(a) real interest rates, and (b) NZers’ migration

No, I’m not getting back into some routine of daily posts, and on this occasion the two topics don’t even have anything to do with each other, but are just a couple of a leftovers from things I was looking at over the last couple of days.

In my fiscal posts this week I’ve noted that the government is consciously and deliberately choosing to run cyclically-adjusted primary fiscal deficits in the coming year larger (probably much larger) than we’ve seen at any time since the end of World War Two. I noted in passing that although people are conscious of stories of large fiscal deficits under Robert Muldoon’s stewardship, in fact a large chunk of those deficits was interest payments, and this in an era when inflation was high, sometimes very high. When nominal interest rates are high just to reflect high inflation, the resulting “interest payment” is really more akin to a principal repayment. Back in the day, various people – especially at the Reserve Bank – did some nice work inflation-adjusting various macro statistics.

But just to check my point I put together this graph

real NZ bond yield since 70

What have I done here?

  • got the OECD’s series for long-term nominal bond rates that goes back to 1970 (this will mostly be 10 year bonds or thereabouts, although for a time in the late 80s we were not issuing bonds that long),
  • for the period since 1993, subtracted the Reserve Bank’s sectoral factor model measure of core inflation,
  • for the period up to 1993, subtracted a three-year centred moving average of the CPI inflation rate.

So for almost entire period prior to 1984 real New Zealand government bond yields were negative.

This is, of course, not testimony to different patterns of desired savings and investment, but (mostly) to financial repression. Until 1983 government bond yields were administratively set and – much more importantly – most financial institutions were simply compelled by law to buy and hold government securities (often 25 per cent of more of total deposits). The costs were borne by depositors.

It is also worth noting that pre-1984 the government was also borrowing, at times heavily, directly from the retail market, at times offering real interest rates well above those shown here. And the government was also borrowing, again at times quite heavily, from abroad. In some of those markets, inflation was a big chunk of the headline interest rate, but in none of the major borrowing markets were government borrowing rates by then as repressed as they were still in New Zealand.

Finally, note that in the chart I have compared a 10 year bond yield to a one year inflation rate. But at least since 1995 we have had a direct read on real government bond yields through trading in government inflation indexed bonds. As this chart shows, the pattern over that period is very similar,

IIB yields since 95

Developments in the last few months are interesting, but that is something for another day.

My second brief topic this morning was sparked by a strange quite-long article in the New York Times yesterday headed “New Zealanders are Flooding Home: Will the Old Problems Push Them Back Out”. A lot of work seemed to have gone into it, and some of the individual anecdotes were not uninteresting (and in the small world that is New Zealand, one of the recent returnees was even someone I’d once worked with) but…….no one (do they have factcheckers at the NYT?) seemed to have stopped and checked the numbers. It took about two minutes to produce this graph that I put on Twitter yesterday.

NZ citizen migration

Using the official SNZ estimates, the problem with the story was that arrivals of New Zealanders had not really changed much at all – a bit higher than usual in the March 2020 year, and then lower than usual in the most recent year. There has, of course, been a big change in the net flow of New Zealand citizens but……..that is mostly the very steep fall in the number of New Zealanders leaving. That reduction – over the March 2021 year – is, of course, not surprising in the slightest given (a) travel restrictions to Australia for much of the year, and (b) travel restrictions and/or bad Covid in much of the rest of the world.

But, on official estimates, there simply is no flood of New Zealanders returning home. None.

This morning I looked a little more closely, and dug out the quarterly (seasonally adjusted) version of the data.

nz citizen migration quarterly

It is, of course, much the same picture, but what surprised me a little was the upsurge in (estimated) arrivals back in late 2019, pre-Covid. Here it is worth remembering that until a couple of years ago our PLT migration data was based on reported intentions at the time of arrival, but the 12/16 approach now used looks at what actually happened. It looks as though some New Zealanders who had come to New Zealand in late 2019, probably not intending to stay, ended up doing so, voluntarily or otherwise, once Covid hit. So they are now recorded as migrant arrivals in late 2019 even though at the time they would not have thought of themselves as such.

But it does not change the picture: there is no flood, or even a little surge now, in returning New Zealanders. A problem with the 12/16 approach is that the most recent data is prone to quite significant revisions (and that is particularly a risk when the normal patterns the models use aren’t likely to be holding, but there is nothing to suggest there is a significant influx of returning New Zealanders happening.

There will be always be natives who’ve spent time abroad returning home. It happens even in rather poor and downtrodden countries, and it happens here – always has, probably always will. That adjustment isn’t always that easy, plenty of people often aren’t sure for a long time that they’ve made the right choice. Covid means a few different factors have influenced some of those choices for some people. But there is no “flood”, just a similar to usual (or perhaps now smaller than usual) number of returnees, coming back to a New Zealand of extraordinarily high house prices and productivity levels and incomes that increasingly lag behind a growing number of advanced economies. Those persistent failures – and the indifference of our main political parties – should be worth a story. But not the non-existent flood.

A bit more on fiscal policy

In yesterday’s post I outlined some of my concerns about the government’s Budget, from a macroeconomic perspective. Not only did it seem to be built on rather optimistic medium-term economic assumptions, but several years out – on current policy advised to it by the government – The Treasury still expects a fairly significant cyclically-adjusted primary deficit (which means, once finance costs are added in, a larger-still overall cyclically-adjusted deficit).

CAB primary

There was a good case for such deficits last year, and perhaps even in the year that ends next month. But there is no obvious macroeconomic reason for running larger deficits in this coming year, and still having cyclically-adjusted deficits four years hence (by which time The Treasury numbers project a non-trivial positive output gap). It is now simply a splurge – a government that, unnecessarily, is simply choosing to take on more debt to fund its new spending, rather than fund core operating spending with taxes. In a climate when risks abound.

And all this is an environment where fiscal policy now appears to be unanchored by any specific fiscal goals a government is committing itself too.

I’ve never been one of those who put huge weight on the Fiscal Responsibility Act 1994, now (as amended) incorporated as Part 2 of the Public Finance Act. There are some good aspects to the legislation but I was never really convinced that asking governments to set out their specific short and long-term fiscal objectives, or articulating in statute “principles of responsible fiscal management” would make much difference to anything that mattered about the conduct of fiscal policy. (Here is a post on the 30th anniversary of the Public Finance Act critiquing some rather over the top claims then made for the framework.) In my take, there was a shared commitment across the main parties to balanced budgets (in normal times) and low debt, and the legislation reflected that rather than driving it.

And I guess I take this year’s Budget as vindication of that stance. There was a shared commitment to such things, and now it appears there is not. And the legislation still sits on the books, lonely and overlooked. Check out the requirements of Part 2 of the Public Finance Act, and then compare it with this year’s Budget documents. In particular, have a look at the statutory principles for responsible fiscal management, and the requirements that a Fiscal Strategy Report brought down on Budget day has to contain outlining both short-term and long-term fiscal objectives.

And then go and check out the vestigial thing the Fiscal Strategy Report appears to have become. Here is the statement of the government’s fiscal intentions.

fiscal intentions 21

Take the long-term intentions first (if you can find them). For debt, the government offers no numbers at all – either as to the level they aim to first stabilise the debt at or the longer-term level they would aim to then reduce it to (not even whether that level is higher or lower than the current level). Not even anything conditional on, say, us avoiding future Covid outbreaks and new lockdowns.

And then what about the operating balance? Well, they assure us they will run an operating balance consistent with the long-term debt objective, but (a) isn’t that obvious?, and (b) it tells us nothing at all, since they give us no medium to long term debt objective. And all the rest of it is equally or more vacuous. Now, sure, the Act does not formally require the government to put numbers on their objectives in these areas, but I’m pretty sure the drafters of the Act – the Parliament that passed it – did not think that simply stating “we’ll do whatever we like to pursue our political objectives” (all that “productive, sustainable and inclusive economy” mantra) would meet the bill. The whole section of the Act is rendered empty and futile.

It is even worse when we get to the short-term intentions. The Act is somewhat more prescriptive there

short term fiscal

And there is simply none of that content at all.   No objectives, no serious discussion reconciling with the (non-existent) long-term objectives, and just this explanation for why the government is (for now anyway) abandoning the statutory principles for responsible fiscal management

Doing so in this case for the short-term operating balance intention is the right thing to do, given the unprecedented size of the global economic shock caused by COVID-19 and the need for the Government to provide a strong ongoing fiscal response to protect lives and livelihoods in New Zealand as we secure the economic recovery. 

But as I suggested yesterday, that argument probably made sense (at least the first half) at the time of last year’s Budget and FSR. It doesn’t today when New Zealand’s unemployment rate is under 5 per cent.

There is no rationale – grounded in the Act – no analysis, and no short or medium goals. Simply structural deficits for years to come (see first chart above) – discretionary deficits actively chosen by today’s government larger than any such cyclically-adjusted deficits run in New Zealand at any time since at least the end of World War Two. It hasn’t been the New Zealand way. But it appears to be so now.

As I noted yesterday, maybe it will all come right. Maybe Robertson and Ardern really are at heart a bit more responsible than this Budget suggests and future new spending splurges (which are, I guess, what one expects from a party whose MPs and leader have now taken to openly calling themselves “socialists”) will be funded by persuading the electorate to stump up with increased taxes.

But bad fiscal outcomes – high debt, and little obvious prospect of reversals – don’t arise overnight. And the sort of thing that concerns me is what has happened in some other advanced countries. Here are the cyclically-adjusted primary balances for the US, the UK, and Japan. Remember, a positive number should be a bare minimum for prudent fiscal management (higher the higher are your accumulated debts and the prevailing real interest rate).

uk and us balances

30 years each had relatively low levels of government debt (OECD data for net general government liabilities as per cent of GDP), the UK and Japan in particular. And now they are all among the OECD countries with the highest levels of (net) public debt.

It can happen here too. And if those on the left are celebrating this week their own government “breaking free” of the shackles, they need to remember that political fortunes come and go. The other parties will form governments again, and the precedent this government is setting may guide them in how constrained they feel about increasing spending or cutting taxes or whatever (see the US as an example). In a floating exchange rate economy the disciplines on fiscal policy are more political than market in nature. If your party believes in bigger government, that’s a choice but then insist that bigger government means higher taxes. If your party believes in much lower taxes, that too is a choice, but then insist that smaller revenue have to mean much lower spending. But don’t toss out the window a hard-won consensus around balanced budgets and low public debt – one of the few real achievements of the last 30 years – and substitute for it feel-good politics (whether from the left or right) that avoids confronting choices about who will pay.

I’m still reluctant to believe that Robertson is quite as reckless as this Budget suggests, but for now at least the evidence is tilting against my optimistic prior. And, disconcertingly, there isn’t much sign of the Opposition calling him out.

This, incidentally, is the sort of analysis and discussion that a Fiscal Council provides in many countries.

A questionable Budget

As far as I can see reaction to last week’s Budget seems to be split between those on the government side who thought it was great – in some cases just a start – and on the other side of politics those noting that there was no sign of any sort of plan or set of policies that might lift the economy’s productivity performance, and in turn lift the capacity – whether or individuals or governments – to spend on personal or collective priorities. Those critics are, of course, right.

But what I really wanted to focus on in this post is the size of the deficit the government is choosing to run.

Little more than four years ago the Labour and Green parties published the Budget Responsibility Rules that, they told us, would guide them should they take office (I wrote about them here). They were seeking to persuade us that in office they would prove to be responsible macroeconomic and fiscal managers.

The first of the rules they offered up was this one.

BRR1

Note especially that second sentence: they expected to be in surplus every year “unless there is a significant natural event or a major economic shock of crisis”. Pursuing other policy priorities wasn’t going to be an excuse either: if they thought they needed to spend more on this or that, they’d fund it by taxes.

It sounded pretty good.

