Harry White, and reconstructing the international financial system

Harry White and the American Creed: How a Federal Bureaucrat Created the Modern Global Economy (and Failed to Get the Credit), a new book by James Boughton, was my weekend reading.

Boughton, now retired, was formerly the official in-house historian of the International Monetary Fund (IMF).   White was a fairly senior official in the US Treasury, a key adviser to Secretary Henry Morgenthau, from the late 1930s to 1945, and has a fair claim to have been the technocratic father of the IMF (and was then for a short time the first US Executive Director of the IMF).  It was a short official career and he died quite young, but has an interesting – and contested – story nonetheless.

What of the book?   Well, ignore most of the title.  I’m still not at all sure what the “American Creed” is supposed to mean in this context, and the bit about “created the modern global economy” is simply laughably wrong (and seriously misleading to the casual bookshop browser).  It is a full biography, but two-thirds of the book is about the last 7 years of White’s life (1941-48), including extensive discussion of the allegations which have dogged his reputation ever since that White may have been a Soviet spy.

By the time White became even moderately senior in the US Treasury, pretty much every country had moved off the Gold Standard (the European “gold bloc” countries not until 1936) and most major exchange rates floated.  In the diminishing number of democratic countries, private capital movements were mostly still free (although in the US for example private holdings of gold were simply outlawed).  Views differed on whether the new exchange rate regimes were a “good thing” or otherwise (in another book on my shelves there is a record of White on an official trip to London in the mid 1930s talking to prominent business figures who had embraced an era of floating exchange rates, but officialdom was often less enthusiastic).  In some circles then – and still today (Boughton seems guided by this story) – there was a narrative that non-fixed exchange rates were a material element causing a backing away from globalisation and multilateral trade in the 1930s (a story that I don’t think stands much scrutiny). It is certainly true that floating exchange rates in peace time were something of a novelty.

Then came the war (the US eventually joining in late 1941) with the attendant debt, disruption, and extensive controls over all manner of aspects in life in pretty every combatant country (and even many neutrals).

White wasn’t heavily involved in the creation of lend-lease, that innovative form of cross-country support initiated by the US (although they too were recipients of lend-lease assistance, New Zealand (for example) being a net provider of assistance to the US) but eventually had oversight responsibility for the administration of the scheme.  The real focus of his efforts as described in the book was on post-war planning, which absorbed a huge amount of resource among (in particular) US and UK officials even as the physical conflict raged.

As is fairly well known, there were rival conceptions of the details of what the post-war international monetary order should look like, exemplified by the ideas of White (for the US) and Keynes (a key adviser to the British).   But what no one seems to have been in much doubt about was that a regime of fixed (but adjustable) exchange rates should be established, and that if current account convertibility (ability to buy, sell and pay for goods and services freely from abroad) was over time to be a goal for many/most, private capital mobility was (at best) looked on with considerable suspicion (neither White nor Keynes were keen).  If you weren’t going to allow private capital mobility, not only were fixed exchange rates were more or less unavoidable but governments had to be sure of their own access to foreign reserves to manage fluctuations in the demand for their respective currencies.  There was no appetite for a return to a classical Gold Standard, but also a surprising attachment to the idea that gold should still have a place in the international monetary system (one presumption being that countries would be reluctant to accumulate substantial foreign reserves simply in the currency of another country without the ability to convert to gold).

If there were different conceptions there were also different interests and contexts.  The US, for example, had been a net provider of assistance to the rest of the world during the war, and so although it would emerge from the war with large domestic debts it had not accumulated an adverse international position.    The US under Roosevelt also came and went a bit on to what extent they sought to undermine the future of the British Empire and British Commonwealth relationships (notably the imperial preference trade arrangements, and the “sterling area” which had developed after Britain went off gold in 1931).  The UK, by contrast, had suffered a real large deterioration in its external financial position (as well as having lots of domestic debt) as a result of the war, and had accumulated huge volumes of blocked sterling liabilities to Commonwealth and Empire countries (goods had been sold to Britain, sellers had been paid in sterling, and the resulting central bank balances were not readily convertible into other currencies –  notably dollars).  New Zealand was among the countries that had accumulated such large claims on the UK.  The overhang of sterling liabilities was to be an issue for decades.   The US was keen on a fairly early move to convertibility, while the UK was wary, to say the least.   (There were, of course, many other countries, including the exiled governments of occupied countries like the Netherlands and Norway, but the bulk of the discussion and negotiation was between US and UK officials –  often led by White and Keynes (both of whom seem to have been awkward characters in different ways).

In institutional terms the US conception won the day. It was almost always going to. The US was by the biggest economy, was not itself dependent on external finance (although had a clear interest in a general post-war economic revival), and of course whatever was agreed between governments had to get through a US Congress that –  as ever – was not generally under the control of the executive.   And, in truth, the basic IMF structure (my focus here although the World Bank –  International Bank for Reconstruction and Development – also emerged, less controversially from this process) was an elegant one.   Countries would fix an exchange rate to the USD, while the USD itself would be convertible (for governments/central banks) into gold at a fixed rate.  Each member country would deposit some portion of their gold or USD reserves with the Fund, which in turn would establish rights for countries to “borrow” from the Fund in times of temporary balance of payments pressures.  Countries could make modest exchange rate adjustments themselves, but larger adjustments – to address structural imbalances – would require the approval of the Fund, itself governed by Executive Directors appointed or elected according to the quotas negotiated for each country.  I put “borrow” in quote marks, as formally the IMF did not do loans, but things that were more like currency swaps –  and obscure currency swaps (partly modelled on what had been done with the US’s own Exchange Stabilisation Fund in the 1930s) were thought easier to get through Congress than loans.  In economic substance there was no difference.

Boughton was, as I noted earlier, the official in-house historian of the IMF. Since the IMF still exists today, it is a perspective that leans him to seeing what was created in 1944/45 as an unquestionably good thing.   I’m much more sceptical.  One could wind up the IMF today and the world would not be worse off.   And one could mount an argument that if negotiated arrangements were almost inevitable in 1945, there is still little reason to suppose that the creation of the Fund was a net positive even then.

It didn’t –  couldn’t –  deal with the really big overhanging issues (including, but not limited to, those blocked sterling balances) and was part of state-led arrangements that enabled for a time some deeply unrealistic post-war exchange rates.  Britain, for example, went through a period of seeking further US financial assistance, was then forced by the US in exchange to allow early convertibility which went badly wrong very quickly, and only finally took the deep exchange rate depreciation that was always needed under pressure in 1949.   It is not hard to think that restoring floating exchange rates pretty much as soon as the war ended might have been a better way (also reducing the pressure later for the Marshall Plan – a point some US sceptics made even at the time).

But whether or not the creation was a good thing, there is little doubt that White was the technocratic father of the Fund – which exists today even if the world it was created for almost wholly doesn’t – and Boughton has written a useful and interesting account of aspects of that period, complementing the range of other books (many on the Bretton Woods conference in 1944 where the final details were negotiated with 40+ allied countries in attendance).

There is lots of other interesting detail in the book (occasionally too much – even as a former Washington resident I did not need every single street address White lived at), including White’s involvement in helping flesh out the madcap Morgenthau Plan that envisaged turning post-war Germany into primarily an agricultural economy. White owed his position to Morgenthau who in in turn owed his position and influence to his friend and neighbour Roosevelt. Once Roosevelt died, White’s hour in the US government system had passed,

One is left with the impression of an influential, extremely hardworking, smart individual, but also an abrasive and not altogether pleasant one.  In an age of great figures –  good and evil – my sense is that no one would today be writing biographies of him if (a) the IMF no longer existed, and (b) it were not for the espionage allegations (the two aren’t unrelated since it was uncomfortable for the Fund to have such allegations about one of its “founders”).

The espionage allegations were not my main interest in buying the book. Not being American I’m probably less interested in any case against White than in, say, the truth about Bill Sutch.   Boughton goes to great lengths to review and rebut in detail many of the claims that have been made ever since the 1940s.  In some cases, he seems very persuasive, and in others a bit less so.   What is now unquestionable is that some of White’s good friends and colleagues were Soviet agents in one form or another (in some cases very active), and even Boughton concedes that at times White may have been indiscreet in his ties with people who, while Soviet officials, were still wartime allies and official interlocutors.  But if Boughton’s is the pro-White case, other serious people (without IMF ties) still seem equally certain of White’s guilt.  Perhaps we will never really know.

New Zealand participated in the Bretton Woods conference where the new international monetary arrangements were settled.  Our key delegate was Walter Nash then (simultaneously) Deputy Prime Minister, Minister of Finance, and resident NZ Ambassador to the United States.  His small delegation including the Secretary to the Treasury, Ashwin, the then Deputy Governor (later Governor) of the Reserve Bank, Fussell, and the highly regarded economist AGB Fisher.   There were two main working groups at the conference –  one on the Fund chaired by White, and another on the World Bank chaired by Keynes.  Nash chaired a less important working group.

Bretton Woods was, in many respects, not a matter of great moment in New Zealand (and it is interesting that neither the war economy  nor political and external affairs volumes of the NZ official history of World War Two seem to have any mention of the conference or the issue).   New Zealand was firmly in the sterling area –  our pound pegged to sterling –  and Nash had a strong aversion to overseas debt.  But there was still an important defensive interest, since Labour has put in place pre-war extensive exchange controls and import licensing restrictions and had no intention of removing those restrictions in peacetime.

Digging around various other books on my shelves, it seems clear that Nash and the NZ delegation did not make a great impression.  Ed Conway’s book, The Summit, has a few comments.  Introducing Marriner Eccles, the then chair of the Fed, he suggests that Eccles’ oratory “would give New Zealand’s dreary Walter Nash a run for his money as the most self-important and tedious delegate”.  The relative size of each country’s quota in the Fund was then, as now, a matter of politicking dressed up behind an apparent technical façade.  New Zealand was among those objecting to the US proposal (not helped by the fact that Nash apparently confused sterling and dollar amounts) “in a ten-minute sermon from the country’s dreary lead negotiator, the Hon Walter Nash”.  Conway quotes from the contemporary diary of UK delegate/economist Lionel Robbins “throughout the conference {Nash] has shown a tendency to be about three bars behind the band”. 

A more recent history of New Zealand diplomacy during the war, by Gerald Hensley, has a more substantive discussion.  He notes that the delegation had a good grasp of the basic New Zealand needs “But not one had been able to do any deeper thinking about the implications of the Fund and on this occasion it showed”.  He goes to quote from a contemporary British delegation report back home which concluded that Nash was simply out of his depth (“He understood comparatively little of the technicalities, but could not restrain himself from intervening in an embarrassing manner on many complicated points which were, moreover, not the least concern to his country”).  The Australian delegation also recorded complaints.

As Hensley notes, however, the government’s (and Nash’s) main focus was on ensuring that nothing in the agreement would interfere with the government’s ability to maintain exchange and import restrictions.   Nash’s official biographer, Keith Sinclair records that “according to the notes he made at this time, he asked the chairman Harry D White whether exchange controls were permissible, provided that exchange was used to pay for all current transactions.  White replied that this was his understanding, and he asked the meeting if there was any dissent. There was none.”

(Which is all very well but it was not be until the early 1980s that New Zealand finally removed all restrictions on even current account transactions)

If Nash himself was content with the final form of the agreement, there was still a significant amount of angst back home.  Instructions came from the Prime Minister that New Zealand was not to sign adhesion to the Final Act from the conference, and in the end the two most junior officials in our delegation were allowed merely to sign a document that certified that it was a true record of the conference proceedings. That Nash himself was persuaded is reflected in a letter to Harry White that was read to the conference by a senior US delegate as the conference was winding up (Nash had had to leave early)

“Owing to the urgency to make a train last night it was not possible to say goodbye before leaving for New Zealand.  In congratulating you and those working with you on the foundation work in connection with the Fund and the Bank I affirm that it can easily be the greatest step in world history with possibilities of removing one of the major causes of war, if not the major cause.”

