Labour on financing new housing infrastructure

The parliamentary Labour Party has been showing signs of being serious about proposing steps that would, as they see it, unwind the structural impediments that keep urban land prices high and slow down the construction of new housing. Their housing spokesman (and campaign chairman) Phil Twyford has indicated that Labour wants to get rid of the artificial urban limits around cities, especially Auckland, and even managed a joint op-ed with the New Zealand Initiative on that.

Welcome –  and no doubt genuine –  as it all is, I’m still somewhat sceptical about what it will mean in practice.  Any Labour government is near-certain to require the support of the Greens, not known for their support for such flexibility.   And Labour or Labour-associated mayors lead our three largest cities, but there has been little sign of those Councils or mayors leading the way in freeing up urban land supply.  There is a great deal councils could do if they wanted to.  And even if they ran into legal challenges under current legislation, they could still be laying down markers as to the likely direction of reform when Labour returns to national office.

Last week Phil Twyford was out with another interesting idea in the same broad area –  very long-term infrastructure bonds paid back by targeted rates – which again garnered public support from the New Zealand Initiative.  Twyford sketched out his idea in an op-ed in the Herald, and also gave a substantive interview on it to interest.co.nz, who covered it in an article here.  A reader with ties to the Labour Party suggested that I might like to write about it.  My interest in the details of local authority finance is, sadly, quite limited, but I’ve been mulling over what to make of the proposal for the last few days.  Is it really a proposal that, if adopted, might make a useful difference?

One difficulty in reaching a strong view is that the idea is no more than sketched out at the moment, and many of the details could matter quite a lot.

Some have argued that New Zealand should introduce, or allow, the sort of model used in many parts of Texas –  Municipal Utility Districts –  where developers of new residential areas outside existing city limits can form an incorporation, with its own governance structure, which in turn borrows to finance infrastructure developments and the provision of utilities such as water, sewerage and even parks.  The bonds are then serviced by user charges and property taxes on the properties within the specific district.    The New Zealand Initiative has written favourably about them (reported here), and I found an interesting recent Texan newspaper article that captured some of the colour/flavour of these sorts of vehicles.    Whatever the merits of these schemes –  and there seem to be some downsides too –  they aren’t what Twyford and the Labour Party are proposing.

There are some real issues they are trying to address.  As Twyford notes

The council is up against its debt ceiling and last week put the brakes on large-scale housing projects in Kumeu, Huapai and Riverhead until more progress is made on roads, stormwater and the like.

When the population of a city is growing as rapidly as Auckland’s, the existing debt ceilings are almost certainly flawed.  There is a huge difference in the amount of debt, relative to (say) current revenue, that should prudently be taken on in a local authority region  with no population growth than in a region that is seeing 2 or 3 per cent population growth per annum.  We saw this at a national level when New Zealand and Australia were rapidly developing prior to World War One.  Overall government spending as a share of GDP was much lower than it is today, but debt levels (again as a share of GDP) were much higher –  in excess of 100 per cent.  It wasn’t a problem, and markets didn’t see it as a problem.

Some of the current problem then seems to arise from a reluctance to use targeted rates, to ensure that purchasers of the new properties bear the cost of the infrastructure involved in developing those properties.  Development contribution levies presumably go only part of the way.  If owners – present or future –  of the newly-developed sections bore the full cost of the infrastructure it isn’t clear what (economic) reason the Council could have for standing in the way of future residential developments. Planners’, bureaucrats’, and politicians’ visions as to what the city “should” look like are quite another problem –  and not one that Twyford’s proposal seems to address at all.

Twyford describes the problem this way

Developers under current rules have to finance infrastructure within a subdivision and are levied by the council for a share of the cost of connecting to the wider roading and water systems as well as parks.

Many developers struggle with the sums of money involved and it adds cost and delay to projects.

But it isn’t clear that the issue here is really infrastructure finance.  Developers need to finance all the costs of bringing properties to market, including covering both the delays that are perhaps inevitable in complex projects, and those brought on by the regulatory approvals processes.  The largest chunk of those costs typically wouldn’t be the infrastructure (I’d have thought) but the unimproved value of the land  (recall that urban and peripheral urban land prices are really what are sky-high).  And property development is risky –  even though the Reserve Bank’s LVR restrictions weirdly exclude new construction, new developments are where far and away the greatest risks lie.  Lend on an existing house in Mt Eden and the risks are far lower than lending on a new development in Huapai.  Sections might sit unsold, or undeveloped for years.  New houses might do so too –  there was plenty of that in Dublin after the boom ended.

There has been talk recently of banks becoming more cautious about lending for new construction –  perhaps partly from their own reassessments of risks, and partly at the prompting of parents, in response to APRA’s nudges.  Broadly speaking, that seems to me quite welcome.  Banks make their own credit judgements and sometimes they will be less willing to lend than the authorities might like.  It is, of course, the money of their shareholders they are putting at risk.

But Labour talks of central government becoming a fairly large scale provider of finance.

Labour’s plan is for infrastructure within a development, as well as the connections to the wider networks, to be financed by 50-year bonds.

Instead of the developer picking up these costs and loading them on to the price tag of a new home, the bonds could be issued by a government agency – perhaps a specialist infrastructure unit within the Treasury.

Bonds issued in this way would be the cheapest finance available, taking advantage of the Government’s ability to borrow more cheaply than anyone else.

The plan seems to be for the government to issue long-term bonds, with the government standing behind the bonds, and then to on-lend the proceeds to developers, tied to specific projects.  The bonds, in turn, would be serviced by targeted rates levied by local councils on properties within that development.