Even before Covid, if they were sticking to their own “rules” it is was a pretty close run thing. In the HYEFU for December 2019, for example, the total Crown OBEGAL measure in (very) slightly in deficit was for 2019/20 and exactly in balance in 2020/21. The same set of forecasts showed the economy running just a bit above potential in those two years. It wasn’t exactly the spirit of the Budget Responsibility Rules.

And then, of course, Covid came along. I don’t think anyone is going to dispute the idea that deficits (even large deficits) made sense for much of last calendar year, particularly to support the incomes of those unable to work because of lockdowns etc, Not many people are disputing the case for the wage subsidy, and of course when people couldn’t work and businesses couldn’t trade tax revenue was also going to be down. You’ll recall that the worst of all that was in the March and June quarters of last year (part of the fiscal year 2019/20). Consistent with that core Crown expenses in 2019/20 was 34.4 per cent GDP, compared with 28 per cent the year previously. Whichever deficit measure you prefer, the 2019/20 deficit was large. And few will quibble about much of that.

Right now we are coming to the end of the fiscal year 2020/21. Wage subsidies and similar measures have been used at very stages, especially early in year.

But as everyone also knows, the economy has bounced back more strongly that most (including me) had expected – notably, much faster than the official agencies had forecast. It is, of course, entirely right to note that the borders are still largely closed, global supply chains are disrupted, and prospects in parts of the wider world still look pretty shaky. On the other hand, the terms of trade are doing really well. In total, Treasury does the forecasts, and they reckon that when we finally get the nominal GDP data for the year to June 2021 it won’t be much different in total than they had thought back in late 2019 pre-Covid. The comparison is a little unfair, since there were some historical SNZ base revisions, but they also reckoned (when they did the forecasts in late March and early April) that the June quarter unemployment rate this year would be less than 1 percentage point higher than they’d been forecasting for that date back in late 2019.

That’s great, something to celebrate. But it doesn’t have the look or feel of a “major economic shock or crisis” – Labour’s 2017 words. There was one, especially in the first half of last year, but from a whole economy perspective it has an increasingly been a stretch to make such a case as 2020/21 drew on. And yet core Crown expenses in 2020/21 are expected to have been 33.1 per cent of GDP, not much lower than in the previous year, and more big deficits have been racked up.

But 2020/21 is really water under the bridge now. There is only five weeks of that year to go, and the Budget is about policy for 2021/22 (in particular) and beyond.

And in 2021/22 not only is the government planning to run large deficits but ones that even larger than those for 2020/21. The Budget documents this year were rather light on the analytical material that Treasury usually publishes, but they put in this year a chart of the cyclically-adjusted primary balance.

CAB primary

Cyclical-adjustment here involves Treasury adjusting for the state of the economic cycle (recessions dampen tax revenue quite a bit and raise spending a bit, as the automatic stabilisers play out). In this chart, the Treasury also exclude the EQC/Southern Response Canterbury earthquake costs. And the primary balance excludes finance costs – it is a standard measure used in fiscal analysis, with a common rule of thumb being that if your primary balance is positive, at least you aren’t borrowing simply to pay the interest on the accumulated debt. Labour’s 2017 commitment re surpluses would have implied running positive primary balances almost every year.

There were significant cyclically-adjusted primary deficits in the years following the 2008/09 recession – the twin consequence of the fiscal splurge at the end of the previous Labour government’s term and the unexpected (by Treasury, whose forecasts governments use) shortfall in potential output. But those cyclically-adjusted deficits over 2010-2012 look small by comparison with the deficit the current government plans to run in 2021/22 (and still smaller than what they are planning for next year).

Perhaps you might think the state of the economy in some sense warrants this, but (a) recall that these are cyclically-adjusted numbers, and (b) check out the state of the economy in the two periods. Over the coming year Treasury expects an average output gap of 1.7 per cent of GDP, coming back to zero in 2022/23. They expect the unemployment rate to be about 5 per cent next June, dropping to around (their view of the NAIRU) 4.4 per cent the following June. By contrast, Treasury now estimates that the output gaps in the 2012/13 and 2013/14 years were each around 1.5 per cent, and the unemployment rate in both years was also higher than they expect in the next two years.

What about some longer-term perspectives? I can’t see a Treasury version of this series going further back but (a) the OECD publishes estimates of the cyclically-adjusted primary balance at a general government level, and (b) the Treasury has primary balance (not cyclically adjusted) back to 1972. Neither series is fully comparable – the OECD numbers aren’t done on an accrual basis, and include local government (but it is small in New Zealand), and the older Treasury numbers aren’t cyclically adjusted. But together they can still create a useful picture.

Here is the OECD chart, back to 1989

CAB OECD

Cyclically-adjusted primary surpluses have been the New Zealand norm in modern times – even (a propaganda line Grant Robertson could have chosen to use, but preferred not to for obvious reasons) in 1990.

And here is the not cyclically-adjusted primary balance numbers back to the year to March 1972, using the data from the Treasury’s long-term fiscal time series.

Tsy primary balance

Note that although these numbers are not cyclically-adjusted, even in quite severe recessions the cyclical-adjustment procedure Treasury uses makes a difference of less than 2 percentage points of GDP.

So, one might reasonably note that over the next couple of years when, on Treasury’s numbers, the economy will be running increasingly close to full employment, the government is choosing – wholly as a matter of discretionary policy – to run a primary deficit bigger than any that have been run in the past 50 years, with the exception only of the accrual effect of the government’s EQC obligations post-Christchurch, obligations that were not discretionary or voluntary at that point. To be pointed, one might reasonably note that the primary deficits are (far) larger than any run under Robert Muldoon’s stewardship (the first two years on the chart, as well as 1976-84), and are in contrast to the primary surpluses run in every single year of the Lange/Palmer/Douglas and Clark/Cullen eras.

(What about those big Muldoon era deficits you keep reading about? Actually, a huge chunk of that was interest costs, and much of that was just inflation – real interest rates themselves were often quite low. Another way of looking at the issue is an inflation-adjustment to the deficits.)

It seems like pretty irresponsible opportunistic fiscal policy to me. It is certainly inconsistent with those mostly-admirable Budget Responsibility Rules Labour campaigned on – since not only are they running large deficits with no macroeconomic crisis, but debt is above their own targets.

Of course, from supporters of the government I expect there will be two responses.

The first might be to celebrate – Robertson and Ardern have thrown off the shackles, scrapping (as they formally have) any references to surpluses or balances budgets now or in the future. What is not to like, surpluses or balanced budgets being things for people like Clark, Cullen, Kirk, and Rowling, but not for our brave new leaders. After all, don’t we know that interest rates are low – even if long-term rates now are no lower than they were pre-Covid. If so, it is a dangerous path they are treading: their cyclically-adjusted primary balance outlook now looks a lot more like the sort of ill-disciplined approach to fiscal management we’ve seen in places like the UK, the US, and Japan over recent years. That was already underway with the various permanent fiscal measures the government put in place as early as last March (under the guise of a Covid package) and has continued since.

The second, more moderate, stance might be to acknowledge my point but to argue that (a) the economy is only doing as well as it is because of macroeconomic stimulus, and (b) better fiscal policy than monetary policy. I’m not going to dispute that policy stimulus is likely to have helped achieve the welcome economic rebound, and (more specifically) if the government had taken steps in this Budget to (say) cut the cyclically-adjusted primary deficit to 2 per cent of GDP in 2021/22, closing to zero the following year (while reserving the need for possible fresh intervention if Covid got loose here), the economic outlook would – all else equal – be worse than is portrayed in The Treasury’s forecasts.

But all is not equal. The primary tool for macroeconomic stabilisation is monetary policy. A tighter fiscal policy – getting back to balance quickly now that last year’s shock has passed – would naturally and normally be offset by monetary policy, doing its job. The Bank stuffed up going into Covid and wasn’t then able to take the OCR negative (or so it claimed), but even they tell us that is an issue no longer. For those who believe in the potency of the LSAP – and I think all the evidence is against it – there is that tool too. And the beauty of monetary policy is threefold:

  • it costs the taxpayer precisely nothing (relative price shift instead and those best placed to respond do),
  • it can be adjusted very quickly as the outlook and circumstances change, and
  • using monetary policy tends to lower the exchange rate while reliance on fiscal policy feeds an overvalued exchange rate, skewing the economy further inwards.

Monetary policy is, of course, no good at income relief. That is what fiscal policy did so well last year. But that was last year’s need not – as Treasury’s forecasts – the need now or for the next couple of years.

My unease about the Budget is not helped when I dug into some of the macroeconomic numbers.

For example, The Treasury’s forecasts for growth in the population of working age show expected growth in the five years to June 2024 exactly the same now as in the projections for the 2019 HYEFU. Perhaps, but it seems a bit of a stretch, when we know – from Customs data – that there has been a significant net outflow of people (migrants, tourists, New Zealanders, foreigners) over the last 17 months.

And then there are the Treasury’s productivity growth assumptions that seem heroic at best.

productivity growth budget 21

And this even though their text explicitly refers to some degree of permanent “scarring” as a result of Covid. Perhaps they could enlighten us as to what about the economic environment or economic policy framework is likely to generate such strong productivity growth (by New Zealand standards) in the next few years? Covid isn’t something the government can do much about, but nothing else in their policy programme now or in recent years seems likely to begin to reverse the lamentable New Zealand productivity performance. Without that productivity growth, future revenue growth would also be weaker than this Budget is built on.

It isn’t as if The Treasury expect business investment to soar. At best The Treasury seems to think we limp back to the rates of business investment seen in the previous half decade (when the Governor of the Reserve Bank was exhorting firms to invest more, as if he knew better than them where the profit opportunities lay).

bus investment 21

And then there is one of my favourite, but sad, charts

export import shares

Exports and import shares of GDP both rebound, of course, but only to settle at even lower levels than we’ve seen in New Zealand for decades. Successful economies tend to be ones that are exporting successfully lots of stuff to the rest of world and importing lots of stuff from the rest of the world. That isn’t New Zealand. But then we haven’t been a successful economy for a long time now.

Perhaps fiscal policy will come out okay in the end. But when the government isn’t expecting to be back in cyclically-adjusted primary surplus even by 2025, and when the medium-term economic projections seem to rest on some rather rosy assumptions (these and others), it is difficult to be optimistic. Thirty years of sound fiscal management – one of the few real successes New Zealand economic managers could claim – looks to be at risk. And yet the grim fiscal outlook seems to have had astonishingly little coverage, as if last year’s (appropriate) mega-deficit numbers have disoriented people so far that they’ve lost interest in the hard slog of delivering balanced (cyclically-adjusted) budgets. The appropriate size of government – perhaps even the appropriate degree of dependence on government – is rightly the stuff of political debate, but what is spent should be paid for, not simply grabbed from the population – reducing their future spending options – without the normal political conversations around what tax rates are tolerable and acceptable.

Central bank independence

Bernard Hickey – fluent and passionate left-wing journalist – had a piece out the other day headed thus

hickey rbnz

with a one sentence summary

TLDR: Put simply, the sort of true independence enjoyed by the Reserve Bank of New Zealand as it pioneered inflation targeting for the last 30 years is now over, and that’s a good thing.

I found it a strange piece on a number of counts, and I say that as someone who (a) does not think financial regulatory policy (as distinct from the implementation and enforcement of that policy) should be handed over to independent agency, and (b) is probably less compelled now than most macroeconomists by the case for operational independence for monetary policy. So I’m not responding to Hickey’s piece to mount a charger in defence of central bank independence. Mostly I want to push back against what seems to me quite a mis-characterisation of the effect of the Robertson Reserve Bank reforms – those already legislated, those before the House now, and those the government has announced as forthcoming. But also about the responsibility of central banks for the tale of woe Hickey sets out to describe.