Talk about overblown political rhetoric.

New Zealand was one of a very small handful of countries that participated in Bretton Woods that did not join the Fund early on (the most prominent of course was the Soviet Union, but even Australia did not join until 1947).  There is an entire article to be written on this strange history one day (I have a big folder of papers I collected a few years ago but cannot immediately find it).  There was significant unease on both sides of parliamentary politics with talk of free votes. It seems to have been one of those issues that few cared much about (either way) but a minority (against) felt very strongly about.   The Labour government failed to take any lead (there was significant dissent in their own caucus), and by the 1946 election campaign the leader of the National Party was openly opposed to joining.   There seem to have been a range of concerns, some reasonable, some not, and it is not as if there was no sensible dissent in other places either (I read one speech from a senior former UK minister in the House of Commons ratification debate expressing concern that the IMF would allow the UK less exchange rate flexibility than the UK had needed in 1931).  Between close ties to the UK, some unease about an emerging US-led system, a commitment to the sterling area and UK trade preferences, all combined with on the one hand the NZ regime of controls and, in the late 40s, New Zealand’s strong external position (we revalued our currency in 1948) there wasn’t much momentum, before the undertones of Social Credit type concerns were mentioned.  When New Zealand did finally sign up in 1961, Hansard still records unease from Labour members that IMF membership might threaten New Zealand’s full employment record.

New Zealand did join.  New Zealand has borrowed from the IMF on a few occasions ( a former colleague recently described to me the gaming of the rules of one particular facility in the 1970s).  It isn’t clear that joining or not really made very much difference then or now – these days we get only not-very-useful advice and a few job opportunities for officials – although it would these days look odd not to be a member.

(Personally I’m quite glad NZ finally did join as four years on the IMF payroll –  two resident in Zambia, two as Alternative Executive Director in Washington – were by far the highest paid of my career, and the only technical assistance mission I ever did for them, in China, was conveniently timed to pay the bills for our wedding.)

UPDATE: Someone inquired about my observation that NZ was a net provider of lend-lease assistance to the US. On checking, I’m reminded that in accounting terms the two sets of flows were roughly even (we received about as much as we provided), however Hensley’s book (p250) notes that this somewhat misrepresented the flow of real value, since much of what New Zealand provided was valued at pre-war prices, while material received from the US was typically accounted for in contemporary price terms. To the extent this was so, NZ was a net provider to the US.

What the IMF has advised

Following on from yesterday’s post looking at what the IMF had advised the government on housing issues in the Concluding Statement from the recent Article IV consultation, I got curious about how that advice had evolved over the years. I could recall some bits and pieces, but I thought something a little more systematic might be in order.

I had hoped to look at the Concluding Statements going back 20 years, to encompass at least the house price surge in the 2000s, but the Concluding Statements I could find on the IMF’s website go back only as far as the (March) 2009 consultation. But at least starting from there encompasses a full economic cycle. In March 2009 all the attention was on the recession, the global crisis pressures, and so on. House prices had been falling, but not dramatically so and so got little attention.

Productivity issues are not the focus on the IMF, which is supposedly primarily about macroeconomic and financial stability issues, but I’ve had a bit of a bee in my bonnet over the years about the way the Fund often comments anyway, often without much depth, and – so it seemed to me – often just reflecting back not much more than the political priorities of the government of the day.

So I went through the 11 Concluding Statements from 2009 to 2021 (there was none in 2016 or 2020) and pulled out all the references I could find to housing (house prices, housing finance, taxation of housing, housing debt vulnerablity, housing policy) and, separately, all the comments that fit, explicitly or not, under a productivity heading. The resulting document, composed almost entirely of cut and paste paragraphs, organised by year (housing at the front, producitivity later), is here.

IMF concluding remarks on NZ housing and productivity 2009 to 2021

What impressions did I take from this exercise?

On housing, the first impression is how event-driven their advice seems to be, except perhaps around the underlying level of household debt (relative to income/GDP). There really isn’t much in the first few years, when house prices weren’t doing much but the underlying structural policy failures around housing hadn’t changed. Then as house prices rise they express concern, and as house price pressures ease so do the expressions of concern. That is the stuff of newspapers, not detached independent analysts supposedly with a long-term vulnerability-based perspective.

There is plenty of evidence in the early years of the Fund endorsing what was then the Reserve Bank’s view – that our banks were adequately capitalised, that our approach to risk weights etc was more conservative than in most places. Then came Graeme Wheeler who, in a radical departure from decades of New Zealand financial system regulation rushed into imposing LVR controls. And the Fund’s advice suddenly thinks such controls are a good and proper thing, albeit to be exercised temporarily and sparingly. Remarkably – well, perhaps not, but the vision (of Fund surveillance) is supposed to be of free and frank external advice – not once do they cast doubt on any of the numerous iterations in aspects of LVR policy (not even, for example, the politically-driven exemption for new builds, even when the Fund must know such developments tend to be riskier than existing dwellings). And then a few years ago when the Bank gets keen on DTI limits, suddenly (but not before) the Fund is very keen too.

And whereas the advice had been that – as the Reserve Bank had stated at the time – that LVRs should be used temporarily and sparingly, the IMF becomes increasingly reluctant to see any easing of such restrictions, even years on. Not coincidentally, that seemed to be the Orr position (he has increasingly talked of such restrictions being a permanent feature).

Of course, they also flipped on capital requirements – essentially the stance at the time of the Bank itself; praising the cautious conservative approach in earlier years, and then flipping to favour Orr’s aggressive planned increases in capital requirements. Never, of course, addressing their earlier view.

What about housing policy itself? There is probably some continuity in Fund advice around favouring a capital gains tax but – whatever the tax policy merits of such a regime – no suggestion in any of the mentions of countries where a capital gains tax had made a sustained material difference to house price outcomes.

For the rest, they talk up Kiwibuild when the government was….and then it quietly disappears. From time to time they mention land taxes, but typically not with any conviction. Again, there is probably an underlying theme – mostly echoing back what officials and ministers tell them – about liberalising supply and land use (but, of course, they have no expertise to evaluate specific claims).

And then this year….quite out of the blue…..we get the proposal for a stamp duty on houses – never before mentioned in New Zealand, and something the Fund has favoured (eg) the UK and Australia getting rid of.

They used to favour neutral policy instruments but by this year’s report you’ll recall that they were dead-keen – echoing the government – on singling out “investors” for much harsher treatment, tackling sypmtoms not causes. Could the Fund have imagined itself – all while still suggesting the financial system is sound – recommending a decade ago the sort of discriminatory measures they proposed in this year’s report?

Now in the Fund’s defence one could argue that housing policy itself is not really part of their mandate: macroeconomic and financial stability is their thing. But it is the Fund itself that repeatedly chooses to step beyond the narrower dimensions – how robust are the banks and the government finances – the housing policy, housing tax policy, policies on the sectoral allocation of credit (the latter I’m sure they’d have censured firmly 40 years ago).

What of productivity? Again, even though this is a longrunning New Zealand policy failure, it isn’t really that close to the IMF’s remit. One can be poor and stable, rich and stable, or – now New Zealand’s story – upper income and stable. Or unstable in all those states of income/productivity.

But again, at times the IMF chooses to offer its tuppenceworth (although in four of years I looked at they focused more narrowly and had nothing to stay on wider structural policies – some of that may be about the interests/style of individual mission leaders). But what of what they did say? A decade ago they were keen on lower income taxes. This year, there is not a mention of the government raising income tax rates. A decade ago they were keen on welfare reform with a focus on encouraging the unemployed back into work. This year, they explicitly welcome permanent increases in unemployment benefit rates. Three years ago they got brave and raised some doubts about increasing minimum wages too much – mentioning specifically downturn risks – but this year, no mention of steadily higher real minimum wages at all, even as they rightly highlight ongoing macro risks.

There is some continuity, but where it isn’t surprising or controversial (among officialdom and the main parties). They like foreign trade and preferential trade agreements – even as they have almost nothing to offer on why trade as a share of GDP remains so low in New Zealand. They are generally keen on facilitating foreign investment (which I welcome) and are reasonably consistently keen on R&D subsidies. A couple of years ago they were keen on the Provincial Growth Fund and even fees-free tertiary education but we must assume they were simply reporting and endorsing the ministerial preferences of the day. This year, of course, we have green and inclusive growth, but with no analysis, evidence or reasoning in support.

Of course, to some extent I am being a little unfair. These Concluding Statements are typically only two or three pages long, and you can’t put everything in that sort of space. I could – but won’t at present – go through the fuller Article IV reports and do a similar exercise. I’m pretty sure what I would find would be no more consistency through time (or across countries) but a bit more reasoning in support of some of the positions IMF staff happen to hold that year.

Does any of this matter? Not a great deal, at least if you start from a view that the IMF has no useful role in today’s world. But given that the institution exists, employs a lot of able people, and has access to the perspectives and experiences of a very wide range of countries (much more readily so than any one here, government or private, does) it seems a shame we don’t get something better. The IMF should be able to bring two things to the table: independence and a willingness to speak in a free and frank way into the local discussion, and the benefit of really good cross-country comparative perspectives and insights. As it is, we are mostly getting neither, mostly just getting reflected back the preferences and inclinations of the day’s ministers and officials, with perhaps a few (nearly random) asides, some marginally useful, but more often not.

Housing, house prices, and the like

We’ve had a couple of widely-reported contributions to discussions on housing policy in the last few days.

The first was the Concluding Statement from the staff mission responsible for conducting the latest International Monetary Fund Article IV consultation with New Zealand (usually a physical mission here from Washington, but presumably done remotely this time). These statements are not formally the official view of the IMF management, let alone the Board, but you don’t get to be a mission leader without demonstrating your soundness and ability to run a line that won’t upset the Board and management. That doesn’t mean the messages are typically consistent either across time or across countries, but it does mean the final report (and the Board review of it) won’t be materially different. Of course, it helps that New Zealand isn’t a very important country (to the IMF – we don’t borrow from them, we pose no threat to global or regional stability etc) – and that the New Zealand authorities don’t these days typically pay much heed to the IMF (in some countries, including a bigger one west of us, authorities have been very very concerned that never is heard a discouraging word from the Fund).

I used to have quite a bit to do with the Article IV processes, both from an RB/Treasury perspective, and in the couple of years I spent representing New Zealand on the Fund’s Board. Specifically, I used to be regularly involved in the final meeting between the Fund mission and Treasury/RB senior macro people on the drafts of the Concluding Statements. I guess it must have been different at times, in countries, when the Fund thought the authorities were going rogue, running reckless or dangerous policies, but if New Zealand has at times offered puzzles for the Fund, it has also been run with pretty cautious macro and financial policy approaches (low public debt, focus on balanced budgets, low inflation, stable banks, high capital requirements and so on). So whatever the Fund has to say tends to be pretty marginal or incidental anyway, and in many topics they touch on the mission team don’t actually have much specific expertise (they are mainly macro people, often very able to that narrow space). So the Fund team tended to be quite accommodating of Treasury/Reserve Bank preferences around what was said in any Concluding Statement, with a focus on “what would be helpful” to the authorities at that time. And this, of course, is only the end of days and days of meetings – often some wining and dining too (although I guess not this year) – in which staff are fully appraised of “sensitivities” and what officials (and the Minister) would prefer the Fund did or didn’t say. No doubt there are limits, but most often the remarks are about issues at the margin – either shades of policy in core areas, or matters on which the mission team doesn’t have much expertise, authority or mandate. Not often then will the Concluding Statement be troublesome for the authorities. (In fact, this is one of the downsides of the move to near-full transparency around the IMF Article IV processes in recent decades.) Favoured mantras will often, quite conveniently, be repeated back to the authorities, as little more than mantras: an example this time is “inclusive green growth”, whatever that means.