It all sounds fine when everything goes well (most things do), but here are a few of my problems/concerns:

  • should we be comfortable with Treasury officials making loans to individual developers, with all the risks of political cronyism in the allocation of credit over time?  At very least, lending would need to be done at much more of an arms-length from elected politicians (as, say, when the government provided loans through the Housing Corporation or the Rural Bank),
  • on what basis would we think that Treasury officials –  or even those of a more independent agency –  are better placed to evaluate and monitor residential property development projects than banks and other private providers of development finance?  Who has the stronger incentive to get it right?
  • isn’t there a high risk that the weakest projects will tend to gravitate towards the government provider of finance (strong projects, strong developers, will typically be able to get on-market finance?).  Isn’t that incentive greatest towards the peak of housing booms, when more conservative private lenders might start to pull back from the funding market?
  • how is cost-control ensured?  If developers can simply shift any cost blow-outs into mandatory targeted rates over the next 50 years, doesn’t that materially weaken incentives to bring projects in on time on budget?
  • what is the proposed legal structure?  Only Councils can levy and collect rates, targeted or otherwise.   Are they, or the developer, legally liable for the borrowing from the government?  Developers can and do go out of business quite quickly.  Councils don’t –  but then don’t the debt ceiling concerns cut in again? And can councils credibly (or legally) commit to maintaining a whole series of specific targeted rate for the next 50 years?    (And what are the protections for the property owners against arbitrary changes in these localised targeted rates?)
  • and what happens if the project fails?  If, for example, population growth slows up and a half-completed development lies idle for the next couple of decades.  Will the owners of the land have to pay the targeted rate anyway and, if so, how resilient is this likely to prove politically?

It seems to me that the proposal is meant to have two main attractions:

  • part of the development cost –  infrastructure costs –  are financed at a lower (government) interest rate, and
  • the headline cost of a new house would probably be reduced.

But in substantive terms, neither is really that much of a gain.   The cheaper government financing cost is only available –  in Twyford’s own words –  because the government’s credit risk is protected by the use of targeted rates.  But money that the government has first claim on isn’t available to service other obligations. The infrastructure bonds might well be rock solid, but the rest of any borrowing people had taken out to finance a new property would be just that much riskier.  Incomes don’t rise, and servicing the infrastructure bonds would have first call on what income there was.  Banks would presumably take that into account (including in deciding how much, and at what margin, they will be willing to lend).

And if the headline cost of a new house is reduced, so what?  If I have a choice between paying $700000 for a new house, or paying $600000 for the house and then having to service $100000 of infrastructure bonds issued by the government to cover the development costs of the house, it doesn’t make much difference to me.  If the infrastructure bonds really were 50 year ones, the annual servicing burden might be a little lower than otherwise.  Then again, New Zealand already has the highest real interest rates in the advanced world, so the notion of paying those high rates for that long might not be overly attractive.

And thus I suspect Twyford is wrong about a possible third benefit.  He argues

Reduce the infrastructure component of the price of a new home, and you’ll reduce not only new house prices but eventually prices across the whole market.

That’s unlikely.  If I’m looking at a $700000 house (with no targeted rates), and comparing it to that new house in the previous  paragraph, changing the financing pattern for the new house isn’t likely to change much about what I’d be willing to pay for the existing house.   Of course, if the policy really did increase the flow of new supply of houses and developed land, there would be benefit in lowering the prices of existing properties.  But simply lowering the headline cost of a new house (while loading an equivalent amount into infrastructure bonds) won’t change that.

In many respects, I’m sorry to reach a negative conclusion.  It is great that the Labour Party is looking for ways to make a difference to the housing market, not just for a few months but permanently  (and it is a disgrace that we’ve had 15 years of increasingly unaffordable house prices under both Labour and National-led governments).  And, of course, this isn’t the only (or probably even the main) component of their housing plan

Fixing the housing crisis and managing Auckland’s growth needs sustained reform on many fronts. Labour will build 100,000 affordable homes, tax speculators, and set minimum standards to make rentals warm and dry. We will free up the planning rules by relaxing height and density rules around town centres and on transport routes, as well as replacing the urban growth boundary with more intensive spatial planning.

But I’m sceptical that the infrastructure bond proposal is a suitable response to a serious constraint or that, even if the governance and monitoring concerns could be overcome, that it would make much difference to house and urban land prices.

If they wanted to consider a bold initiative, how about promising that any private land within 100 kms of Queen St could be built on to, say, two storeys without further resource consents?  With a similar policy –  perhaps 50 kms circles  –  for Hamilton and Tauranga, it would seem much more likely to make a real difference in lowering land prices –  the biggest financing issues not just for developers, but for ultimate purchasers.    There are other pieces of the jigsaw, but changing the rules that underpin expectations of future potential land values is probably the biggest component of the problem.

Throw in a sharp cut in the immigration residence approvals target –  not mostly to solve the housing problem, but because there is no evidence New Zealanders are gaining from the large scale non-citizen immigration  – and properties in or near Auckland would be much more affordable really rather quickly.

 

 

 

 

 

 

 

 

 

Reforming the Reserve Bank

A couple of weeks ago I wrote a post on where the Labour Party seemed to be going on monetary policy, informed by Alex Tarrant’s interest.co.nz article on his conversations with Grant Robertson.  It all seemed to amount to not very much –  wording changes to make explicit an interest in the labour market (employment/unemployment), but without much reason to think it would make much difference to anything of substance.  My suggestion was that there was a distinct whiff of virtue-signalling about it.   And the sort of change Robertson seemed interested in on the governance front  –  legislating the position of in-house technocrats –  seemed unlikely to be much of a step forward at all.

Last week, interest.co.nz had a piece on the same issues by former Herald economics editor Brian Fallow, also benefiting from an interview with Robertson.   Fallow pushes a bit harder.  His summary is that

The changes Labour proposes to make to the monetary policy framework sit somewhere between cosmetic and perilous, but closer to the former.

Cosmetic for the sorts of reasons I’ve outlined.  On the one hand, the Bank has always taken the labour market into account as one indicator of excess capacity.  And on the other hand, plenty of pieces of overseas central banking legislation refer to employment/unemployment somewhere, but there is little evidence that the central banks in those countries have run monetary policy much differently, on average over time, than the Reserve Bank of New Zealand has.