It is worth remembering that, by international standards, the Reserve Bank’s monetary policy independence – de facto and de jure – was always quite limited by international standards. Under the 1989 Act the Minister and the Governor jointly agreed the target, but every Governor largely deferred to the Minister in setting – and repeatedly changing – the objective, even if details were haggled over. And with a fairly specific target, and explicit power for the Governor to be dismissed for inadequate performance relative to the target, it was a fairly constrained (operational) independence. The accountability proved to be weaker that those involved at the start had hoped, but it could have been used more.

The monetary policy parts of the Act were overhauled in 2018. There were some good dimensions to that, including making the Minister (alone) formally responsible for setting the monetary policy targets. The Minister got to directly appoint the chair of the Bank’s (monitoring) Board. And a committee was established by statute to be responsible for monetary policy operational decisions. But setting up the MPC didn’t change the Reserve Bank’s operational independence, and if it had been set up well could even have strengthened it de facto over time. The Minister did not take to himself the power – most of his peers abroad have – to directly appoint the Governor or any of the other MPC members. As it is, the reforms barely even reduced the power of the Governor – previously the exclusive holder of the monetary policy powers – who has huge influence on who gets appointed to the MPC (three others are his staff) and who got the Minister to agree that no one with any ongoing expertise in monetary policy and related matters should be appointed as a non-executive MPC members. Oh, and got the Minister to agree that the independent MPC members should be seen and heard just as little as absolutely possible (unlike, say, peers in the UK or the USA).

Hickey cites as an example of the reduced independence the Bank’s request for an indemnity from the Minister of Finance to cover any losses on the large scale asset purchase programme the Bank launched last March. I’d put it the other way round. The Bank did not need the government’s permission to launch the LSAP programme – indeed it is one of the concerns about the Reserve Bank Act that it empowers the Bank to do things (including fx intervention and bond buying) that could cost taxpayers very heavily with no checks or effective constraint. It seemed sensible and prudent of the Bank to have sought the indemnity, partly to recognise that any losses would ultimately fall to the Crown anyway. Operational independence never (should meant) operational license, especially when (unusually) the Bank is undertaking activities posing direct financial risk to the Crown. (And I say this as someone who thinks that the LSAP programme itself was largely pointless and macroeconomically ineffectual.)

What about the other reforms? I’ve written previously about the bill before the House at present, which is mostly about the governance of the Bank. It will make no difference at all to the Bank’s monetary policy operational independence (although increases the risk that poor quality people are appointed in future to monetary policy roles). That bill transfers most of the Governor’s remaining personal powers to the Board. The Minister will appoint the Board members directly (unlike the appointment of the Governor) but even then the Minister will first be required to consult the other political parties, so it is hardly any material loss of independence for the Bank. The Minister will, in future, be required to issue a Remit for the Bank’s uses of its regulatory powers – and we really don’t know what will be in such documents – but those provisions don’t even purport to diminish the Bank’s policy-setting autonomy (notably since it is much harder, probably not sensibly possible, to pre-specify a financial stability target akin to the inflation target).

Details of the next wave of reforms were announced last week. Of particular note is the provisions around the standards that the Bank will be able to issue setting out prudential restrictions on deposit-takers, including banks. I wrote about that announcement last week. Since then more papers, including the (long) Cabinet papers and an official sets of questions and answers has been released. We do have the draft legislation yet, so things might change, but as things stand it is clear that what the government is proposing will amount to no de facto reduction in the Bank’s policymaking autonomy, and only the very slightest de jure reduction.

Why do I say this? At present, the Bank regulates banks primarily by issuing Conditions of Registration (controls on non-bank deposit-takers, mostly small, are set by regulation, which the Minister has control over). Under the new legislation is proposed that Conditions of Registration will be replaced by Standards, which will be issued (solely) by the Bank, but will be subject to the disallowance provisions that are standard for regulations via theRegulations Review Committee. In between the Act (which will specify – loosely, inevitably – objectives and principles to guide the use of the statutory powers) and the Standards, the Minister will be given the power to make regulations specifying the types of activity the Bank can set standards for. Note, however, that empowering the Bank to set standards in particular areas does not compel the Bank to do so (in practice, it is likely to be a simultaneous process)

There was initially some uncertainty about how specific the Minister could get – the more specific, the more effective power the Minister would have. But the Cabinet paper removed most of the doubt.

standards 1

Backed up in the relevant text of the official questions and answers released on The Treasury’s website.

standards 2

That isn’t very much power for the Minister at all; in effect nothing at all in respect of housing lending (since once the new Act is in force the Minister will simply have to regulate to allow a Standard on residential mortgage lending, if only to give continuing underpinning to LVR restrictions). Perhaps what it would do is allow a liberalising Minister to prevent the Bank setting specific standards for specific types of lending but……that doesn’t seem like the Labour/Robertson approach. And once a Minister has allowed the Bank to set standards for residential lending, the Minister will have no further say at all: the Bank could ban lending entirely to particular classes of borrowers, ban entirely specific types of loans, impose LVRs, impose DTI limits, perhaps impose limits of lending on waterfront properties (we know the Governor’s climate change passion). For most practical purposes it is likely to strengthen the independence of the Bank to make policy in matters that directly affect firms and households, with few/no checks and balances, and little basis for any formal accountability. Based on this government’s programme, the age of central bank policy-setting independence is being put on more secure foundations (since the old Act never really envisaged discretionary use of regulatory policy, which crept in through the back door).

Hickey argues that the introduction of LVR controls in 2013 by then-Governor Graeme Wheeler required government consent. In law, it never did. If the law allowed LVR controls – a somewhat contested point – all the power rested with the Governor personally. It may have been politically prudent for the Governor to have agreed a Memorandum of Understanding with the Minister on such tools, but he did not (strictly) have to. At best, it was a second-best reassertion of some government influence of these intrusive regulatory tools.

Now perhaps some will argue that there might be something similar in future too: the Minister might have no formal powers, but any prudent central bank might still seek some non-binding agreement with the government. But I don’t believe that. If the government had wanted any say on whether, say, DTI limits were things it was comfortable with, or what sorts of borrowers they might apply to, the prudent and sensible approach would be to provide explicitly for that in legislation. The old legislation may have grown like topsy, but this will be brand new legislation. The Minister is actively choosing to opt out and given the Bank more policy-setting independence (including formally so for non-banks) on the sorts of matter simply unsuited to be delegated to an independent agency, that faces little effective accountability (see the table from Paul Tucker’s book in last week’s post).

Whether independence should be strengthened or not, the Ardern/Robertson government has announced plans that will do exactly that, while at the same time weakening the effective accountability of the Bank (since powers will be diffused through a large board, with no transparency about the contribution of individual members).

That was a slightly longwinded response to the suggestion that actual central bank independence (monetary policy or financial regulation) is being reduced, in practice or by this goverment’s reforms. I favour a reduction in the policymaking powers of the Bank around financial regulation (the Bank should be expert advisers, and implementers/enforcers without fear or favour, not policymakers – the job we elect people to do).

What about monetary policy. Hickey reckons not only (and incorrectly so far) that monetary policy operational independence has been reduced, but that it should be reduced.

As it happens, I’m now fairly openminded on the case for monetary policy operational independence. One can mount a reasonable argument – as Paul Tucker does – for delegation to an independent agency (since a target can be specified, there is reasonable agreement on that target, there is expertise to hold the agency to account etc). But it has to be acknowledged that much of the case that was popular 30 years ago – that politicians could not be trusted to keep inflation down and would simply mess things up on an ongoing basis – is a lot weaker after a decade in which inflation has consistently (in numerous countries) undershot the targets the politicians (untrustworthy by assumption) set for the noble, expert and public-spirited central bankers.

What I’m not persuaded by is any of Hickey’s case for taking away the operational autonomy. Five or six years ago, I recall him – like me – lamenting that New Zealand monetary policymakers were doing too little to get the unemployment back down towards a NAIRU-type rate (it lingered high for years after the recession) and core inflation back up to target. But now, when core inflation is still only just getting back to target, unemployment is above any estimate of the NAIRU (notably including the Bank’s) Hickey seems to have joined the “central banks are wreaking havoc, doing too much etc etc” club.

One can debate the impact of the Bank’s LSAP programme. Personally, I doubt it has any made material useful macroeconomic contribution over the last year (good or ill – I don’t think it has done anything much to asset prices generally, and not that much even to long bond prices), and as I’ve argued previously it has mostly been about appearing active, allowing the Governor to wave his hands and say “look at all we are doing”. But even if you believe the LSAP programme has been deeply detrimental in some respect or other – Hickey seems to be among those thinking it plays a material part in the latest house price surge (mechanism unclear) – why would anyone suppose that a Minister of Finance running monetary policy last year would have done anything materially different to what the Bank actually did. After all, as Hickey tells us the Minister did sign off on the LSAP programme anyway, and a decisionmaking Minister of Finance would have been advised primarily by…..the Reserve Bank and the Treasury (and recall that the Secretary to the Treasury sits as a non-voting member of the MPC, and there has been no hint that Treasury has had a materially different view).

I think the answer is that Hickey favours a much heavier reliance on fiscal policy – even though he laments, and presents graphs about, how much additional private saving has occurred in many advanced economies in the last year, the income that is being saved mostly have resulted from….fiscal policy. Again, I think the answer is that he wants the government to be much more active in purchasing real goods and services – not just redistributing incomes. I suppose it comes close to an MMT view of the world.

But again there is little sign of anyone much – not just in New Zealand but anywhere – adopting this approach, or even central bank independence being restricted in other countries (what there is plenty sign of is central bankers getting out of their lane and into all sorts of trendy personal agendas – be it climate change (non) financial stability risks, indigenous networks or whatever.

None of this agenda seems to add up when it comes to events like those of the last 15 months. We know that monetary policy instruments can be activated, adjusted, reversed almost immediately. We know that governments are quite technically good at flinging around income support very quickly. But governments – this one foremost among them – are terrible at, for example, wisely using money to quickly get real spending (eg infrastructure) going in short order, and such projects once launched are hard to stop or to adequately control. Monetary policy is simply much much better suited to the cyclical stabilisation role.

Hickey is a big-government guy, and there are reasonable political arguments to have about the appropriate size and scope of government, but they haven’t got anything much to do with stabilisation policy – and nor should they. One doesn’t want projects stopped or started simply for cyclical purposes – brings back memories of reading of how the Reserve Bank wasn’t able to build its building for a long time because the governments of the day judged the economy overheated.

The (unstated) final part of his story seems to relate to a view that perhaps monetary policy has reached its limits. It would be a curious argument, given that much of his case seems to rest of the damage monetary policy is doing (impotent instruments tend to be irrelevant, even if deployed). He repeat this, really nice, long-term Bank of England chart

hickey 2

The centuries-long trend has been downwards, and many advanced country rates are either side of zero. But interesting as the chart genuinely is, including for questions about the real neutral interest rate (something monetary policy has little or no impact on), it tells one nothing about (a) who should be the monetary policy decisionmaker, or (b) the relative roles of fiscal and monetary policy. After all, the only reason why nominal interest rates can’t usefully go much below zero yet is because of regulatory restrictions and rules established – in much different times – by governments and central banks. Scrap the unlimited convertibility at par of deposits for bank notes – not hard to do technically – and conventional monetary policy (the OCR) immediately regains lots more degrees of freedom, able to be used – easily and less controversially – for the stabilisation role for which is it the best tool.

To end, I wouldn’t be unduly disconcerted if the government were to legislate to return to a system in which the Bank advised and the Minister decided on monetary policy matters. It might just be an additional burden for a busy minister, but it would be unlikely to do significant sustained harm (and one of the lessons of the last 30+ years is that central bankers and ministers inhabit the same environment, have many of the same ideological preferences etc) in a place like New Zealand. But to junk monetary policy as the primary cyclical stabilisation tool really would be to toss out the baby as well as the bathwater, no matter how big or active you think government tax and spending should be.