In this post I wanted to focus on housing, a rather central issue in current policy and political debate in New Zealand, arguably even a source of potential financial sector instability. What did the Fund have to say on the subject? There were several references, the first from the summary bullet points

  • The rapid rise in house prices raises concerns around affordability and financial vulnerabilities. A comprehensive policy response is needed, including measures to unlock supply, dampen speculative demand, and buttress financial stability.

Surging house prices have supported household balance sheets but amplify affordability concerns for first home buyers and financial stability risks.

“Affordability” has certainly been stretched (to say the least), but it isn’t clear there is any greater threat to financial stability at this point. After all, as the report notes, household balance sheets as a whole have improved – not worsened – and if some marginal borrowers have taken on new debt at very high valuations (a) they are the marginal players, and (b) both banks and the Reserve Bank have imposed new and demanding LVR standards. Private lending standards have tightened – over the whole of the last year – not loosened. But it will have suited the authorities to have these references included.

Then we start to get to policy. The first reference reads as follows

Surging house prices should be addressed primarily through fiscal, regulatory, and macroprudential measures, though monetary policy may have a role if house prices pose risks to the inflation objective.

FIscal (tax?) measures as the main way to “address” house prices? On what planet does the Fund think this would be anything more than papering over cracks, and distracting from the core issue? But it will have suited the authorities to have it. And when they say “macroprudential measures” what they really mean is just new waves of controls. After all, the rest of the report suggests no particular reason for concern about the soundness of the financial system. It might have been nice to have seen “deregulatory” instead of “regulatory”, but I guess we can let that pass.

And what about monetary policy? Remarkably, there is no mention at all in this Concluding Statement of the government’s recent change to the Reserve Bank’s monetary policy Remit – the one that seemed designed to create the impression monetary policy was going to do something, even as the Reserve Bank itself said it wasn’t (an impression that at some international audiences have also erroneously taken). And that final half sentence? Well, it just looked like pandering as the Statement had already indicated the team’s macro view that monetary policy is likely to need to “remain accommodative for an extended period”.

They then get a little more substantive

Tackling supply-demand imbalances in the housing sector requires a comprehensive approach.

· Achieving long-term housing affordability depends critically on freeing up land supply, improving planning and zoning, and fostering infrastructure investments to enable fast-track housing developments. Steps taken to support local councils’ infrastructure funding and financing would facilitate a timely supply of land and infrastructure provision. The reform of the Resource Management Act is expected to reduce current complexities in land use that restrict infrastructure and housing development and contribute to efficiency in strategic planning. Increasing the stock of social housing also remains important, and the Residential Development Response Fund’s plans to deliver 18,000 public houses and transitional housing space, undertake rental housing reforms, and provide assistance to low-income households are welcome.

I guess the government will be quite happy with that. Suggest it is all big and complex and will take years to come to much. Oh, and that final sentence which would appear to be pure politics – you might agree, or not, with building more state houses or handing out more money to low-income people, but it bears no relationship at all to the Fund’s macro mandate, let alone to fixing the housing/land market that regulation has rendered dysfunctional. Smart active (but big) governments are clearly the thing.

But the broad thrust of that paragraph isn’t really that objectionable. Where it gets really problematic is the next paragraph.

· Mitigating near-term housing demand, particularly from investors, would help moderate price pressures. Introduction of stamp duties or an expansion of capital gains taxation could reduce the attractiveness of residential property investment. The authorities should differentiate in these approaches between first home buyers and investors, while continuing to provide selective grant and loan assistance to first-time buyers.

and this one

The deployment of macroprudential tools to address housing-related risks is welcome. The reinstatement of loan-to-value ratio (LVR) restrictions in March and further tightening for investors from May 2021 will help mitigate stability risks. Additional tools, including debt-to-income ratio limits, caps on investor interest-only loans, and higher bank capital risk weights on mortgage lending, are under consideration and could play a useful role in addressing housing-related risks.

Of the first of those paragraphs, really the less said the better. Price freezes dampen reported CPI inflation, wage freezes dampen reported wage inflation. Lockdowns reduce effective demand for, say, restaurant or cafe services. And so on. All sorts of daft, dangerous and inefficient mechanisms can be deployed to try to suppress symptoms, but most of them never should be. And nothing in that first paragraph stands up to any serious (macroeconomic, or really housing market functionality) scrutiny at all. But it must have gone over quite well in the Beehive, where “investors” seem now to be scapegoats for all ills, almost in the way that Jews were often so tarred in eastern Europe etc 100+ years ago. Just an attempt to distract from the real issues, the real policy failures.

The IMF – once concerned with functioning markets and more efficient policy regimes – is now actively touting policy interventions that differentiate by type of buyers, even though this advocacy seems to rest on no analysis whatever. And take as a particularly egregious example the mention of a stamp duty. These sort of transaction taxes are widely disliked in the economics literature – since they impede the functioning of the market directly affected and impair, for example, labour market mobility. In fact, they used to be firmly disapproved of by the IMF – which within the last five years has again recommended to the Australian and UK authorities (with very similar housing markets) that they move away from using stamp duties. So where did this suggestion come from? Either the Fund itself – in which case, serious questions should be asked about consistency of advice – or from The Treasury or the Minister of Finance? Is this an option that they are considering – perhaps (as the Fund phrasing talks of) just for the despised “investors”? The government made those idle pledges about no new taxes, but the “two minutes hate” now routinely directed at “investors” might suggest the government could get away with such a (Fund-supported) fresh distortion, at least among their own base.

And what about that “while continuing to provide selective grant and loan assistance to first-time buyers”? Surely the Fund knows – they’ve told countries often enough – that such interventions tend to flow straight into prices? And what does any of it have to do with the Fund’s macro or financial stability mandate (let alone any focus on economic efficiency?) But no doubt it went down well with the government: was “helpful to the authorities”.

I have heard a suggestion that perhaps what the Fund might have had in mind was a “temporary” stamp duty – whether just for investors or for everyone. If so, they should have said so. But if so, what planet are they on? All manner of taxes have been introduced “temporarily” over the years in many countries. Few get removed very easily – governments become addicted to the revenue, and/or happy to continue to deal with symptoms not causes. And the Fund itself – at least those of its officials with any sense of political economy – knows that.

And then there is the financial controls paragraph. These days the Fund really likes LVR restrictions, and the tighter ones still to come. In none of this is there any hint of the efficiency dimension. In none of it is there any hint of the analysis of risk (let alone of the interaction with the demanding new capital requirements – which don’t mess up the allocation of credit across sectors – the Fund has previously favoured), And having favoured very stringent LVR controls there is then no discussion about what, if any, the residual systemic risks (related to housing) might be. Instead, they allow themselves to become a channel for communicating, and apparently endorsing, the Reserve Bank’s own interventionist aspirations. If the Fund favours, for example, banning interest-only mortgages to “investors”, how does it square that preference with a regulatory restriction that already requires investors to have a 40 per cent deposit? One or other restriction might, in some circumstances, make sense. Both combined just seem like giving up on the market allocation of credit, papering over symptoms, and returning to the control mentality of ministers like Walter Nash. All ungrounded in that statutory goal that the Reserve Bank must exercise its regulatory powers over banks towards: promoting the soundness and efficiency of the financial system.

(Oh, and if the IMF believes that higher risk weights are warranted on housing, it will be interesting to see any argumentation they can advance in their final report – surely there will be none – for how the Reserve Bank has previously got it wrong: the same organisation the Fund repeatedly praised over the years for its cautious (emphasis on risk) approach in setting capital requirements, including for housing.)

If one had any doubts about the direction in which things are heading, there was the Q&A interview with the Reserve Bank Governor yesterday. It was a seriously soft interview by a TV1 political reporter, who displayed (a) no sign of any understanding of the legal framework the Bank operates under, (b) no sign of any real understanding of the housing market, and (c) no interest in doing anything but helping the Governor run his message, even feeding him loaded phrases in the questions. There was not a single serious challenging question. Not one. (Not even – an obvious question for a political reporter – about the recent change to the MPC Remit, talked up the Minister of Finance and then talked down – to the point of being almost dismissed – by the Bank.)

Orr went on and on about investors purchasing housing, but never once noted that if the land market were sorted out – and he did in passing acknowledge supply issues – the entire environment would be different: not only would houses/land not be expected to appreciate in real terms, but owner-occupier affordability would be that much greater (and without LVR restrictions it would also be easier for first home buyers). He made no attempt to tie the fresh interventions he and the government seem to be cooking up to the soundness of the financial system. In fact, he almost disavowed that as a consideration, claiming that the Bank had previously focused on systemic stability (whole financial system) but now had a new mandate that would enable it to focus on a specific asset class. Here he appeared to be referring to the direction issued to be the Bank a couple of weeks ago under section 68B of the Reserve Bank Act. It reads

 I direct the Reserve Bank of New Zealand (“Reserve Bank”) to have regard to the following government policy that relates to its functions under Part 5 of the Act.

Government Policy

It is Government policy to support more sustainable house prices, including by dampening investor demand for existing housing stock which would improve affordability for first-home buyers.

As the Governor himself noted in a speech just a few days ago, no one really knows what “have regard to” (the statutory phrase) means. The Act itself provides no further guidance. But what is clear is that this direction provides the Bank with (a) no additional powers it had not already had, and (b) no change (broadening or narrowing) in the statutory goals the Bank is required to use its Part 5 (banking regulation) powers towards. Those powers must be exercised for these purposes (only):

The powers conferred on the Governor-General, the Minister, and the Bank by this Part shall be exercised for the purposes of—

(a) promoting the maintenance of a sound and efficient financial system; or
(b) avoiding significant damage to the financial system that could result from the failure of a registered bank.

It might be all very interesting to know that an incumbent left-wing government really doesn’t like non owner-occupiers buying housing, but what of it? If such activity threatens the soundness of the financial system the Bank should (have) acted anyway, and if it doesn’t well….they can’t. And any such interventions are all-but certain to detract from the efficiency of the financial system, a (statutory) consideration one never hears of from the Governor (except perhaps when he thinks banks don’t lend to people he thinks they should – but that is no definition of efficiency).

There is just nothing in the Act that allows the Bank to focus on the soundness or health or performance of anything other than the financial system (as a whole). And yet they appear to be lining up new restrictions on interest-only mortgages (see above) to help the government out politically, and pursue’s Orr’s own political agendas, not to underpin the soundness and efficiency of the financial system. (As he noted, using debt to income restrictions – which he is legally free now to deploy, if doing so would support the soundness and efficiency of the system, already buttressed by very high capital requirements – would almost certainly cut further against the government’s bias towards first-home buyers.)

Policymaking in this country has been going backwards for years. We see examples of it all the time (another recent one is of course the Climate Commission’s secrecy around its modelling, Treasury’s secrecy around relevant analysis), but the housing market and housing finance markets seem particularly egregious examples, where more interventions keep on substituting for addressing issues at source, adding ever more inefficiency and papering over the cracks (hoping prices will level off for a while and the political heat will recede) rather than cutting to the heart of the problem. It is bad enough when governments and government departments do it, worse when autonomous agencies like the Reserve Bank weigh in beyond their mandate, pursuing personal and political agendas. And whatever limited value an independent international agency like the IMF might have brought to the policy debate, is severely undermined when – supported by no analysis whatever – they just weigh in largely echoing the preferences of the moment of domestic political playersa.

Some IMF modelling on NZ

Earlier in the week I wrote about the IMF’s less-than-impressive Article IV report on New Zealand’s economy and economic policy.   As part of the bundle of documents released last Saturday there was the Selected Issues paper – a collection of some supporting research/analysis undertaken by Fund staff to help underpin the Article IV report and Fund surveillance of New Zealand more generally.

