Not doing their core job

This isn’t going to be one of my usual lengthy post-MPS posts. I really just wanted to make one point about the disconnect yesterday between the words and the actions of the Governor and the MPC.

There were more than a few good words and phrases from the Governor, and even a few in the document itself. There was, for example, the reiteration of the MPC’s so-called “least regrets” framework, under which for now they say they’d rather run the risk of inflation being a bit high than run the risk that they (continue to) undershoot the target the government has laid down for them. And there was the Governor’s response to Stuff’s Thomas Coughlan about whether the Bank’s new mandate – the employment bits – had made any difference to monetary policy decisionmaking this year: he said not, since both unemployment and inflation indicators/outlooks had pointed to the need for much easier monetary policy, even highlighting the risks of inflation expectations settling below target. On Radio New Zealand this morning, Orr even allowed himself to say yes when asked if monetary policy would do “whatever it takes” to lean against a cyclical economic slump.

All of which sounded great. It was pretty much standard inflation-targeting cyclical stabilisation stuff, especially when overlaid on a background of the last decade when – as the Governor put it – central banks hadn’t demonstrated such a good track record in getting inflation back up to the target (recall that in our case in particular that target is set by elected governments, and that set by the current government is much the same as that of their predecessors.

But what do the MPC’s forecasts show? Recall that these published forecasts include all the expected effects of the monetary policy stance announced yesterday (although perhaps not the proposed new LVR controls), including the new Funding for Lending scheme (which, as the Governor noted, the Bank thinks market pricing for retail deposits has already anticipated).

Here are their CPI projections.

RB forecasts CPI

Inflation does not get back above 1 per cent – the very bottom of the target range – for two more years, at which point it will have been more than 2.5 years since the Covid-related severe downturn got underway. It is three years from now until inflation is forecast to get back to 2 per cent.

What about the unemployment rate, still probably the best indicator of excess capacity (at least in a forward-looking context)? They expect that the unemployment rate will keep rising and will be still 6.3 per cent by the end of next year. And at the end of 2023 – more than 3 years away – they still think the unemployment rate will be 5.2 per cent, barely lower than the current 5.3 per cent. Their output gap estimates for the year to March 2022 are slightly larger (negative) than their – inevitably wildly imprecise – estimate for the latest quarter.

And then there are inflation expectations. In a distinct step forward yesterday there was quite a bit of discussion of inflation expectations in yesterday’s MPS, including in the minutes of the MPC meeting. At least some members must be getting quite worried, even if staff gallantly try to play down the issue by refusing to engage with direct estimates of breakeven inflation from the government (indexed and conventional) bond market.

They included this chart in the document

RB inflation expecs nov 2020

On this measure – which deliberately excludes all market-based measures – inflation expectations are below target for the next several years and well below the target midpoint. The longer those low expectations persist the harder it will be for monetary policy to do its job. (Note that the latest of the RB’s own expectations surveys still has medium-term inflation expectations well below target, even though respondents now believe the OCR will be taken negative next year, and presumably included that expectation in their in responses about inflation too.)

And yet what did they do in response to this outlook? Nothing. Simply nothing. And in the process pushed the exchange rate – usually a key adjustment mechanism in New Zealand downturns – even further above the level it was, whether yesterday morning or at the start of the year.

There is simply no sign that they take their own rhetoric seriously. There is no sign of a central bank acting as if it really believes it would be better to run the risk of a temporary overshoot of the inflation target. There is no sign of a central bank that acts as if it thinks cyclical unemployment is a scourge that should be countered aggressively, at least while the inflation outlook allows it. And there is no sign of a central bank acting as if it takes the slump in inflation expectations as something it needs to take seriously.

Instead they are content with rhetoric (sometimes quite good rhetoric) and handwaving, and throwing around big dollops of money in ways that make little useful difference (and whatever good effects the Bank thinks those tools are having are already baked into the forecasts). Oh, and of course no serious accountability either: it is now 19 months into the new MPC and not one of the external members – the ones who don’t work directly for the Governor – has given a speech or a serious interview.

Oh, and remaining wedded to that bizarre commitment made in March – before the severity of the crisis was apparent to them – not to touch the OCR for a year, come what may.

(Of course, some readers may want to defend the RB on the basis that they – readers – don’t believe a negative OCR could help. There is an argument to that effect – I’m among those who resolutely disagree – but the point here is that it is not an argument the Bank itself is relying on. They claim monetary policy is still capable of doing useful and important stabilising stuff….and yet won’t even cut the OCR to zero, let alone negative, despite (a) such weak foerecasts, and (b) averring that a lower OCR would do good stuff.)

Bleak passivity

Reading last week’s statement from the not-very-transparent, not-very-accountable, Reserve Bank Monetary Policy Committee I was struck by both the bleakness of the statement and the do-little-or-nothing passivity of the monetary policymakers.

I guess you could argue it wasn’t much different than the previous month’s statement – which wouldn’t be much consolation, since that statement itself was pretty downbeat – but the relentlessness struck me. There was almost nothing positive in the commentary, even six months on from when the Committee belatedly recognised the Covid economic risks and started adjusting policy. The risks, both globally and domestically, are deemed to be to the downside – which seems right to me – and this around a base scenario in which the “the Committee expects a rise in unemployment and an increase in firm closures”. There is, again rightly, an emphasis on the susbstantial uncertainty firms and households face, again here and abroad, as the future course of the virus is really little more than anyone’s guess. We are told – in, I think, materially stronger words than they’ve used before – that “monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit”.

And yet what did they actually do? Nothing.

Seven months on from when they should have been first easing monetary policy, we still have an OCR that is only 75 basis points lower than it was at the start of the year. The Committee continues to cling to their bizarre March pledge – made in a climate of extreme uncertainty – not to change he OCR for a year, a pledge that has/had no solid economic foundations to it. They would prefer people to believe that in some sense they “can’t” move, but all it takes to know that is simply false is a look across the Tasman to Australia where, with a higher inflation target, and higher inflation expectations, short-term wholesale interest rates are 20 basis points lower than those here. Even if you buy the Bank’s claim that the OCR can’t be taken negative yet, there is no obstacle at all to them cutting the OCR to zero now. It should have been done months ago. It should be done now – their own outlook (all that downside talk) tells you as much. (20-25 basis points is, of course, not that much, and not a macro game-changer in and of itself, but in an all-hands-to-the-pump scenario, every little helps – and it would be a third more OCR easing than we’ve had to date.)

And, of course, the claim that the OCR can’t be taken negative now should itself be taken with a considerable pinch of salt. If true, it should of course lead to serious questions of the Bank’s competence and basic preparedness, which don’t yet seem to have been asked (although the Board’s Annual Report must be due out in the next few days, so perhaps…..unlikely as it is …..there will some sign of holding management to account). But it was never very convincing. For a start, had the Reserve Bank simply taken the OCR negative a few months ago it would have (a) rewarded the institutions that had read the – all too visible – international signs and got ready, and (b) encouraged the others to adapt very quickly. Even if the argument was partially defensible in February/March, it is now September….they’ve had months to get it right, and (on the MPC’s own reckoning) the economy could have done with more stimulus over that period. More generally still, a significant part of the way monetary policy works in an open economy is through (a) signalling and (b) the exchange rate: had the MPC moved aggressively months ago, or even now – not next March/April – it would likely have generated a lower exchange rate, supporting the New Zealand economy, and underpinned inflation expectations.

