the effective floor on short-term nominal interest rates much less binding than it is.   It binds because the practice of central banks –  perhaps backed by law – has been to sell banknotes, in unlimited quantities, at par.   That practice can be changed.  It could be as simple as putting an (adjustable) cap on the volume of notes in circulation (quite a bit above the current level, but not at a level that would be transformative) and then, say, auctioning the right to buy additional tranches of bank notes from the Reserve Bank.  In normal times –  with the OCR at, say, current levels – the auction price would be at par.  If the OCR were cut to, say, -3 per cent (and be expected to stay there for some time) the auction price would move well above par, acting as a disincentive on people to attempt to make the switch from deposits to cash.  There is a variety of other ideas in the literature, as well (no doubt) as much less efficient regulatory interventions that could prevent really large-scale conversions happening.

Unusual as such options may sound, this is where the authorities –  here and abroad –  should really be concentrating their energies: giving monetary policy more leeway, in ways that will buttress market confidence that monetary policy will do the job when it is required.  At present, by contrast, when market participants contemplate a severe downturn they look into an abyss wondering what, if anything, will eventually be done, by whom, and for how long.  In a serious downturn that will just worsen the problem, driving down inflation expectations as economies slow (note that in the RB survey out yesterday, medium-term inflation expectations fell away quite noticeably –  and this while we still have conventional monetary policy to use).   And if there are objections that all this is somehow “unnatural”, bear in mind that had the inflation target been set at zero (rather than 2 per cent), as was the normal average inflation rate for centuries, we’d already have run into these practical limits, and been unable to get real interest rates even as low as they are now.

So there is plenty to be done with monetary policy, and the work programme to do it should be something open and active, drawing in the Bank, the Treasury, the Minister, and other interested parties.  The time to do preparation is now, not in the middle of a surprisingly severe downturn.

I have a few other reasons –  than “it shouldn’t be necessary” –  to be wary of calls for large scale fiscal stimulus now.  Just briefly:

  • there would be little agreement on what should be done –  these are inherently intensely political issues.  There is lots of talk of infrastructure gaps etc, but no agreement on what those are, let alone recognition of the twin facts that (a) the best projects, with the highest economic returns, have probably already been done, and (b) New Zealand government project evaluation is not such as to inspire confidence that new projects would add economic value.    And suppose there were attractive roading projects –  perhaps central Wellington and the second Mt Vic tunnel? – we know the attitude of the government’s support partner to new major roads.  Not a thing.  So what should we then spend on?  Uneconomic new railway lines?  Or what?  Perhaps some just favour more consumption or transfers spending – which might be fine if you are a lefty who believes in permanently bigger government, but if you aren’t the issue has to be addressed of how programmes once put in place are unwound later.
  • I don’t rule out the possible case for discretionary fiscal stimulus in the event of a new severe recession (especially if the authorities refuse to address the monetary policy issues above) but my prediction is that (in many ways fortunately) the political appetite for large deficits would not last very long, and that therefore we should preserve the option for when it might really be needed.  It isn’t now.   I take much of the rest of the world after 2008 as illustrations of my point: in late 2008 all the talk was of fiscal stimulus, but within two or three years all the political pressure was to pull deficits back again.  I don’t see why New Zealand would be any different (and that is to our credit, since low and stable debt has become established as a desirable baseline).
  • And thirdly, a point we don’t often hear from champions of more fiscal stimulus, relying more on fiscal policy and less on monetary policy to support economic activity and demand will, all else equal, put more upward pressure on the real exchange rate, further unbalancing an already severely-unbalanced economy (see yesterday’s long-term chart of the real exchange rate).  In a severe recession –  when the NZD tends to plummet –  that isn’t a particular problem, but it should be a worry now (when the TWI is still a bit higher than it was a year ago, let alone thinking about the longer-term imbalances.

Perhaps the Governor and the (experts-excluded) Monetary Policy Committee will proactively address some of these issues this afternoon. I do hope so. If not, I hope some journalists take the opportunity to push the Governor on why he (and the Minister and Treasury) aren’t actively pursuing work to make the lower bound on nominal interest rates much less binding, in turn instilling confidence in the capacity of New Zealand policy to cope conventionally with a severe downturn if/when it happens.

Oh, and I do hope some journalists might also ask the Governor this afternoon about the justification for ruling out from consideration for appointment to the Monetary Policy Committee

“any individuals who are engaged, or who are likely to engage in future, in active research on monetary policy or macroeconomics”

The Governor is, after all, a Board member and was one of the three person interview panel.    What was it that he –  or the Board generally –  were afraid of?    Expertise?  An independent cast of mind?  Of course, it isn’t only active researchers who have such qualities –  indeed, not all of them do either –  but it simply seems weird, and without precedent in serious central banks elsewhere in the advanced world, to simply disqualify from consideration for the (part-time) MPC anyone with the sort of background that many other central banks (Australia, the UK, the euro area, Sweden, the United States, and so on) have found useful, as one part of a diverse committee.

Wages have risen faster than output per hour

I have a few other things on my plate today, but I thought I’d just share this update to a chart I’ve run before, showing wage growth (using the LCI analytical unadjusted measure for the private sector) relative to growth in nominal GDP per hour worked.

GDP and wages aug 19.png

When the line is moving upwards, private sector wage rates have been rising faster than nominal GDP per hour worked.  Growth in nominal GDP per hour work can be loosely conceptualised as some measure of the economy’s capacity to pay (average overall domestic production is rising that rapidly, leaving to be resolved the extent to which those gains –  whether from the terms of trade, productivity, or just general inflation –  end up going to labour or capital).

The reason the chart has tantalised me since I first stumbled across the idea of constructing it a couple of years ago, is (of course) that private sector wages in New Zealand do seem to have been rising faster than “the capacity of the economy to pay”.  It has happened in fits and starts, and there is a fair bit of noise in the data, but the trend since about 2001 has been pretty clearly upwards.   (The wages data released this morning give us June quarter numbers for the numerator, and hours worked data, and here I’ve assumed nominal GDP rose 1 per cent in the June quarter.)   The cumulative difference over time –  around 15 per cent now –  is not small.

As a reminder, here is the comparable chart for Australia, which I included in a post last week.

wages in aus

The New Zealand numbers do not, repeat not, suggest that people are in some sense overpaid in New Zealand.  Mostly, wage rates are a market outcome (firms and employees, and the respective opportunities etc), and although policy initiatives like pay equity settlements and large minimum wage increases have boosted the New Zealand line in the last few years, those specific measures don’t explain the longer-term trend to anything like the full extent.

The New Zealand numbers also don’t suggest that New Zealand workers are doing particularly well in an absolute sense.  They aren’t.   New Zealand incomes lag well behind those in leading advanced countries.  But although wages can and do wander away from aggregate economywide productivity for a time, in the longer-term only productivity growth can really underpin a closing of those wage/income gaps.  As I’ve highlighted here before, it would take productivity increases of about 60 per cent here to match the leading OECD bunch.  And we’ve had virtually no productivity growth at all in recent years.   All the data is saying is that workers haven’t done too badly given a badly-performing economy: little or no productivity growth and fairly stable terms of trade.