On this occasion, there are three such papers.  The one that caught my eye was the first: a modelling exercise under the title


In this paper staff took a Fund model carefully calibrated to capture key features of the New Zealand economy and used it in conjunction with their global model to look at several possible shocks New Zealand might face over the coming years.    There is a piece on possible agricultural shocks (pp19-21) which may interest some readers, but my focus was mostly on the other shocks they studied:

  • a significant growth slowdown in the People’s Republic of China,
  • a significant growth slowdown in Australia, and
  • and a significant (exogenous to New Zealand) change in net migration from (a) the PRC, and (b) separately, from Australia.

They illustrate the estimated transitional effects and report the model estimates for the long-term steady state effects.

The PRC growth shock involves (mainly) materially slower productivity in China, such that 10 years hence PRC GDP is 11.9 per cent lower than the (WEO forecast) baseline.  You’ll have heard New Zealand politicians and other lackeys parrot lines about how New Zealand depends heavily on the PRC for its prosperity etc.  The IMF modellers are having none of it.  Here are the New Zealand economy responses (quarters along the horizontal axis).

sel issues 1.png

On this model, a 12 per cent lower level of GDP in China –  largest trading partner, first or second largest economy in the world –  leaves New Zealand…….every so slightly better off in the long run (but treat that as basically zero).  Oh well, never mind…..I don’t suppose it will stop the lackeys doing their thing, but it is a helpful reminder that, to a first approximation, countries make their own prosperity.

The scenario of an adverse growth shock in Australia is of similar magnitude (Australia’s GDP is 9.3 per cent lower than otherwise in the long-term.  I won’t clutter up the post with the same set of charts for the Australia shock, but suffice to say that the bottom-line results aren’t that different.  This time, a 9.3 per cent sustained fall in GDP in the economy that is our second largest trading partner and largest (stock) source of foreign investment is estimated to reduce New Zealand long-run GDP, but by only 0.03 per cent.  I’d treat that as zero as well.  In both cases, a lower real exchange rate is part of the way the New Zealand economy adjusts, so consumption here is a touch lower (it is relatively more expensive) but overall real incomes generated in New Zealand (GDP) are all but unchanged.

That was interesting, but not really that surprising (in truth, even I might have expected a slightly larger adverse effect).   It was the migration shocks, and the Fund’s modelling of those, which should really garner more interest and scrutiny.  Note that these results have already had bureaucratic scrutiny: the paper notes that

The chapter benefited from valuable comments by the Treasury of New Zealand and participants at a joint Treasury and Reserve Bank of New Zealand seminar.

Both institutions have some smart and critical people.

Here is the shock re PRC immigration

Additional Net Migration Effect in New Zealand. There are permanently fewer migrants to New Zealand from China. There is a 0.1 percent reduction in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 1.0 percent lower.

This shock is added to the PRC growth slowdown shock illustrated earlier.  As the Fund’s model is calibrated, these are the results.  The additional effect of the migration shock is the difference between the two lines in each panel.

sel issues 2

The Fund writes these results up as “a bad thing”

The fall in net migration would exacerbate the negative spillovers to New Zealand
from China. Real GDP would now be 0.7 percent lower than baseline in the long term.

Which is true, of course, on their model.  But, strangely, not once in the entire paper do they mention per capita GDP.  The population in the long-run is 1 per cent lower, but GDP is only 0.7 per cent lower, implying that GDP per capita is 0.3 per cent higher in this “Chinese migration shock” scenario than in the baseline scenario.  That sounds like a good thing, for New Zealanders, not a bad thing, at least in the longer-term.  (Since labour input and GDP both fall by the same amount, it doesn’t look as if this model can deal with endogeous changes in productivity).  For what it is worth, real wages in New Zealand are also higher in this scenario.)

What about the Australian net migration shock?

Additional Net Migration Effect in New Zealand. There are permanently more migrants to New Zealand from Australia. There is a 0.26 percent increase in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 2.6 percent higher.

Again, this shock is on top of the sustained slowdown in Australian growth modelled earlier (and thus is probably best thought of as a reduction in the net outflow of New Zealanders to Australia, the income gap having changed a bit in our favour).   Here is the chart of those results.

sel issues 3.png

In sum, the population is 2.6 per cent higher in the long-run and GDP is 2 per cent higher.   The Fund again spins this as a positive story (it appears under the heading “How Net Migration Could Improve Outcomes for New Zealand”) but again completely overlook the per capita story.  In this scenario, real GDP per capita is 0.6 per cent lower than in the baseline.  New Zealanders are poorer (and in the long-run real wages in New Zealand are lower).  It isn’t even as if there is much of a short-term vs long-term story (the GDP effects just build pretty steadily over the 10 year horizon).

These effects become large if you apply them to the scale of the non-citizen migration we’ve had in New Zealand in recent decades.  Cumulatively, they would not be out of line with the observed slippage in New Zealand productivity relative to other advanced countries over that period.

So the headline out of this particular paper should really be “additional migration makes New Zealanders poorer in the long-run, at least according to IMF modelling”, not stuff about how helpful immigration is.  A focus on GDP might make sense if you are building an army (raw numbers matter) or to silly comparisons politicians make.  Other people know that per capita GDP is much the more important variable, relevant to material living standards etc.  On its better days I’m sure the IMF knows that too.

In a way, even in their report on New Zealand the IMF shows glimpses of recognising that high rates of immigration might not be so good for New Zealand (whatever the possible benefits in some other places).  Both in the main Article IV document and in the Selected Issues paper “a remote location” comes first in the list of factors the Fund identifies as constraining New Zealand productivity.  Combine that glimmer of recognition (and I could also recommend to them this piece) with their own published model results suggesting that, at the margin, immigration makes New Zealanders poorer –  recall that this model is calibrated by the Fund to capture what they see as key features of the New Zealand economy) –  and it might have pointed disinterested observers towards suggesting to New Zealand governments that they consider rethinking their enthusiasm for such high (globally unusual) rates of immigration to a relatively unpropitious location.   Instead of which, the Fund (like the OECD) tends to act as cheerleaders for New Zealand immigration policy.

The IMF, of course, is not a disinterested observer.   It knows little distinctive about New Zealand – and New Zealand’s productivity performance has long been an awkwardness, even a bit of an embarrassment, for the international economic agencies.  And it is a global champion of the idea that immigration is good and more immigration is better.  If you think that an unfair characterisation, check out this post (and this more NZ focused) where I unpicked parts of an official IMF paper which purported to show that

If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

What do I actually make of the latest IMF paper?  Not that much to be honest.  I’m sure the authors could probably play around with their model – it is calibrated rather than estimated –  to produce results more suitable to the causes of their masters in Washington.  And since productivity isn’t affected, one way or another, by immigration in this model, I’m certainly not attempting to suggest that these results are somehow reflective of the sorts of channels and models I’ve been championing as central to the New Zealand story.

But when even the champions of high immigration to New Zealand acknowledge that there is not much (any?) New Zealand specific research showing that high rates of immigration to New Zealand, in New Zealand’s specific circumstances (eg remoteness, resource endowments, institutions etc) has been beneficial to New Zealanders over recent decades, it should be a little uncomfortable for the officials and politicians who champion the status quo that one of the leading internation economic agencies, pretty sympathetic to their approach, nevertheless (and without really trying) manage to produce research once again casting doubt on whether on this central tool of economic policy –  probably the biggest structural intervention our governments have done over the last 25 years –  is really working for New Zealanders.

Perhaps someone might ask the Prime Minister or the Leader of the Opposition why they act as if they are so convinced that on this count the IMF is wrong.  (Oh, and they might stop parroting the “our prosperity depends on China” line too.  IMF modelling confirms (common sense) that it simply doesn’t.)


IMF: telling it like it isn’t

Since New Zealand joined the International Monetary Fund almost 60 year ago now –  amid all sorts of controversy we were very late to join – their officials have produced a report (Article IV consultation) on New Zealand’s economy every year or so.  These reports used to be held very closely –  which might have made for more free and frank advice – but these days they are routinely published for most countries (including New Zealand).    I’ve participated in quite a few of these reviews over the years, in New Zealand, in other countries where I’ve worked, and in my time on the board of the IMF.  I increasingly wonder why they bother.  For most countries, there isn’t an obvious gap in the market for economic commentary requiring a supranational agency to fill, and if there is occasionally some really good analysis included with the published report, it is rare for the IMF to be adding very much value.  That has long been so in New Zealand.

The IMF once had a fearsome reputation as a nest of fairly hardline ‘right wing’ economists.   The reality of hard budget constraints can have that sort of effect.  And bankers will put conditions on their loans.

But, of course, the IMF doesn’t really have an independent existence.  It is governed by an Executive Board meeting in near-permanent session, where the clout is held by Executive Directors appointed by, and dismissable by, the governments of larger economies and –  reasoanably enough I suppose –  the actions and words of the IMF tend to reflect the politics and preferences of the shareholders.   It isn’t that the Managing Director is unimportant, but the Managing Director gets and keeps her job, and her effectiveness, by keeping onside with the shareholders.   Good money gets thrown after bad –  in places like Greece, Pakistan, and Argentina –  to reflect these shareholder political preferences.  Sometimes the MDs even have personal political and career ambitions to pursue, in turn usually dependent on the goodwill of major shareholders (bearing in mind that every single MD  –  including the next one – has been from Europe.   Except perhaps on quite narrowly technical points, it doesn’t make sense to think of Fund’s view apart from the politics and preferences of the governments that dominate it.    Like the OECD, that makes it part of the centre-left consensus on most things.

But there are also lower-level institutional incentives.  The IMF wants to be “helpful”, it wants access, and its mission-team leaders want to be promoted to more important responsibilities.  When dealing with normal countries with reasonably normal governments, there is quite an incentive to make nice, to talk up things the government you are dealing with is fond of, not to make much of consistency through time (governments change after all).  All compounded by the tendency for Fund missions to weigh in on stuff they really don’t know much about at all (staff tend to have a great deal more macro expertise than that on, say, productivity or housing –  reflecting their formal mandate –  and New Zealand being a somewhat idiosyncratic economy, and staff turning over quite quickly, few really know much about New Zealand).

The latest Article IV report for New Zealand was published on Saturday.   Being dropped into a news deadzone (only accentuated by the RWC) presumably the government –  which has its say on timing –  wanted even less coverage than the little attention these reports usually get in New Zealand media.

Which was odd in a way because in many respects the document  –  at least the headline bits –  could have been published by a government PR body.   There was, for example, that talk about the “solid” economic expansion which must have been welcome, at least until one dug down a few paragraphs and found that staff recognised that any relatively decent performance, albeit (as they note) with skewed downside risks is coming only from supportive macro policy (fiscal and monetary), not from any robust long-term foundations.  Oh, and that they thought that the unemployment was now lower than could be sustained.

Lots of policies were deemed “appropriate”, but with little or no supporting analysis it was hard to know why we should agree with the social democrats from Washington.  Last year the Fund seemed keen on a capital gains tax, but this year –  free and frank advisor role notwithstanding –  the waters have apparently closed over that option and it gets no mention at all.  Last year, Kiwibuild was talked of positively, while this year’s report –  written weeks ago –  is left with vague talk of resets, “key programs still need to be calibrated” etc.

It is on the productivity front that the Fund is perhaps the most far-fetched.    Buried deep in the report is this chart (of OECD data)


Which is a chart so bleak it could almost have originated here.

They also note that business investment has been weak this decade.

And yet, like our own government agencies I guess, they include projections in the report suggesting that total factor productivity growth is just about to accelerate away again, and that lots of capital-deepening business investment will also occur over the next five years (projections to 2024).    From a quick glance at global or domestic bond markets, you’d have to think that market pricing doesn’t really agree with the Fund.   Oddly, when they comment explicitly on the productivity projections we are told to expect this renewed growth because of “cost control and efficiency gains”.  Well, maybe…..

But, or so we are told by the IMF, there is in fact a promising productivity-focused policy agenda already being implemented by the government.  Perhaps you missed it. I did.