(As a reminder, the exchange rate has barely changed from where it was at the end of last year, real (1 and 2 year fixed) mortgage rates seem to be down perhaps 20-30 basis points since the end of last year, and the inflation expectations – whether survey measures or market measures – seem to be down about 50-60 basis points. Oh, and in case people hadn’t noticed, the unemployment rate has risen and the MPC expects it to rise further. Their August inflation projections – including all that fiscal policy – was also well below target. It is hard to imagine in any other circumstances a central bank doing nothing.)

Now defenders of the Reserve Bank will, of course, point out that the MPC is talking up some sort of “Funding for lending” scheme that it now says “would be ready before the end of this calendar year” (while also noting that “the design of the programme would be agreed and published ahead of deployment” – but there is only one more scheduled MPC meeting before the end of the year). The idea of this scheme is to lend to banks directly at a rate close to the (unnecessarily high) OCR, with the aim to “lower the financial system’s funding costs, and therefore borrowing costs for firms and households, and support the availability of credit to the economy”.

I don’t greatly like these sorts of schemes – although the details, which apparently won’t be consulted on, may matter. By contrast to the OCR, which is an instrument that works pervasively and unconditionally, FFL-type schemes are often available to some market participants but not others (undermining a core principle of efficient policy design, around competitive neutrality), and are often tied to some officials’ preferences around increases in lending to the private sector, whether or not such lending makes much sense in the prevailing economic climate (hint: in an environment of extreme uncertainty, of the sort the MPC talks of, not many firms are going to be voluntarily taking on much debt, and banks would generally be rightly cautious – even if not with the added uncertainty about the Bank’s new capital requirements next year). And an FFL is no substitute for an OCR adjustment when it comes to influencing the exchange rate, typically a really important part of the New Zealand transmission mechanism.

But here’s the thing. They’ve had a scheme like this in Australia since March. Term deposits rates in Australia have for a long time been closer to wholesale rates than has been the case in New Zealand, but – on checking this morning – are still materially higher than Australian wholesale rates. And although our Reserve Bank has been talking up an FFL scheme for some time now there is no hint in the schedule of retail rates banks are offering that, for example, 3-6 months are holding up but that longer-term rates (relevant to the period when an FFL will be deployed) have fallen away sharply, or at all. Big banks seem to be offering much the same rates for six month retail term deposits as they are for 1 to 5 year term deposits, just as they were at the start of this year. It just isn’t obvious that a realistic FFL is likely to make much difference to retail rates – and actual term rates suggest banks rather share that perception. It would be good to be wrong on this – all the evidence and the MPC comments suggest the economy needs the additional support – but nothing at present suggests it is likely.

Meanwhile, of course, months and months into this severe recession, there is no sign that the MPC or the Bank is doing anything about removing the real effective floor on the OCR (at perhaps -0.5 or -0.75), that results from the official provisions – regulatory interventions – that mean deposits are convertible to cash at par in unlimited quantities, with cash paying a zero interest rate. We have interminable debates and commentary on what macro difference a small further cut to the OCR – to just slightly negative – might make, but nothing on making feasible and useful the sort of deeply negative interest rates the economy might actually need. It is a cavalier indifference to the state of the economy and the plight of the unemployed – and to the health of the public finances – that seems to be shared by most central banks – which makes it no more excusable. One can, reasonably, haggle about whether threshold effects mean that,say, a -0.25% OCR would make much difference – although (a) the ECB seems persuaded, and (b) retail deposit rates in NZ would still be well above zero in such an environment. There should be much less room for doubt about the gains from a deeply negative OCR, including for the exchange rate and inflation expectations.

Of course, those on the left are often keen on fiscal policy substituting for monetary policy – especially while they are in power and get to choose the goodies being handed out – but that isn’t a path to an efficient allocation of resources, a wise evaluation of investment options (what do politicians have on the line?) and does nothing at all for promoting the health and growth of the tradables sector of the New Zealand economy. Whatever the merits of something like the wage subsidy scheme initially, fiscal policy initiatives seem to have become over recent months increasingly dependent on who you know, who is in favour, which project rings political bells, and not on a pervasive, fairly neutral, support framework in which politicians aren’t using your resources and mine to pick winners (unlikely to be so in actuality), rewards favourites and so on. Monetary policy operates much better as a countercyclical stabilisation tool for many reasons, if only central bankers would use it aggressively, or their political masters simply insist they do. It is fit for purpose, and respects the proposition that private firms and households are generally better at spending wisely than governments, in a way that handouts to Green schools, Pacific churches, this or that council, or whatever do not.

Technology

Politicians of whatever stripe seem to want to associate themselves with “technology”. It was then British Labour Party leader – and Opposition leader – Harold Wilson who 57 years ago gave the speech where he talked of the new economy he looked to, referring to the “white heat of technology”. Perhaps it was the same in the 19th century too, but we certainly see and hear a lot about it in 21st century New Zealand. The economy continues to underperform, while same strange alliance of industry lobbyists and politicians want to talk up “technology” and so-called technology industries. I don’t think there is much difference between National and Labour on this one, but National is in Opposition, and yesterday Judith Collins was at it again.

As reported here, she wants to “double New Zealand’s technology sector in a decade, and specifically to double “New Zealand’s technology exports” to “$16 billion by 2030”, complete with talk of the sector being bigger than dairy 10-15 years hence.. Oh, and there was lots of money being flung around, and to top it all off National is promising a Minister for Technology. Presumably, that will be just one more title some other Minister would add to his or her list and – for better or worse – MBIE would carry on providing policy advice much as it does now.

Much of the political rhetoric in this area is fuelled by the annual TIN (“Technology Investment Network) report, a collaboration between MBIE and some private sector groups with an interest in talking up the sector. I took a sceptical look at this report in a post back in 2017. They seem to be the source of the idea that “technology exports” are currently around $8 billion per annum – the sort of line that led former minister in the current government, Clare Curran, to suggest a year or two back that technology was now our third largest export.

But the $8 billion (or thereabouts) is not a measure of exports from New Zealand – and certainly not in the sense that any serious economic analyst or national accounts statistician would recognise. Rather, it is the total foreign sales of the group of companies the TIN report put on their list. Exports, by contrast, are things produced the country concerned. ANZ is an Australian-owned and controlled bank, with significant operations in New Zealand. Last year its total revenue in New Zealand was about $7 billion, but no one thinks of that – or counts it as – an Australian export. But that is the sort of thing the TIN people lead people to do – TIN themselves tend to draft a little more carefully, but in ways that they know will lead people to talk of this revenue as somehow New Zealand exports. Last time I looked, for example, both Fisher and Paykel Appliances and Fisher and Paykel Healthcare were on the list. The former is not even New Zealand owned any more and both companies have substantial overseas operations – Healthcare, for example, does much of its manufacturing in Mexico, selling into the US. That makes it a successful New Zealand business, but those sales from Mexico to the US are Mexican exports not New Zealand ones.