Robertson’s response is pretty underwhelming.

Asked how much difference the regime he advocates would have made, had it been in place in the past, he said, “In the very immediate past, not that much, truthfully. But there have been other times in our history, and there have been other examples around the world, when lower interest rates could have helped to reduce unemployment.”

If he was serious about this making a difference, he’d surely be able to quote chapter and verse.  When, where and how does he think it would have made a difference?

He is, however, clearly tantalised by the current situation

Even now, “Are we satisfied as a country that with 3.5% growth 5.2% unemployment is okay?”

Given that the Treasury thinks our NAIRU is nearer 4 per cent, I don’t think we should be content.  But Robertson has spent so long over the last few years defending Graeme Wheeler that he can’t quite bring himself, even now, to suggest that monetary policy could have been conducted better in the last five years, whether on the current mandate or something a little different.

If the proposed change isn’t cosmetic, Fallow worries that it could be perilous.  Why?  Because when he pushes Robertson he gets a more explicit –  and more concerning –  answer than the one Alex Tarrant got.

He has told interest.co.nz’s Alex Tarrant that he was not going to tell the Reserve Bank whether one objective is more important than the other.

Talking to me, however, he said that ultimately the bank would remain independent. “But if unemployment starts to get out of control I would expect in that environment it says ‘At this time we are preferencing that and we are going to lower rates by a greater percentage than we might have’.”

In the event of a stagflation scenario he would expect it to focus more on the falling output and employment side of the dilemma and to ease.

“I think the setting of a clear direction here is what is important.”

In short Robertson seems to be saying that if Parliament were to change the statute, the message to the bank would be when in doubt err on the side of stimulus.

If unemployment is prioritised by the Reserve Bank in such circumstances, it is a recipe for inflation getting away.  In the medium-term, monetary policy can really only affect nominal variables (inflation, price level, nominal GDP or whatever), it simply can’t affect real variables.  Using monetary policy to pursue such goals directly is a risky prescription.  I wouldn’t want to overstate the issue –  New Zealand isn’t heading for hyperinflation – but part of reason we and other countries ended up with persistently high inflation in the 1970s is that too much weight was placed on unemployment in setting monetary policy.  Getting inflation back down again was costly –  including in terms of increased unemployment.  On a smaller scale, as Fallow highlights, the desire to “give growth a chance” was part of what was behind the monetary policy misjudgements of 2003 to 2006, when monetary policy wasn’t tight enough.

Robertson’s words suggest he still hasn’t thought the issues through very deeply or carefully.  For now, I’m sticking with the “cosmetic” or virtue-signalling interpretation of what Labour is on about.   And I’m still uncomfortable at the lack of command of the issues and experience in someone who aspires to be Minister of Finance later this year.

But yesterday, a mainstream economist came out in support of more or less the direction Robertson is proposing.  In his youth Peter Redward spent a few years at the Reserve Bank, and then spent time in various roles, including at Barclays and Deutsche Bank, before returning to New Zealand and establishing his own economic and financial markets advisory firm.  He focuses on emerging Asian foreign exchange markets, but keeps a keen eye on monetary policy developments in New Zealand.

In his short piece at Newsroom, Peter Redward says It’s time for a Reserve Bank change.  He notes of the last few years that

Whether Governor Wheeler consciously aimed for a hawkish interpretation of the Act, or not, we may never know. But hawkish he’s been, leading to tighter monetary conditions than were necessary, boosting the New Zealand dollar and confining thousands of New Zealanders to needless unemployment.

And argues that

…maybe it’s time to adopt a dual mandate in the Act. One possibility is the dual mandate of the U.S. Federal Reserve. The Federal Reserve has a two percent inflation target but it also targets ‘maximum employment’. Economists have differing interpretations of ‘maximum employment’ so it acts as a constraint, and that’s the point.

While no one knows exactly where ‘maximum employment’ in New Zealand is, I believe most economists would agree that it’s likely to be consistent with an unemployment rate somewhere around 4.5 percent (give or take 0.25 percent). If the Reserve Bank had a dual mandate, its elevated level would have acted to constrain the bank’s aborted tightening of policy in 2009 and 2014.

I’m very sympathetic to his critique of Graeme Wheeler’s stewardship of monetary policy, and highlighted in numerous of my own commentaries, after it became apparent that the 2014 OCR increases had been an unnecessary mistake, the Governor’s apparent indifference to an unemployment rate that remained well above any estimates of a NAIRU.

But I remain a bit more sceptical than Peter appears to be about how much difference a re-specified mandate might have made.  As I’ve argued before, past Reserve Bank research suggests that faced with the sorts of shocks New Zealand experienced, policymakers at the Fed, the RBA and the Bank of Canada would have responded much the same way as the Reserve Bank of New Zealand did.  That work was done for periods prior to 2008/09 –  for most of the time since then the Fed was at or very near the lower bound on interest rates, so the game was a bit different –  but it isn’t clear that the specification of the target has been the problem in New Zealand in the last few years.  After all, simply on inflation grounds alone the Reserve Bank hasn’t done well.

Here is a chart of the Reserve Bank’s unemployment rate projections from the March 2014 MPS, the occasion when they started raising the OCR.

2014 U projections.png

The second observation is the last actual data they had –  the unemployment rate for the December 2013 quarter.  So when they started the tightening cycle they thought the unemployment would be falling quite considerably that year, before levelling out around what they thought of as something near what they must have thought of as the practical NAIRU  (this was before last year’s revisions to the HLFS which lowered unemployment rates, and NAIRU estimates, for the last few years).    The problem then wasn’t that they didn’t care about unemployment, it is that they got their forecasts –  particular as regards inflation –  badly wrong.  It isn’t clear why a different target specification would have altered the policy judgement at the time.