But most people would still have been better off had we actually managed decent productivity growth, and if the economy were not so badly skewed as to have a substantially overvalued exchange rate and, in association with that, non-tradables sectors doing well, but tradables sectors as a whole typically doing poorly.   Reasonably strong domestic demand can result in high demand for labour, and higher wage rates.  But the associated overvalued real exchange rate deters (crowds out) the sort of investment in internationally competitive industries that might have allowed real productivity gains to have been achieved.

On which note, I’ll end with the OECD’s real exchange rate measure for New Zealand, calculated using relative unit labour costs (ie wages adjusted for productivity).

rel ULcs.png

The orange line is the average for the last 15 years:  far higher than for any sustained period in the history of the series, even as our productivity performance has remained pretty woeful.  And, of course, at the end of the period the series is above even that fifteen-year average.

Interest rates

Interest rates are in focus this week as we look to the Monetary Policy Committee (minus anyone who might ever do macro or monetary policy research) OCR decision, and accompanying Monetary Policy Statement on Wednesday.    No one seems to doubt that the Reserve Bank will cut the OCR this week  (on the radio this morning I heard one of the historically most hawkish of the market economists being interviewed – who only a year ago was articulating the case for a higher OCR – and sounding quite relaxed about two more OCR cuts this year), so the real focus will be on the messages the MPC tries to send about what they might do in future if (unlikely event, as ever) things unfold as they expect.   And perhaps on which risks and issues they choose to emphasise.  I wonder if they will acknowledge that their relatively upbeat GDP forecasts earlier in the year relied on a strong acceleration in KiwiBuild –  of which there is little or no sign.

As week succeeds week, interest rates have generally been moving lower. But it is easy to lose sight of just how large the change has been.  I mostly use the Reserve Bank’s tables, and latest spreadsheet covers the period –  only 19 months –  since the start of 2018.    At the start of last year, the New Zealand 10 year government bond rate was 2.77 per cent.  Today, it is about 1.31 per cent.    That fall was almost as large as what we observed in New Zealand over the course of 2008.

10 year interest rate swaps have also fallen very sharply, with yields down 150-160 basis points over the period.

And it isn’t that inflation expectations have been collapsing.  Here are the yields on the three longest maturity New Zealand government inflation indexed bonds.

2030 maturity 2035 maturity 2040 maturity
3-Jan-18 1.53 1.76 2.03
2-Aug-19 0.40 0.61 0.78

Over the course of 2008 the then only (8 years remaining) indexed bond dropped only about 40 basis points in yield.

With two (or more) maturity dates, one can back out an implied future short-term rate at some point in the future.  Thus, for example, the Reserve Bank publishes rates for 10 year and 15 year interest rate swaps, which enables one to back out a implied five year rate in 10 years’ time (ie the period between the 10 and 15 year maturities).  At the start of last year, that implied forward rate was 3.89 per cent.  On Thursday (the last date for which the Bank has published numbers), it was 2.42 per cent (and the 10 year swap looks to have fallen another 15 points since then, most of which is likely to be reflected in the implied forward rate).    Something no higher than 2.3 per cent –  allowing for term premia perhaps something nearer 2 per cent – now looks like the best market guess at the long-term future OCR, when all the short-term cyclical factors are stripped away (no one forecasts cyclical factors 10 years plus ahead).

Incidentally, while those New Zealand yields are low by our standards, and have fallen a very long way over the last 18 months or so, they still look quite high by international standards.   Without a Bloomberg terminal (or something comparable) swaps data can be hard to find, but as far as I could tell 5 year forward rates 10 years ahead are still higher than those in Australia, the US (even though they currently have a higher policy rate), the euro area, Japan, Switzerland, Sweden or Norway.     That has been the New Zealand story for decades – our yields are typically higher than those in other advanced countries, for reasons not including commensurately faster productivity growth.  Low as our rates are now, and are expected to be, those gaps to other countries haven’t closed, and aren’t expected to.

We can do the same implied forward exercise using the indexed bonds on issue.    With a 21 year bond and a 16 year bond, we can back an implied 5 year rate in 16 years time: on Friday that would have been about 1.33 per cent down from 2.9 per cent at the start of last year.   That is a huge fall for an implied rate so far in the future.

With the 11 year maturity and the 21 year maturity, we can back out an implied 10 year rate in 11 years time.   That rate is 1.2 per cent.  The roughly comparable rate in the United States (implied 10 year rate in 10 years time) on Friday was 0.66 per cent.  Long-term real interest rates have fallen a long way in New Zealand, but are still well above those in the United States (and the US is a relatively yielding market internationally).

There was interesting, quite stimulating, article in the Financial Times last week on interest rates, headed “Profoundly low interest rates are here to stay“.   I wasn’t fully persuaded by all the author’s arguments (perhaps partly because he didn’t dig deeply into the question of why interest rates are so low in so many countries), but he ended with a couple of very useful points that are often lost sight of. First

this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi [or Adrian Orr for that matter]  to make life miserable for the world’s savers. The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.

There are structural issues at play that are not adequately understood, perhaps around savings preferences, perhaps around demography, perhaps around productivity potential, perhaps aroud the optimal capital intensity of future production structures, perhaps…..(each of which have different implications).

I’m still sceptical of the idea that rates will remain low for ever: history would appear to be against that proposition

500 yrs

But the FT author’s final point is exactly right, and one too few central banks –  and probably market participants as well –  have heeded enough

it is time to stop waiting for rates to recover and face the world as we find it.

Including the fact that on current technologies, short-term official interest rates cannot be taken much lower in most advanced countries, and can’t even be lowered much in historically high interest rate countries such as New Zealand.

Contemptible

I’m sure many, perhaps even most, of those who purport to be “leaders” in New Zealand are at some level decent people.  Mostly, they probably love their spouses, hope for the best for their kids, and at some private level many probably conduct themselves according to some sort of values and morality the rest of us might recognise.

But I’ve increasingly come to doubt that many (if any) in their public roles care for anything much at all beyond deals, donations, keeping their job, and perhaps the sugar-high of costlessly cheering on popular causes.  If the only true measure of the values of a (purported) leader is what they are willing to pay a price, or incur a cost, for, there aren’t many other values on display at all.

There is a myriad of issues which could be used to illustrate my point: in the economic sphere one could point to the utter failure to deal with the regulatory disaster that puts home-ownership out of the reach of so many (at a time when it should –  global low real and nominal interest rates –  be more readily achievable than ever), or the indifference and lets-pretend approach taken to the decades-long disaster that is the New Zealand productivity performance.  How does almost anyone who has been in elected government over the last 25 years not hang their head in shame?