It is difficult to get any sort of precise sense of the scale of (what one might reasonably think of us) “technology” exports from New Zealand, not least because technology is embedded, to a greater or less extent, in so much that is sold, whether locally or internationally.

But in my earlier post, I took a couple of proxies to try and get a sense of trends. I’ve updated some of those.

In the TIN report, for example, many of the companies are in “high-tech manufacturing”. But here is a “elaborately transformed manufactures” have done as a share of New Zealand merchandise exports.

ETM

And from services exports I worked out the share of the total made up of

Services; Exports; Charges for the use of intellectual property nei
Services; Exports; Telecommunications, computer, and information services
Services; Exports; Other business services
Services; Exports; Personal, cultural, and recreational services

The latter because the largest component of it appears to be film and TV exports (Weta workshops, Peter Jackson etc). “Other business services” is going to be quite a grab-bag, but it does include (for example) research and development services.

Here is how those services have done as a share of total services exports

tech exports

That series seemed to be doing quite well for a while, but unfortunately the last few years have not been very impressive and the latest observations are lower than those for, say, 2009. (Of course, there was a surge in education and tourism exports for a while, boosting the denominator.)

So what if we combine these two series and look at them as a share of New Zealand’s GDP?

tech exports 2020

Perhaps I’m missing some important series. But I went looking and I couldn’t spot anything obvious. Perhaps you are thinking of Xero for example, but wherever any of its export revenues from New Zealand might have been, the category of services of exports that mentions “accounting services” has shrunk hugely in real terms over the last 15-20 years. I’m sure there must be some other items some would reasonably label “technology exports” but if they were game-changing they should be easy enough to find.

We can all name various individual successful technology-based companies founded by New Zealanders. Some are even still owned, controlled, and/or based in New Zealand. And there is plenty of technology embedded in many of other exports – including dairy, the one they all seem to hope to rival.

But the overall picture really isn’t very encouraging at all. That is most unlikely to be “fixed” by flinging more scarce public money at the industry, or more visas. And we can be pretty confident that appointing a Minister of Technology would make no difference at all. In fact, if we keep on with the economic policies with run for the last 20 years, perhaps the main role for a Minister of Technology might be to front up to Parliament to explain why transformational change still hasn’t happened, hand in hand with the then Minister of Finance explaining why no progress has yet been made – perhaps another decade on – in reversing New Zealand’s longrunning relative productivity decline.

Of course, there is something of hint that the political parties aren’t really serious in the scale of the promise. National talked of doubling “technology exports” in a decade, which is akin to an average annual growth rate of about 7 per cent. For any really serious technology success story that would be a derisorily low rate of growth. Who knows: perhaps those worldwide sales of the TIN companies will grow 7 per cent per annum over the next decade – when nominal GDP is probably forecast to grow 4-5 per cent per annum – but even if that happens, it is unlikely to be the makings of a seriously stronger New Zealand economy.

Thinking Big still

Just before I went on holiday I wrote sceptically about the “five point economic plan” speech given by the then National leader Todd Muller.

We were promised then a series of major speeches fleshing out the framework Muller enunciated.  Among the five points was this

Delivering infrastructure had this promise

Before the end of this month, I will announce the biggest infrastructure package in this country’s history. It will include roads, rail, public transport, hospitals, schools and water.

My heart sank somewhat.  A new and different Think Big? But lets see the specifics.

Of the five points Muller had outlined, this seemed to be one where they were investing any hopes they might have of lifting New Zealand’s medium-term economic performance.

New leader Judith Collins started on the details with a speech given on Friday and some supporting documents.    This announcement had (a) some big headline numbers for spending over the next decade, (b) the “roads, rail, public transport” components for the North Island north of Tauranga, several of which are mainly about periods well beyond the next decade, and (c) some material on how they propose to replace the RMA, and to fast-track some of these projects in the meantime.  I think there had already also been a promise to build an expressway between Christchurch and Ashburton.

I don’t have any particular problem with building more and better roads where they make sense.  Same goes for rail within cities, again where such proposals make robust economic sense.  (I’m much more sceptical of things like cycleways, whether across the Waitemata Harbour or locally.)  And clearly congestion is a major issue in Auckland and –  for what is really a pretty-tiny city by international standards – to some extent in Wellington too.  Congestion has real economic and welfare costs.  National’s leader referred to one estimate of those costs in Auckland (presumably this one) at around $1 billion a year –  and since the study was done a few years ago, perhaps it would be reasonable to use a higher estimate now.

But we have tools that can deal with congestion.  Pricing.  It is a tool that seem to work when tried in other countries/cities.    Of course, simply pricing congestion doesn’t mean building no more roads ever, but it (among other things) helps give a better steer as to what the real price of congestion – and the value people put on avoiding it – and it deals with the congestion directly in the meantime.    Even the current government’s Minister of Transport has been on record suggesting that congestion pricing is “inevitable” at some point, just not now.

And what is National’s stance, to address what Collins calls a “congestion crisis”?

Looking further ahead, if we and Auckland Council ever look at congestion charges in the future, my Government will insist they are only ever revenue neutral, with other fuel taxes reduced to compensate.

“If we ever”….Not exactly a ringing endorsement, looking to shift the ground in the debate.  Perhaps congestion pricing isn’t easy electoral politics, but it is the direction we need to be heading.  It might actually make a material difference within five years, unlike (as far as I can see) most other things in the National plan.

Instead the focus seems to be a flinging around some big numbers, not being too bothered about how robust any analysis supporting the mooted projects is, and all with little or no sense of decent mental model of what has gone wrong with New Zealand’s economic performance,   And yet it is, supposedly, “the Plan that New Zealanders –  including Aucklanders –  have been waiting for, for generations”.

Pretty sure that last sentence isn’t true.  Collins, for example, talks up the “if onlys”, in her case around Sir Dove-Myer Robinson’s “rapid rail” proposal, that got lots of attention in Auckland in the early 70s.  We moved to Auckland about that time, but I was 10 and can’t claim to have given it huge attention.  But here’s the thing: the population of the Auckland urban area then was about 650000, the birth rate had been dropping for a decade, and the new government was just about to markedly tighten up on immigration access, a policy that carried through for the following 15+ years.  And even with all the New Zealand tendencies to boosterism, neither central nor local government was persuaded that Robinson’s scheme made economic sense.  Nor, most likely, did it.  Collins also talks up the City Rail Link project, the costs of which have escalated greatly since the government she was a part of first signed off on the project, which didn’t look very economic even then.

The promise seems to that this big infrastructure spend-up is going be pretty transformative in economic terms.  There are these quotes

This city is broken by congestion. Every Aucklander and every visitor to Auckland knows it. Congestion costs Aucklanders over $1 billion per year. That’s the strict economic loss. It represents lost production, lost productivity, lost opportunity.

But congestion is far worse than that. Congestion means unreliable journey times. It means frustration at sitting idle on the motorway. It means goods being delivered late to our ports. It means Mum being late to pick up the kids from rugby practice. It means a tradie only doing two, rather than four, cross-town trips per day. That’s fewer jobs for him; less income, and less economic activity.

I guess $1 billion per annum is supposed to sound like a big number.  In fact, it is about 1 per cent of Auckland’s GDP.   Fixing the problems is probably worth doing, but 1 per cent of GDP is tiny in the context of either Auckland’s gaping economic underperformance, let alone that of New Zealand as a whole (recall that the productivity leaders are more than 60 per cent ahead of us).