Perhaps it would have done so once it became apparent that the OCR increases hadn’t really been necessary, but a stubborn refusal by the Governor to concede mistakes, even with hindsight, plus a mindset firmly focused on how “extraordinarily stimulatory” monetary policy allegedly was –  when no one had any real idea what a neutral interest rate might be in the current environment, and when inflation stubbornly didn’t rise much if at all –  seem more likely explanations.    The Bank kept forecasting that inflation would rise and unemployment would fall –  the jointly desired outcomes.

(And if one looks at the Bank’s forecasts in mid 2010, when they made the previous unnecessary start on tightening, one gets much the same picture –  forecasts of falling unemployment and rising inflation, that simply didn’t happen.)

So why should we supposed that a different specification of the target would have made much difference to how policy was set?  We had an institution that was misreading things, in a political climate where no one seemed much bothered by the unemployment rate holding up, and where for a long time financial markets endorsed the approach taken by the Reserve Bank (often more enthusiastic for future tightenings than even the Governor and his advisers were).   Getting something closer to the right model of the world (for the times), and quickly learning from one’s mis-steps, seem likely to matter more than the words of the Act in this area.

As I’ve said repeatedly here, I’m not firmly opposed to amending the relevant clauses of the Reserve Bank Act to mention the desirability of things like a low unemployment rate.  But even the Federal Reserve Act makes clear that good monetary policy focused on a nominal target creates a climate consistent with high employment.  High employment isn’t a goal for the Federal Reserve is supposed to pursue directly, even if –  all else equal –  a high unemployment rate relative to an (uncertain) NAIRU is a useful indicator that something might be wrong with monetary policy settings. It isn’t clear there is anything much to gain from such amendments –  or that they are where the real issues regarding the Reserve Bank are – but sometimes perhaps virtue needs to be signalled?    My own concrete suggestion in this area would be to require the Reserve Bank to publish, every six months, its own estimates of the NAIRU and to explain the reasons for the deviations of actual unemployment from the NAIRU, how quickly that gap could be expected to close, and the contribution of monetary policy to the evolution of the gap.

Brian Fallow’s article suggested that Labour still hasn’t settled on how to reform the governance of the Reserve Bank.

Robertson is non-committal at this stage on the composition of a monetary policy committee to take interest rate decisions, including to what extent it should include members from outside the bank.

Peter Redward has a more specific proposal for him.

What’s needed is a formal Monetary Board complete with published minutes and, released after a grace period, transcripts of the meeting and the voting record of members. In a recent speech, U.S. Federal Reserve Vice Chair, Stanley Fischer, argued that this arrangement is superior to the sole responsibility model in achieving outcomes and accountability. Changes to the role and responsibility of the Governor will necessitate changes to the structure of the Reserve Bank Board. Best practice would suggest that a Monetary Board should be created to set monetary policy with the Reserve Bank Board selecting candidates for the committee while maintaining oversight of the bank. To ensure that external board members are not simply captured by the bank it may be necessary to provide a secretariat similar to the Fonterra Shareholder’s Council, operated at arms-length from bank management.

It isn’t my favoured model, but it would be a considerable step in the right direction, and far superior – in terms of heightened accountability and good governance of a powerful government agency –  to Graeme Wheeler’s preference to legislate his own internal committee.  The biggest problem I see with the Redward proposal, is that it has too much of a democratic deficit.  Monetary policy decisionmakers shouldn’t be appointed by other unelected people –  the Reserve Bank Board –  but by people (the Minister of Finance and his Cabinet colleagues) whom we the voters can toss out. That is how it is pretty much everywhere else.

Peter’s proposal focuses on monetary policy.  But, of course, the Reserve Bank has much wider policy responsibilities, including a lot of discretionary power –  not constrained by anything like the PTA –  in the area of financial regulation.  I presume he would also favour committee decisionmaking for those functions.  I’ve proposed two committees –  a Monetary Policy Committee and a Prudential Policy Committee, each appointed by the Minister of Finance, with a majority of non-executive members, and with each member subject to parliamentary confirmation hearings (although not parliamentary veto).  It is a very similar model to that put in place in the United Kingdom in the last few years.  It puts much less reliance on one person –  who will sometimes be exceptional, and occasionally really bad, but on average will be about average –  and would be more in step with the way in which other countries govern these sorts of functions, and with the way we govern other New Zealand public sector agencies.  I hope the Labour Party is giving serious thought to these sorts of options, and while the headline interest is often in monetary policy, the governance of the financial regulatory powers is at least as important to get right.

And then of course, getting a good Governor will always matter a lot.  The Governor, as chief executive, will set the tone within the organisation, and determine what behaviours are rewarded and which are frowned on or penalised.  If the Reserve Bank failed over the last few years, it wasn’t just because Graeme Wheeler was the sole monetary policy decisionmaker –  his advisers mostly seemed to agree with him –  but because of the sort of organisation he fostered, where “getting with the agenda” seemed more important and more valued than dissent or challenge, in area where few people know anything much with a very high degree of confidence.    Character and judgement are probably, at the margin, more important than high level technical expertise.

And while people are thinking about reforms to the Reserve Bank Act don’t lose sight of how little accountability and control there is over the Reserve Bank’s use of public money, or about the provisions it has carved out for itself from the Official Information Act which allow it to keep secret submissions on major policy proposals even –  perhaps even especially –  when they come from parties who would be affected by those proposals.

Revising the Reserve Bank Act was the first legislative priority for the first Labour government that took office in 1935.    I’m not suggesting the same priority if there is a new Labour-led government later in the year, but there is a real and substantial agenda of reforms to address, which will take time to get right, and which take on some added urgency in view of the vacancy in the office of the Governor that needs to be filled by next March.   That appointment –  a key step in the reform and revitalisation of the Reserve Bank –  should be led by whoever is Minister of Finance, not by the faceless (and unaccountable) men and women of the Reserve Bank’s Board, the people who have presided complacently over the mis-steps of the last few years.

