Self-imposed constraints (the latest from the RB)

The Governor of the Reserve Bank had an op-ed in the Sunday Star Times yesterday, and I’d intended to use it as the basis for post today.   The column is quite as complacent, relative to the fast-unfolding reality, as anything we’ve had from Orr since first we heard from him on the coronavirus topic at the mid-February Monetary Policy Statement.  Even last week he was telling Mike Hosking that his level of concern wasn’t really that high (“six out of ten” was his line, and none of it sounded like simply an attempt not to spark a panic, and he told RNZ’s Kathryn Ryan that it was ridiculous to compare what was unfolding with the Great Depression (of course the specific causes are differerent, but when people make those comparisons they are typically highlighting the scale and severity of the drop in output and/or the  –  largely self-imposed –  limitations of monetary policy).  Everything Orr has said on the subject has sounded as if it might have been reasonable 10 days earlier, but not when he actually said or wrote things.   Complacency has been the best description, in a climate in which it is the last thing we can afford from our powerful, but barely accountable, head central banker.

But I’m not going to waste time unpicking the latest column, which it isn’t even clear why he wrote.

Before moving on, this is the standard real GDP estimates for New Zealand for the Great Depression (there are no official numbers that far back, although there were a lot of partial indicators).

nz depression

Real GDP in New Zealand is estimated to have fallen by about 15 per cent, peak to trough, over three years ( as a reminder it had fully regained those losses, though not got back to the previous trend, before Labour’s icon Michael Savage took office in December 1935).

Any bets on how deep the fall will be in New Zealand’s GDP over even just the first half of this year?   It depends a bit on how intense any lockdown is, but if someone forced me to put a number on the likely fall (June quarter GDP relative to last December quarter’s) it would probably be 25-30 per cent (similarly numbers are bruited about by serious people in the US, with the risks skewed to something worse.

And, reverting to the Great Depression, what got things going again then?  Well, the UK –  our major market, and less hard-hit than many countries – went off the Gold Standard in September 1931 allowing a substantial easing in monetary conditions.  And we, without yet having a proper currency of our own, further devalued against sterling in January 1933  (the US threw in some monetary policy easing later in 1933 as well).  In other words, letting off the previous self-imposed shackles of monetary policy made a great deal of difference for the better.

This is a quite different, but for now much more severe, sort of shock.    It seems unlikely that we can envisage even beginning much of any economic recovery until the virus situation is more or less sustainably under control, not just here and abroad.  Neither monetary nor fiscal policy will stop the deep drop in GDP going on right now, and probably shouldn’t even think to try right now (we are deliberately closing things down as part of fighting the virus).

But that doesn’t mean significant monetary policy easing would not still be helpful.  There are those worrying falls in inflation expectations, and more immediately there are the still-high servicing costs of a rising stock of private debt.  Public and private debt overhangs were a big issues, including in New Zealand, in the Great Depression, exacerbated then by the sharp fall in the price level.    It is pretty unconscionable that in this climate, where time has no value, floating rate business borrrowers are still paying 5 , 6 or more per cent interest rates.  That is almost solely because the Governor and the Bank refuse to do anything about significant negative interest rates possible –  it is this generation’s Gold Standard (there was a real aversion to moving away from it, and yet doing so finally made a huge difference for the better).

The Governor likes to claim that the Bank still has lots of monetary policy leeway within his own refusal to take the OCR negative (even though his chief economist told the public two weeks ago that it really wasn’t so)

yuong ha

Really just “a little”.

And I think it is safe to say that we have had fairly confirmation of Ha’s (generally not very controversial point) this morning.  The Bank and MPC issued a statement in which they committed to buying $30 billion of government bonds over the coming year.

It was a pretty feeble programme, even if the headline number was big.  A year is a very long time at present.  And whereas the RBA the other day announced an asset purchase programme centred around targeting government bond yields of three years to maturity at 0.25 per cent, it isn’t really clear what the goal of our MPC actually.  Settlement cash balances –  which is what banks get when market participants sell bonds to the Reserve Bank –  aren’t the binding constraint on anything.