PREFU thoughts

The debt numbers in yesterday’s PREFU are, to me, almost the least concerning aspects of the pages and pages of numbers/charts The Treasury published. My preferred debt measure – net core Crown debt, including the government financial assets held in the NZSF – is projected to peak at just under 40 per cent of GDP. As I’ve noted previously, numbers like that at the start of this year would have put us in the less-indebted half of the OECD countries then. By no obvious somewhat-objective metric is net debt at those sorts of levels particularly problematic, even if bond yields (and eventually, we assume, the OCR) do eventually head back in the direction of more-normal historical levels. And I hope neither main party – whether at this year’s election or that in 2023 – is going to make a fetish of specific timebound numerical targets for a particular debt measure (governments in few other countries do).

That said, the fiscal picture is not a rosy one. And it isn’t just because of Covid one-offs or because of the recession itself. Treasury produces estimates of the cyclically-adjusted balance, and this time gave us numbers that also stripped out those Covid measures. This is the resulting surplus/deficit chart.

CAB ex covid

Treasury estimated that there was a modest structural surplus over the second half of the 2010s, but now reckon the structural deficit will be around 1.5 per cent of GDP once we emerge from the immediate shadow of Covid. A three percentage point deterioration in the structural balance isn’t ruinous in and of itself – and is smaller than the moves in the previous decade – but it isn’t something to be entirely relaxed about either. It is the result of specific choices about permanent spending/tax choices. One would want to be comfortable that spending choices were of a particularly high quality.

I’m rather more bothered by the overall macroeconomic story, and the apparent complacency of The Treasury in these matters – not just as principal macro advisers to the government, but given that the Secretary to the Treasury is a non-voting member of the Reserve Bank Monetary Policy Committee. In four years time, the unemployment rate is forecast to still be materially above the NAIRU (and the output gap materially negative), and inflation is barely getting back to the target midpoint. A standard view of the monetary policy transmission mechanism is that monetary policy works with its fullest effects over perhaps an 18-24 month horizon. And yet on these projections not only has fiscal policy largely done its dash already, but there is hardly any further easing assumed in monetary policy (90 day bill rates drop to 0.1 per cent, but the OCR seems never to go negative). We have macroeconomic stabilisation policy to produce better cyclical outcomes than that. It has the feel of an approach that is just fine with people not likely to lose their jobs – Treasury and Reserve Bank officials – but shouldn’t be counted satisfactory to the rest of the population (and voters). Macro policy can’t solve structural failings, but it can address sustained cyclical weakness. A serious Opposition might make something of this, and reflect on the capabilities and priorities of our macro policy officials, and indeed on those (in the Beehive) who appoint/retain them.

One issue I’ve hammered on about here over the years is New Zealand’s rather woeful foreign trade performance. At the high tide of the latest wave of globalisation, we spent this century to date with the value of exports and imports shrinking as a share of GDP.

Treasury only produces volume forecasts for exports and imports in the PREFU. They aren’t pretty. Of course, (services) exports and imports are currently taking a large hit from closed borders, but Treasury assumes borders are reopened by the start of 2022.

Over the last economic cycle (2007/08 to the end of last year) the volume of New Zealand exports more or less kept pace with the growth rate in real GDP. But on Treasury’s forecasts over the full five years to 2023/2024, real GDP is projected to have risen by 8.4 per cent, while the volume of exports is projected to have risen by only 1.7 per cent. And whereas the volume of imports – things we consume, and use to produce – ran ahead of the growth in real GDP (quite significantly, as real import prices fell), even the latest forecast period to 2023/24 import volumes don’t even manage to keep pace with the subdued growth in real GDP.

As the prices of both exports and imports tend to grow more slowly than general prices (CPI, GDP deflator etc) and since Treasury projects the exchange rate goes nowhere over the next five years, these projections will be consistent with exports/imports falling to around a quarter of GDP. At the turn of the century they were around a third. And yet (growing) trade with the rest of the world is a key element in almost any country’s economic success – particularly for small countries.

The bottom line is perhaps expressed in lost GDP. We could do a simple comparison and look at nominal GDP for the years 2019/20 to 2023/24 from the Treasury’s HYEFU late last year and yesterday’s PREFU. Over those five years, Treasury now expects the value-added from all production in New Zealand will be $140 billion less than they thought just nine months ago. (For what it is worth, there is another $200 billion lost in the following five years, a period Treasury does not forecast in detail). These are really large losses, and on the Treasury numbers the associated wealth is never being made back. Nominal GDP matters for various reasons, including that most public and private debt is expressed in nominal terms.

But, of course, there is also plenty of focus on real GDP per capita. Over the last economic cycle (2007/08 to the end of last year), real GDP per capita. increased by about 1 per cent per annum. That was pretty underwhelming growth, reflecting the poor productivity performance and limited outward-oriented opportunities in turn reflected in weak business investment.

But here is rough comparison between the Treasury projections and a scenario in which we’d continued to stumble along at 1 per cent per annum growth in real per capita GDP.

scenario PREFU

On a rough estimate, the difference between the two lines is just over $100 billion – lost and never coming back. And although the two lines look as though they will eventually converge, my understanding of the Treasury projections beyond the official forecast period is that they don’t. Not only have we lost wealth upfront (that $100 billion) but our real annual income will always be a bit less than we previously thought.

None of these scenarios/numbers looks particularly unrealistically pessimistic to me. If anything, Treasury seems a bit more optimistic than I would be about the wider world economy – given how little has been done with monetary policy, the approaching political limits of fiscal policy, and the way that all societies look to be materially poorer than they would have thought just a few months ago, it is difficult to be very optimistic about the likely pace of sustained economic rebounds anywhere. And while Treasury assumes that we keep on in the medium-term with our modest productivity growht, it isn’t obvious even how that is going to be achieved – it is not as if either political party has any sort of serious economic plan. It doesn’t take aggressive fiscal consolidation here or abroad to think that private spending growth (consumption and investment) is likely to be really rather subdued for quite a long time to come.

Much of the political debate tends to turn on how much more debt governments have taken on, how much more public spending has been done. And there are important issues there, that deserve ongoing scrutiny, but at least as important is just how much poorer we now look likely to be than we thought just a few months ago. Fiscal policy redistributes among people in New Zealand, but even with all that fiscal support, as a country we are in aggregate so much poorer than we expected to be. And that will influence behaviour, choices, appetite for risk etc in the years ahead.

(Oh, and finally, I don’t have space to labour the point, but isn’t there something shameful when The Treasury reckons that – with no new fiscal or monetary stimulus – current structural features of the housing market (land use, immigration and whatever else) mean that they expect 7.4 per cent house price inflation in 2022/23 and a further 8.5 per cent the following year. That, not whether prices fall a bit this year as ,eg, unemployment rises, should be getting a lot more attention that it seems to be.)

Macro policy pitfalls and options

The sad sight of someone who has seemed to be a normally honourable man –  Greens co-leader James Shaw – heading off down the path of Shane Jones-ism, is perhaps a general reminder of the temptations of politics and power, but also of much that is wrong about how the government is tackling the severe economic downturn we are now in.   Fiscal discipline around scarce real resources, always pretty weak at the best of times. is flung out the window and there is a mad scamper for ministerial announceables, and thus rewards to those who successfully bend the ear of ministers in a hurry.  Connections, lobbying, and the ability to spin a good yarn seem to become foremost, with a good dose of partisanship thrown in too.   The extraordinary large grant to a private business  planning to operate a school is just the example that happens to have grabbed the headlines, but there will be more no doubt through the list (apparently not all yet announced) of “shovel-ready projects”, and we’ve seen many through the Provincial Growth Fund almost from day one of its existence.

Don’t get me wrong.  I’m not opposed to the government running deficits –  even really rather large deficits – for a year or two.   Some mix of external events and government actions have tipped the economy into a severe recession and –  against a dismal global backdrop – the outlook is not at all promising.  Tax revenue would be down anyway, and that automatic stabiliser is a desirable feature of the fiscal system.   And one can make –  I have made –  a case for a pretty generous approach across the board to those, through no direct fault of their own, are caught in the backwash of the pandemic.  I’ve argued for thinking of such assistance as if we some ACC-like pandemic insurance, for which we paid the premiums in decades past through higher tax rates/lower government spending rates –  and thus lower debt – than would otherwise have been likely.

And some aspects of the government’s economic policy response have –  whatever their other faults –  had elements of that broadbased no-fault/no-favours approach.   I guess ministers couldn’t put a press statement for each individual who benefited from the wage subsidy, or the weird business tax clawback scheme.  But beyond that, and increasingly, what is supposed to be countercyclical stabilisation policy has become a stage for ministers to choose favourites, to support one and not another, to announce particular bailouts as acts of political favour.  It is a dreadful way to run things, rewarding not just ministerial favourites but the chancers and opportunists who are particularly aggressive in pursuing handouts.  So some tourist operators get handouts and other don’t.  Some sports got handouts and others don’t.     Favoured festivals –  I see the nearby festival on the list this morning –  get handouts.  And, in general, unless you are among the favoured, businesses (the myriad of small and low profile ones) get little or nothing at all.  James Shaw’s green school gets a huge capital grant and while no one –  of any ideological stripe –  should be getting such handouts, we can be quite sure no-one of a different ideological stripe than those associated with the governing parties would be getting one.    Perhaps many people involved really have the best of intentions, but frankly it is corrupt, and predictably so.

I was reading last night an open letter on economic policy that Keynes had addressed to Franklin Roosevelt in late 1933.  It was a bit of mixed bag as a letter, and had really a rather condescending tone, but the couple of sentences that caught my eye were these

“our own experience has shown how difficult it is to improvise useful Loan-expenditures at short notice. There are many obstacles to be patiently overcome, if waste, inefficiency and corruption are to be avoided”

Quite.

Now, of course, elections have consequences, and one would expect a government of the left to be deploying public resources in directions consistent with (a) manifesto commitments, and (b) their own general sympathies.    But in this case (a) the government was elected on a promise (wise or not) of considerable fiscal restraint, and (b) whatever the broad tenor of their policy approach, we should not expect public resources to be handed to individuals or favoured groups and companies, solely on the basis of the ability of those entities to get access to, and bend the ear of, ministers.  And it is not necessary to do so to deploy very substantial fiscal resources –  whether with a focus on consumption, investment, or business etc support more generally.  Broadbased tools, that do not rely on rewarding favourites, aren’t hard to devise or deploy.

More generally, of course, monetary policy is an option that has barely been used at all.   We have a severe recession, with little or no relief in sight (including globally) and yet whereas, faced with a serious downturn, we usually see perhaps a 500 basis point fall in interest rates and a sharp fall in the exchange rate, we’ve had no more than a 100 basis point fall in interest rates and no fall at all in the exchange rate.  And not because of some alarming inflationary threat that means further monetary support can’t prudently be risked…..but because the appointed Monetary Policy Committee, faced with very weak inflation forecasts and lingering higher unemployment, choose to do nothing.  And those with responsibility for the Bank –  the Minister of Finance, and the PM and Cabinet –  seem to be quite content with this abdication.

The beauty of monetary policy, and one of the reasons it has been a preferred stabilisation tool for most of the time since countercyclical macro policy became a thing, is that even if ministers are the ones making the day to day decisions –  and they usually aren’t because we mostly have central banks with day-to-day operational autonomy –  they don’t get to pick which firm, which party favourite, gets the benefit of lower borrowing costs, who suffers from reduced interest income, or what is affected by the lower exchange rate.    It is broad-based instrument, operating without fear or favour, and doing so pervasively –  it takes one decision by the relevant decisionmaking body and relative prices across the whole economy are altered virtually immediately, not some crude process of ministers and officials poring over thousands of applications for grants and loans and deciding –  on who knows what criteria –  whether or not to grant them.  And it has the subsidiary merit, when used wisely, of working with market forces –  in times like these investment demand is weak and precautionary savings demand is high, so one would normally expect –  if no government agency were in the way – the market-clearing interest rate would fall a long way.