 

 

 

Labour on monetary policy

Alex Tarrant of interest.co.nz had an interesting article earlier this week on the approach the Labour Party plans to take on monetary policy and Reserve Bank issues.    It seems that we should take it as a reasonably authoritative description, even though the formal policy has yet to be released. Labour’s finance spokesman Grant Robertson  described it thus

Useful write up from Alex Tarrant on monetary policy in NZ, including some thinking from yours truly.

From the article

Labour’s stance that the Reserve Bank of New Zealand’s (RBNZ) price stability goal should be accompanied by a focus on employment will not see it propose a specific, nominal employment or unemployment figure for the central bank to target, finance spokesman Grant Robertson told interest.co.nz.

Meanwhile, Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.

Being picky, one might hope that Robertson appreciates the difference between real and nominal targets:  ‘nominal’ is usually a term referring to price measures, money supply measures, or even nominal GDP (the dollar value of all the value-added in New Zealand), while “real” usually refers to quantities/volumes, or to a price-change adjusted for the movement in the general level of prices (eg real house prices, or real interest rates).    Employment or unemployment are “real” variables, not nominal ones.

Mostly I don’t have too much concern if a Labour-led government were to seek to amend the Reserve Bank Act, or to put words in the policy targets agreeement for the new Governor next March, that made some reference to employment or unemployment.  So long, that is, as no one thinks it will make any difference.

No one seriously doubts that monetary policy choices can affect employment/unemployment in the short-term.  But, equally, no one seriously thinks that monetary policy can make much difference to those variables over the longer-term.

Monetary policy affects employment/unemployment in the shorter-term to the extent it affects economic activity.  And thus, when the Policy Targets Agreement states, as it has since 1999 when the incoming Labour Minister of Finance inserted the words, that the Bank should avoid “unnecessary instability in output”….

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

….it was already enjoining the Bank to be concerned about the shorter-term employment/unemployment implications of its monetary policy choices.  And in inserting those words it was really just describing –  to help make it better understood to a wider audience –  what it was the Reserve Bank had been doing anyway.  Those considerations were the reason why, from the very first Policy Targets Agreement, price stability had been something to be pursued over the medium-term, with explicit provision for various shocks to prices.  If the Reserve Bank had attempted to fully offset those shocks –  GST increases, or petrol price increases for example –  it would have come at a cost of unnecessarily disrupting output and employment.

So one option for Labour could simply be to add in “employment” or “unemployment” to the existing list of things the Bank should try to avoid unnecessary instability in.

It is also worth noting that Policy Targets Agreements have long opened with descriptions of what a monetary policy focused on low and stable inflation is trying to achieve –  again, mostly an opportunity to remind people that price stability isn’t just an end in itself.   Under the current government, those words have read

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders.  Price stability plays an important part in supporting this objective.

Although it isn’t stated explicitly, presumably high employment/low unemployment is part of that mix.

But under the previous (Labour-led) government, it was explicit.  These words were added to the PTA in 2002 by Michael Cullen when Alan Bollard took office

The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

Of course, those words made no discernible difference to how the Bank ran monetary policy. But then they weren’t really meant to: it was more a matter of “virtue-signalling”: “we care, and monetary policy isn’t just some Don Brash thing”.

And so a challenge that should be put to Grant Robertson and his colleagues is to clarify whether they think that adding a “focus on employment”, whether to the Act or the PTA is intended to make any substantive difference whatsover, and if so how?

In his interview, Robertson refers to the example of the United States, where the Federal Reserve is often described as having a dual mandate.   In fact, in statute that isn’t really true.  Here is what the Federal Reserve Act says of the objectives of monetary policy

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The goal, in the somewhat outdated language of the 1970s, is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production”.    All the rest of it is simply a description of outcomes that, over time,  pursuing that nominal (money and credit) target can help achieve.

Of course, you won’t often hear Federal Reserve officials highlight that statutory goal –  and they will often talk of “dual objectives” –  but it does highlight that there isn’t an easy off-the-shelf model of legislative wording for Labour to adopt.

A few years ago, recognising that these issues were now the subject of active debate in New Zealand, the Reserve Bank did a Bulletin article collecting and classifying the statutory and sub-statutory (eg PTA type documents) monetary policy objectives for a variety of advanced countryies  If I say so myself, it remains a useful reference (partly in highlighting the different roles that different ways of framing objectives can play –  some are explicitly aspirational, some more accountabilty focused, some language is old and some new etc).  In many of the countries, employment pops up somewhere or other –  but mostly, apparently, in that same sense that we’ve seen in New Zealand, or in the US statutory objective, that a well-run monetary policy will contribute over time (perhaps in quite small ways) to a well-functioning economy, and labour market.

Robertson has also talked about the statutory language in Australia.  The Reserve Bank of Australia Act specifies (as it has since 1959)

It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

a.the stability of the currency of Australia;

b.the maintenance of full employment in Australia; and

c.the economic prosperity and welfare of the people of Australia.

But surely the challenge for Robertson is “so what”?    Is there any evidence he can point to suggesting that, over time, the Reserve Bank of Australia (or the Federal Reserve) have run monetary policy materially differently from the Reserve Bank of New Zealand?    Past research the Reserve Bank has done looking at exactly that issue suggested not.

Perhaps this might seem a curious stance for me to be taking.  I’ve been repeatedly critical of the Reserve Bank’s conduct of monetary policy over the last couple of years  at a time when the unemployment rate that has lingered well above estimates of the NAIRU  (while, curiously, Robertson has often been a defender of the Governor).    But it is most unlikely that any sort of weak reformulation of the statutory goal would make any material difference, especially when  according to Robertson

Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.

and

He told interest.co.nz that Labour is not going to tell the RBNZ whether one is more important than the other.