But the issue that finally crystallised my own total disillusionment with “leaders” in New Zealand is the obsequious, deferential, cowardly, values-free approach taken to the People’s Republic of China, which continues to deepen even as the regime’s excesses, including attempts to exert influence in New Zealand, become more apparent and better known.    Perhaps  –  not really though, these were the butchers of Tiananmen –  there were excuses 15 years ago (all those somewhat-deluded dreams of the PRC evolving towards (semi-free) Singapore). But even if there were excuses then, there are none now.  It is hard to think of a single dimension on which the CCP-controlled PRC operates according to the sorts of values, practices and precepts which New Zealanders have typically sought to live by, and which New Zealand has been willing to fight for.  No rule of law, no freedom of speech, no political freedom, no religious freedom, mass incarceration of minorities who fall foul of the regime, kidnapping of law-abiding foreigners, sustained and intensifying threats to a free and democratic neighbour, claims to the loyalties of ethnic Chinese in other countries (regardless of citizenship), wholesale state-sponsored intellectual property theft, attempts to shutdown critics in other countries, and so on.   There is mounting evidence of the aggressive activities of the regime in New Zealand and countries like ours.

And yet our leaders –  political, business, religious or whatever – almost without exception say nothing, ever.  And do nothing either, other than continue to pander, to ask only “how high?” when the regime suggests that jumping might be a good idea.  Deals, donations, customers I guess.  Never mind any sort of morality, any sort of decency.  Any meaningful values.

We’ve seen it on display this week, in two cases that directly involve the activities of the PRC embassy and its consulates in New Zealand.   First, there was the AUT case, in which the Vice-Chancellor and his senior management rushed around madly trying to assuage the hurt feelings of the PRC, ensuring that a booking for a meeting to mark the 30th anniversary of the Tainanmen Square massacre (“incident” as the AUT senior managers descrived it) was cancelled.    They can play diversion all they want, talking of how the building wouldn’t have been open on a public holiday anyway, but everyone recognises how thin that excuse is, when we see the Vice-Chancellor of a New Zealand university writing to the consulate

“Happily, on this instance your concerns and ours coincided, and the event did not proceed at the university,”

“Happily”?   The man seems to have no decency at all when dollars might be at stake.  It reads and sounds a lot like the only value left in his university –  well, our university actually –  is the dollars.  Not truth, not freedom of expression, nothing of the sort  (those reminders occasionally of a statutory role of universities to be “critic and conscience of society” –  not something I’d look to overwhelmingly left-wing institutions for, but let that be for now), just dollars.

There has been some blowback against McCormack and his managers.  I was left wondering how different any other New Zealand university Vice-Chancellor would have been –  perhaps some would have phrased things a bit more neutrally, or even avoided writing things down (the OIA and all that), but they seem as bad as each other.   Have you heard a senior New Zealand academic figure ever criticise the PRC, including for the intensifying restrictions on the “freedoms” of academics in the PRC.  I haven’t.   None of them came out this week and distanced themselves from AUT.

But what was really striking was how feeble the political response was. Only David Seymour seemed to care enough to speak.  Not a single National Party MP was heard to comment.  And the Minister of Education was reduced to mouthing a few cliched points and then spluttering about how important the relationship with the PRC was.    We didn’t see the China Council –  who often tells us how important New Zealand values are to them (but never tell us which ones) –  saying that this sort of conduct –  from the Consulate, but particularly from the university –  stepped over the mark, or suggesting that –  in the face of the PRC refusal to acknowledge what went on in 1989, and to offer any contrition – in a free society we should encourage efforts to remember and draw attention to what Beijing did.    “Friends” and “partners” in Beijing seem more important to all of them: “friends” was what National called the CCP/PRC in their international affairs document just a few months ago, “partners” seems to be what successive governments call these tyrants (just last month the current government signed up to a defence cooperation agreement with them).

That episode was bad.  But the real low point of the week was the open effort by the PRC embassy/consulate to laud those students who sought to disrupt a peaceful protest at the University of Auckland –  a foreign embassy cheering on lawlessness in New Zealand.   As the Herald reported the initial events

The university launched a formal investigation after three Chinese men were filmed clashing on campus with protesters who were against a controversial extradition bill.
A woman was pushed to the ground by one of the men, and the police are now seeking the identities of those involved in the incident.

The PRC consulate statement is here.

The Consulate General expresses its appreciation to the students for their spontaneous patriotism, and opposes any form of secessionism. We strongly condemn those engaged in activities of demonizing the images of China and HKSAR government, inciting anti-China sentiment and confrontation between mainland and Hong Kong students, through distorting the factual situation in Hong Kong under the pretext of so-called freedom of expression.

As far as I can tell, of our entire Parliament and our entire “establishment” more generally, again only David Seymour was moved to comment.   About a flagrant intervention by a foreign embassy into the internal affairs of New Zealanders, encouraging and celebrating lawlessness.     Even for the China Council, or the National Party, or the budding National Party candidate currently running Air New Zealand, perhaps this might have been a step too far.  Or what about the group of university vice-chancellors collectively?  The best proof that you actually have limits –  values, self-respect etc –  is when you demonstrate it, by calling out an egregious breach of acceptable standards.  This was surely one of those, to anyone of any decency.   Does Don McKinnon –  chair of the China Council –  really regard this as acceptable conduct?  And if not –  and surely he doesn’t really –  why won’t he say so?   China Council Executive Director Stephen Jacobi seems to be a decent chap personally –  occasionally, he even gets let off the leash and has made the odd mildly critical comment on his personal Twitter account.  He objected strongly a couple of weeks ago when I suggested that the China Council functioned to provide cover for the CCP, writing to (cc’ed to one of his Advisory Board members) in a Twitter exchange

“Say what you like but associating the NZ China Council with the CPC is really rather silly.”

Wouldn’t this episode have been an ideal opportunity for him and the China Council to have demonstrated that there are limits, that there is such a thing as unacceptable activities by the PRC Embassy in New Zealand (who they mostly champion and celebrate).  But not a word.  I guess Beijing prefers it that way.

And, which is really the point, probably Wellington too.  I imagine that there was a collective intake of breath at MFAT when they saw the Consulate statement; an “oh not”, a “they really shouldn’t have said that”.    But what does that amount to. even if so?  Precisely nothing.   There has been not a word from the Prime Minister (and leader of the Labour Party), not a word from the Foreign Minister (and leader of New Zealand First), not a word from the Greens (for whom I once had a sneaking regard on some of these sorts of issues), not a word from a single government minister or backbencher.  None. Not a word.

One of my readers –  from the tone, someone who knows of what he speaks – left a comment here

Promoting violence and disorder in the receiving State is a transgression that would normally result in any diplomat’s expulsion as persona non grata. But the New Zealand government obviously has no self-respect so these people can get away with whatever they choose to do.

There haven’t been expulsions, but there haven’t even been public statements.  Not a word. I guess it is always possible that someone from MFAT had a word with the consulate, but when the PRC Embassy is openly cheering on lawlessness in New Zealand, there needs to be an open, public, response and rebuke.  At least if our government, our establishment, stand for anything other than deals and dollars.  And if they want us to believe they take these things at all seriously.