And yet, according to Collins, there are really huge gains on offer.

National’s approach to infrastructure is simple: Make decisions, get projects funded and commissioned, and then get them delivered, at least a couple of years before they are expected to be needed. That is the approach that transformed the economies of Asia from the 1960s.

Quite possibly, some east Asian cities/countries did infrastructure better than New Zealand has, but I’d be surprised if National can cite any authoritative development studies suggesting that the catch-up of that handful of successful east Asian economies was primarily about moving things/people more easily around their own countries.  They are typically regarded as outward-oriented, tradables-sector led, growth stories, perhaps with improving infrastructure going hand in glove with those flourishing outward-oriented opportunities.

But, as least as far as we can tell from this speech, or the framework one Muller gave, National’s policy approach is now primarily inward-looking?  That has long been the practical effect of the policy approach they (and Labour) have adopted over 25+ years, but it isn’t usually so blatantly put.

Collins went on.  Build these roads, rail etc and

Half of New Zealand lives in the Upper North Island region. We want a genuinely integrated region of 2.5 million New Zealanders. Our vision is to transform the four cities to be one economic powerhouse. We will unlock their potential so that the upper North Island becomes Australasia’s most dynamic region.

Recall that the expressway to Whangarei, complete with possible tunnel under the Brynderwyns, is –  even on this plan –  well over a decade away.  And recall that in the regional GDP per capita data, Northland has the lowest per capita GDP in the entire country, suggesting that if Whangarei has any part in some future “Australasia’s most dynamic region” it has a very very long way to come.      But even forget about the Whangarei bit of the fairytale for now, do the National caucus have any serious idea how far behind key bits of Australia productivity levels in New Zealand actually are (and Australia is no great OECD productivity success story)?   As a hint, that 1 per cent of GDP Collins talked about fixing won’t even begin to make a visible dent in the productivity gap –  a gap only likely to continue to widen for the next few years, even if Collins plan did eventually make some small helpful difference.

National –  like Labour really –  seems to have no idea at all what has gone wrong with the New Zealand economy, what has taken us from among the very richest and most productive countries on earth to be some slightly embarrassing laggard, increasingly unable to offer the best to our own people.   But they’ll just fling some more cash at things –  as Labour does, just a slightly different make-up – in the hope of getting elected, and the vague sense then the something must be done, and anything is something.

Here is the Collins approach to project evaluation

The economists will tell you we should build projects only when they’re needed. My sense from my time in politics is that you just want the government to get infrastructure projects built. You just want them done. And you want them done ahead of time.

My Government will be informed by processes like NZTA’s Benefit-Cost Ratio analysis, and by advice from the Infrastructure Commission. But we will not consider that analysis or that advice to be holy writ when making decisions about major transformational projects. Think about all of the Roads of National Significance the National Government built.

I don’t think Transmission Gully passed a decent cost-benefit test, even when it was going to be operational by now.

Now I’m not about to suggest that officials and appointees to government boards should be making the decisions, but any well-done cost-benefit analysis should be a key hurdle in any proposed commitment of large amounts of public money.  Perhaps there are reasonable arguments about methodology or about specific assumptions used in the calculations.  All that can and should be debated, but a project that cannot return a decently positive benefit-cost ratio is one the public should be very sceptical of.  Simply waving your hands and talking about “major transformational projects” should be no more acceptable now than ever.     And having projects in place “ahead of time” –  when few projections about the future, including about population, are that robust –  also has significant economic costs, even at today’s lower public sector discount rates.

One other questionable aspect of National’s plan is what they call “intergenerational funding”.  This is fancy language for borrowing, in this case off the core Crown accounts and having NZTA borrow instead.  As far as I can see there is almost nothing going for this particular approach –  one already indulged in by Labour, with Housing New Zealand now borrowing on-market.  It will be a (a bit) more costly than the central government borrowing itself, with no more likelihood the debt will be defaulted on, it is less transparent,  and unless the government is proposing to delegate all final decisions on projects to officials (which they –  rightly in my view –  show no sign of) there is no reason to think it will either tap new sources of capital (the NZ government not being debt-constrained) or introduce new disciplines on Crown capital spending.  There is, or can be, a place for government borrowing, but decisions on that are better taken, and managed, centrally.

So there were big numbers in the announcement, some big projects (which may or not be economic, may or may not ever happen even if National winds), but little or no sense of a credible economic model lying behind it, grounded in the specifics of New Zealand’s underperformance.  And if there is such a model at all, it just seems to be more of the same –  rapidly growing, but quite volatile, population – the strategy that has so comprehensively failed for the last few decades.      More and better roads aren’t going to materially change that.  Nor –  although it should be done as a matter of priority –  are the sorts of land use reforms that might make house prices more affordable. The new Leader of Opposition suggests a National government might do something there.  But we’ve heard that story before – whether from National in Opposition in 2008 or from Phil Twyford in Opposition in 2017.  Perhaps this time really would be different, but I’m certainly not counting on it.

Little changes

The good news of the morning was that Jian Yang will be leaving Parliament at the election.  Perhaps the only disappointing aspect is that he didn’t stick around to be voted out, but at least he will be gone, and our Parliament will no longer have a CCP member, former part of the PRC military foreign intelligence system, champion of the evil Party/state in its ranks.   Oh, and someone who acknowledged that he had actively misrepresented his past –  on instructions from his PRC bosses –  to get residency and citizenship here in the first place.  In any decent country he’d not have been in Parliament in for long in the first place –  a decent party wouldn’t have selected him, decent opposition parties would have made his political position untenable, and once alerted to his acknowledged lies about his past the relevant authorities would have acted to prosecute him, perhaps even deport him.  But this is New Zealand.

A party with a modicum of decency, prioritising some values higher than soliciting donations and doing trade deals with a barbaric repressive regime, might even have insisted that Jian Yang step aside when he past become very public.  But this was the New Zealand National Party.

And although Jian Yang is finally going, it appears to have been his own doing.  Perhaps the unease about his past has become such that (a) he could not really hope to go any higher in politics, and (b) his presence was only going to be lightning rod for discontent.   And no serious person was likely to say anything much sensitive in his presence, given his known close ties to the PRC Embassy.  It can’t be that the grind of endless interviews with the critical media wore him out: he’s not given any.   Perhaps he can be more use to National now, bringing in the donations, away from the spotlight of Parliament?

Whatever his reasons, there is not a thing to suggest that it was National that had finally done the decent thing.  After all, recall that a few months ago he was promised one of the list places specially designated by the party’s Board  (recall that he announced that only to the Chinese language media).  Recall too that when Todd Muller took over Jian Yang was pushed a few more places up the caucus rankings, and left in place as chair of a select committee.   And perhaps more telling still, it was only a few days ago that Todd Muller was defending Jian Yang, with arguments so thin they can only have been the words of someone determined to follow in the unworthy tradition of Bill English and Simon Bridges, championing the presence of Jian Yang in Parliament.  There was no sign the party was about to turn him out –  and, of course, Jian Yang has had close ties to the party president Peter Goodfellow, himself as shamefully obsequious to the PRC/CCP as they come.