The Bank’s failures over the last few years, to the extent that they can be seen as such, have been mostly about forecasting, combined with some over-confident priors, not about policy preferences, or an aversion to seeing high employment/low unemployment.

But if Labour really wants to give the Reserve Bank two objectives, and not even subordinate one to the other (on, for example, the basic grounds that in the long run nominal instruments –  monetary policy –  can only really achieve nominal targets), it is simply fairly explicitly abdicating what are inherently political choices to unelected technocrats.    The strongest case for an independent Reserve Bank is when there is a widely-accepted single target.

Then again, perhaps what is really going on is just “virtue-signalling”.  I’m sure Labour has access to plenty of people who can tell them that the RBA, the Fed, the Bank of England and the Bank of Canada –  all with different ways of phrasing monetary policy goals –  don’t do things much differently from each other, or from the Reserve Bank of New Zealand.  Each will make mistakes at times, each with have idiosyncrasies, and from time to time each might have poor decisionmakers, but there is just no evidence that the framing of the New Zealand target keeps the Reserve Bank from making good policy.  But promising to tinker with the central bank goals probably sounds good in certain quarters –  suggesting that the speakers aren’t dreaded “neo-liberals” and might be “sound” on other stuff.

The Tarrant article also confirms that Labour is looking at governance changes for the Reserve Bank.  Sadly not the right ones.

If Labour leads the government after the 23 September general election, it will immediately launch a review into its proposals. This will also include a look at a Labour preference of taking sole rate-setting responsibility from the RBNZ Governor in favour of a rate-setting board that includes the Governor, his deputies and potentially other voices within the bank.

I hope Robertson and his colleagues bear in mind that governance reforms along exactly those lines –  entrenching a legislative role for internal technocrats –  was rejected by the previous Labour government in 2001.  I thought they were right to do so then (even though at the time I held a role that Labour’s independent reviewer, the academic expert Lars Svensson, thought should be a statutory member of the decisionmaking monetary policy committee), and I hold to that view.

At very least, a decisionmaking committee comprised of internal line managers would necessitate wider changes.   Since the case for moving away from a single decisionmaker is to reduce the risks associated with one person, one shouldn’t just move to a system where that one person, together with people s/he appoints/remunerates, make the decisions.  In the right hands, it might work fine, but we build institutions to protect us against bad outcomes and people who turn out to be poor appointees.  The sort of Governor one might have to worry about isn’t likely to be appointing people who will systematically differ from him/her.  If deputy or assistant governors are to be given statutory decisionmaking powers, those appointments (and that of the Governor) need to be ministerial appointments.  But I’m not aware of any other New Zealand government agency where a group of line managers get to make key policy decisions (perhaps Robertson is?).  Far better to use line managers to service (provide the research and analysis to) a decisionmaking committee, appointed by the Minister of Finance, and made up of a mix of internal and external people (as in Australia or the UK, and –  in a different system of government –  the US).

Although I don’t agree with their specific solution, on this issue I think the Green Party is much closer to proposing a good model than Labour (at least on the evidence of this article) is.  The same goes for enhancing the openness and transparency of the Reserve Bank –  another issue Labour seems not greatly interested in.  On that score, one option perhaps the parties on the left could think about is to require the Reserve Bank to publish, at least six-monthly as part of a Monetary Policy Statement, its estimates of the NAIRU (and perhaps other medium-term trend real variables, such as the natural rate of interest, and the projected trend rate of labour productivity).

There are plenty of aspects of the Reserve Bank legislation and practice that warrant review and reform.  Time has moved on, the Bank’s responsibilities have changed gradually etc.   If Labour is in the position to lead a government after the election, I hope they would be open to setting the terms of their review sufficiently broadly to encompass those issues (eg decision-making, appointment procedures, transparency, openness, the allocation of prudential policymaking powers between the Bank and the Minister etc).  I doubt any of these are really vote-winners, but they are the sort of issues that a modern responsible competent government would put on its agenda, for a tidy-up and modernisation.

Perhaps there are votes in promising to rearticulate the monetary policy objectives. But if so, it is more likely to be through “virtue-signalling”, than through the likelihood that  the sort of stuff Labour is talking about would make any material difference at all either to how monetary policy is actually run, or to the resulting economic outcomes.  Surely Labour must know that.  But does it bother them?

New Zealand has serious long-term structural economic underperformance challenges that need to be grappled with.   Sadly, the current government seems largely indifferent to them.  One can only hope that as policy programmes emerge over the next few months, the opposition parties will be offering some serious alternatives.  At present, there doesn’t appear to be much reason for hope on that score.

 

Labour and housing supply liberalisation

In a post the other day, I noted in passing that the political Opposition parties seemed to be as lacking as the government in any serious ideas or analysis as to how New Zealand’s dismal post-war economic performance might begin to be reversed.

That prompted a commenter to suggest that the Labour party did seem to be offering fresh ideas for dealing with the housing market, drawing my attention to a recent substantial post by Labour’s highly-regarded housing spokesperson Phil Twyford.  Twyford’s post is written with a left-wing audience in mind, but for anyone interested in housing policy issues it is worth reading.

There have been some encouraging words, at times, from Twyford on getting at the root cause of the housing problems –  the pervasive land use restrictions imposed or facilitated by central and local governments of both parties that have driven what should be quite a cheap product (suburban land) into one of the most expensive around.  It isn’t just a New Zealand phenomenon, but one seen in the United Kingdom, Australia, Canada, large chunks of the United States, and no doubt plenty of other non-Anglo parts of the advanced world.  Deal to those restrictions and houses will be as affordable as they still are in many other parts of the United States, or as they used to be here before the planners (bureaucratic and political) got control.

Twyford goes as far as to say that

The next Labour Government, led by Andrew Little, will be defined by how we respond to the housing crisis.

Of course, the current housing “crisis” got underway under the last Labour government  –  and neither that government, nor the current National-led government, have done anything much structural about it.