In a very similar situation last week in Australia, Marise Payne Australia’s Foreign Minister put out a pretty forceful statement making it clear that such behaviour from foreign diplomats in Australia was not acceptable.  It was still milder than it should have been –  no naming specific names, no calling in of the Ambassador –  but it was a great deal better than the shameful supine silence of our Prime Minister, Foreign Minister (and Leader of the Opposition).   It looks a lot as though, when it comes to the PRC, all our purported leaders care about is party donations and the sales prospects of a few export businesses (public –  universities –  and private).  And our backbench MPs –  just keeping their seats I supposed (both main party presidents have been cheerleaders for the PRC regime) – not a single one, on either side, broke ranks.  Values, decency, morality just didn’t seem to come into it. Neither it appears does any sense of prudence –  if we don’t draw the line somewhere, the PRC is likely to simply keep on pushing.  I don’t suppose they see themselves as pursuing Beijing’s interests, but in substance that is exactly what they are doing.

(These three –  Ardern, Peters, Bridges –  were also all notable for their silence, apparent utter indifference, to the attempts to intimidate Anne-Marie Brady, and have given no leadership to the meandering foreign interference select committee inquiry.)

It is sickening.   No doubt each individual compromise and choice to stay silent doesn’t amount to very much, but they add up to something shameful: “leaders” who have simply abandoned any sense of the things New Zealand once represented and stood for, seemingly just to keep the next dollar flowing and keep a quiet life.

Are there rare, and puzzling, exceptions?  There are, and the New Zealand government’s recent choice to join 21 other countries in signing a letter of protest at what the PRC is up to in Xinjiang, is one of those.   It was, of course, better that they signed than not but it is almost as if the New Zealand government was embarrassed to have done so, perhaps “coerced” into doing so from other free and democratic countries.   Little or nothing has been heard from the government on the letter, nothing (in support) from the Opposition.  There is no sign they represent any decent values at all.

In an exchange earlier this week, someone suggested that the tide was turning.  “Look how much progress has been made since 2017” I was told.  I wasn’t persuaded.  2017 was when the background of Jian Yang, the National Party MP who had been a Communist Party member and part of the PRC military intelligence system, and who was never ever heard to say a critical word about the PRC (not even about Tiananmen Square), was revealed to the public. It was when Anne-Marie Brady’s Magic Weapons paper was published.   There was a bit of debate, some controversy –  including when Jian Yang acknowledged that he has actively misrepresented his past, on Beijing’s instruction, when applying for citizenship/residency.

But where are we now, almost two years on?    Jian Yang still sits in Parliament, in the National Party caucus –  in fact, he got a promotion this week and now (almost incredibly, but this is New Zealand) chairs a parliamentary select committee.  No one else in politics makes a fuss, there are no media calls for him to be de-selected.   In the intervening period, he and Phil Goff got together to get a royal honour awarded to another person with close CCP ties, whom National had been soliciting for donations.  No electoral laws have changed.    Phil Goff is still free to fund his campaign with anonymous bids for the works of Xi Jinping.   The government is signing defence agreements with the (increasingly aggressive) PRC, and the Prime Minister rushed off to Beijing to placate the PRC.  And now, when the PRC consulate grossly oversteps and attempts to directly interfere in free expression (“so-called”) in New Zealand no one in authority says or does anything.

Optimists tell me there is a groundswell of discontent among the public.  Perhaps.  But people don’t much like high house prices, and nothing serious gets done about that either.    Selective elite interests, and a comtemptible fear of a distant foreign power, seem to drive our political “‘leaders”, who seem now to inhabit a values-free zone when it comes to attitudes to one of the worst regimes (that matter much) on the planet today.   Their predecessors – National and Labour, who resisted Nazism and Soviet Communism –  would be ashamed of them. We should too.  On this issue in particular they have become  contemptible.

Appointing an MPC: worse than Trump?

Interest.co.nz had a story yesterday picking up on the Official Information Act releases (from the Minister and from the Board) I wrote about the other day about the appointment of the members of the new Monetary Policy Committee.  The story focused on the weird decision to exclude from consideration “any individuals who are engaged, or who are likely to engage in future, in active research on monetary policy or macroeconomics”.     This wasn’t just a hypothetical: at least one person who could have been quite suitable for the MPC was actively turned away on these grounds.

The tweet promoting the story sums up reaction quite well

One measure of how crazy this is, is that Don Brash has been willing to comment on the record.  Whatever else he talks openly about, Don has generally been very careful not to comment much about Reserve Bank matters since leaving office as Governor, and he is the chair of a bank the Reserve Bank (prudentially) regulates.  And yet this time he has spoken out.

“One would’ve expected the members of the MPC to be experts in monetary policy, or at least macroeconomics more generally. It seems quite extraordinary to exclude people who would have that kind of expertise…

The claim has been that the issue here is about “conflicts of interest”.   Conflicts of interest were, and always will be, a real and important issue to consider in putting together an MPC.   We couldn’t, for example, have as an MPC member someone who was advising clients on monetary policy and macroeconomics, or who was actively trading financial markets themselves.  I hope all the MPC members have suitable stand-down periods written into their terms and conditions that mean that members can’t leave the MPC one day and turn up advising a bank or hedge fund on New Zealand monetary policy a very short time later.

But “conflict of interest” is one of those labels that is sometimes flung around loosely, as a weapon against people someone is trying to exclude, without sufficient calm deliberation as to the specific nature of any alleged conflict.    There is simply no conflict of interest involved in having someone on the Monetary Policy Committee who is doing, or is likely to do, active research in monetary policy or macroeconomics.  In fact, it would be highly desirable to have at least one such person on an MPC.  It isn’t a conflict so much as a natural complement.

There might, appropriately, be rules about such a person not being able to, say, sell their research findings to a hedge fund or an advisory firm.  There might, appropriately, be rules about them not trying to trade the research results (in the unlikely event that the research results were that good.  That would be no different than (see above) prohibitions on selling advice on related issues.  And any (external) member of the MPC should have no better access to –  or ability to use for research –  Reserve Bank data than any other researchers.    But actually having someone on the MPC who was thinking and writing about monetary policy and macroeconomics –  whether quantitatively or through other approaches – would normally be a plus rather than a minus.

In truth, there aren’t that many people in New Zealand who would fit the description (researching now, or likely to in the future, monetary policy or macroeconomics), but that isn’t really the point (and overseas people with such expertise should have been able to have been considered for at least one slot).  One of the old arguments against a committee was that it would be hard to fill it: harder still (with capable useful people) if you rule from the start people actively engaged in thinking and/or writing about the issues.

And it isn’t as if the management majority on the MPC is so stocked with monetary policy or macroeconomic expertise and experience that any more might simply be redundant (although diversity of view and perspective, and informed challenge, would be valuable even then).   Of the four internals, probably only the Governor has ever done anything that might reasonably be called research on monetary policy and macroeconomics, and that will have been the best part of 20 years ago.

In a comment on my earlier post someone (whom I deduce to have been a former Reserve Bank staffer) noted

A former colleague used to say that if Bernanke, Yellen, Williams, Orphanides, Bean, Forbes, Posen, Pagan or Gregory were Kiwis they would have stood no chance for a role at the RB. I started agreeing with him more.

That covers the Fed, the ECB (central bank of Cyprus), the Bank of England, and the RBA. And it isn’t even remotely an exhaustive list of the people serving on decision-making monetary policy committees in the last few decades (whether in executive or non-executive roles) who would have been excluded on the bizarre criteria the Minister and Board have cobbled together.