Here were some of Muller’s remarks reported by Newshub earlier this week.  Asked about Jian Yang’s refusal to answer questions from the English-language media, Muller apparently responded this way

Muller says it’s not true that Dr Yang is avoiding the media because he has fronted on issues to do with statistics.

“He’s done close to 10 in the last 18 months in his role as spokesperson for statistics across all the various media outlets,” Muller told Magic Talk on Monday. “This view that he’s somehow not fronting for media isn’t correct.”

The last time Dr Yang released an English media statement was almost a year ago when Stats NZ’s Chief Statistician Liz MacPherson resigned over the handling of the 2018 Census.

“He’s made very clear statements to the media in the past… He’s statistics spokesperson so I would think that’s fair that when he talks to the media it’s in that context,” Muller said.

Talk about deliberately obtuse.  As Muller knows very well, the legitimate media interest in Jian Yang has nothing to do with Statistics New Zealand (not that he had done that well in that minor role –  has anyone heard anything from him in recent months on the inadequacies of our official statistics?).

Then there was this

Muller said Dr Yang has been transparent about his past.

“He’s been very clear in the past in terms of his history and the length of time he’s been in New Zealand. Obviously one of the key points is when he left the Communist Party, he left 26 years ago. These things tend to want to be trawled over again.”

As Muller knows very well, you don’t just leave the CCP –  especially having worked in the military intelligence system –  by failing to pay the annual membership fee.  And as for the preposterous claim that he had been transparent about his past…….it was only after six years in Parliament and sustained journalistic investigative work that that past was finally revealed to the public.  Since then, Jian Yang has avoided any serious questioning, but simply refusing to engage.  Some transparency.

The article reminds us of Jian Yang’s close ties to Beijing

In October 2019 Dr Yang was one of 50 New Zealanders who were invited to attend the CCP’s 70th anniversary celebrations in the Chinese capital.

He also accompanied former National leader Simon Bridges on a trip to China where a meeting was set up with Guo Shengkun, described as head of China’s ‘secret police’.

Playing down that latter point somewhat; Jian Yang was apparently instrumental in arranging the meeting, such are his ties to the evil regime.

And then Muller’s values-free approach is put fully on display

Muller pushed back against criticism of Dr Yang’s ties to the CCP.

“It’s a massive country for us in terms of trade and relationships and my experience in the context of all the corporate export roles I’ve had is that as you build relationships with people in China, they are members of the Communist Party – that’s sort of how it works, right?

“You end up having conversations and building deep relationships with people who have roles in the Communist Party and China because that’s their system.”

Well, perhaps….but this isn’t Beijing, this isn’t where the writ of the CCP is supposed to run, this is the New Zealand Parliament.

In a way though it is almost a little unfortunate that Jian Yang will soon be gone.  He was the visible and particularly stark tip of the iceberg, but almost beside the point as this late stage.  The real issue is the wider National Party deeply deferential approach to Beijing, and its refusal to make a stand on any issue of the excesses of that regime.   This is the way I put it last week.

The real issue now isn’t about Jian Yang’s own choices, but about the rest of our political system (and much of our media for that matter).   It clearly suits Jian Yang to avoid any English-language media –  he is, after all, elected by all National Party voters, not just a few CCP-aligned ethnic Chinese one – but if the leadership of the National Party had even an ounce of decency on these issues it really wouldn’t be Jian Yang’s choice at all.  It would be as simple as “front up, honestly and fully, pretty whenever you are asked, and if not well forget about any caucus seniority, in fact forget about a list place at all at the next election”.   No one  doubts that if  any of that succession of leaders had wanted Jian Yang to be accountable to the public and to voters he’d do so, or he’d be gone.  So his silence is the silence of Bill English, Simon Bridges and now Todd Muller.   The same “leaders” who’ve been, for example, utterly unbothered by Todd McClay’s defence of the Uighur concentration camps, and who utter not a word about the activities of the PRC/CCP at home, abroad, or here.   Totally sold-out.

Jian Yang might soon be gone, but Todd Muller, Simon Bridges, Gerry Brownlee, Todd McClay and Peter Goodfellow are still very much in place.  There is no sign that the mindset has shifted even slightly.   Quite probably with Jian Yang having gone, National will wheel up another ethnic Chinese candidate whose acceptability will be based on his ties to the PRC embassy and his ability to work the rooms of the various United Front bodies here for party funding, but whose CV will presumably look a bit less obviously egregious than Jian Yang’s came to be.   This is, after all, the party that went soliciting donations for CCP affiliate Yikun Zhang and his mates, and had one of his CCP associates as part of their candidates college, preparing the ground for a bid for a place on National’s list.

It is one of those times when the excesses of the CCP/PRC are becoming ever more obvious to anyone not determined to keep their eyes wide shut.  But there is no sign of any shift in stance from National, no sign of any moral leadership –  in fact, over the last couple of years they’d be the first to complain if the current government, itself not great over the PRC, showed any slight hints of backbone.    This is the disgraceful party that has a senior MP on record suggesting the Uighur concentration camps are no one’s affair but China’s.   These people, and their business/university allies, seem to have no moral core.  Even around Hong Kong we’ve heard only the feeblest, most reluctant, of comments from Muller.

Is there some hope in the fact that Tamaki MP Simon O’Connor is now part of the interparliamentary alliance on China (together with Labour Louisa’s Wall)?  I guess it is better than nothing, but there is nothing anywhere to suggest that the National leadership group is at all happy about such modest independence of thought.   Then again, I’m not aware that any of the media have asked Muller or Foreign Affairs spokesman Bridges what they make of the IPAC and of O’Connor’s membership and calls.  Given that O’Connor is Bridges’ brother-in-law I guess that might be a little awkward.   But it would seem to be a fair question just a few weeks out from an election, as the PRC becomes more aggressive, more threatening (including in their attempts to criminalise anyone anywhere in the world criticising the regime).

It is good that Jian Yang will soon have gone. But the deeper issues around the corruption of New Zealand politics –  National and Labour particularly on this score –  haven’t changed a jot.  Neither party has done anything to fix the electoral donations from CCP affiliates scandal, and both seem more intent on donations flowing than on the sort of values most New Zealanders hold, including the many ethnic Chinese New Zealanders who deplore almost everything to do with the CCP.  And if they are dragged occasionally to utter a mild word of criticism for the latest PRC abuse, you always get the sense it is reluctant, not born of any conviction whatever.

(After 5-6 weeks of ill-health my troublesome bug is finally abating.  However, we’ll be on holiday next week so no more posts until Monday week.)

 

Two charts

The two have nothing to do with each other, except that both were things I happened to see over the weekend.

First, motorways.   Someone yesterday sent me a table of motorway length per capita by country.   From it I generated this chart for the group of (loosely) advanced countries (EU members, OECD members, and Singapore and Taiwan) –  plus I seem to have accidentally left Georgia on.

motorways

One always has to be careful with these sorts of cross-country comparisons.  The data were taken from a Wikipedia page, but there are footnotes which appear to link to a range of national sources (and the NZ numbers coincide with the definition/number NZTA reports on its website).   I found one other such listing, and while the precise numbers differ (sometimes probably because of different dates) the broad patterns looked similar.    That said, I suspect one still needs to be cautious, including about what roads do and don’t get classed as “motorways”.