On the left there still seems to be a view that monetary has done a great deal, and perhaps all it could.  I saw the other day a commentary from retired academic Keith Rankin on fiscal and monetary policy.  He claims not to be a “left-wing economist” –  although I suspect most would see him as generally being on the left –  but has no hesitation in pegging me as “right-wing economist”.  Apparently “right-wing economists tend to have a philosophical preference for monetary policy over fiscal policy”.   Anyway….he was picking up on some comments I made in a recent interview on Radio New Zealand.

To a non-right-wing economist, Reddell’s position in the interview seems strange; Reddell argues that New Zealand has – so far during the Covid19 pandemic – experienced a large fiscal stimulus and an inadequate monetary stimulus. In fact, while the fiscal outlay is large compared to any previous fiscal stimulus, much of the money available may remain unspent, and the government is showing reluctance to augment that outlay despite this month’s Covid19 outbreak. And, as a particular example, the government keeps pouring salt into the running sore that is the Canterbury District Health Board’s historic deficit (see here and here and here and here); the Minister of Health showed little sign of compassion towards the people of Canterbury when questioned about this on yesterday’s Covid19 press conference.

Further, monetary policy has been very expansionary. In its recent Monetary Policy Statement (and see here), the Reserve bank has committed to ongoing expansions of the money supply through quantitative easing. Because the Reserve Bank must act as a silo, however, it has to participate in the casino (the secondary bond market) to do this; perhaps a less than ideal way to run monetary policy. Reddell has too much faith in the ability of the Reserve Bank to expand business investment spending.

Reddell is a committed supporter of negative interest rates – indeed he cites the same American economist, Kenneth Rogoff, who I cited in Keith Rankin on Deeply Negative Interest Rates (28 May 2020). This call for deeply negative rates is tantamount to a call for negative interest on bank term deposits and savings accounts; that is, negative ‘retail interest rates’. While Reddell does not address the issue in the short interview cited, Rogoff notes that an interest rate setting this low would require something close to a fully electronic monetary system to prevent people withdrawing wads of cash to stuff under the bed or bury under the house.

I struggle to see how anyone can doubt that we have had a very large fiscal stimulus this year to date.  One can debate the merits of extending (or not) the wage subsidy –  personally (despite being a “right-wing economist”) I’d have favoured the certainty my pandemic insurance scheme would have provided –  but it doesn’t change the fact a great deal has been spent.  Similarly, one can have important debates about the base level of health funding –  and I’ve run several posts here in recent years expressing surprise at how low health spending as a share of GDP has been under this government, given their expressed priorities and views –  but it isn’t really relevant to the question of the make-up of the countercyclical policies deployed this year.  With big government or small government in normal times, cyclical challenges (including serious ones like this year’s) will still arise.

And so the important difference seems to turn on how we see the contribution of monetary policy.  Here Rankin seems to run the Reserve Bank line –  perhaps even more strongly than they would –  about policy being “highly expansionary”, without pointing to any evidence, arguments, or market prices to support that.  It is as if an announced intent to swap one lot of general government low-interest liabilities (bonds) for another lot (settlement cash deposits at the Reserve Bank) was hugely macroeconomically significant.  Perhaps it is, but the evidence is lacking…whether from the Reserve Bank or from those on the left (Rankin and others, see below) or those on the right (some who fear it is terribly effective and worrying about resurgent inflation.

While on Rankin, I just wanted to make two more brief points:

    • first, Rankin suggests I “have too much faith in the ability  of the Reserve Bank to expand  business investment spending”.  That took me by surprise, as I have no confidence in the Bank’s ability to expand investment spending directly at all, and nor is it a key channel by which I would be expecting monetary policy to work in the near-term.  It really is a straw man, whether recognised as such, often cited by those opposed to more use of monetary policy.  Early in a recession –  any recession –  interest rates are never what is holding back investment spending –  that would be things like a surprise drop in demand, heightened uncertainty, and perhaps some unease among providers of either debt or equity finance.  Only rarely do people invest into downturns,  When they can, they will postpone planned investment, and wait to see what happens.  There is a whole variety of channels by which monetary policy works –  and I expect I’m largely at one with the Reserve Bank on this –  including confidence effects, wealth effects, expectations effects and (importantly in New Zealand) exchange rate effects.  Be the first country to take its policy rate deeply negative and one would expect a significant new support for our tradables sector through a much lower exchange rate.  In turn, over time, as domestic and external demand improved investment could be expected to rise, in turn supported by temporarily lower interest rates, but that is some way down the track.
    • second, as Rankin notes I have continued to champion the use of deeply negative OCR (and right now any negative OCR at all, rather than the current RB passivity).  As he notes, in the interview he cites I did not mention the need to deal with the ability to convert deposits into physical cash at par, but that has been a longstanding theme of mine.  I don’t favour abolishing physical currency, but I do favour a potentially-variable premium price on large-scale conversions to cash (as do other advocates of deeply negative policy rates).  Those mechanisms would be quite easy to put in place, if there was the will to use monetary policy.

From people on the left-  at least in the New Zealand media –  there also seems to be some angst that (a) monetary policy has done a great deal, and that (b) in doing so it has exacerbated “inequality” in a way that we should, apparently, regret.   I’ve seen this line in particular from interest.co.nz’s Jenee Tibshraeny and (including again this morning) from Stuff’s Thomas Coughlan.  On occasion, Adrian Orr seems to give some encouragement to this line of thinking, but I think he is mostly wrong to do so

Perhaps the most important point here is the otherwise obvious one.  The worst sort of economic outcome, including from an inequality perspective (short or long term) is likely to be one in which unemployment goes up a long way and stays high, and where labour market participation rates fall away.  Sustained time out of employment, involuntarily, is one of the worst things for anyone’s lifetime economic prospects, and if some of the people who end up unemployed have plenty of resources to fall back on, the burden of unemployment tends to fall hardest on the people at the bottom, people are just starting out, and in many cases people from ethnic minorities (these are often overlapping groups).  From a macroeconomic policy perspective, the overriding priority should be getting people who want to work back into work just as quickly as possible.   That doesn’t mean we do just anything –  grants to favoured private companies to build new buildings are still a bad idea  – but it should mean we don’t hold back on tools with a long track record of contributing effectively to macroeconomic stabilisation because of ill-defined concerns about other aspects of “inequality”.

Asset prices appear to worry people in this context.    I’m probably as puzzled as the next person about the strength of global equity prices –  and I don’t think low interest rates (low for a reason) are a compelling story –  but it is unlikely that anything our Reserve Bank is doing is a big contributor to the current level of the NZX indices.  Even if it were, that would not necessarily be a bad thing, since one way to encourage new real investment is as the price of existing investment assets rises relative to the cost of building new.

And if house prices have risen a little (a) it is small compared to the 25 year rise governments have imposed on us, and (b) not that surprising once the Reserve Bank eased the LVR restrictions for which there was never a compelling financial stability rationale in the first place.

More generally, I think this commentators are still overestimating (quite dramatically) what monetary policy has done.   I read commentaries talking about “money flowing into the hands of asset holders” (Coughlan today) from the LSAP programme, but that really isn’t the story at all.  Across this year to date there has been little change in private sector holdings of government bonds, and certainly no large scale liquidation by existing holders (of the sort that sometimes happened in QE-type programmes in other countries).  Most investors are holding just as many New Zealand government bonds as they were.  All that has really happened is that (a) the government has spent a great deal more money than it has received in taxes, (b) that has been initially to them by the Reserve Bank, and (c) that net fiscal spending is mirrored in a rise in banks’ settlement account deposit balances at the Reserve Bank.  It would not have made any difference to anything that matters much if the Reserve Bank had just given the government a huge overdraft facility at, say, 25 basis points interest, rather than going through the bond issuance/LSAP rigmarole.  The public sector could have sold more bonds into the market instead, in which case the private sector would be holding more bonds and less settlement cash.  But the transactions that put more money in people’s pockets –  people with mortgages, people with businesses –  are the fiscal policy programmes.   Without them we might, reasonably, have anticipated a considerably weaker housing market.  Since few on the left would have favoured less fiscal outlays this year –  and neither would I for that matter –  they can’t easily have it both ways (Well, of course, they could, but the current government of the left has been almost as bad as previous governments of the left and right in dealing with the land use restrictions that create the housing-related dimensions of inequality.

Coughlan also seems to still belief that what happens to the debt the government owes the (government-owned and controlled) Reserve Bank matters macroeconomically.  See, on this, his column in last weekend’s Sunday Star-Times.   As I outlined last week, this is simply wrong: what matter isn’t the transactions between the government and the RB, but those between the whole-of-government and the private sector.  Those arise mostly from the fiscal policy choices.  The whole-of-government now owes the non-government a great deal more than it did in February –  reflecting the fiscal deficit.  That happens to take the form primarily of much higher settlement cash balances, but it could have been much higher private bond holdings.   Either way, the asset the Reserve Bank holds is largely irrelevant: the liabilities of the Crown are what matter.  And as the economy re recovers one would expect that the government will have to pay a higher price on those liabilities.   It could avoid doing so –  simply refusing to, engaged in “financial repression” –  but doing so would not avoid the associated real resource pressures. The same real resources can’t be used for two things at once.  Finally on Coughlan’s article, it seems weird to headline a column “It’s not a question of how, but if we’ll pay back the debt” when, on the government’s own numbers and depending on your preferred measure, debt to GDP will peak at around 50 per cent.  Default is usually more of a political choice than an economic one, but I’d be surprised if any stable democracy, issuing its own currency, has ever chosen to default with such a low level of debt –  low relative to other advanced countries, and (for that matter) low relative to our own history.

Monetary policy really should have been –  and should now, belatedly –  used much more aggressively.  It gets in all the cracks, it avoids the temptations of ministerial corruption, it works (even the RB thinks so), and it has the great merit that in committing claims over real resources the people best-placed to make decisions –  individual firms and households, accountable for their choices –  are making them, not politicians on a whim.

For anyone interested, the Reserve Bank Governor Adrian Orr is talking about the Bank’s use of monetary policy this year at Victoria University at 12:30pm today.  The event is now entirely by Zoom, and the organisers invited us to share the link with anyone interested.

Writing off the Reserve Bank’s government bonds

From time to time I’ve been asked about the idea that the government bonds the Reserve Bank is now buying, and will most likely be holding for years to come, might be written off.   I thought I’d written an earlier post on the idea but I can’t find it –  perhaps it was just a few lines buried somewhere else – and the question keeps coming up.

The Reserve Bank’s own answer to the question –  I’ve seen it recently from both the Governor and the Chief Economist (the latter towards the end of this) – is to smile and suggest that, since they are the lender, it really isn’t up to them.    That, of course, is nonsense.  It is quite within the power of a lender to write-off their claim on a borrower, and that doesn’t require the borrower first to default or to petition for relief.   To revert back to some old posts, that is how ancient debt jubilees worked.

I guess that, in answering the way the do, the Bank is simply trying to avoid getting entangled in controversies that they don’t need.  I have some sympathy for them on that, and so just possibly it might be a tactically astute approach.  A better approach would be for them – as the specialists in such things, unlike the Minister of Finance – to call out the idea of that particular debt being written off for what it is: macroeconomically irrelevant.

In reality, of course, if the debt held by the Reserve Bank were to be written off, it would only be done with the concurrence of the government of the day.    Apart from anything else, if the Governor (or the Board, when the new Reserve Bank legislation is enacted) were to write off the Bank’s claims on the government, it would render the Bank deeply insolvent (very substantial negative equity).  You can’t have management of a government agency just deciding – wholly voluntarily – to render the agency deeply insolvent.

And that is even though the Reserve Bank is quite a bit different than most public sector entities, in that life would go –  operations would continue largely unaffected –  if the Reserve Bank had a balance sheet with a $20 billion (or $60 billion) hole in it.   The Bank isn’t a company, its directors don’t face standard penalties and threats, and –  critically – nothing about substantial negative equity would adversely affect the Bank’s ability to meet its obligations as they fall due.   The Reserve Bank meets its obligations by issuing more of its own liabilities (notes or, more usually, settlement cash balances).  People won’t stop using New Zealand dollars, and banks won’t stop banking at the Reserve Bank, just because there is a huge negative equity position.