There is a list of all former UK MPC members here, and the sort of people Robertson, Quigley and Orr would have excluded would include (in addition to those in the quote above) (and still non-exhaustively) Charles Goodhart, Willem Buiter, Sushil Wadhwani, David Miles, Danny Blanchflower and, of course, Andy Haldane.    Lars Svensson (and a bunch of other who served at the Riksbank) would be excluded.    So too would Alan Blinder (former vice-chair of the Fed), Stan Fischer (another former vice-chair and former Governor in Israel) Ric Mishkin, Jeremy Stein and, just of the current FOMC and alternates, John Williams (president of the New York Fed) and several others.    It is simply an absurd stance.

One measure of the absurdity is that Donald Trump –  hardly a byword for trust in expertise –  hasn’t applied the same sort of standard.  One of his latest two nominees to the Board of Governors is Chris Waller, Director of Research at the St Louis Fed –  who had a new empirical article out on monetary policy just a couple of months ago.  Earlier Trump sought to nominate Professor Marvin Goodfriend, an active researcher on monetary policy issues (and often more “hardline” than the Fed).  It is the sort of standard people generally expect to be applied –  not all active researchers by any means, but nothing like the sort of Robertson-Quigley-Orr (RQO) blackball  – when it comes to the monetary policy decisionmaking body.

By the RQO logic, you wouldn’t anyway actively engaged in monetary policy research as one of the internal appointees either.  Which would be equally absurd.  Just as well, I suppose, as none of them are, but in most central banks –  with four internals on a committee –  you’d probably expect at least one would meet that standard.

What do the Minister and Bank have to say for themselves?

Here is the Minister’s take

Robertson admitted: “It was a difficult balance to strike and we certainly had conversations about where it should lie.

“The idea is that we want the person to be able to focus on the MPC work; that we’re not looking for a lot of public comment on that work.

“It’s where you draw the line between somebody’s professional working life and commenting on aspects of the economy or aspects of monetary policy that the Committee would be considering.”

Robertson didn’t accept the argument those with the skills to be on the MPC were the sorts of people highly likely to do “monetary policy” or “macroeconomic” research when their terms were up, and ruling them out would severely limit the talent pool.

Robertson said members having a good understanding of monetary policy was important, as was ensuring they have a range of backgrounds.

“Over time this will evolve. What I’m trying to say is that I actually have some sympathy with the view that we do want informed people on the committee. I think we’ve got that, but we do have to get a balance.”

(Note that there was no hint of those “conversations” was in the OIA releases from either the Minister or the Board.)

To be fair, it doesn’t sound as if this blackball was really his idea.  Perhaps he isn’t even really that keen.  But it still isn’t a very convincing response.  Being an external member of the MPC isn’t a full-time role –  it was advertised as being about 50 days a year –  so you might have supposed that someone (eg an academic) doing research in the broad area of monetary policy or macroeconomics (macro is a big field might offer a bonus –  the taxpayer gets the benefit of that work without having to pay them to do it.    And quite how doing academic (or similar) research on macro issues after they left the MPC should be disqualifying, well….tells you all you really need to know.  The aim was about excluding capable, energetic, knowledgeable people –  experts who might have made a valuable, if potentially awkward for management, contribution to a diverse committee.   And, to sheet home responsibility, I don’t suppose Robertson really cared that much but Bank management will have.

The Bank’s response was interesting.  Recommendations of MPC appointments were a matter for  the Board, chaired by Waikato University Vice-Chancellor Neil Quigley.   Quigley apparently wasn’t commenting –  rather makes my point about an unaccountable shadowy Board, in this one of their few areas of formal power –  but a Bank staffer provided this comment.

The RBNZ spokesperson likewise said: “The full seven-member monetary policy committee has a broad range of economic expertise that does include monetary policy, labour markets, macroeconomics, asset markets, financial markets, agricultural economics, international trade, fiscal issues, taxation, etc.”

(Without getting into the substance of those claims) that response simply doesn’t address the issue at all.  It is little more than stonewalling and distraction.   Part of the point about externals was to provide a counter-balance, an alternative perspective, on management.  What possible grounds could the Bank have had for such a blackball on specific research expertise and interest in monetary policy or macroeconomics?  An academic expert in wellbeing is fine apparently, but not one who is actually expert in monetary policy, macro or financial markets.   Almost beyond belief.

Almost, but not quite.  Because in all these debates over the last five or six years that presaged the move to a committee, management never ever wanted to materially dilute its influence, power and control (Wheeler wanted to set up a statutory committee that was only him and his senior staff, appointed by him).  In response to a question from Eric Crampton on my post the other day I noted

I don’t think it is really a conflict of interest issue, but more one about the “collegial” model that the Bank management largely persuaded Robertson to go along with. They don’t really want MPC members taking an independent stance, or presenting conference papers that might raise questions (no matter how indirectly). Bank management tended to have a very negative view of the role Lars Svensson played at the Riksbank, and were also influenced years ago by negative views from BOE management about the way some external MPC members played their (then) new roles. They don’t want “big beasts” – they want people who will go along or (charitably) who will quietly ask not-too-hard questions in the closed confines of the Board room.

Remember that even when the Bank favoured a move to a committee – Wheeler tried to get the legislation changed – they never wanted to diminish management influence (that was explicit in Wheeler’s proposal, but strongly suffused what they got Robertson to sign up to). There is no sign Robertson much cared, and altho Tsy was probably a positive influence at the margin, the Bank was more invested in the issues than Treasury.

That still seems about right to me.   Even though –  against the Minister’s initial stance, persuaded by the Bank  – Treasury eventually managed to get provision in the MPC rules for individual members to speak openly, it never seemed very likely those provisions would be used much if at all –  and thus we’ve heard nothing from any of the external MPC members since they were appointed.  After all, the Governor is the boss of the internals (a majority of the committee), not known for his tolerance for dissent (or competing egos), and he played a huge role in appointing the externals (one of a three man interview panel, and the one with time, resources, and knowledge at his disposal).  The prohibition from the start on anyone who knows too much, and might want to go on thinking and researching, was just one more element in the winnowing process to make sure that they secured a tame and safe team.   Buckle, Harris, and Saunders may even add a little value at times, but it will all be terribly safe, and not very demanding. Just the way management like it –  and of course, the Board has always acted as defensive cover for the Governor.  (This hypothesis may also explain how Buckle got on the MPC –  he is now retired, but has done research on macro, and even written a little about monetary policy: the OIA from the Board showed that his name was suggested by……management.)

It might be one thing –  although still pretty undesirable –  if the Bank had covered itself with glory in the conduct of monetary policy and associated economic analysis in the last decade. But that is so very far from being the case –  not only has inflation consistently undershot, but Bank speeches and research offer little that is interesting, insightful or challenging.  And there is little sign now that management is any nearer to having rebuilt an internal capability of excellence –  indeed, reports suggest the internal research capacity has been gutted.  Add in a closed and defensive culture, and the sort of challenge and contest that a couple of people actively working on monetary policy or macro could have brought to the table should have been exactly what the situation demanded.