And what did this large asset purchase programme announcement do?   The yield on a 10 year government bond fell by 50 basis points.  That is a big move for a single day, but……that still leaves the 10 year bond rate materially above the lows reached after the MPC’s cut in the OCR last Monday.  Quite possibly, without this action bond yields and corporate credit spreads would have spiked still higher.  So I’m not opposed to the action, but all it has done is to stop monetary and financial conditions tightening further, when what the circumstances demand is a really substantial easing of monetary conditions.    It isn’t as if there was a great deal (much at all, it seems) of an easing in the exchange rate either.   And this was the MPC’s preferred unconventional tool……as I said last week, if they are going to refuse to go negative it really is game over for monetary policy, at just the time when adjustment is most needed.  Recall the 400+ basis point cuts in retail rates we typically see in a New Zealand downturn, all of which will have been less dramatic than what we are now experiencing.  Central banks huff and puff and wave their hands to suggest lots of action, and they have done useful stuff on liquidity (again to stop conditions tightening) but the Reserve Bank of New Zealand is not alone it seems in playing distraction, to divert attention from what little monetary policy is doing given the self-imposed (wholly self-imposed) constraints.

(All of which said, even relative to the RBA, our MPC is not doing as much as they could.  As noted above, they could explicitly target and securely anchor government bond yields.  They could also still cut the OCR, even without going negative: the headline rates in both countries are 0.25 per cent, but in New Zealand that is the rate we pay banks on deposits at the Reserve Bank, while in Australia the deposit rate is lower again.   These are small differences, of course, but there is no sound analytical or systems reasons for not using all the leeway even their self-imposed constraints allow them.

Of course, the much more immediate huge issue is what the government is going to do to underpin the credit system and support a willingness of banks to lend and firms to borrow.  The only secure foundation for that remains some mix of grants and income guarantees (which will become grants).  I can only repeat that the most useful way of thinking about these thing is as the national pandemic economic policy we would have adopted twenty years ago if we’d thought hard enough, been serious enough, about what could happen: undertake to underpin all net incomes at 80 per cent of last year’s for the first year (reducing after that if the issue is still with us).    The fiscal costs are easily manageable for New Zealand: if guaranteeing 80 per cent of incomes than even if full year GDP fell 40 per cent, it would still only be a fiscal commitment of 20 per cent of GDP, and we are starting with net government debt (properly defined) of zero per cent.   It isn’t the exact dollars that really matter at this point, let alone trying to distinguish good and bad firms, but the certainty such a guarantee –  ex post insurance policy –  would provide in capping the extreme downside risks, individually and collectively for the first year.  It wouldn’t stop all exits –  some have already happened, some firms are likely to think it not viable to come back even with a grant/guarantee –  but it is the best option to help stabilise the economic damage, and to ensure that banks are able and willing to play a strongly facilitative part.

On Q&A yesterday the Minister of Finance suggested more announcements very shortly. I hope so but what worries is that once again whatever they do will be inadequate and not really get ahead of the issue. There is an opportunity now, but time is running down fast.

Another sobering chart

On Saturday I showed the then-current version of this chart.

aus 22 march

As I noted on Saturday morning

It is much the same locally-exponential pattern we’ve seen in so many other countries.  If current rates of increase continue then by the end of tomorrow Australia will have per capita numbers akin to those in the US or UK yesterday.  That is the sort of impact exponential growth has.

Australia now has as many, slightly more, cases per capita than the US and UK had on Friday.

What about New Zealand?  In this chart I’ve shown the Australian numbers divided by five (to put them on the same per capita basis as New Zealand).

nz and Aus

Perhaps at a very first glance, New Zealand doesn’t look too bad.  But look across the chart not up and down.  Our latest observations are where Australia (in equivalent population terms) was just a week ago. There is no evident or obvious reason to expect that in a week’s time we wouldn’t be something like where they are now  (or if there is such a reason no political ‘leader’ has been willing to try to articulate one).