But here is what the IMF has in mind

Addressing long-standing low productivity growth continues to be a central concern. In this respect, some important first steps have been taken, including the introduction of a new R&D tax credit regime; the creation of the New Zealand Infrastructure Commission to help in closing infrastructure gaps; and the reform of the vocational education and training sector.

and, elsewhere in the same document

Within the greater focus on wellbeing under the Living Standards Framework, the government has a roster of policies to foster productivity growth. These include introducing an R&D tax credit regime, continuing to increase education spending, creating a New Zealand Infrastructure Commission to enhance procurement and delivery and set up of an infrastructure pipeline, using wage increases to further more inclusive growth, and fostering regional development through the Provincial Growth Fund and greater focus on regional immigration to align immigration of skilled labor with employers’ needs in the regions.

Spare us.

In case you are wondering that “using wage increases to further more inclusive growth” appears to be a reference to the government ramping up the minimum wage, combined with some modestly-sympathetic references to the proposed Fair Pay Agreements.  If you think those two will boost TFP growth (whatever you might think of the “fairness” arguments), I’m sure someone has all manner of scam projects to sell you.

Or perhaps it was the Provincial Growth Fund –  which no credible observers thinks is likely to lift economywide productivity –  or fees-free tertiary education (“continuing to increase education spending” –  and last year the Fund was explicitly keen on something like fees-free).  I haven’t focused on vocational education reform, but count me sceptical that it is going to make much sustained difference to economywide productivity.

I get that outfits like the Fund like interventions like R&D tax credits. Perhaps it will even make a difference (although I’m sceptical) but the Fund’s supporting “analysis” seems to be no more than “R&D spending in New Zealand is low, so we should have more government subsidies”, with no analysis for why firms haven’t regarded it as attractive to spend more themselves.  And, who knows, perhaps the Infrastructure Commission will do some good work, but (a) it makes no spending decisions, and (b) the government’s own actual infrastructure choices have been more about keeping the Greens happy than about having a credible chance of enhancing productivity growth.

Oh, and it wouldn’t do to skip the other reform the Fund seems most keen on –  it features in the covering statement.  On housing, they seem still right with the government

The reform of the institutional structure, including the establishment of the Ministry of Housing and Urban Development, should help in implementing housing policies. Further work is needed to complete the agenda, including enabling local councils to actively plan for and increase housing supply growth.

(with no mention at all of initiatives that at least some regard as signficant backward steps)  but they still want action on tax, this time an even flakier option

Tax reform, such as a tax on all vacant land, should also be considered.

Again with no supporting analysis whatever.  (Land value rating would be the more sensible, and feasible, option in that space.)

And, bottom line surely, despite having a spiffy new bureaucracy “house prices are expected to continue rising under the baseline economic outlook”.

The other point from the report that I wanted to touch on here was around the Reserve Bank’s bank capital proposals.   The Fund is keen.

The proposed higher capital conservation buffers would provide for a welcome increase in banking system resilience. The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the banking system.

Of course, there is no supporting analysis for that proposition either. In a a short report perhaps that might be too troubling, except that as I have pointed out before this seems to be a classic example of the Fund simply going with the flow and echoing whatever the authorities happen to favour at the time.    Don’t want to make life awkward for our mates at the Reserve Bank, I suppose.

Here was what I said when the Fund mission released their concluding statement at the end of their visit to Wellington

They are not much more than a couple of sentences in a press release, with no published supporting analysis.  And the Fund almost always backs the authorities – who are the people they talk to mos?t  –  especially when central banks and regulators want to put more restrictions on banks. Why wouldn’t they?  Any economic costs don’t sheet home to them.  But the IMF’s support isn’t without its problem for the Reserve Bank.     Here is what they said

The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the dominance of the four large banks with similar concentrated exposure to mortgages, business models and funding structures.

Which, by logical deduction, appears to be saying that current levels of capital are grossly inadequate to the risks the New Zealand banking system faces. But there was no hint of these serious risks in past Financial Stability Report from the Reserve Bank (although they amped up the rhetoric in the latest one), and –  perhaps more to the point –  no hint of that in past IMF Article IV staff reviews or Executive Board discussions.  This snippet is from last year’s Article IV report, published as recently as June last year.

IMF capital

Not a word from staff, from the Board –  or, indeed, fron the New Zealand authorities in their published comments –  of a pressing need for a huge increase in minimum capital ratios.

In other words, take what the Fund says with a huge bucket of salt.    And if, perchance, the Governor has second thoughts and doesn’t go ahead with large increases, probably next year the Fund would be back to tell us that was “appropriate” too.

As I say, I really struggle to see the value of the Article IV reports.  At one level, perhaps that reflects the fact that the Fund is a macro agency, and macro policy has been where New Zealand –  all on its own –  has done pretty well over the last 25+ years (low government debt, low stable inflation etc etc), and where we face hard issues the Fund has little or nothing to offer except the institutional sympathies of the centre-left.  But it isn’t as if New Zealand is the only place where they struggle to add much value, or make much difference to important debates in a timely ways.  If it were wound up – rarely ever happens to international agencies of course –  it is hard to see how the world would be the poorer.  Some officials would be – and I had several very remunerative years on their payroll –  but not obviously the world, and certainly not New Zealand policymaking or economic analysis.

The Fund does often publish some research done in association with the Article IV report in a separate document. They have done so again this time.  I haven’t yet read the paper in full, but on skimming through it there look to be some points worth coming back to later in the week.



Debt: dodgy analysis from the IMF

I should really be doing something else, but I just read Brian Fallow’s column in today’s Herald outlining his views on why the government shouldn’t relax its own fiscal rules.   Reasonable people can differ on that –  and as per my post yesterday I’m certainly not arguing for the government to raise debt levels (per cent of GDP) from here.  But what caught my eye was some IMF “analysis” Brian quoted.

He introduced his article noting that on IMF data (or any other measure you like) New Zealand’s net or gross government debt is quite low as a share of GDP.  On my preferred measure, net debt is about 8 per cent of GDP.    But he goes on

A third reason for being cautious about ramping up government debt is that not all of its obligations are on the balance sheet.

In particular, there is the future additional cost of superannuation and health spending as the population ages.

The IMF has had a stab at calculating the net present value (NPV) of those increased costs out to 2050. We can think of that as how big a pot of money we would need to have set aside, earning compound interest, if those liabilities were fully funded.

It reckons the NPV of the pension spending increase out to 2050 is 54 per cent of GDP. That is $150b in today’s dollars, only partially offset by $38b in the New Zealand Superannuation Fund. The NPV of the expectable health spending increase is even larger, at 66 per cent of GDP.

When those two factors are accounted for, New Zealand is no longer a fiscal outlier, but sits in the middle of the range for advanced economies, between Germany (with its challenging demographics) and Ireland (with its debt crisis legacy).

That sounded interesting, so I dug out the chart Brian appears to be referring to from the latest IMF Fiscal Monitor publication.

IMF fiscal monitor implied debt chart

I don’t know quite how the IMF did their health and public pension numbers, or how comparable their estimates are across countries.  But just take them as what they are (our pension numbers are high because, unlike many countries, we haven’t done anything to raise the NZS age).   Allegedly, New Zealand is now in the upper half of the indebted advanced countries.

But this is a nonsense chart, adding apples and oranges.    It might make some sense if every country had the same starting deficit/surplus, in which case future differences in discretionary spending associated with ageing might be the only difference in the projected future debt paths across countries.

In fact, some countries are in (cyclically-adjusted) surplus, and some are in (cyclically-adjusted) deficits.     Israel, for example, is estimated to have structural deficits of 3.5 per cent of GDP, and the US is now estimated to have structural estimates of about 6 per cent of GDP.   Israel is much further down that IMF chart than we are, but annual deficits of 3.5 per cent of GDP  (before the effects of additional ageing) soon compound into very large numbers.

And New Zealand?   Here are the IMF’s own estimates of the average cyclically-adjusted fiscal balance for 2018-2023 (their forecast period).

fisc balances IMF

On the IMF’s own numbers we have the largest (structural) surpluses projected over the next few years of any advanced economy.  Structural surpluses of 2 per cent per annum, in a country with high real interest rates, compounds to a very big (positive) NPV really quite quickly.

As it happens, Germany is also projected to be running quite large surpluses. No wonder markets aren’t remotely worried about fiscal/debt risks in either Germany or New Zealand.     You simply can’t sensibly start with today’s debt, add one bit of additional future spending, and not take account of the baseline fiscal parameters that, in countries like New Zealand, mean we already have material fiscal surpluses (on the books, and in prospect).   Fiscal people at the IMF sometimes liked to quip that IMF stood for “It’s mostly fiscal” (the problems, and macro solutions, that is).  But they really should be producing better fiscal analysis than this (even if, perhaps, their main interest is big countries with both high debt and ongoing deficits).

None of which means I think NZS shouldn’t be changed. To my mind –  as voter –  failure to do so is both a fiscal and moral failure.  But, despite those future pressures, by international standards our fiscal position remains very strong, and there is –  objectively –  plenty of time to adjust (even if I personally might prefer the adjustment had already begun years ago).



Visiting economists opine on NZ

Lots of people, even abroad, look at New Zealand’s economy.   For example, there are ratings agencies selling a commercial product to clients, and there are investment funds putting their own and clients’ money at risk.   And then there are the government agencies; notably the IMF and the OECD.

Every year or so, a small team of IMF economists come to visit for their Article IV assessment.  New Zealand isn’t very important to the Fund: we aren’t systemically important, we don’t borrow money from the Fund, and we aren’t even part of any of the country groupings with traditional clout at the Fund (eg the EU or euro-area). And the New Zealand story is complicated –  there aren’t other countries much like New Zealand to compare us against and learn from, and especially not in the Asia-Pacific region (the department of the IMF that covers New Zealand).  There isn’t much incentive for the Fund to spend much time on New Zealand, or to devote their best people to New Zealand issues, or to do much other than pay polite deference to the preferences of whoever happens to hold office (bureaucratic and political) at the time, spout some conventional verities favouring smart government intervention, while burying any scepticism in very careful drafting.    We might deserve better than we get –  after all, we are a member just like all the other countries – but to expect better would be to let wishful thinking triumph over (very) long experience.

But because the IMF’s report on New Zealand is published, and because the mission chief makes themselves available to the local media, the IMF team’s views tends to get some local media coverage.  The latest report – in this case the three page concluding remarks from the just-completed mission –  came out yesterday.

As has become traditional, they tend to laud New Zealand’s cyclical economic performance

New Zealand has enjoyed a solid economic expansion in recent years. Construction and historically high net migration have been important growth drivers. Accommodative monetary policy, increasing terms of trade, and strong external demand from Asia have supported activity more broadly.

As it happens, on the IMF’s own numbers, growth in real per capita GDP in New Zealand over the last five years has been nothing spectacular –  among advanced countries we’ve been the median country and the advanced world hasn’t done that well.  And nowhere in the report do they even allude to the fact that almost all that New Zealand growth has resulted from more inputs, and that productivity growth has been near-zero for much of the last five years.  From an international organisation that emphasises the importance of open trade etc, there is also no mention at all of the fact that exports and imports have been shrinking as a share of GDP.

They also tell us that “the baseline economic outlook is favourable”.   Perhaps, but their own numbers say something a bit different.  Here is a chart of the IMF’s own forecasts for growth in real per capita GDP for the five years from 2017 to 2022.

IMF forecasts

Not only do they forecast New Zealand’s growth rate to slow (whereas the median country’s growth rate is forecast to accelerate) but on these projections we are expected to have one of the slowest (per capita) growth rates of any advanced country over the next five years.  Perhaps there is some productivity miracle embedded in these numbers –  the IMF doesn’t produce the breakdown of their growth forecasts –  but it looks as though they expect another half decade when we drift a bit further behind.  Strangely, none of that showed up in ysterday’s statement.