The person who sent the data to me is frustrated and believes that New Zealand has too few motorways.  I don’t have a strong view on that.  I’m not in any sense anti-car,  I staunchly oppose government/Council efforts to coerce people to live more densely, and if I have the advantage of no longer commuting, the trip north out of Wellington or bits of state highway 1 in the central North Island are a reminder of some of the limitations of our roading network.  On the other hand, there have been plenty of individual roading projects where the economic case has often been questionable/marginal, to say the very least.  My correspondent argues that in part that reflects a tendency for New Zealand roading projects (expressways etc) to be over-specified, and perhaps there is something to that.  But it isn’t obvious (perhaps I’ve missed them?) that there are lots of projects with really high benefit/cost ratios.

In some ways, the interesting thing about the chart was how diverse the experience was.  Yes, even the Latin American OECD countries –  who often seem included to help make New Zealand seem less bad –  all have more motorways per capita than New Zealand, but richer Taiwan and much richer Singapore are both down our end of the chart (of course, Singapore strongly disincentivises private car ownerships, and is extremely dense).   And if the US is towards the high end of the chart, so are fairly small, not very rich, places like Slovenia, Croatia, and Portugal.

At the far left of table, Canada is interesting.  In a way it seems surprising: after all, Canada has extremely low population density.  But then one remembers that most of Canada’s population (two-thirds) lives in the 4 per cent of Canada’s land within 100 kilometres of the US border.

I guess one would need a proper multi-variate analysis to really unpick the cross-country data, but if I was looking around for countries with some relevant similarities to New Zealand (modest population, low population density) perhaps Finland, Sweden and Norway might be relevant comparators.  Of course, they are each richer/more productive than us –  and at least in part motorway networks will be consumption goods rather investment ones.  A little further up the population listings, but also with low population density are Australia and Chile.   All five have, on these numbers, more motorways per million people than New Zealand does.

The other chart was prompted by this tweet from someone who appears to be a New Zealand diplomat.

Those looked like large net outflows from the last few months. A later tweet confirmed that Appleton was using daily Customs data on air passenger movements (which will be the overwhelming bulk of the net flow).

But my initial reaction was utterly and completely wrong.  In this chart, I’ve used the SNZ monthly total arrivals and departures data, which are only available on Infoshare to April, and added the Customs data for the last two months (the two measures are pretty similar for the first four months of the year).   This is how the net flow out of New Zealand has compared this year to each of the first half years for the last decade.

net outflow

I was quite surprised, and am still a little puzzled.  Up to the end of April, SNZ estimates of the numbers of visitors in New Zealand and of New Zealanders temporarily abroad suggested a significant reduction, compared to the same period last year, in foreign visitors here and only a small drop in the number of New Zealanders temporarily abroad.

But the unseasonally adjusted total data is what it is.  In the first half of the year, we typically see a net outflow of 100000 people (foreigners and New Zealanders), and this year hardly much of a net outflow at all.    Presumably for the last two months, for which we only seem to have the highly aggregated data, the picture is being more influenced by a drop in New Zealanders heading to warmer climes.  But it was still a little surprising; we seem, on these numbers, to currently have 100000 more people in New Zealand –  in many cases in their own homes –  than might have been expected just six months ago.

Little fiscal discipline at the RB

There was a story on Stuff the other day (that I’ve not seen anywhere else) than ran under the heading  “Reserve Bank restructures digital services team, cuts five roles”.    A family member drew it to my attention noting that “people at the Bank are losing their jobs”, and thought I might be interested.   It seemed a little surprising that the Bank was shrinking, with an empire builder in charge, but….

As it turned out, once I read the article it became clear that the Bank isn’t shrinking at all, but growing (quite substantially), increasing staff numbers in what are clearly non-core areas.

“The new operating structure is in response to the changing priorities, outcomes and initiatives that the bank has set out to achieve in its digital strategy, which is part of us achieving our vision of ‘great team, best central bank’. The new structure will improve the functional alignment across our digital services team.”

He said 14 new full-time-equivalent roles would be created across the department and its head count would increase to 58.

“Five roles have been disestablished as part of the changes. Affected staff are being offered full support at this time and are eligible to apply for these new roles.

Fourteen new FTEs just in this one bit of the Bank.  That looks like a case for the Taxpayers’ Union.

Especially as it would appear that this is not the only growth going on in the non-core areas of the Bank.

As it happens, much earlier in the year I had lodged an Official Information Act request with the Reserve Bank asking for the budget and organisation chart for what the Bank calls its Governance, Strategy, and Corporate Relations Group.  The Bank answered a pretty simple question not too many days beyond the statutory 20 working days, but by then everyone’s focus was almost wholly on coronavirus things and so I largely set the response to one side.    It is clearly one of those the Bank does not want to draw attention to, as this is not one of the OIA responses they have chosen to publish on their website, but here is the full response.

RB OIA response Governance Strategy and Corporate group

I lodged the request for various reasons.  Perhaps the most immediate one was the large number of different names (from the Communications section) that kept showing up on OIA responses, press releases and so on.    And then there were things like the Bank’s expensive –  and entirely unrelated to anything they have statutory responsibility for –  Maori strategy, and a story I’d heard from a friend who’d been approached by a headhunter to see if they were interested in a very well paid but not overly-senior role doing “stakeholder relations”, which my friend described as “seemed to involve having coffee with lots of people”.    There was a sense that public money was being used very loosely, even as the Governor repeatedly claimed that his core functions were underfunded –  and the evidence certainly suggested that they were not spending heavily on high-quality analysis, research, and policy development/implementation in their core areas of responsibility.

The Reserve Bank is not a particularly large organisation.  In the latest Annual Report we are told they have 274 FTEs last June (plus a few vacancies).   They do real stuff, including  (mostly) important things like monetary policy, the issuance of physical currency, clearing and settlement operations, prudential regulation/supervision of banks, non-bank deposit-takers and insurance companies, and things like AML for banks as well.

And then there are the luxury consumption items, which seem mostly to be grouped in this Governance, Strategy, and Corporate Relations Group, run by Assistant Governor Simone Robbers.      Within her group are a couple of functions I’m not going to say any more about.   There is a Legal Team of five lawyers (one of whom also acts as Board Secretary).   Given the range of regulatory responsibilities, that is probably inevitable.  And there is the Risk and Audit department with six roles dealing with those functions (recall that Bank has a large balance sheet and significant operational activities).

What caught my eye was the other two departments in Ms Robbers’ empire.  There was this one

RB corporate 1

and this one

RB corporate 2

Take Performance and Corporate Relations first.  It isn’t clear that almost any of this needs to exist at all.   Perhaps they need one person to jump through the bureaucratic hoops that Annual Reports and Statements of Intent require (if that is what the Senior Adviser, Planning and Performance does), but the entire rest of the department has the feel of a make-work activity or (which is worse) the Governor using scarce public money to pursue personal whims.     As I’ve noted before, the Reserve Bank is not really a public-facing organisation (in the way that, say, Police, Corrections, MSD, hospitals, schools or the like are), suggesting that the Maori stuff is just a virtue-signalling personal whim.  And if they make a case that there is connection between climate change and financial stability –  a very weak one in a New Zealand context at least –  shouldn’t the climate change function be with the financial stability one.  Again, it feels more like funding the Governor’s personal politics.   And, of course, what is “Corporate Relations” in a government agency, responsible primarily to the Minister of Finance?