But management won and mediocrity prevailed.  Robertson, Orr, and Quigley deserve to be the laughing stock of international central banking –  worse than Trump on this score, the only people responsible for advanced country central banking who wanted to ensure that no one with any real expertise –  who might add real value – got near monetary policy decisionmaking (even as the Bank’s own internal research capability has been gutted).¹  The Bank’s international reputation in the 1990s was always a bit overdone (better than deserved), but those who were involved then, and those who once sang the Bank’s praises then – could probably never have imagined things would quite come to this.  But bureaucrats guard their bureaucratic empires, and ministers often let them get away with that.  And so mediocrity triumphs and the opportunity to produce a good quality MPC has passed for now.  Fortunately, the prohibition on expertise isn’t in the Act, this Minister won’t last for ever, Quigley’s term ends soon, and the very future of the Board is up for grabs.  But if you don’t start off new institutions strongly, it is hard to pull them up to a better, more internationally comparable standard, at some later date.  Such a shame.  Such a lost opportunity.

  1.  Well, perhaps they and the Irish Minister of Finance.

 

Why does good government matter?

That was the title of a speech Jacinda Ardern gave in Melbourne a couple of weeks ago.   For the short trip to Melbourne, the Prime Minister had eschewed commercial flights and taken an RNZAF plane instead, only to have the plane break down.  It later emerged (page 11) that her office knew how badly this bit of New Zealand’s government was run

757.png

There must have been some wry chuckles in parts of the Australian government and public sector.

The “progressives” who turned out to hear Ardern (it was an ANZSOG event, so I presume lots were public servants and academics) appear to have loved her.  Stuff reported that

The event on Thursday night attracted more than 2000 people. Ardern appeared to rapturous applause, and was told that she had put fire in the belly and power in the hearts of Australians.

In The Guardian one particular left-wing Australian academic, a former adviser to Julia Gillard, lost all sense of reason and perspective, claiming Ardern as “one of the world’s great leaders”, and hankering for something different, for New Zealand type politics and reform.

In more recent times it seems that for every policy success achieved by New Zealand, Australia has suffered an equal and opposite failure.

Which is, no doubt, why so many hundreds of thousands of New Zealanders have migrated to Australia and so few Australians to New Zealand (even though we make it easier for them to come, than it is for us to settle in Australia) and why when our two countries were once more or less economically level-pegging, Australia is now so much richer and more productive than New Zealand is.  Don’t take it from me: as Australian Labor MP Andrew Leigh put it in his recent article, productivity makes a real difference, and creates real opportunities and choices.

For a time there was a strange phenomenon whereby people on the right in Australia tried to talk up John Key and Bill English as great leaders and economic managers (mostly, it seemed, in reaction to people they didn’t like in Australia –  whether Rudd, Gillard, Abbott or Turnbull).  Curiously, this particular left-wing academic manages to embrace that strange line as well –  Jacinda Ardern is great and so was John Key (“exceptional leadership”).  Going by results, could we perhaps trade these stellar figures for someone Australians think is less impressive, but who might actually address some of the serious New Zealand problems and failures?

But the real point of this post was about the Jacinda Ardern’s text.   When I first heard the title (“Why does good government matter?”) my immediate reaction was along the lines of “how would she know?”, but I guess it is possible to recognise what good government might be even if, as a serving Prime Minister, you aren’t presiding over such a beast.   A good start might be recognising that as Prime Minister you might perhaps be thought of as chief executive of the government but not –  contrary to the PM’s suggestion in her text –  of “the country”.

I’d have thought the question of why good government matters was pretty straightforward.  Governments exercise enormous power –  actual and potential (the latter especially in a country like New Zealand with few formal checks and balances) –  take an enormously large share of our incomes (equal to more than 30 per cent of GDP), and any agency that powerful needs to be kept in check, and we need assurances that those in charge of the goverment are operating efficiently, effectively, compassionately, honestly, openly, knowing their own limitations, and so on.    Good goverments can do some good.  Bad governments can be incredibly dangerous and damaging.  Look, after all, at the productivity or housing records in New Zealand –  or at the 10 per cent of working age adults living on welfare.

But there is little sense of any of this in Jacinda Ardern’s speech.  I guess she is a socialist –  former president of the International Union for Socialist Youth –  speaking to an audience of people with pretty similar beliefs about the desirability of a big and active government, with little emphasis on how –  time after time –  governments mess things up.

Ardern’s imperial mindset is on display early in the speech

Good government matters, because government affects everything.

Breathtaking.  The love of husband for a wife (and vice versa).  Of a parent for a child?  Our core beliefs –  those under the label of religion and others –  that shape what we value?   Friendships?  Whether or not the All Blacks win the World Cup?

I suppose you could mount a defence of the Prime Minister along the lines of bad governments can interfere even in these things, but there is not even a hint of that in her address – no sense at all of the appropriate limits of government or of the failures of even the most capable and well-intentioned governments.    In fact in the very next sentence she – I guess she is a Socialist –  goes on to suggest that this “government affects everything” line is something “we” (she and the smart active government types) “perhaps take for granted”.  She tells us, quite seriously, that she was “gutted” that an old school friend had no interest in politics: but then Ardern has never known anything but politics, and that simply isn’t (fortunately) the case for most people.   But she really wants to a better class of citizen to be worthy of people like her.

She goes on with unsupported stuff

Around the world, democratic values and institutions are under threat in a way that many of us never expected to see in our lifetimes.

It would perhaps be good if she were a bit more specific.   Perhaps she had the PRC in mind, and the way she and her colleagues repeatedly defer to PRC interests and pressures, allow PRC regime/Party-affiliated individuals to serve in our Parliament?  But I’m guessing not.

Perhaps she isn’t too keen to Vladimir Putin (neither am I) or Viktor Orban (not ideal either) but most adults are old enough (“our lifetimes”) to remember when these places were far far worse.   She surely can’t mean Brexit –  which was, after all, the choice of the British voters in a hotly-contested energised referendum?   And yet I fear she might, because in the next sentence we read

Nationalist sentiment that closes off the possibility of countries working together is surging.

Except that it doesn’t, does it.  Free and independent nations often choose to work together on specific items of mutual interest (eg no sign of the UK pulling out of NATO).  Aren’t Australia and New Zealand proudly independent countries –  doesn’t the PM tell us at every opportunity about her “independent” foreign policy? –  and yet we work closely together and are still able to disagree, and not subsume ourselves in one combined “New Australasia”.

Strangely, in her paean to good government, the Prime Minister talks of how

Norms that we in New Zealand and Australia take for granted – the rule of law, the peaceful transfer of power, freedom of expression – are being challenged in new and more explicit ways.

Must have been the PRC she was talking about again surely? But I guess not.

I’m old enough to remember when military coups in various African and Latin American countries were the regular fare on Morning Report, and when from the Fulda Gap eastwards few had the benefit of the rule of law, freedom of expression, and Party rule was something akin to the end of history.    Things are better now in so much of the world.  And 23 Democrats are lined up across the political spectrum to try to defeat Donald Trump in an open and contested election.