(This isn’t just some hypothetical.  Several central banks have operated for long periods with negative equity; indeed I worked for one of them that had so many problems it couldn’t even generate a balance sheet for years at a time.  It also isn’t materially affected by arguments that seignorage revenue –  from the issuance of zero interest banknotes –  means that “true” central bank equity is often higher than it looks (much less so when all interest rates are near zero, and not at all if other interest rates are negative).)

The big reason why writing off the claims the Reserve Bank has on the government through the bonds it holds wouldn’t matter much, if at all, for macroeconomic purposes is that the Reserve Bank is –  in substance – simply a branch of the government.  Any financial value in the organisation accrues ultimately to the taxpayer, and the taxpayer in turn is ultimately responsible for the net liabilities of the Bank.  Governments can –  and sometimes do – default, but having the obligation on the balance sheet of a (wholly government-owned and parliamentarily-created) central bank doesn’t materially change the nature of the exposure.  If anything, governments have tended to be MORE committed to honouring the liabilities of their central bank –  their core monetary agency, where trust really matters –  than in their direct liabilities (thus, in New Zealand  –  as in the US or UK – central and local governments have –  long ago –  defaulted, but the Reserve Bank has never done so).

It is worth remembering what has actually gone on in the last few months.  There are several relevant strands:

  • the government has run a huge fiscal deficit, (meeting the gap between spending and revenue by drawing from its account at the Reserve Bank, in turn resulting in a big increase in banks’ settlement account balances at the Reserve Bank, as bank customers receive the net fiscal outlays),
  • the government has issued copious quantities of new bonds on market (the proceeds from the settlement of those purchases are credited to the Crown account at the Reserve Bank, paid for by debiting –  reducing –  banks’ settlement account balances at the Reserve Bank,
  • the Reserve Bank has purchased copious quantities of bonds on market (paying for them by crediting banks’ settlement accounts at the Reserve Bank).

In practice, the Reserve Bank does not buy bonds in quite the same proportions that the government is issuing them.  But to a first approximation –  and as I’ve written about previously – it does not make much macroeconomic difference whether the Reserve Bank is buying the bonds on market or buying them from the government directly.   In fact, it would not make much difference from a macroeconomic perspective if the Reserve Bank had simply given the government an overdraft equal to the value of the bonds it was otherwise going to purchase.     There are two caveats to that:

  • first, under either model the Reserve Bank has the genuine power to choose, and
  • second, that the fiscal deficit itself is not altered by the particular mechanism whereby the funds get to the Crown account.

But that seems a safe conclusion for now under our current institutional arrangements and culture.

From a private sector perspective, the net effect of the various transactions I listed earlier has been that:

  • private firms and households have been net recipients of government fiscal outlays, (which, in turn, boosts the non-bank private sector’s claims on banks)
  • banks have much larger holdings of (variable rate) settlement cash balances at the Reserve Bank.

Those settlement cash balances are the (relevant) net new whole-of-government debt.

By contrast, quite how the core government and the Reserve Bank rearrange claims between themselves just doesn’t matter very much (macroeconomically) at all.

Suppose the Minister of Finance and the Governor did get together and agree no payment needs to be made in respect of the bonds that Bank holds at maturity.  What does it change?   It doesn’t change is the appropriate stance of monetary policy –  determined by the outlook for the economy and inflation.  It doesn’t change the nature and extent of the Reserve Bank’s other liabilities –  which still have to be met when they mature.   And it doesn’t change anything about the underlying whole-of-government fiscal position.

I guess what people are worried about is that the government might feel it had to raise  taxes –  or cut spending –  more than otherwise “just” to pay off those bonds held by the Reserve Bank.  But remember that the Reserve Bank is just another part of government.  What would actually happen in that scenario is that settlement account balances held by banks at the Reserve Bank would fall (as, say, net taxes flowed into the government account at the Reserve Bank) –  and those are the new claims the private sector currently has on the government.    In other words, the higher taxes or lower spending still extinguish net debt to the private sector.   And if the government didn’t want to raise taxes/cut spending, it could simply issue more bonds on market.  In the process they would (a) repay the bonds held by the Reserve Bank, and (b) reduce settlement cash balances at the Reserve Bank, but (c) increase the net bonds held by the private sector.    Total private claims on whole of government aren’t changed.

(Now it is possible that at the point where the bonds mature, the Reserve Bank still thought that for monetary policy reasons settlement cash balances needed to be as large as ever.  If so, then of course they could purchase some more bonds on-market, or do some conventional open market operations. Neither set of transactions will change the overall claims of the private sector on the government sector –  net fiscal deficits are what do that.)

And what if the bonds were just written off?   As I noted earlier, write off the bonds and the Reserve Bank has a deeply negative equity position.   I don’t really think that is a sustainable long-term position.  It is a bad look in an advanced economy. It is a bad look if we still want to have an operationally independent central bank.  And we can’t rule out the possibility that, for example, risk departments in major international financial institutions might be hesitant about continuing to have the Reserve Bank of New Zealand as a counterparty, including for derivatives transactions, if it had a balance sheet with a large negative position –  even though, as outlined above, the Bank could unquestionably continue to pay its bills.  So at some point of other, the Bank would have to be recapitalised. But again that has little or no implications for the rest of the economy –  or the future tax burden.   The government subscribes for shares…and settles them by issuing to the Bank…more bonds.  The government, of course, pays interest to the Bank –  whether on bonds or overdrafts –  but, to a first approximation, Bank profits all flow back to the Crown.

This post has ended up being quite a lot longer than I really intended, as I’ve tried to cover off lots of bases and possible follow up questions.  Perhaps the key thing to remember is that what creates  the likelihood of higher taxes and lower spending (than otherwise) in future is unexpected/unscheduled fiscal deficits now.

Those deficits might be inevitable, even desirable (as many, perhaps most, might think of those this year as being), but it is they that matter, not  what are in effect the internal transactions between the core government and its wholly-owned Reserve Bank.   That is true even in some MMT world, provided one takes seriously their avowed commitment to keeping inflation in check over time.  You could fund the entire government on interest-free Reserve Bank overdrafts and the consequence would be explosive growth in banks’ settlement cash balances at the Reserve Bank.  But real resources are still limited (see yesterday’s post).  Over time, if you are serious about keeping inflation in check, you still have to either pay a market interest rate on those balances, or engage in heavy financial repression of other sorts, imposing additional imposts on the private sector just by less visible means.

Perhaps the other point worth remembering is the relevance of focusing on appropriately broad measures of true whole-of-government indebtedness, not ones dreamed up from time to time for political marketing purposes.

 

MMT

So-called Modern Monetary Theory (MMT) has been attracting a great deal more attention than usual this year.  I guess that isn’t overly surprising, in view of (a) the severe recession the world is now in, and (b) the passivity and inaction (and the ineffectiveness of what actions they do take) of central banks, those with day-to-day responsibility for the conduct of monetary policy.

Until about three years ago I had had only the haziest conception of what the MMTers were on about.  But then Professor Bill Mitchell, one of the leading academic (UNSW) champions of MMT ideas, visited New Zealand, and as part of that visit there was a roundtable discussion with a relatively small group in which I was able to participate.  I wrote about his presentation and the subsequent discussion in a post in July 2017.   I’d still stand by that.  (As it happens, someone sent Mitchell a link to my post and he got in touch suggesting that even though we disagreed on conclusions he thought my representation of the issues and his ideas was “very fair and reasonable”.)  But not many people click through to old posts and, of course, the actual presenting circumstances are quite a bit different now than they were in the New Zealand of 2017.  Back then, most notably, there was no dispute that the Reserve Bank had a lot more OCR leeway should events have required them to use it.

Among the various people championing MMT ideas this year, one of the most prominent is the US academic Stephanie Kelton in her new book The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (very widely available – I got my copy at Whitcoulls, a chain not known for the breadth of its economics section).   Since it is widely available –  and is very clearly written in most places – it will be my main point of reference in this post, but where appropriate I may touch on the earlier Mitchell discussion and this recent interview on interest.co.nz with another Australian academic champion of MMT ideas.

As a starting point, I reckon MMT isn’t particularly modern, is mostly about fiscal policy, and is more about political preferences than any sort of theoretical framework (certainly not really an economics-based theoretical framework).     But I guess the name is good marketing, and good marketing matters, especially in politics.

The starting proposition is a pretty elementary one that, I’d have thought, had been pretty uncontroversial for decades among central bankers and people thinking hard about monetary/fiscal interactions: a government with its own central bank cannot be forced –  by unavailability of local currency –  to default on its local currency debt.  They can always “print some more” (legislating to take direct control of the central bank if necessary).  So far so good.  But it doesn’t really take one very far, since actual defaults are typically more about politics than narrow liquidity considerations and governments may still choose to default, and the actual level of public debt (share of GDP) maintained by advanced countries with their own currencies varies enormously.

A second, and related, point is that governments in such countries don’t need to issue bonds –  or raise taxes – to spend just as much as they want, or run deficits as large as they want.  They can simply have the central bank pay for those expenses.  And again, at least if the appropriate legislation was worded in ways that allowed this (which is a domestic political choice) then, of course, that is largely true.  That means governments of such countries are in a different position than you and I –  we either need to have earned claims on real resources, or have found an arms-length lender to provide them, before we spend.    Again, it might be a fresh insight to a few politicians –  Kelton spent a couple of years, recruited by Bernie Sanders, as an adviser to (Democrat members of) the Senate Budget Committee, and has a few good stories to tell.  But to anyone who has thought much about money, it has always been one of the features –  weaknesses, and perhaps a strength on occasion – of fiat money systems.

Kelton also devotes a full chapter to the identity that any public sector surplus (deficit) must, necessarily, mean a private sector deficit (surplus).  Identities can usefully focus the mind sometimes in thinking about the economy, but I didn’t find the discussion of this one particularly enlightening.

It all sounds terribly radical, at least in potential.  One might reinforce that interpretation with Kelton’s line that “in almost all instances, fiscal deficits are good for the economy. They are necessary.”

But in some respects –  at least as a technical matter –  it is all much less radical than it is sometimes made to sound.   As a matter of technique and institutional arrangements, it is mostly akin to “use fiscal policy rather than monetary policy to keep excess capacity to a minimum consistent with maintaining low and stable inflation”.    Supplemented by the proposition that advance availability of cash –  taxes, on-market borrowing –  shouldn’t be the constraint on government spending, but rather that the inflation outlook should be.

Quoting Kelton again “it is possible for governments to spend too much. Deficits can be too big”.

What isn’t entirely clear is why, as a technical matter, the MMTers prefer fiscal policy to monetary policy as a stabilisation policy.    In the earlier discussion with Bill Mitchell, it seemed that his view was the monetary policy just wasn’t as (reliably) effective as fiscal policy.  In Kelton’s book, it seems to reflect a view that using monetary policy alone there is inescapable sustained trade-off between low inflation and full employment (a view that most conventional macroeconomists would reject), and that only fiscal policy can fill the gap, to deliver full employment.    Kelton explicitly says “evidence of a deficit that is too small is unemployment” –  it seems, any unemployment, no matter how frictional, no matter how much caused by other labour market restrictions.

I can think of two other reasons.  The first is quite specific to the current context.  Some might prefer fiscal policy because they believe monetary policy has reached its limits (some effective lower bound on the nominal policy rate).   Kelton’s book was largely finished before Covid hit –  and US rates at the start of this year weren’t super-low –  but it seems to be a factor in the current interest in MMT.     The other reason –  not really stated, but sometimes implied by Kelton – is that central bankers might have been consistently running monetary policy too tight – running with too-optimistic forecasts and in the process falling down on achieving what they can around economic stabilisation.  Since 2007 I’d have quite a bit of sympathy with that view –  although note that in New Zealand prior to 2007 inflation was consistently too high relative to the midpoint of the target ranges governments had set.  But it is, at least initially, more of an argument for getting some better central bankers, or perhaps even for governments to take back day-to-day control of monetary policy, than an argument for preferring fiscal policy over monetary policy as the prime macro-stabilisation tool.