But even that was as nothing compared to the Communications Department. I can remember a time –  and I’m pretty sure it would have been this century –  when there might have been four people in Communications, including a ministerials/OIA person and the person doing publications (design, layout, dealing with printers etc).  It was a step when it was decided, over some objection, to have a specialist internal communications person.    And yet by February this year there was 16 roles, and that Stuff story suggests they are just about to add a whole lot more people –  for statutory roles that really haven’t changed much.

I presume this latest restructuring was about the middle column –  the responsibilities of the Manager, Content and Channels.   One could easily see a case for change –  the Bank’s Twitter account, for example, doesn’t seem to be well-used, although whether that is the responsibility of the staff directly involved or of other senior managers is an open question (recall the episode earlier in the year when senior managers had them tweeting out in late February a belief that the world economy was going to be improving this year).  But quite how they warrant going from five people to 14 is a bit beyond me (I have requested a copy of the consultation document).  Perhaps some individuals will lose their jobs, but the empire seems set to grow a lot.

And then there are those other functions in the Communications Department.  The Manager, Government and Industry Relations for example.  In many private sector companies that might be a role for a lobbyist.  But this is a government agency itself.   Aren’t functional departmental heads, the Governor and the Board responsible for dealings with the Minister, the Treasury, and so on.   Isn’t the head of bank supervision responsible for dealing with banks?

And then there is the left-hand column –  notably, the Manager, External Stakeholders and not one but three Senior Adviser, External Stakeholders roles.  There must be a great deal of coffee being drunk.   It isn’t clear what the case is for any of these roles.

Let alone for adding lots more staff.  And note that Stuff article suggested that the head count of the relevant department (presumably Governance, Strategy, and Corporate Relations group) was rising to 58.  By my count in February the total of roles was 36, suggesting that all these new “digital channels” roles – whatever these people are supposed to be doing –  aren’t even the only non-core staff increases that have occurred this year.  It is as if the Bank has money galore, little or no sense of restraint –  all while still not doing their day jobs (the ones Parliament actually assigned them) at all well.

It is doubly puzzling because based on what is in the public domain, the Bank has authorised funding only until the middle of next week.

The Reserve Bank has a very odd funding structure. Formally, there are no binding constraints on the Bank’s ability to spend whatever it likes.  If seignorage revenue is not what it was with interest rates so low, it is still more than ample, and in any case the Bank does not even need positive capital to keep operating.

But 30 years ago when the 1989 Act was passed a strange and inadequate partial reform was put in place, whereby the Governor and Minister could (but did not formally need to) agree a five-year Funding Agreement.  If such a Funding Agreement was signed it was subject to ratification by Parliament.  There has been a succession of Funding Agreements in place since which, almost always, the Bank underspent.  It was very much a half-measures reform –  better at the time than what had gone before (no constraints at all) but well out of step with modern expectations for transparency and accountability.     The current Funding Agreement covers the period to 30 June 2020, and thus in effect expires next week.

Here are some observations I made when the current Funding Agreement was adopted

I don’t have any particular argument with the size of the Funding Agreement total, or the modest increase over the next few years (although it does seem to be a larger increase than many government departments, with flat baselines, have been experiencing).  My concern is about process.

In particular, for one of the most powerful government agencies in New Zealand, the agreement contains almost none of the information people might reasonably need, whether as MPs or citizens, to know whether $49.6 million is the right amount.  The entire document runs to just over two pages, but the meat of it is simply five lines

funding agreement

That is the same level of detail we get in the Estimates about the spending of the SIS – and at least Parliament (a) has to vote for the SIS’s spending, or the spending can’t happen, and (b) has to vote each and every year.

MPs were asked to vote on the Funding Agreement yesterday with no information about what the Bank and the Minister proposed that the Bank would do with the money.  Presumably the Minister is aware of the Bank’s plans, but he now has no control over them beyond the top line number.  In particular, the Bank has two quite distinct main statutory functions and it would be useful to know how the spending is split between monetary policy and financial stability.  And within financial stability, how much is being spent on responsibilities under the Reserve Bank Act and how much on those under the Insurance (Prudential Supervision) Act?  And how are those splits envisaged as changing over time?

It remains pretty extraordinary.    And it wasn’t as even as if this highly limited degree of detail was mandated by law

There is nothing in the Act that requires funding agreements to be so abbreviated, and there is certainly nothing that would have stopped the Bank, the Minister, and Treasury releasing background papers to accompany the Funding Agreement, either before it was put to Parliament.  That would have given MPs, and outside observers, the opportunity to scrutinise the plans for the Bank’s spending before the matter came to a vote in the House.  Estimates hearings for other departments spring to mind.

But the Bank (mostly, I imagine) and the then Minister and Treasury had no interest in serious scrutiny or accountability.  It probably won’t be any different this time, but we”ll see.

Even setting aside transparency issues, it is a very odd mechanism.  No other organisation I’m aware of, public or private, has a fixed budget five years in advance.  And whereas, for example, the Minister can override the Bank’s monetary policy target (for a time, transparently) he can do nothing to override the five-year spending allowance (which is not even binding anyway).  I remain convinced that when the rest of the Reserve Bank Act is overhauled the Bank should be moved to a conventional system of annual appropriations, with a proper breakdown by function.    The standard objection –  what about backdoor ministerial pressure? –  doesn’t stop us funding a whole bunch of other important agencies, including Police, annually through a proper system of parliamentary appropriations, including estimates hearings.

Presumably

(a) in the next few days a new Funding Agreement will be announced, and time will have to be made for a parliamentary debate on that agreement.  If/when that happens, hard questions should be asked about just how wisely and frugally the Bank is spending public money (even if you are unworried about the total government spending at present, an additional kidney transplant might be a better use of money than another “digital channels” person, let 14 of them),

(b) the Bank has already been told by the Minister that he is okay with them spending a lot more money or else in the dying weeks of the old agreement they wouldn’t be restructuring to add lots more positions.

I should perhaps add in conclusion that the Reserve Bank may be no more wasteful on these sorts of “corporate” functions than many other government agencies, some of which probably should not even exist at all.   But that is no consolation.  We should want senior officials and ministers spending money as frugally as if it were there own, not as liberally as tends to happen when it is other people’s money and there is little transparency and less accountability.

Failing

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

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

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

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

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

gunther 1

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

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

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

gunther 2

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

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

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

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

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

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

gunther 3

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

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

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

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

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

 

 

Economic fortunes of Her Majesty’s realms

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

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

Queen 1

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

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

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

queen 2

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

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

queen 3

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

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

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

queen 4

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

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

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

Losing $128 billion

I don’t usually pay much attention to forecasts of nominal GDP.  Not many people in New Zealand really seem to.  But The Treasury takes nominal GDP forecasts more seriously than most, since nominal GDP (in aggregate) is, more or less, the tax base.