What of macro policy (monetary and fiscal)?

Here is what they have to say on monetary policy

Current monetary policy is appropriately expansionary. The policy settings are robust to current uncertainties. A precautionary further easing would raise risks of a steeper tightening if inflationary pressures emerged sooner than expected, given that the economy appears to have been operating close to capacity for some time. On the other hand, a premature tightening could prolong price setting below the mid-point of the target range, given persistently low inflation in recent years.

But this is pretty vacuous.   Getting policy wrong is, rather obviously, a bad thing.   But it is nonsense to suggest that current policy is “robust to current uncertainties”.  After all, if inflation ends up staying persistently low,  then not to have eased earlier would have risked inflation expectations falling away, and more people being unemployed than necessary.  All they are really saying is “we believe –  as we have for years, wrongly –  that inflation is about to start rising back to the target midpoint, and if so current policy will prove to have been appropriate”.   But this was the same organisation that only a few years ago was cheerleading for the ill-fated 2014 Wheeler tightening.

(And one might have hoped that the IMF – in principle able to take a longer-term perspectives –  might have been pointing to the risks, of rather limited monetary policy capacity, in the next recession and encouraging the authorities to be taking steps now.)

What of fiscal policy?

The strong fiscal position provides space to accommodate the needs from strong economic and population growth. Compared to the time of the last Article IV Consultation, the updated baseline expenditure path already incorporates higher infrastructure spending and new growth-friendly measures, as discussed below. The continued political commitment to budget discipline and a medium-term debt anchor in New Zealand is welcome. With the country’s strong fiscal position, there is no need for faster debt reduction beyond that outlined in the 2017 Half Year Economic and Fiscal Update. Stronger structural revenues, such as from higher-than-expected population growth, should be used to increase spending on infrastructure and other measures that would strengthen the economy’s growth potential.

This paragraph just exemplifies how the IMF has  –  at least for tame untroublesome countries –  ended up too often as a mouthpiece rehearsing the preferred lines of whoever holds office at the time.   Contrast the tone with these lines from last year’s statement.

Current budget plans appropriately imply a counter-cyclical fiscal stance going forward. Stronger-than-expected revenue for cyclical reasons should be used to reduce public debt.

With not a hint that anything fundamental has changed to justify the change in advice, except the government……

The Article IV mission still seems as mixed up as ever on housing and associated risks.  They’ve been enthusiastic supporters of LVR controls –  never even alluding to the efficiency or distributional costs – as if the basic issue in the housing market had been inappropriate credit availability.    Thus they can write

Household debt-related vulnerabilities are expected to decrease following recent stabilization. Macroprudential policy intervention contributed to slowing household debt growth, and momentum in house prices moderated last year. While housing demand fundamentals remain robust under the baseline outlook, the soft landing in the housing market should continue, reflecting increasing supply and, in the medium term, gradually rising domestic interest rates.

But then later in the report they talk at some length about the various measures –  some concrete, some (at this stage) still promises – the government is planning to affect the housing market.   Perhaps the IMF doesn’t believe those measures will actually do much, in aggregate, but there is no discussion at all about how fixing the housing market would (desirably) actually lower house and urban land prices.  Stress tests the Reserve Bank has undertaken suggest banks can cope with big price falls, but the possibility of such an adjustment doesn’t even rate a mention in this statement.

The Fund is clearly not enthusiastic about the government’s foreign house buyer ban (emphasis added)

The proposed ban in the draft amendment to the Overseas Investment Act is a capital flow management measure (CFM) under the IMF’s Institutional View on capital flows. The measure is unlikely to be temporary or targeted, and foreign buyers seem to have played a minor role in New Zealand’s residential real estate markets recently. The broad housing policy agenda above, if fully implemented, would address most of the potential problems associated with foreign buyers on a less discriminatory basis.

But, as I noted, in the unlikely event that a broad housing policy agenda was fully implemented, it would be likely to lower house prices considerably, which surely should rate a mention from the IMF?

The IMF doesn’t know a lot about structural policies –  ones that might actually make a difference to productivity (indeed, in New Zealand’s case it is either unaware –  or too polite to mention –  pressing productivity failures).  But that doesn’t stop them devoting a fair chunk of a short report to what they call “Supporting Productivity and Inclusive Growth”.   Here, I think it is fair to say, they aren’t entirely convinced.


The proposed minimum wage increases out to 2020 could help ease income inequality.

But do notice the “could” in that sentence.   And the Fund certainly doesn’t seem to buy the story sometimes heard here, suggesting that higher minimum wages will raise productivity (beyond any averaging effect of simply pricing out the lowest skilled people).     And

Free tertiary-level education and training for at least one year could boost human capital.

Notice the “could” again.  And

Tax reform could play an important role in shifting incentives toward broader business investment.

Again…not a great of confidence that these things “would” make a difference.  Then again, there is little sign that the IMF team really understands the issues.

There is also a “should” –  highlighting, diplomatically, something that isn’t happening

The new Provincial Growth Fund should ensure project selection that helps regions to benefit from income gains more in line with the major urban centers.

But even that implies that the IMF see the PGF as primarily an income distribution tool, not one  –  as the government would have us believe –  of lifting the underlying economic performance of the regions.  But scarily, the IMF seems signed on to the idea of the PGF

It can also be an appropriate tool to relieve pressures on the major urban areas by encouraging movement of population into the regions.

It would be interesting to see the IMF’s analysis justifying government interventions to try to encourage people out of the cities.  Ideally, people will flow towards economic opportunities……which either haven’t been there in some of the regions the government worries about, or which the government is in the process of taking away (eg oil and gas exploration).

There is just one element of this structural agenda the IMF is sure of, as both the IMF and OECD have been for years.

The agenda appropriately focuses on lifting R&D spending in New Zealand to 2 percent of GDP. An R&D tax credit, if well designed, would be an efficient instrument to support R&D spending in the business sector.

Note that change of wording: “would”.   I guess such a scheme “will” put money in the pockets of some firms.  But whether it encourages more worthwhile R&D –  and surely the most worthwhile R&D must already be being done –  is another matter.   And there is no sign that the IMF has ever considered what structural reasons there might be why firms in New Zealand –  or considering being in New Zealand – haven’t found it profitable to undertake more R&D spending.   Astonishingly, writing about in a country with a real exchange rate persistently out of line with widening productivity differentials, there is no mention of the real exchange rate at all.  And if anything is IMF territory, surely it would be exchange rates?

In the end, these days I wouldn’t think better or worse of a policy position because a visiting IMF team favoured it, or opposed it.  After all, on macro policy quite possibly the position they hold today will be reversed next year (as we’ve seen happen on fiscal policy).  On other things, they show little sign of having thought hard about the New Zealand issues.  That’s a shame, but it seems to be a fact of life now.


Donald Trump & lessons from NZ’s economic boom of 1996-2001

Late last week I was scrolling through a story about the IMF’s latest comments on the US economic outlook, short-term and more medium-term.   As the story reminded readers

The Trump administration says its economic platform — including cutting corporate and ­income taxes, boosting infrastructure spending and reducing regulations — will push growth up to a sustained rate of 3-4 per cent a year and cut unhealthy government debt levels.

At present, the Federal Reserve’s FOMC members collectively think potential GDP growth rates in the US are a touch under 2 per cent per annum.

The IMF has just finished its Article IV “mission” to the US (the US Treasury and the Fed being each a few blocks’ walk from the IMF), and released the team’s Concluding Remarks.   The Fund is, understandably, (more than) a bit sceptical about prospects for such an acceleration in the rate of growth of potential output.  But they are international public servants, and the US has a lot of clout on the Fund’s Board –  and, what is more, the Administration is currently looking to cut back US funding of various international organisations.

So the IMF can’t just come out and talk about the unlikelihood of any sort of large-scale acceleration of potential economic growth because of (a) a fundamentally unserious President, with little interest in policy and no apparent ability to deliver on an agenda anyway, or (b) a US Congress which has, if anything, (and on a bipartisan basis) lower approval ratings than the President, or (c) the corrupting influence of vested interests.  Instead, the Fund has to fall back on fairly bloodless technocratic arguments and illustrations.   But one thing they should be able to bring to the table is authoritative use of perspectives from other countries –  the Fund, after all, undertakes monitoring and surveillance of virtually every country’s economy, other than North Korea.

And whereas I’ve never seen a chart in the IMF’s Concluding Remarks for New Zealand, there were five in last week’s US document, four of which looked quite useful.  A couple even found their way into the Wall St Journal, and given how little attention the IMF’s view on the US usually get in the US, that probably counts as success.

Little old New Zealand was even singled out in one of the charts.

IMF growth accelerations

Looking at advanced countries since 1980, the IMF found this smallish sample of cases where countries had achieved at least a one percentage point lift in potential output growth (per working age adult) that lasted at least five years.    On this chart, New Zealand’s experience over 1996 to 2001 looked pretty impressive –  fourth best seen among IMF advanced countries in the last 35 years.

But it was a bit puzzling.   I sat around the Reserve Bank’s Monetary Policy Committee table right through that period, and “startingly impressive economic performance” wasn’t one of the descriptions that came easily to mind.     Even though the Fund’s asterisk describes us as “coming from recession” during that period, it was actually one that began at the end of a (pretty strong) four or five year recovery, encompassed another mild recession, as well as some chaotic monetary policy, an odd mix of fiscal policy, and towards the end of the period, increased marginal tax rates and a considerable slump in business confidence.    Through quite a bit of volatility, interest rates and the exchange rate fell a long way.

But perhaps I’d missed something, through getting too close to the short-term ups and downs.  So I dug out the data and had a look.

Perhaps if the IMF had had a quick look at this chart first, they’d just have left New Zealand off the chart (I’ve used the average of our two GDP measures, and the official HLFS working age population data).

Real GDP per WAP

Nothing stands out about that 1996-2001 period (average growth for which is highlighted in orange).  By our standards. it wasn’t a bad period, but it wasn’t obviously one I’d be wanting to send other countries’ officials and ministers to learn from.  There was no acceleration in real growth, let alone a sustained one.

But I had read carefully the labels on the IMF chart, and they were using “potential output growth” (per working age adult).  The problem with “potential output” growth is that it isn’t directly observable, and even years later it often hard to get a reliable handle on.

The OECD publishes estimates of potential output growth for its member countries including New Zealand.  And one can back out IMF estimates of potential output growth because they publish output gap estimates (actual growth adjusted for the change in the output gap is potential output growth).   Adjusting both for growth in the working age population produced this chart.

potential growthThere isn’t anything startling about 1996 itself, but at least on these measures potential output growth in the late 1990s was estimated to have been stronger than before or since.

So over the period the IMF highlights, actual real GDP growth (per working age person)wasn’t anything out of the ordinary, but the international agencies think that potential growth (per working age adult)  was pretty impressive  –  more of an acceleration than seen almost anywhere in the advanced world in modern times.

One possible reconciliation could be that New Zealand went into a severe recession during this period, leaving lots of excess capacity (but lots of underlying potential growth, as trend productivity grows rapidly).  It does happen –  it was part of the story of the US in the 1930s for example.

But that certainly doesn’t look to have been the story here.

Labour util

The unemployment rate was a bit lower in 2001 than it had been in 2006, and the labour force participation rate was a bit higher.

Another way to try to make sense of what was going on is to look at:

  • growth in the capital stock (per working age person)
  • growth in multi-factor productivity,
  • growth in hours worked per working age person, and
  • growth in labour productivity (real GDP per hour worked).

Here is the growth of the real capital stock per working age person, shown in two different ways –  the total capital stock, and the capital stock excluding residential dwellings.

cap stock

The period from 1996 to 2001 certainly saw stronger growth in the capital stock (per person) than in the previous period, and thus there is something to the IMF point about growth in potential during this period being somewhat influenced by the previous recession.    But even on this measure, nothing really stood out about the period.  Growth in the capital stock was no faster than it had been at the end of the previous boom, and was lower than we experienced in the last few years prior to the 2008/09 recession.