I’ve been a bit skeptical about quite how serious Labour is about structural reforms to make the housing market work better over the longer-term.  Unfortunately, Twyford’s latest piece doesn’t give me any reason for greater optimism.

He outlines a five point plan, as follows:

  1. “Bring back active government again” –  which means having the state building lots of houses for first-home buyers
  2. Tax changes

    (“We are going to tax speculators who sell a rental property within five years

    We are going to shut down the tax breaks that allow speculators to write off their losses.”)

  3. Restrict foreign buyers  (“We will ban non-resident foreign buyers from buying existing homes. And we will review the immigration settings to find a better balance between the country’s need for skilled workers and the impact on housing and the labour market”).
  4. Free up the planning system
  5. Build lots more state houses

     

Sure enough, doing something about the planning system is on his list, but (a) it is a long way down the list, and (b) it is the shortest section of any of those in his post.  Here is the total of what he had to say on the topic

4. We should be pragmatic about finding solutions and willing to adjust our policies when the facts change.

The right have constantly blamed Councils and planning laws for expensive housing. The left has always reflexively defended planning. But it’s a fact that restrictive land use controls have stifled building, and choked off the supply of land driving up prices.

We will reform the planning system so it can both protect the environment, while allowing us to build more and build better.

Which is fine, I guess, but says almost nothing of substance at all.  It has the feel of a ritual incantation –  feeling the need to acknowledge the point –  rather than being any sort of centrepiece of a housing reform programme.

Some of the other things on Twyford’s list may, arguably, be useful, or not harmful, in a transition (I’ve argued myself that if governments won’t/can’t reform the planning system they should pull back on immigration targets to give young New Zealanders more of a chance), but none get to the heart of the issue: allowing individuals and firms, and private markets, to much much more easily build houses in locations, and of densities, that suit them.

I hope I’m wrong.  Perhaps Twyford just felt the need to play down the market-oriented reforms because of his left-wing audience, but even if so that hardly fills one with confidence that his party has grasped where the fundamental problem is.

So I’m skeptical.  And for a number of reasons.  First, and a point I’ve made often before, there has been no case anywhere –  here or abroad – that I’m aware of where once the planning mentality has taken hold it has been enduringly unwound.  Perhaps the debate is a little further advanced in New Zealand than in some places –  although even the Obama Administration has made good, and sophisticated, noises on the importance of the issue –  but I see little reason to hope that New Zealand is about to lead the reforms.  At other times, and on other issues, New Zealand has been a reform leader, but there is no sign of any such appetite this decade.  Bad ideas and bad policies usually get discarded eventually, but it can take a very long time.

And for all the talk about the housing crisis, the National Party remains pretty popular.  It could well lose the election next year –  lots can happen in a year – but right now there is little evidence of a popular groundswell demanding far-reaching change.  For all the talk, bread and circuses –  and a few small measures to temporarily paper over specific cracks – seems to be enough to distract the populace.

And whatever the Labour Party genuinely thinks, if it should lead a government after the next election, it seems most unlikely that Labour will overwhelmingly dominate the government.  Perhaps they will have two-thirds or even three-quarters of the seats, but the Greens, and/or New Zealand First would have the rest.  In such an arrangement, each party has to decide what really matters to it, and what they can trade.  Perhaps far-reaching liberalization of planning law will be one of those things for Labour, but Twyford’s speech content doesn’t give one much confidence of that.  And the Greens aren’t known for supporting the physical expansion of our cities, or allowing markets to make such choices.  The other items on Twyford’s list look much more like the sort of stuff Labour and the Greens could happily agree on as a common housing policy: suppress demand, further mess up the tax system, and fall back on government as a chief provider of new housing.

And lest anyone think this is just an anti-Labour piece, it is also worth remembering that Opposition parties have talked a good talk on fixing the housing market before.     The National Party used a parliamentary select committee to run an inquiry into housing affordability in 2007 –  over the objections of the then Labour government –  and went into the 2008 election suggesting that it would fix the system.  Despite dominating all three governments since then, almost nothing has happened –  just more first home buyer subsidies, various demand suppression tools, and now talk of large government house-building programmes.

Labour and National are almost equally to blame for the mess we are in –  although of course, any incumbent government has to take a bit more of the blame.  But, no doubt, neither has done any far-reaching reform because there just isn’t the public demand for it –  and because neither really believes it enough to (a) properly prepare the ground, and (b) take some political risks and expend some political capital in a cause they think would genuinely advance the long-term well-being of New Zealanders.

I’d like to think I was wrong, and that Phil Twyford’s words really do foreshadow a Labour-led government that would lead a process of substantially freeing-up the housing supply market.

But if Labour is serious, perhaps they should think about the leadership opportunities they now have in local government.  Of our three largest cities, two now have Labour mayors, and the third has a mayor who was a former Labour Cabinet minister.  Central government might be an enabler of the land use restrictions, but it is local governments that put, and keep, the specific rules in place.  And local governments could lead the charge in removing those rules, freeing up land use restrictions in ways that could make a real difference.  Those three mayors can’t do everything in just a year, but if Labour is serious about liberalizing land use restrictions, Justin Lester, Phil Goff, and Lianne Dalziel could surely go quite some way before next year’s General Election to show us that Labour is serious about this stuff.  Sure, mayors don’t control councils, and only have one vote, but they have a  fresh mandate, and a bully pulpit (media cover mayors), and they lead our three largest cities.

Sadly I don’t expect much.  Here is the housing policy of the new Labour Party mayor of Wellington.

For starters, I’ll be sending a bill through to parliament to make rental WoF a reality in Wellington. If you’re paying rental for a house it’s only fair that house meets basic standards. Living in a warm, dry house that’s free of mould should be a right for every Wellingtonian.