But she also mentioned “freedom of expression” –  the same Prime Minister whose government is beavering away on plans to restrict that freedom in New Zealand, whose government made mere possession of the manifesto of Brenton Tarrant an offence punishable by many years of imprisonment.

To this point she seemed to be merely warming up with some generic tropes for his left-wing audience.  And then it was into the red meat with a strong denunciation of the reforms of the 1980s and early 1990s –  all this from a Prime Minister of the same party that did many of the reforms.

In many countries, while the very wealthiest have grown consistently wealthier, the rest have seen little or no real rise in their incomes or their living standards – over decades.

Inequalities that deepened with the great deregulating reforms of the 1980s and 90s have become a permanent feature of these economies – not a brief moment of pain.

That is certainly the case in New Zealand.

Except that very little of that stacks up against the evidence.  In New Zealand wages have been rising faster than the capacity of the economy to pay (growth in nominal GDP per hour worked), income inequality hasn’t widened for decades, and to extent there have been issues in New Zealand they have to do largely with housing –  where successive governments have presided over grossly over-regulated urban land markets.

And look at her try to distance herself from and disown all sorts of reforms  (notice that “said to”)

Starting in 1984, through to the 1990s, we removed regulations that were said to hamper business, slashed subsidies, transformed the tax system, dramatically cut public spending and massively reduced welfare benefits paid to the sick, those caring for children and the unemployed.

Now we can argue whether those regulatory reforms were necessary, but regardless the numbers speak for themselves.

And yet she shows no sign of even understanding the numbers, repeating the same line she took into the 2017 election, claiming that in aggregate the economy did well, but the “right” distribution didn’t happen, as if oblivious –  or uninterested –  in the continued widening gap between the level of productivity in New Zealand and that in leading advanced OECD economies (and than in Australia).

She does go on to devote a paragraph to housing markets, but shows no sign of actually understanding the issues, suggesting that low interest rates are the cause of the problem.  Similarly she laments technological advance putting “people out of work” (it is called productivity –  doing more with less), seemingly oblivious to the incredibly high labour force participation (and employment) rates we actually have in New Zealand (higher, for example, than in Australia).

And in a line of (stunning) naivete, we read this

Stunningly, our most connected generation in New Zealand, has also been found to be our loneliest.

And in the next line (emphasis added),

what does good government look like, not for us but for the very people who are turning away from us?

The Prime Minister of the ANZSOG (public servant and academic) audiences, “people like us”.

And so she goes on

Domestically, some have chosen to reject the independent and expert public service and the possibility of a mutually respectful and diverse nation.

Could we perhaps have one of those “independent and expert public services”, instead of the degraded (for example) Treasury we currently have in New Zealand?

Abroad, they reject the international institutions that they paint as responsible for both economic and cultural problems when they aren’t necessarily at fault.

One of my old bosses used to jump up and down when we (unspecifically) tarred unnamed individuals.  She might be a fan of the EU, but there is no reason why the British public should be, or why them choosing the pull back from the push for a federal Europe should be any sort of marker of societal failure or decline.    And if the IMF, the World Bank, the UN etc do little harm, they don’t do much good either.  And if she wants to criticise the US over the WTO, perhaps she should say so directly –  or perhaps even live the view that free trade benefits most those who take off restrictions on their people, and take a lead and remove New Zealand’s remaining tariffs and import restrictions.

And then

So this is one answer that is available to people – and that some are signing up for. After all, fear and blame is an easy political out.

Except that some people –  parties and individuals, Labour included –  are to blame for our housing disaster, our dreadful productivity performance.  That blame should be sheeted home.

We get several mentions in the speech of high rates of GDP growth but (I think) not a mention of immigration –  which the PM and the ANZSOGers love –  and not a hint of per capita income growth, let alone the (lack of) productivity growth.  Productivity creates possibilities and options, eases hard choices etc.  But Ardern seems to prefer not to know.

And we get stories about “social and economic inequality” driving deprivation, poverty and crime, but nothing at all about cultural failures (a point Winston Peters was making this week), family breakdown, or choices and individual responsibility.   Free societies can’t flourish without strong and functioning families and cultures.

As she was talking to public servants, there is several pages of talk about public services reforms –  but nothing about transparency, nothing about accountability, nothing about excellence, nothing about (say) fixing a system in which the head of the State Services Commission largely exonerates his buddy the outgoing Secretary to the Treasury after a monumental stuff-up, revealing an inability to operate under pressure at the very top of our public sector.  Once upon a time Labour talked of being the “most open and transparent government ever”.  Now even people on the left just scoff and make fun of the claim.   And if the public service is in such good shape (as she claims) doesn’t it make it very clear that responsibility for the severe ongoing policy failures really lies with her (and her colleagues, and people elected before her from her party and others).

The speech ends with the claim that “Good government need not be an oxymoron”.  At one level that is obviously true, and yet at another it invites the reaction “and yet surely in New Zealand in recent decades it has proved to be so”.   And if it weren’t for the ideological blinkers of her audience (for whom her main appeal seems to be that she is the “not Scott Morrison” or the “not Donald Trump”, you’d have to marvel at the presumption of the Prime Minister offering lectures on good government to a country that is so much richer and materially more sucessful than New Zealand is, to which so many New Zealanders have moved in recent decades, and when her government has done so little.

For those –  as many do –  who praise Jacinda Ardern as a great communicator it was also striking to read the speech and not find a single fresh or interesting idea, not even a fresh or startling way of making an old point. It was as if some public servant or PMO staffer had simply turned the handle and churned out a set of cliched notes, empty of almost any substance, with nothing to leave people thinking.   Is there anything to this alleged communication skill, beyond the level of individual empathy –  not an un-useful quality in a Prime Minister, but hardly the foundation for any sort of transformative government.

In his Herald column last week, Matthew Hooton brought me up short with this summary

The Ardern Government is the emptiest and most incompetent in living memory,

But it is hard to disagree (despite some competition for the title) and the problem starts at the top.  So much of what the Prime Minister says is vacuous –  almost devoid of content –  and it has been matched by an absence of any serious steps to deal with pressing failures (or utter failure in, for example, an actual initiative: KiwiBuild), in turn presumably built on  no compelling narrative about what has been done wrong in the past, and what might make a material difference in the future.  Endless blather about wellbeing doesn’t change that failure.

For those who doubt the “vacuous” charge, consider finally this

Someone I debate these things with, perhaps inclined to making a few more allowances than I am, observed “even I have to agree that is pretty vacuous”.

We really need good  –  disciplined, rigorous, courageous, open, self-aware, limited – government.  We don’t have it.

 

Thoughtful analysis of productivity from the Opposition

The Opposition in the Australian Federal Parliament that is.

In my post yesterday, I noted  that Simon Bridges’s latest speech continued the pattern in which our Opposition pretends there is no real structural problem in the New Zealand economy: no decades of productivity underperformance, no near-complete absence of any productivity growth in the last several years (whether under National or Labour).