What about multi-factor productivity growth?   Measured properly, this is stuff everyone is after –  more outputs for the same inputs.    This is annual growth in the OECD’s measure of MFP.

MFP growth

Nothing stands out about the 1996 to 2001 period (consistent with the IMF chart itself, in which the contribution of MFP growth is all but invisible).

Here is (HLFS) hours worked per working age person.

hours worked

Again, nothing stands out about the 1996 to 2001 period.  There had been a big contribution in the previous few years, as demand recovered, drawing more labour back into employment, but by the period the IMF is focusing on there is nothing notable.

And, finally, what about labour productivity (growth in real GDP per hour worked)?    Here, at last, perhaps there is something to the IMF story.


Using the average of the two real GDP measures, labour productivity growth actually was a bit faster in this period than in, say, the five year windows either side.     Even by New Zealand standards (among the weakest productivity growth in the OECD over 45 years) it is not that strong a performance, but the recovery in investment growth (see capital stock chart above) must have made a helpful difference for a time.

I got to the end of all this reassured that I hadn’t in fact missed any great lift in New Zealand’s economic performance over 1996 to 2001.  People are simply better to look at our actual experience, rather than the IMF or OECD estimates of unobserved “potential”.  Perhaps the other country examples the IMF cited work better?

I don’t suppose Donald Trump will be taking any notice of the IMF’s analysis or advice,  but if any minions do pay some attention to the IMF piece, the Fund’s use of the New Zealand case won’t do anything to lift anyone’s confidence that the IMF really has anything very compelling to offer.   Sadly, they didn’t have much useful to offer us either (here and here).


The IMF’s paper on New Zealand immigration

The International Monetary Fund (IMF), like their counterparts at the OECD, tend to be big fans of immigration.  And if some is good, more is generally better.  If immigration in some times or places make a lot of sense, it probably should do so in all times and places.  Or at least that is the sort of tone that often pervades their documents.   There is, no doubt, a variety of reasons for these stances –  some good, some less so – but it can’t hurt that these organisations are made up largely of highly-paid economists who have themselves left their own countries to ply their trade in some of the richer and more comfortable capitals of the world.   Theirs is, typically, a migrant’s perspective, rather than that of a citizen of a recipient country.  And no one doubts that migration typically, or an average, benefits the migrant.  If it didn’t, then mostly they wouldn’t move.

Last year, the IMF was out championing the potential gains from immigration in one of their flagship publications, the World Economic Outlook.    I wrote here about the work they were highlighting –  some empirical estimates suggesting some rather implausible things.

If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

Come to think of it, the model also implies that if 20 per cent of New Zealanders moved to Australia (oh, they already have) and an equivalent number of Australians moved to New Zealand, we could soon be as wealthy as Australia is now, simply by exchanging populations.   Believe that, as they say, and you’ll believe anything.   (Since the New Zealand Initiative also drew on this IMF work in their advocacy piece on New Zealand’s immigration policy, I also touched on the Fund research here.)

Last week, the IMF released their Article IV report on New Zealand.  In the main text, there is a pretty typical, but not very specific, tone around the generally beneficial effects of high rates of immigration to New Zealand.    The Fund’s Board happily went along, noting among other things.

Directors agreed that measures to lift potential growth should focus on leveraging the benefits from high net migration and interconnectedness.

As I noted last week, there was no hint of what these benefits might be, or how they might be “leveraged”.

But buried deep in the package of papers released with the Article IV report was an annex with some interesting empirical research on the economic effects of immigration. It can be found starting on page 39 of the report document.     These annexes, or what used to be called “selected issues” papers, involve someone on the Fund staff team doing some more in-depth work on a topic of relevance to the specific member country.  Topics are usually agreed with, and may be suggested by, the national authorities (in practice, the Reserve Bank and Treasury).   I commend those agencies for asking for, or agreeing to, this work.

In opening, the paper notes

Over 1990-2014, net migration measured as annual net flow of foreign born
population averaged about 0.9 percent of previous-year population, which is around twice the OECD average


In New Zealand both inflows and outflows fluctuate markedly over time, which has a resulted in more volatile net migration compared to most other OECD countries.

The IMF’s own starting presumptions are clear.

The educational attainments of New Zealand’s migrant population suggest that
migration policy has contributed to raising human capital

They include a chart showing that, relative to other OECD countries, a larger proportion of New Zealand’s migrant have a university degree, but appear unaware of the OECD skills data that shows that, even so, the average skill level of immigrants has still been lower than the average skill level of natives.

But the focus of the paper is on two quite separate pieces of empirical analysis, one focused specifically on cyclical effects in New Zealand, and the other focused on longer-term growth and productivity effects, but not specific to New Zealand at all.

The modelling of the cyclical effects appears to be very similar to some research work published by the Reserve Bank a year or so ago (the paper is here, and my discussion of it is included in this post), which distinguished between net migration flows between New Zealand and Australia, which are heavily influenced by what is going on in the Australian labour market, and other net migration flows.

For the “other” migration they find exactly the sorts of results one would expect, and which researchers in New Zealand have pretty much always found (going back many decades).   For these migration shocks, the demand effects tend to outweigh the supply effects in the short to medium term,   This is a point that seems to be repeatedly lost in the current popular debate on immigration.  Migrants aren’t just workers, they are consumers (and need new capital stock).  So in the short to medium term immigration shocks tend to lower unemployment (and increase the “output gap”).  All else equal, in the short to medium term, they increase inflation pressures.

Both the IMF and the Reserve Bank’s researchers find something a bit different for migration between New Zealand and Australia that is associated with Australian labour market shocks (proxied by changes in Australian unemployment).    Reduced net flows to Australia are associated with slightly higher unemployment (and lower employment) in the short-term –  and, thus, presumably weaker inflation pressures.

Unfortunately (and perhaps they were pressed for space), the IMF left out the critical point that the Reserve Bank’s researchers had acknowledged

the Australian unemployment shock could capture other indirect demand effects. There are common drivers of labour market movements in Australia and New Zealand, and these common drivers mean that the Australian and New Zealand unemployment rates typically co-move. A high Australian unemployment rate is reflected in higher unemployment in New Zealand, but also high net immigration.

In other words:

  • similar international shocks often hit both New Zealand and Australia.  When they do, Australian unemployment rises, and (net) fewer New Zealanders go to Australia, but New Zealand unemployment also rises, not because of the change in the immigration numbers but because of the international adverse shock itself.
  • Australia is also the largest trade and investment partner for the New Zealand economy.  Thus, any downturn in Australia (whether home-sourced or global) will reduce demand for New Zealand goods and services, and perhaps investment in New Zealand by the many Australian companies operating here.  All else equal, those effects will weaken demand and employment, and raise unemployment, in New Zealand.  At the same time, (net) fewer New Zealanders will be moving to Australia.  The estimates in the Reserve Bank and IMF models capture the combined effects of all this, not just the effects of a change in immigration flows between New Zealand and Australia.

On my reading, the safest conclusion remains –  as it always has –  that increased net migration inflows (especially if they arise from things exogenous to the New Zealand market –  whether global events or New Zealand policy changes) increase pressure on local resources in the short to medium term. But if, at the same time, demand in one of our major markets is also weak, the overall effect (of the weak international demand and the increased immigration) will not necessarily be to require higher interest rates.  If we could have one without the other, there would be a cleaner test.  With the Australian flows, no one has yet done the research to enable us to do so.

The second half of the IMF paper looks at “how migration affects growth, factor accumulation, and productivity in a sample of OECD countries”.      This is similar to what the IMF did in the paper they published last October (see above), and relative to that paper it has some pros and cons.

The downside is that it uses a smaller sample of OECD countries (this time only 14, whereas the earlier paper used 19).  And whereas in the earlier paper, all the countries were already advanced market economies in 1990 (when the data start), this one includes Hungary.   Unlike the earlier paper, this paper also includes Luxembourg, which complicates things because a large proportion of Luxembourg’s workforce doesn’t actually live in Luxembourg, so making sense of their data is harder than usual (there is, for example, a very large gap between GDP –  stuff produced in the country –  and GNI – income accruing to residents of the country).

On the other hand, the earlier paper only looked at GDP per capita, and simply hand-waved about where the large suggested gains from migration might be coming from, suggesting that we might expect to find a boost to total factor productivity (TFP) growth.  By contrast, in this exercise for the New Zealand Article IV the Fund’s researchers look specifically at productivity measures, both labour productivity and estimates of TFP.

The modelling exercise does not produce results for any individual country; rather they are average results across this pool of very different countries.   Here is the summary table from the IMF’s paper

imf migration results

Tables like that can be a bit hard to read.   On GDP per capita, the results suggest that over this period and for these countries on average

“a net migration flow of 1 per cent of total population is associated with an increase in output of nearly 1.5 – 2 per cent, driven by an increase in both employment and the capital stock”

That sounds good (and, if still implausibly large, not inconsistent with the results in the earlier IMF paper).   But note that there was no mention of productivity gains in that quote.   We’ve seen these sorts of results, in different types of models, in Australasia before.   Since migrants tend to be relatively young they, for example, tend to have a higher average labour force participation rate than natives (not too many 80 year migrants).   One can get a boost to GDP per capita, at least for a time, even if there are no gains in productivity, and if there are no gains in productivity there are no long-term gains to natives.  This was the sort of result the Australian Productivity Commission suggested in its recent report on immigration.

So what did this particular IMF cross-country empirical exercise suggest about productivity effects?

For labour productivity, you can compare the two lines ‘output” and “hours”.  On one specification, output and hours increased almost identically (so no labour productivity effects at all, and in the second specification of the model, output increases less than hours (1.54 vs 1.72).   We don’t know if that difference is statistically significant, but lets assume not.  At best, immigration produced no gains to labour productivity, across these particular 14 countries, in the last 25 years.

And what of TFP?  The authors report those results directly.  In both specifications, the coefficients are negative, but not statistically significant.  Again, at best, no TFP gains from immigration across this pool of countries over the last 25 years.

I’ve previously showed simple scatter plots suggesting that the correlation coefficient between immigration –  using the immigration data in the previous IMF study – and TFP growth, cross-country, is negative –  the outlier in the top right is Ireland, and as this post illustrated, Irish immigration growth came several years after its TFP surge.


As I said, this new IMF work isn’t a New Zealand specific result.  But it might have been nice if the IMF authors, in a New Zealand focused paper, had included a chart or table highlighting how New Zealand’s experience compares to the average finding.  For example, of the countries in the study, only Luxembourg had higher net immigration (as a share of population) over the same period, and over the period we’ve had moderate per capita income growth, very weak labour productivity growth (third lowest of these countries over this period) and pretty disappointing TFP growth by international standards.  You would have to suppose that we look like an outlier (relative to this model, over this period).      Of course, there may be others things at work –  a relatively simple model like this can’t capture everything –  but if you are an international agency wanting to use international research findings to buttress a policy choice of a New Zealand government, surely you owe it to readers –  whether interested citizens, or officials and politicians –  to provide some detail on how New Zealand’s experience looks to compare to the general results of your model.

As I’ve said repeatedly, I’m quite comfortable with the idea that migration at some times and in some places will benefit natives of the receving country/region.  These particular results aren’t that encouraging on the score (no productivity gains on average), even for the larger group of advanced countries as a whole in modern times.  But if migration benefits natives economically in some times and places –  as it no doubt did in 19th century New Zealand –  there is no reason why that automatically translates to a conclusion that all cross-border migration anywhere and at any time is beneficial.  In fact, even in this study, a finding of no productivity gains (labour or TFP) across the whole sample must mean that, even if the model is robust, some countries will have had positive experiences and others negative.  My suggestion is that New Zealand’s has been negative.  Nothing in the IMF results challenges that.