Out of little more than idle curiosity I dug out the numbers from last December’s HYEFU forecasts –  the last before the coronavirus –  and compared them to the numbers published in last week’s BEFU, accompanying the Budget.  And this was what I found.

Nominal GDP ($bn)
HYEFU BEFU Difference
2019/20 319.8 294.2 -25.6
2020/21 336.4 294.2 -42.2
2021/22 354.1 328.3 -25.8
2022/23 371.5 352.3 -19.2
2023/24 389.2 374.3 -14.9
Total 1771 1643.3 -127.7

Over the full five years, New Zealand’s nominal GDP is projected to be $128 billion less than The Treasury thought only a few months ago.

Recall that changes in nominal GDP can be broken down into three broad components:

  • the change in real GDP  (the volume of stuff produced here),
  • the change in the general price level (inflation), and
  • the terms of trade

On this occasion, changes in the terms of trade make only a tiny difference over the five years taken together.

General (CPI) inflation is expected to be lower than previously thought.    On average over the five years, the price level in the BEFU forecasts is about 1.8 per cent lower than in the HYEFU forecasts.  That accounts for about $33 billion in lost nominal GDP.

The balance –  the overwhelming bulk of the loss –  is real GDP.

I haven’t written anything much about The Treasury’s forecasts, which were done quite a while ago, and could not fully incorporate the final fiscal decisions the government made.  But for what it is worth, I reckon Treasury’s numbers were on the optimistic side –  quite possibly on all three components of nominal GDP.  On inflation, for example, they are more optimistic than the Reserve Bank (which finished its forecasts later), even as they assume tighter monetary conditions than the Bank does.

But the point I really wanted to make was that these forecast GDP losses will never be made back (in the sense that some future year will be higher to compensate –  resources not used this year mostly represents a permanent loss of wealth).  And that these losses occur despite all the fiscal support (and rather limited monetary support).   And fiscal here includes both the effects of the automatic stabilisers (mainly lower tax revenue as the economy shrinks) and the discretionary policy initiatives (temporary and permanent).

How large are those fiscal numbers?  Well, here is core Crown revenue (more than 90 per cent of which is tax)

Core Crown revenue ($bn)
HYEFU BEFU Difference
2019/20 95.8 89.5 -6.3
2020/21 101.6 87 -14.6
2021/22 106.5 94.6 -11.9
2022/23 112.7 104 -8.7
2023/24 117.7 109.9 -7.8
534.3 485 -49.3

Almost $50 billion the Crown was expecting but which it won’t now receive.  Some of that will be the result of discretionary initiatives –  the corporate tax clawback scheme, much of which will result in permanent losses, and the business tax changes announced in the 17 March package –  but the bulk of the loss will be the automatic stabilisers at work.

And on the expenditure side?

Core Crown expenses ($bn)
HYEFU BEFU Difference
2019/20 93.8 114 20.2
2020/21 98.8 113.5 14.7
2021/22 102 119.8 17.8
2022/23 106.3 118.6 12.3
2023/24 109.2 113 3.8
Total 510.1 578.9 68.8

Almost $70 billion of current spending the Crown didn’t expect to make only a few months ago.  A small amount of this will be the automatic stabilisers at work (the unemployment benefit), but The Treasury is pretty optimistic about unemployment.  Most of the change is discretionary policy initiatives (announced or provided for).

And here is the change in net debt

Net core Crown debt (incl NZSF) as at year end  ($bn)
HYEFU BEFU
2018/19 14.1 14.1
2019/20 14.6 47.6
2020/21 17.6 82.8
2021/22 17.1 111.7
2022/23 12.3 131.7
2023/24 3.9 138.2 134.3

That will be almost $135 billion higher than expected.

As I’ve noted in earlier posts, I don’t have too much problem with the extent of overall fiscal support (although I would have structured it differently and made it more frontloaded –  consistent with the “pandemic insurance” model).

But even on this scale, fiscal policy is nowhere near enough to stop the losses.  Some of those losses are now unavoidable.  It is only five weeks until the end of 2019/2020, so we can treat $26 billion of nominal GDP losses (see first table) as water under the bridge now.   As it happens, fiscal policy looks to have more than fully “replaced” the income loss in aggregate (whether $27 billion from operating revenue and expenses in combination, or the $33 billion increase in net debt) –  not as windfall, but as borrowing (narrowing future choices).   (UPDATE: Even in quote marks “replaced” isn’t really quite right there, as without the fiscal initiatives it is near-certain that actual nominal GDP would have been at least a bit lower than The Treasury now forecasts, even for 19/20.)

But there is a great deal of lost income/output ahead of us, even on these (relatively optimistic) Treasury numbers.

Which is really where monetary policy should be coming in.   The Treasury assumes that monetary policy does almost nothing: there is no further fall in the 90 day rate (the variable they forecast), and as they will recognise as well as anyone inflation expectations have fallen, so real rates are little changed from where they were at the start of the year.  And although the exchange rate is lower throughout than they assumed in the HYEFU, the difference is less than 5 per cent –  better than nothing of course, but tiny by comparison with exchange rate adjustments that have been part of previous recoveries.  It isn’t entirely clear how The Treasury has allowed for the LSAP bond purchase programme, but whatever effect they are assuming…….there is still a great deal of lost output.

The Governor has often been heard calling for banks –  private businesses – to be “courageous”.  It is never quite clear what he means, but he apparently wants to risk other peoples’ money.  But the central bank is ours –  a public institution.   A courageous central bank, that had really grasped the likely severity of this slump, could have begun to make a real difference.  If they’d cut the OCR back in February, and taken steps to ensure that large amounts of deposits couldn’t be converted to physical cash, and then cut the OCR to deeply negative levels (perhaps – 5 per cent) as the full horror dawned, we’d be in a much better position now looking ahead.     Wholesale lending and deposit rates would be substantially negative at the short end, and even real rates on longer-term assets might be as low as they now, without much need for bond purchases.   Retail rates might also in many case be modestly negative –  perhaps for small depositors achieved through fees.   And, almost certainly, the exchange rate would have fallen a long way, assisting in the stabilisation and recovery goal.  There are winners and losers from such steps –  as there are from any interventions, or from choices just to sit to the sidelines –  but it is really just conventional macroeconomics: in a time of serious excess capacity and falling inflation expectations, act to seek to bring domestic demand forward, and net demand towards New Zealand producers.    Working hand in hand with the substantial fiscal support (see above), we’d be hugely better positioned to minimise those large future nominal GDP losses –  losses that at present, we risk never making back.

But neither the Governor nor, apparently, the Minister of Finance seem bothered.

Finally, if nominal GDP appears to be a slightly abstract thing, it is worth recalling that almost all debt is nominal and it is nominal incomes that support outstanding debt.  There is about $500 billion of (intermediated) Private Sector Credit at present (and some other private credit on top of that).  Most likely that stock won’t grow much over the next few years. But government debt will –  on Treasury’s numbers net debt rises by $134 billion.   Against those stocks, a cumulative loss of nominal GDP of $128 billion over five years is no small loss.  As noted earlier, amid all the uncertainties, the precise numbers are only illustrative, but the broad magnitude of the likely losses (on current policies) are what –  and that magnitude is large, if anything perhaps understated on The Treasury’s numbers.