I’ll also invest in social housing, so there’s more available for the people who need it most. This means a long term building program, partnering with third sector housing providers to increase the number of live-to-own dwellings. It also means improving the 2500 existing Wellington council owned social housing units, making them safer and better to live in. 

But that’s not enough. It’s vital that we look after those in need, but we also want Wellington to grow and prosper. That’s why I’m offering a $5000 rates rebate for anyone building their first home in Wellington. Newer homes means better quality homes, and Wellington needs to encourage fresh young talent and new families to move here if we want to keep thriving. 

Plus, I’m committed to establishing Build Wellington, an urban development agency that will utilise existing green-field land holdings for affordable, good quality residential development in the tradition of state and Council housing in years gone by.

Nothing, at all, about freeing-up land supply, just more statist “solutions”, and a local version of the sort of first home buyer grant central government offers –  the sort of tool that has been proved, time and time again, to do precisely nothing to improve housing affordability.

For those interested in housing policy and urban planning issues, I’ve been meaning to draw attention to the  stimulating new website/blog Making New Zealand

 

 

 

 

 

A good feature of our tax system

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

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

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

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

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

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

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

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

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

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

 

 

Labour on New Zealand’s economy

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

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

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

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

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

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

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

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

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

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

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

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

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

Setting interest rates: no need to change the system

Andrew Little has moved on from wanting to “stiff-arm” banks over dairy foreclosures, to talking of the possibility of legislating to force banks (and other lenders?) to pass on in full any OCR changes.

It isn’t the oddest idea in the world – and personally I find the new talk of a Universal Basic Income, much as it has also been propounded by some  on the right, including Milton Friedman, rather more consequential, and worrying.  Many quite sensible countries set fixed exchange rates.

For 15 years in New Zealand –  1984 to 1999 –  we didn’t have a government agency setting interest rates at all.  For much of that time, many of us at the Reserve Bank thought that was only right and proper.  And when we first proposed an OCR-like system, many of the leading economics commentators and bank economists were pretty dismissive.  But in 1999 we simply concluded that –  like most of the rest of the advanced world –  it made more sense to set, or manage directly, an official interest rate.  And now that model is just taken for granted.

Of course, setting the OCR isn’t the same as setting the individual interest rates for each borrower, but I’m sure that if he gave it any thought that isn’t what Little means either.  Perhaps he just means that the Reserve Bank should be able to direct set some commercial bank base lending rate against which all other lending rates have to be calculated? It seems administratively cumbersome, and perhaps prone to being circumvented –  not unlike much other government regulation, including (for example) direct restrictions on mortgage lending of the sort once unknown in New Zealand but now imposed by the Reserve Bank and accommodated by the current government.  And it is not as if governments universally eschew price-setting in other markets either –  the government recently proudly announced an increase in the regulated minimum price for labour, talking of wanting to push that price (once just a market price) up as fast as possible.

One of the attractions of an OCR-type arrangement is that it is a fairly indirect instrument.  The Reserve Bank can put the OCR pretty much wherever it needs to to deliver on an inflation target.  That is an imprecise linkage, but it works pretty well (at least if the Reserve Bank is reading underlying inflation pressures correctly) and it does so without needing lots of direct controls or impinging very directly on anyone’s business or financial affairs.  The OCR is simply the rate the Reserve Bank pays on deposits banks (and any other settlement account holders) have at the Reserve Bank, and the rate at which the Reserve Bank will lend to banks on demand (against good quality collateral) is pegged to the OCR.   The amounts banks borrow from and deposit with the Reserve Bank aren’t that large : bank balance sheets total almost $500 billion, and bank deposits with the Reserve Bank are fairly stable, currently around $9 billion.  And yet changes in the rate paid on these balances, which don’t move around much, provide substantial and sufficient leverage (partly signaling, partly a change in pricing on one component of the balance sheet) for macroeconomic stabilization purposes.    It isn’t a mechanical connection, but it works.

A variety of other models might too, but the judgement has been –  not just here, but in other similar countries – that an indirect approach like the OCR is less intrusive and has fewer efficiency costs than the alternatives.

And it is not as if there is some obvious problem.  Here is a chart, drawn from data on the Reserve Bank website, showing floating residential mortgage interest rates and six month term deposit rates since 1965.  (It is an ugly chart because the mortgage rate data are monthly throughout, but the term deposit rates are quarterly until 1987).

retail interest rates

Largely, lending rates reflect deposit rates (and to some extent vice versa).   These aren’t perfectly representative indicators, just what we have.  But for the almost 30 years for which we have the full monthly data are available, the average spread between these two series was 2.45 percentage points, with a standard deviation of 0.6 percentage points.  The latest data are for February, and the spread was 2.49 percentage points.  One would expect spreads to move around a bit –  demand for individual products ebbs and flows, and the links between foreign funding markets and domestic term deposit markets aren’t instant or mechanical –  and they do, but there is no obvious or disconcerting trend.

Through the period since 1965 we have had all manner of regimes.  Direct controls on lending rates, direct controls on deposit rates, indirect controls on one, other or both, no controls at all, and then for the last 17 years direct control of the interest rates on one small component of bank balance sheets.  Go back far enough, and during the 1930s a conservative government legislated to lower all lending rates.  But it just isn’t obvious that there is any need to change the operating system now.

To a mere economist, it is a bit of a puzzle what Little is up to.  No doubt the Opposition needs to be seen to be offering alternative policies, but these issues (bank lending rates and dairy foreclosures) don’t seem like an area where there is a substantive policy issue (while there are many other areas of policy where the same could not be said, such as New Zealand’s continuing slow relative decline).  But there does seem to be quite a strain of anti-bank sentiment in New Zealand –  perhaps especially anti foreign banks, the same sentiment that gave us state-owned Kiwibank under the previous Labour-Alliance government.  Perhaps people on the left here are looking to the US and the striking degree of response Bernie Sanders is achieving for his populist message, much of which is centred on an anti Wall St message?