Having said that, it was good to have the work done.  I hope the authors considered extending or refining it, and if they are still working on New Zealand issues to drawing out more explicitly how New Zealand’s experience is best explained.

The IMF opines on the economy

The International Monetary Fund (IMF) was out yesterday with two major reports on New Zealand.    One was the Financial System Stability Assessment, the conclusion of the quite infrequent (the last one for New Zealand was in 2004) FSAP programme of reviews of the regulation of countries’ financial systems.  I haven’t read that document yet, but from media accounts there are some recommendation I’d agree with (eg deposit insurance, as second-best) and a great deal (mostly derived from the “nanny knows best” starting point) that I’ll have more problems with.

But this post is about the Article IV report –  the (typically) annual review and assessment of a member country’s macro economy.

Once upon a time, these reports were simply confidential advice to the government.  These days, at least for countries like ours, it is all out in the open.  And, partly in consequence, there often isn’t that much to see.  The IMF might be a prestigious organisation full of rather highly-paid economists, but it is striking how weak their surveillance reports often are.   Perhaps there just isn’t a gap in the market that can usefully be filled by a handful of Washington-based economists looking at our economy for a couple of months a year.

The challenge is compounded by the fact that no one much cares about New Zealand.  We are small, in an age when the IMF is heavily-focused on systemic risk, global spillovers etc.    We aren’t in Europe –  still over-represented at the Fund –  or from one of those Asian countries where governments are hyper-sensitive about anything the Fund says.    It is decades since we had an IMF (borrowing) programme ourselves.  And, whether this is cause or effect I’m not sure, but for decades no one here has paid much attention to the Fund.  As an example, our capital city newspaper this morning has some coverage of the FSSA, but really nothing at all about the Article IV report.  If a tree falls in the forest, and no one is around to hear it, does it make a sound?    (By contrast, when I was at the Board of the IMF, my Australian boss was very exercised about each year’s Australian Article IV report.  He’d get phone calls direct from the Treasurer about it, and the serious Australian media gave the reports a lot of coverage.)

Oh, and of course, the other challenge for those reviewing New Zealand is the features that stand out, and which haven’t readily and convincingly been explained.  Thus, we have a lot of reasonably good micro policies, we have pretty good government finances, a floating exchange rate, low and stable inflation, sound banks, high levels of transparency, and low levels of corruption.     And yet……having once been among the very highest income countries in the world, we now languish.  International agencies find Venezuela’s decline easy to explain.  New Zealand’s not so much.

But with all the resources at their command, including the benefit of being an organisation with data and perspectives on all the countries in the world, none of it really excuses the mediocre quality of what gets dished up each year.  Or the inconsistency from one year to the next.   Last year, for example, we were told that raising national savings rates was “critical” –  and it was reported that the NZ authorities agreed –  but this year there is barely even any mention of the issue.

This year we are served up some mix of regurgitated PR spin about how well New Zealand is doing, and when it comes to policy suggestions we get a grab-bag of bits of conventional wisdom, or favoured centre-left policy positions, without any discernible sign that the authors (or their reviewers in Washington, or the Fund’s Board) had any sort of robust framework (or ‘model’) for thinking about the New Zealand economy.

It isn’t easy to excerpt a fairly lengthy report, and often it is the omissions that are more striking than what is in the report itself.      Thus, the release opens with this

Since early 2011, New Zealand has enjoyed an economic expansion that has gained further broad-based momentum in 2016, with GDP growth accelerating to 4 percent, and the output gap roughly closing. Reconstruction spending after the 2011 Canterbury earthquake was an important catalyst, but the expansion has also been supported by accommodative monetary policy, a net migration wave, improving services exports, and strong terms of trade.

On its face, that all sounds quite good.  But countries don’t get rich by rebuilding themselves after disasters –  that reconstruction process mostly displaces resources from other, typically more productive and prosperous uses.   They don’t get rich through monetary policy either, valuable a role as it has in short-term stabilisation.  And although services exports grew quite strongly for a while (a) little or none of it was high value products (lots of tourism, and students pursuing immigration access at PTEs), and (b) in a world in which services exports are becoming steadily more important (as illustrated in eg this recent IMF working paper), for New Zealand services exports as a share of GDP are materially lower than they were 15 years ago.

In fact, you could read the entire Article IV report and not find any mention of the fact that, with total population growing at around 2 per cent annum and working age population growing at around 2.7 per cent annum, per capita income growth in the last few years has been pretty unimpressive.  And you’d find no mention –  explicit or by allusion – to the almost five years that have now passed since we saw any labour productivity growth in New Zealand.   I guess that would have undermined the relentless good news story the Fund staff seemed determined to tell.

Perhaps more surprising is the treatment of the external sector of the economy, typically a subject of considerable interest to the IMF.  Readers of the Article IV report in isolation would have no idea that exports (and imports) as a share of GDP have been falling –  not just this year, but for some time on average.  Nor would they appreciate that per capita real GDP of the tradables sector has shown no growth at all for more than 15 years.     The report does note that an overvalued real exchange rate is probably an obstacle to faster growth in the tradables sector, but again there is no hint of any sort of integrated understanding of what is going on with the real exchange rate, and what might make some difference in future.

The complacency, and weak analysis, carries over to the labour market.

The unemployment rate fluctuated around the natural rate of unemployment of 5 percent in 2016

But there is not a shred of analysis presented to suggest that the NAIRU for New Zealand is now anywhere near as high as 5 per cent.  It would be very surprising if it were that high, whether in view of continuing very weak wage inflation, the history of the last cycle (in which unemployment got to 5 per cent fairly early in the recovery), and changing demographics which are appearing to lower the NAIRU.  Oh, and not forgetting that our Treasury has published its own estimate of the NAIRU, at something close to 4 per cent.

The Fund isn’t really much better on the housing market.   They are all very interested in the various tweaky tools the government and its agencies have applied in the last couple of years (LVR limits, tax changes etc) and – contrary to many of the pro-immigration people in New Zealand –  they are at least quite clear that rapid increases in population are contributing directly to high house price inflation.    But there is no simple and straightforward observation that, at heart, the house price issue is a matter of regulatory failure, and that the current government (like its predecessors) has done little or nothing to fix the problems. Instead, we get banalities along these lines

Tighter macroprudential policies, higher interest rates, lower rates of net
migration, and increasing housing supply should help moderate house price inflation and stabilize household debt vulnerabilities in the medium term.

If you don’t change the fundamental structural distortions that gave rise to the problem in the first place, it is a little hard to take seriously the idea that things will come right even “in the medium term”.  You would not know, reading this report, that almost nothing substantive has been done to free up the market in urban land.    An organisation with the benefit of cross-country perspectives and databases might usefully have pointed out that this is an obstacle not just in New Zealand but in Australia, the UK, much of the east and west coasts of the US, and other places besides.  The silence might suit the current government, but it also makes the Fund complicit in the failure.  The Fund’s Board considered the material in the Article IV report on housing. They observed, in conclusion, that

Recognizing the steps being taken by the authorities to address the demand-supply imbalance in housing markets, Directors generally highlighted that further tax measures related to housing could be considered to reduce incentives for leveraged real estate investments by households. Such measures could help redirect savings to other, potentially more productive, investments and, thereby, support deeper capital markets.

Except that very little has actually been done on the supply side, and not much has been done to change the medium-term “demand-supply imbalances”.      Perhaps there is a place for tax changes (I’m sceptical, including that any changes would make much difference –  where else have they?) but the Board didn’t even seem to recognise that inconsistency in their own advice.  Do we have too many houses in New Zealand or too few?  Most people, rightly, would say “too few”  (a good indicator of that is the ridiculously high prices).    And yet the Fund Board thinks that a greater share of investment should go into other things, and a smaller share into housing?????   (As it happens, I agree with that, but only on the basis that we have much slower population growth, something there is no hint of in this report).

Buried deep in the report, is a recognition of some of the longer-term challenges facing New Zealand.

New Zealand’s structural policy settings are close to or mark best practice among
OECD economies, but persistent per capita income and productivity gaps remain. Income is lower than predicted by these policy settings, by an estimated 20 percent. Growth in labor productivity has declined, with multifactor productivity growth slowing from the early 2000s, and capital intensity has stagnated recently.

One could question even those details.  I wrote a bit about our structural policies a few weeks ago, as illustrated by the OECD’s Going for Growth publication.  There are plenty of areas in which we are well away from best practice, and overall at best you could probably say that our structural policies aren’t bad by OECD standards.  But there is no doubt that productivity levels are far lower than most would have expected based on those policies.

What does the IMF propose in response?   They reckon remoteness is a problem and for some reason, despite that, still seem very keen on lots of immigration.  But here is the rest of their list:

  • Targeting housing supply bottlenecks more broadly would safeguard the
    attractiveness for high-skilled immigration and business.
  • More central government property taxes, the proceeds of which would be distributed to local authorities.
  • Trade liberalization could help to strengthen competition and productivity, including in the services sectors.
  • Tax incentives for private R&D spending
  • As discussed during the last Article IV mission, there is also scope for tax reform to raise incentives for private saving and discourage real estate investment as a saving vehicle

And that is it.

I’d certainly support fixing up the land supply market and foreign trade liberalisation.  I’m a lot more sceptical of the other items.  And what about, for example, our high compayn tax rates?  But my real challenge to them is twofold:

  • first, where is the model or framework that explains how the absence of these policies is at the heart of New Zealand’s disappointing long-term economic performance (because it feels more like a grab bag of ideas they picked from one person or another), and
  • second, how large a difference do they really believe these measures, even if they were all implemented flawlessly, would make?     Without much more supporting analysis, they have the feel of playing at the margins, as if they felt obliged to offer up some suggestions, any suggestions.

A year ago, the Fund seemed quite taken with the idea that the persistent gap between our interest rates and those abroad was an important issue (they even cited approving my own paper on this issue), but that flavour seems to have disappeared this year.  And when they allude briefly to our high interest rates it is to fall back on the discredited risk premium hypothesis.

Of course, the government is just as much at sea.   The NZ authorities get to include some responses in the Article IV report.  In this section, they begin thus

The government’s ongoing Business Growth Agenda (BGA) aims to help overcome the disadvantages of distance and small market size, in particular by deepening international connections, with a focus on increasing the share of exports in GDP to 40 percent by 2025, and diversifying the export base.

Just a shame that, if anything, things have been going backwards on that count, and show no signs still of progress.

And, finally, from the final paragraph of the Executive Board’s assessment

Directors agreed that measures to lift potential growth should focus on leveraging the benefits from high net migration and interconnectedness.

But there is nothing in the report to show what these benefits might be (recall that the focus here is on potential growth, not the short-run demand effects), let alone what “leveraging the benefits” might involve (generally, I thought the IMF was uneasy about leverage).   I guess it is just an article of faith.

It is pretty depressing all round.  Supposed international experts fall for the spin, and can offer nothing very profound on even the longer-term challenges.  Our own government agencies seem to be at sea, or just happy to go along.   Our representative on the Board of the IMF  – no longer a public servant, but now the (able) former chief (political) policy adviser to John Key – was happy to go along.  In his statement to the Board, published as part of the package of papers, he observed

As staff observe, New Zealand’s structural policy settings are close to, or mark, best practice. Lifting productivity, in the face of New Zealand’s small size and isolation, therefore requires incremental reforms across a broad range of areas. Recognizing this, the Government has established the Business Growth Agenda as an ongoing program of work to build a more productive and competitive economy,

When various major OECD countries have productivity levels 60 per cent above ours, who are they trying to fool in pretending that we have policy broadly right, and just need to keep tinkering (“incremental reform”) at the margin?

As part of the package of material released with the Article IV report, there is an interesting empirical annex on immigration.  It isn’t well-integrated with the report itself, and I will cover it in a separate post.  The annex probably should have had some publicity in the local media, given the salience of the issue in New Zealand debate at present.