But in general there is little reason to suppose that fiscal policy is any more reliably effective than monetary policy.  Sure, if the government goes out and buys all the (say) cabbages in stock that is likely to directly boost cabbage production.  If –  in a deep recession – it hires workers to dig ditches and fill them in again that too will directly boost activity.  But most government activity –  taxes and spending (and MMTers aren’t opposed to taxes, in fact would almost certainly have higher average tax rates than we have now) –  aren’t like that.  If it is uncertain what macro effect a cut in the OCR will have, it is also uncertain how  –  and how quickly – a change in tax rates will affect the economy, and even if governments directly put money in the pockets of households we don’t know what proportion will be saved, and how the rest of the population might react to this fiscal largesse.  In principle, there is no particular reason why fiscal policy should be better, as a technical matter, than monetary policy in stabilising economic activity and inflation.  But Kelton just seems to take for granted the superiority of fiscal policy, and never really seems to engage with the sorts of considerations that led most advanced countries –  with their own central banks, borrowing in local currencies –  to assign stabilisation functions to monetary policy, at arms-length from politicians, while leaving longer-term structural choices around spending and tax to the politicians.

These probably shouldn’t be hard and fast assignments. In particular, there are some things only  governments (fiscal policy) can do.  Thus, if an economy largely shuts down –  whether from private initiative or government fiat –  in response to a pandemic, monetary policy can’t do much to feed the hungry.  Charity and fiscal initiatives are what make a difference in this very immediate circumstances –  just as after floods or other severe natural disasters.    And we consciously build in some automatic stabilisers to our tax and spending systems.  But none of that is an argument for junking monetary policy completely, whether that monetary policy is conducted by an independent agency, or whether such agencies (central banks) just serve as technical advisers to a decisionmaking minister (as, for example, tended to be the norm in post-war decades in most advanced countries, including New Zealand).

The MMTers claim to take seriously inflation risk.  This is from the Australian academic interest.co.nz interviewed (Kelton has very similar lines, but I can cut and paste the other)

“They should always be looking at inflation risk. Because when we say that our governments can never become insolvent, what we are saying is that there is no purely financial constraint that they work under. But there is still a real constraint. So New Zealand has a limited productive capacity. Limited by the labour and skills of the people and capital equipment, technology, infrastructure and the institutional capacity of business organisations and government in New Zealand. That limits the quantities of goods and services that can be produced there is a limitation there. Also it depends on the natural resources of a country,” says Hail.

“If you spend beyond that productive capacity it can be inflationary and that can frustrate your objectives, frustrate what you’re trying to do. So it’s always inflation risks that’s important. Within that productive capacity, however, what it is technically possible to do the Government can always fund. So yes, you can fund any of those things but there’s always an inflation risk and that inflation risk is not specific to government spending. It’s specific to all spending.”

There is a tendency to be a bit slippery about this stuff.  Thus Kelton devotes quite some space to a claim that government spending/deficits can’t crowd out private sector activity.  And she is quite right that the government can just “print the money” –  so in a narrow financing sense there need not be crowing out –  but quite wrong when it comes to the real capacity of the economy.  Real resources can’t be used twice for the same thing.  When the attempt is made to do so, that is when inflation becomes a problem –  and the MMTers aver their seriousness about controlling inflation (and I take them at their word re intentions).

Partly I take them at their word because Kelton says “the economic framework I’m advocating for is asking for more fiscal responsibility from the federal government not less”.     And it certainly does, because instead of using monetary policy, the primary stabilisation role would rest with fiscal policy.  That might involve easy choices for politicians flinging more money around to favoured causes/people in bad times, but it involves exactly the opposite when times are good, resources are coming under pressure, and inflation risks are mounting.  Under this model, a government could be running a fiscal surplus and still have to take action to markedly tighten fiscal policy because –  in their own terms –  it isn’t deficits or surpluses that matter but overall pressure on real resources.  And they want fiscal policy to do all the discretionary adjustment.

Maybe, just maybe, that is a model that could be made to work in (say) a single chamber Parliament, elected under something like FPP, so that there is almost always a majority government.  Perhaps even in New Zealand’s current system, at a pinch, since to form a government the Governor-General has to be assured of supply.

But in the US, where party disciplines are weak, different parties can control the two Houses, and where the President is another force completely.     What about US governance in the last 30 years would give you any confidence in the ability to use fiscal policy to successfully fine-tune economic activity and inflation, while respecting the fundamental powers of the legislature (no taxation without representation, no expenditure without legislative appropriation)?   In a US context, I’m genuinely puzzled about that. [UPDATE:  A US commentator on Twitter objected to the use of ‘fine-tune” here, suggesting it wasn’t what the MMTers are about.  Perhaps different people read “fine-tune” differently, but as I read MMTers they are committed to maintaining near-continuous full employment, and keeping inflation in check, and even if some like rules –  rather than discretion –  it seems to me frankly no more likely that preset rules for fiscal policy would successfully accomplish that macrostabilisation than preset rules for monetary policy did.  “Successfully managed discretion” is what I have in mind when talking about “fine-tuning” in this context.]

But even in a relatively easy country/case like New Zealand using fiscal policy that way doesn’t seem at all attractive.    It takes time to legislate (at least when did properly).  It takes time to put most programmes in place, at least if done well –  and don’t come back with the wage subsidy scheme, since few events will ever be as broad-brush and liberal as that, especially if fine-tuning is what macro-management is mostly about.   And every single tax or spending programme has a particular constituency –  people who will bend the ear of ministers to advance their cause/programme and resist vociferously attempts to wind such programmes back.  And there are real economic costs to unpredictable variable tax rates.

By contrast –  and these are old arguments, but no less true for that  – monetary policy adjustments can be made and implemented instantly.  They don’t have their full effect instantly, but neither do those for most fiscal outlays –  think, at the extreme, of any serious infrastructure project.   And monetary policy works pretty pervasively –  interest rate effects, exchange rate effects, expectations effects (“getting in all the cracks”) –  which is both good in itself (if we are trying to stabilise the entire economy) and good for citizens since it doesn’t rely on connections, lobbying, election campaign considerations, and the whim of particular political parties or ministers.  And what would get cut if/when serious fiscal consolidation was required?  Causes with the weakest constituencies, the least investment in lobbying, or just causes favoured by the (at the time) political Opposition.     Perhaps I can see some attraction for some types of politicians –  one can see at the moment how the government has managed to turn fiscal stabilisation policy into a long series of announceables for campaigning ministers, rewarding connections etc rather than producing neutral stabilisation instruments –  but the better among them will recognise that it is no way to run things.  It is the sort of reason why shorter-term stabilisation was assigned to monetary policy in the first place.

Reverting to Kelton, her book is quite a mix.  Much of the first half is a clear and accessible description of how various technical aspects of the system work, and what does and doesn’t matter in extremis.   But do note the second half of the book’s title (“How to Build a Better Economy”): the second half of the book is really an agenda for a fairly far-reaching bigger government – (much) more spending, and probably more taxes.    There is material promoting lots more (government) spending on health, welfare, infrastructure, and so on –  all the sort of stuff the left of the Democratic Party in the USA is keen on.

That is the stuff of politics, but it really has nothing at all to do with the question of whether fiscal or monetary policy is better for macro-stabilisation.   I guess it may be effective political rhetoric –  at least among the already converted –  to say –  as Kelton does –  “cash needn’t be a constraint on us doing any of this stuff”.  But –  and this is where I think the book verges on the dishonest (or perhaps just a tension not fully resolved in her own mind) – the constraint, or issue, is always about real resources, which  – per the quote above –  can’t be conjured out of thin air.    Resources used for one purpose can’t be used for others, and even if some forms of government spending (or lower taxes?) might themselves be growth-enhancing in the long run, that can’t just be assumed, and almost certainly won’t be the case for many of the causes Kelton champions (or that local advocates of MMT would champion).

I can go along quite easily with much of Kelton’s description of how the technical aspects of economies and financial systems work, but the really hard issues are the political ones.   So, of course, we needn’t stop government spending for fear that a deficit will quickly lead to default and financial crisis, or because in some narrow sense we don’t have the cash available in advance.   But we still have to make choices, as a society, about where government programmes and preferences will be prioritised over private ones –  the contest for those scarce real resources, consistent with keeping inflation in check.    And we know that rigorous and honest evaluation of individual government tax, spending and regulatory programmes is difficult to achieve and maintain.  And we know that programmes committed to are hard to end,  And that government failure is at least as real a phenomenon as market failure –  and quite pervasive when it comes to many spending programmes.    And so while Kelton might argue that, for example, balanced budget rules (in normal circumstances, on average over the cycle) are some sort of legacy of different world, something appropriate and necessary for households but not a necessary constraint for governments, I’d run the alternative argument that they act as check and balance, forcing governments to think harder –  and openly account for –  choices they are making about whose real resources will be paying for the latest preferrred programme.

Kelton tries to avoid these issues in part by claiming that “outside World War Two, the US never sustained anything approximating full employment”,  and yet she knows very well that real resource constraints still bind –  inflation does pick up, and was a big problem for a time.  Hard choices need to be made –  not by the hour (government cheques can always be honoured) but over any longer horizon.

There are perfectly reasonable debates to be had about the appropriate size of government. but they really have nothing to do with the more-technical aspects of the MMT argument.  Even if, for example, one accepted the MMT claim that there was something generally beneficial about fiscal deficits, we could run deficits –  presumably still varying with the cycle –  with a government spending 25 per cent of GDP (less than New Zealand at present) or 45 per cent of GDP (I suspect nearer the Kelton preference).

This post has probably run on too long already.  Perhaps I will come back in another post to elaborate a few points.  But before finishing this post I wanted to mention one of the signature proposals of the MMTers – the job guarantee.  There is apparently some debate as to just how central such a scheme is –  that is really one for the MMTers to debate among themselves, although it seems to me logically separable from issues around the relative weight given to fiscal and monetary policy.   I covered some of the potential pitfalls in the earlier post and I’m still left unpersuaded that the scheme has anything like the economic or social benefits the MMTers claim for it, even as I abhor the too-common indifference of authorities (fiscal and monetary to entrenched unemployment.  In the current context, one could think of the wage subsidy scheme as having had some functional similarities, but it is a tool that kept people connected to (what had been) real jobs, and which works well for identifiable shocks of known short duration.  That seems very different from the sort of well-intentioned job creation schemes the MMTers talk about. From the earlier post

It all risked sounding dangerously like the New Zealand approach to unemployment in the 1930s, in which support was available for people, but only if they would take up public works jobs.  Or the PEP schemes of the late 1970s.   Mitchell responded that it couldn’t just be “digging holes and filling them in again”.  But if it is to be “meaningful” work, it presumably also won’t all be able to involve picking up litter, or carving out roadways with nothing more advanced than shovels.  Modern jobs typically involve capital (machines, buildings, computers etc) –  it accompanies labour to enable us to earn reasonable incomes –  and putting in place the capital for all these workers will relatively quickly put pressure on real resources (ie boosting inflation).   If the work isn’t “meaningful”, where is the alleged “dignity of work”  –  people know artificial job creation schemes when they see them –  and if the work is meaningful, why would people want to come off these government jobs to take existing low wage jobs in the private market?

And much of Kelton’s idealistic discussion of the job guarantee rather overlooked the potential corruption of the process –  favoured causes, favoured individuals, favoured local authorities getting funding.  It is a risk in New Zealand, but it seems a near-certainty in the United States.

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
2.75

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.

Financing the government

In normal circumstances governments finance themselves primarily with visible legislated taxes, with a bit of additional debt on the side.