And so it was some mix of refreshing and depressing (would that it were so in our country) to yesterday read a new paper by the Australian Shadow Assistant Minister for Treaasury on “tackling Australia’s productivity crisis”.  No doubt it helps that the Shadow Assistant Minister was previously a professor of economics at the Australian National University (I wrote about a paper he gave in New Zealand last year here).   And perhaps the political context is different: it is now six years since the ALP was in (federal) office and it is three years until the next election.  And Leigh isn’t the highest profile ALP politician.  Nonetheless, a moderately senior figure in the main opposition party actually went to the effort of writing a serious paper on productivity failures in Australia (not even engaging mainly in gotcha politics –  all the fault of the other lot).   Would that it were so here.  If National doesn’t have any former professors of economics, I’m sure there must be some serious economists around who would be National supporters and might be happy to help, were the party to be seriously interested in addressing –  rather than avoiding –  the issue.

And I don’t say any of this because I agree with Andrew Leigh’s prescriptions.  Mostly I don’t –  in fact, to a first approximation I think he has the wrong mental model of the Australian economy –  but he is a politician showing every sign of trying to take the issue seriously.  Productivity growth is what underpins any long-term sustainable improvement in material living standards.  As he puts it (with his particular left-wing emphases)

Too often, Australians see productivity as a dirty word — synonymous with working harder, rather than working smarter. But productivity should lead to a better quality of life, in which people have more choices in the workplace and more opportunities to spend time with friends and family. The path towards higher productivity should also allow us to live in a cleaner environment, and to be more generous to the needy. Tackling major challenges, from gender equity to traffic congestion, is easier in a highly productive economy.

Here is how Leigh introduces his article

At the start of June, the Productivity Commission quietly dropped a bombshell. Australia’s productivity growth had basically stalled. Labour productivity — output per hour worked — was more or less flatlining. After a generation in which labour productivity had grown at almost 2 per cent a year, it had tumbled to just 0.2 per cent.

The commission called the results “mediocre” and “troubling,” but for some sectors they were downright appalling. In farming, mining, construction, transport and retail, labour productivity went backwards. In other words, workers in those sectors were producing less per hour than they had the year before. The latest numbers continued a trend of weakening productivity growth that the commission dates back to 2013.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for household incomes to rise faster than the rate of inflation. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, that engine is making a nasty rattling noise.

Note that in the final paragraph of that extract is one difference between Australia and New Zealand.    In New Zealand wage growth has outstripped growth in nominal GDP per hour worked (ie the combination of terms of trade and productivity) for some time, but this is the Australian version of that chart

wages in aus

There is a variety of possible explanations, but the comparable New Zealand chart slopes upwards, not downwards.

But how does the aggregate productivity picture look for Australia?  This is quarterly ABS series of real GDP per hour worked.

aus prod.png

In the last two or three years, the picture is quite as bad (no growth at all) as in New Zealand –  bearing in mind that the average level of productivity in Australia is far higher than in New Zealand.

Leigh makes a lot of an asserted relative deterioration in Australia’s position this century.  In doing so he relies on a recent speech from a senior Australian Treasury official on productivity (another contrast to New Zealand), reporting some research work Treasury had done.

For Australia, the most hard-hitting presentation came from Treasury’s Meghan Quinn, who revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving deeply into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s “productivity frontier” has slipped back by about one-third. The best of “Made in Australia” hasn’t kept pace with the best of “Made in Germany,” “Made in the Netherlands” or even “Made in America.”

Go to Quinn’s speech and you find this chart (unfortunately a bit fuzzy)

quinn

The left hand panel is the point Leigh is making.  It doesn’t look very good.

On the other hand, the economywide cross-country comparisons really don’t look so bad at all (and being annual data you don’t see the recent flattening in the way the quarterly chart above shows).

In this chart, I’ve shown Australia’s real GDP per capita compared to an average for Leigh’s three countries (Germany, Netherlands, US) and to the median for the leading OECD bunch (as I’ve used in previous charts and tables for NZ comparisons: US, France, Belgium, Netherlands, Germany, Austria, Denmark, Sweden).

AUs prod 2

On these economywide measures, the 1970s and 1980s were a pretty bad time for Australia, in relative productivity performance terms.   Since then, a pessimist might say Australia has more or less flat-lined relative to these leading OECD economies, while an optimist might suggest some modest beginnings of a catch-up process at work.   It isn’t a good performance at all –  the leaders are almost 20 per cent ahead of Australia and if the gaps are closing, it is an incredibly slow process –  but it is a rather different emphasis than in the Federal Treasury chart Leigh draws on.

That idea that it isn’t a good performance at all is reinforced once one realises the extent to which Australia has been able to draw anew on nature’s bounty in the last ten to fifteen years –  all those newly developed iron ore and LNG exports.  There has been nothing comparable in most of the other OECD countries I’ve used in the chart above (oil in the US might be closest thing, but much smaller relative to the size of the economy).   I haven’t looked in detail at the Australian Treasury research (which is still described as “forthcoming”) but perhaps what is going on is that existing Australia firms haven’t done that well (and as Leigh highlights the rate of business start-ups etc is low), but that the economy as a whole just has a whole lot of newly-exploited natural resources it has been able to use to hold up overall economic performance  (well done them: I had an email yesterday from some NZ public and private sector group oncerned to stop the depletion of New Zealand’s natural resources, a cause with which –  in this context –  I could not sympathise).

And yet, despite that, Australia has made very little progress in closing the gaps to the OECD leaders.  Here is another comparison I’ve long found interesting, looking at real GDP per capita in Australia relative to that in Norway, the other advanced OECD country able to exploit an abundance of natural resources in recent decades.

aus norway

Australia –  still building up its fresh wave of resource exports –  has regained a little ground relative to Norway in the last fifteen years (oil exports from Norway are falling, and gas looks to have peaked) but it isn’t dramatic, and has been barely a thing at all in the last few years.  And yet these two countries were more or less level pegging fifty years ago.

There wasn’t much (any?) mention of resource exports in Andrew Leigh’s article.  There also wasn’t much (anything?) on the other big change in Australian policy in the last fifteen years or so, the marked increase in policy-led immigration to Australia.  My own story of Australia’s underperformance is much like that for New Zealand.   Remoteness and distance are huge issues –  perhaps even increasingly important globally –  and the fortunes of both countries depend very very heavily on natural resources (and the ability of talented people and decent institutions to facilitate their extraction and utilisation).  It isn’t just a matter of simple division –  but it is close to it, bearing in mind what else we know about the Australian economy –  to suggest that had Australia’s population not been supercharged again by policy (like New Zealand bipartisan policy) that the bounty from the natural resources newly exploited would have translated into higher living standards for the average Australian, higher economywide productivity.

There are lots of detailed points in Leigh’s article, some of which seem more compelling than others (I’m not persuaded that getting more people into tertiary education is likely to make much economywide difference, when the people not going now are likely to be those who would benefit least from doing so –  it hasn’t been worth their while to do so). And I’m not convinced he has the right model to think about Australia –  where the bigger issues seem more macro in nature – but it is just refreshing to see a moderately senior active politician actively engaging in thinking about, writing about, talking about, how productivity performance might be markedly improved.  Because, as he says, it really matters to all of us.