In New Zealand, over the last complete 10 years, core Crown revenue was $715 billion (mostly taxes) and debt contributed between $10 and $40 billion –  depending which gross or net measure you prefer.    That borrowing was almost all from the private sector, again as one would expect.  The Reserve Bank’s holdings of government bonds. for example, hardly changed at all (nor did bank settlement cash balances at the Reserve Bank).   And the government mostly had credit balances in its account at the Reserve Bank.

In the last couple of months, everything has been thrown up in the air.   On the Budget numbers I mentioned in Friday’s post, almost a quarter of government spending over the five years (including 2019/20) is expected to be financed by increased debt.   And on the Reserve Bank’s own numbers we could easily see at least half of that increase in debt take the form of Reserve Bank lending to the Crown (the forecast rise in net debt is $134 billion, and the Governor has talked of the possibility of raising further the current $60 billion limit on the LSAP programme).

That the Bank is buying those bonds on the secondary market, rather than getting some or all direct from the government (as some advanced country secondary banks are now doing to an extent), is a second or third order issue, making little or no macroeconomic difference.   The important point at present is that (a) the Bank is buying the bonds, and (b) the Bank is sterilising the liquidity effect on those purchases by paying an at-or-above market rate on the resulting settlement cash balances.

Oh, and the most important points of all were that the decision to buy bonds at all is (a) wholly a decision for the Monetary Policy Committee, and (b) working with an unchanged (from pre-crisis) mandate: delivering inflation near 2 per cent and, as much as it can consistent with that, supporting employment.  The government has given the Bank an indemnity, which makes the Bank feel more comfortable taking the associated interest rate risk, but if the government had not done so, it need not have stopped the Bank making the purchases if the MPC felt that was what the monetary policy mandate required.

I wrote about all this a month ago when there was first a flurry of concern about reported comments suggesting that at some point the Bank might buy bonds direct from the Crown, in a post intended to be basically supportive of the Bank.

Now, as you know, I don’t think the LSAP is making much difference at all now to anything that matters much to macroecononomic outcomes.  It is slightly perverse in that it involves shifting the duration of the Crown’s effective debt portfolio much shorter –  swapping long-dated government bonds for on-demand instantly repriceable settlement cash liabilities –  but if you believe interest rates are going to be low for quite some time, you might even downplay that.  Other than that, it probably does little harm –  and adds to our database of monetary experiments for future analysis – if little good.

But in the last couple of weeks there have been a number of comments from the Governor that suggest that something much more troubling is afoot.

The first hint I heard of it was when the Bank turned up to Parliament’s Finance and Expenditure Committee on the day after the Monetary Policy Statement.  This is an extract from the post I wrote then.

Goldsmith asked the Governor about those comments a few weeks ago that the Bank could consider buying government bonds directly from the Crown, rather than (as at present) in the secondary market.  He seemed to just be wanting to close off the issue, but the Governor opened it up all over again, in a way that seems to have attracted no attention.

The expected answer would probably have been along the lines that there were no plans at present, the secondary market was working well, but if there ever were dysfunction there was really no macro difference in the Bank buying direct, so long as the decision rested with the Bank, consistent with the inflation target.   In backing the Governor on this point previously, that is what I have said.

Instead, the Governor launched into a discussion noting that while the Bank did not rule out lending direct to the Crown, that was really fiscal policy not monetary policy, that the central bank can always lend as much as fiscal policy requires, but that that would be a matter for the government to decide, not the Bank.

Goldsmith then challenged him on that, asking whether he was really saying that the Minister could decide whether the Bank would lend direct.  Orr reiterated the possibility of market dysfunction, while noting that at present markets were functioning well, but then repeated that what he called “pure monetary financing” would be a matter for the Minister of Finance to decide.

At this point, the Governor invited the Deputy Governor Geoff Bascand –  usually the safe pair of hands in that senior management cohort –  to comment.  He indicated that it would be a matter of ministerial direction, but which would involve a substantial process including looking at whether what the minister might be directing would still be consistent with the existing price stability etc target.  And then he tried to close things down by suggesting that this was all just an “esoteric discussion”.

Reasonably enough ACT’s David Seymour reacted to that, suggesting that if the Bank was seriously saying the Minister of Finance could direct them to lend to the government, in any amount he chose, it was “anything but esoteric”.

I went on to articulate the (possibly) relevant provisions of the Act as I saw them, concluding

But……there is no hint in this provision [section 12 override powers], or anywhere else in the Act, suggesting that the Minister of Finance can direct the Bank to lend to the government.  Perhaps the Bank and its lawyers think/worry that “lend to the government at zero interest up to $…billion” is an alternative “economic objective” within the meaning of section 12 of the Act.   But, at very least, it would be a stretch –  it isn’t an “economic objective”, but an instrument,  and favouring one specific party in the economy.    And note that if a government did attempt to impose such an “economic objective” there would still be nothing to stop the Bank setting interest rates for the rest of the economy at a sufficiently high level to counter the inflationary effects of this coerced lending.

I’m at a loss to know what the Governor and Deputy Governor mean.   I’m tempted to lodge an OIA request, but am not sure I’ll bother, as they would find myriad ways to refuse to release anything.  But journalists could directly ask the Bank what the Governor/Deputy Governor were on about?   MPs could use parliamentary questions to ask the Minister of Finance whether (a) he has received any advice as regard his direction powers over the Reserve Bank, and (b) whether he or Treasury believe he has the statutory power to compel the Bank to lend to the Crown.  Most everyone I’m aware of has always assumed they can’t –  and took great reassurance in that –  so if the powers that be now believe differently we deserve to know?    (Of course, if the government just wants more inflation, it can always raise the inflation target, but that is a rather different issue).

And there I left it, a bit puzzled, none the wiser, and even wondering whether Orr had perhaps confused some details and there really wasn’t anything to worry about.

At least until over this last weekend.  Then I happened to listen to a post-MPS presentation Orr had given to clients of Jardens (on 15 May), in which he touched on the issue and noted that (paraphrasing from my notes) “if we were to take a direction from the government to finance it directly – as distinct from what monetary policy needs might imply – we would have to have different legislation”

I then read an interesting interest.co.nz article reporting comments the Governor had given to their journalist Jenee Tibshraeny late last week in which this topic was addressed at some length.

Orr said it was up to government to decide if it wanted to go further and give the RBNZ the mandate to buy bonds for fiscal policy purposes, rather than monetary policy purposes – IE buy bonds to help pay for government spending initiatives rather than to keep inflation and employment in check.

“There’s no right or wrong,” Orr said.

“It’s just that it is different and you would need legislative and/or institutional instructions, because when I last looked at my job description, I’m not allowed to go off and buy whatever I feel like because I’ve got the ATM…

“That would take some significant transparency as well as operational structures to ensure everyone knew who was doing what, why, how, where, when.”

Asked whether he would be hesitant to go down this path if Robertson asked him to, Orr responded: “Yes, I mean, it really depends to what purpose… and under what conditions is this managed.

“Because you could take it to the extreme immediately and you’ve gone back in time 30, 40 years and the central bank is being used as the ATM for a government and it’s unclear whether we can control inflation anymore, and it’s back in the hands of the elected officials…

“It’s not for me to choose the policy. I would implement the policy, but I would be extremely cautious about making sure the risks are understood, managed and mitigated wherever they could be.

“And I imagine I would be surrounded by many many people with free and often unsolicited advice around whether it did or didn’t work… which is good…

“People are very passionate about the structures that have been built and you don’t muck around with them lightly.

“These things are achievable; they’re just different.”

On the one hand, it is good to know that the Governor seems to think that under current law he can’t just go and buy anything he likes (he probably can, but it has to be consistent with the Bank’s statutory functions, including the monetary policy Remit the Minister has given him, which in turn is subordinate to the Act).   But then note those Bascand comments earlier suggesting the Bank thinks it could be directed under existing legislation, even if that might involve overriding or changing the Remit.

The Bank has clearly been giving such radical options quite a bit of thought, not just as extreme contingency plans (Parliament, being sovereign, can empower almost anything) but as something they are quite openly talking about.    That suggests something that they are either keen on themselves, or which the Minister and/or Treasury has raised fairly seriously as a possibility.

Given the Governor’s longstanding belief in a bigger government and a more aggresssive use of fiscal policy, it wouldn’t be entirely surprising if this were something he was championing (indeed, it would be the best explanation for why (a) he is the only one talking about it, and (b) doing so in a non-negative sort of way).

Going down such a path would, however, be a seriously retrograde step. Perhaps it might lift inflation expectations a bit –  governments acting to direct the central bank to lend to them will create some concern – but in a quite undesirable sort of way (even if Social Credit and the more rabid MMT enthusiasts might be salivating at the prospect).

For a start, there is no obvious need for such a mandate.  The New Zealand government is a highly creditworthy borrower which, on current government plans, will remain one of the least-indebted of all the advanced countries.   One can never rule out a new extreme global crisis that might seize up markets for a few days, but the prospects of the New Zealand government not being able to issue on market the quantity of debt believes it requires is slim indeed.   And the Crown already has an overdraft facility at the Reserve Bank that it can draw on to smooths ups and downs.

More disconcertingly, although technically the Reserve Bank could be required to lend to the government –  beyond anything consistent with the Remit –  and that wouldn’t immediately tip us into serious inflationary problems, it would be a highly distortionary policy.  In principle, the Bank could lend lots of money to the Crown at zero interest, and the government then further increases its spending beyond what would normally be consistent with the inflation target. If that happened, you would expect the MPC to start raising the OCR, to keep overall demand in check.  And then we’d be in the bizarre throwback world in which the government was borrowing for zero and the rest of the economy faced really quite high interest rates, squeezing out private sector activity to favour the government.

I’m not going to allow myself to be drawn into an inconsistency here.  At present, if anything, the presenting issue is that the Reserve Bank is not doing its core monetary policy job sufficiently well that either the market, survey respondents, or the Bank itself believe that inflation will be consistent with the target set for them.  If they persist in that stance, amid a really savage recession, I believe the Minister of Finance should act, using existing powers either to replace the key individuals (to ensure the current Remit is being followed) or to explicitly direct the Bank to adopt an easier monetary policy (consistent with the current Remit over the medium term).  Those powers are in the Act for a reason, to protect citizens.   There is no such power to direct the Bank to lend to the government and there has long been an international consensus that it would be quite unwise to provide for such a power.  It would be to step away from any sense that monetary policy operates in a neutral way, not setting out to favour or disadvantage any particular party or sector (private or public), and into a world where governments could regard control of the “printing press” as an acceptable way for them to finance their spending (or reluctance to tax) preferences.  With reasonable people, it isn’t some immediate path to hyperinflation, but it would be undesirable on numerous counts and further increase the politicisation of the Reserve Bank.

One can make an argument against central bank operational autonomy –  I sometimes come and go and whether there are real advantages that justify the costs and lack of accountability (part of the reason why I keep on about enhancing real central bank transparency) – but giving the government reason to think control of the printing press is a legitimate tool has nothing going for it at all.

We need some answers as to just what is going on.   When I tweeted about this on Saturday, Tibshraeny responded

That is encouraging, and I will look forward to her story.  But if Robertson –  who always seem conservative and risk averse (sometimes beyond what is warranted) – is not interested, then what cause is Orr championing, to what end, and why?

If he thinks more macroeconomic stimulus is required, try conventional monetary policy (would have helped, of course, if he’d sorted out those alleged “operational issues” some banks are claimed to have, but even those obstacles exist they can be overcome).  If the governments thinks it needs to spend more, the conventional options are still open to them –  higher taxes (probably not a great idea at present) or tapping the global market for public debt.  Maintaining that borrowing capability was, as you’ll recall, one of the main reasons why successive governments kept net debt low and stable.  (Of course. it also has a $40 billion fund –  which it insists on putting more money into, even as its new borrowings are large, to speculate on world markets –  much of which could be quite readily liquidated.)