And yet our government continues to pretend to believe there is no community transmission, confirmed or not.  It is simply extraordinary.  Reversing the presumption now – in light of what has happened in ever other similar country, but most notably in Australia with whom until almost now we’ve had a Common (travel) Virus Area –  seems much the safer option.

Sadly, it seems on a par with how the government and the Ministry of Health have treated the threat from the start.  It was, after all, only about three weeks ago that the Ministry was tweeting, on its official account, that there was more to fear from rumours, stigma etc than from the virus itself.  Nine days ago, on their website they asserted that the risk of outbreak was low.  And presumably acted/advised accordingly?

And then there is the elected government and the Prime Minister in particular (the Minister of Health has been largely invisible and apparently irrelevant).   Because it is so easy to lose track of what was said even a few days ago I went back and read the transcripts of her post-Cabinet press conferences since the start of the you (28 January was the first).  Admittedly the questioning was often equally lethargic, but it was truly startling just how complacent the Prime Minister had consistently been.  There was no apparent sense of urgency, no apparent recognition that significant spread globally was –  if not a certainty – a very high probability against which the whole of government and the private sector should be preparing, and no attempt to get out in front and alert the public to the serious threat that was looming.

Now, you might argue that our Prime Minister wasn’t much different to those abroad, and from what one sees that might be a fair comment.    But it isn’t exactly an excuse for any of them is it, with the full horror of Wuhan already in view by the end of January.   You might also argue that few/commentators were sufficiently alarmed either, which is probably also fair.   But the government is the government –  hugely well-resourced by any other standards, and fully linked in to the intelligence and threat assessments of other countries.  On the economic side, it is not much more than two weeks ago that the Prime Minister was playing down the risk of recession – laughable, if not so serious, even then –  when now we are heading into the deepest (and they are all temporary) and most sudden deep slump in New Zealand history.

When they have finally taken actions, they’ve usually been like knee-jerk reactions (often a mere day or so after denying any intention of anything of the sort, going all the way back to the first China travel ban, which they were bounced into by Australia a day after telling the Chinese foreign minister they’d do no such thing).   And, most concerningly to me, there is simply no evidence of a strategy, and no willingness to engage the public on the options, choices and risks around threats and policies that have huge huge economic, social, and civil liberties implications for us all –  not for days, but potentially for months or a year or more.  It is simply inexcusable, and almost beyond belief (even as we have to watch it day by day).    The four-stage scheme they rolled out on Saturday is certainly no strategy, and although it might have been a welcome start six weeks ago, coming out with no substance in a much-vaunted Prime Ministerial address on Saturday, it had all the feel of having been dreamed up on the back of an envelope on Friday afternoon.  There is no evident strategy.  There is no evident exit strategy for anything done so far, or anything they have in mind.   Some of the specifics even look untenable, notably the detail of their schools policies.

In fact, the more I’ve reflected on the issue over the weekend, the more I wonder how much relevant planning has been done at all.    I was recalling the huge effort that went into pandemic planning in the public sector in abour 2005/06, which I had quite a lot to do with (the economic dimensions of).   The problem with that work, as I reflect back now, is that it was mostly based on something like a re-run of 1918, where a huge proportion of the population was off work sick, or caring for the sick, but that the country was never “locked down”, and it envisaged the pandemic passing through perhaps in waves, but pretty concentrated ones, as in 1918/19.  I don’t recall anyone giving any serious thought to the idea of closing the border indefinitely (short closures sure), to locking down the economy and social interactions for many months at a time.  Perhaps in the subsequent decade, official agencies revised their planning – I hope so, but I was in public sector economic agencies until 2015, and never heard a hint of that.     And given how lethargic the whole of government was in January and February you have to worry that officials, in our greatly diminished public service are just now making it all up as they go along.

One specific dimension that got my goat was the PM lecturing (and that was her tone, repeatedly) the country about stocking up in supermarkets.   She assures that everything not only is  fine now, but always will be, no matter what stage of the crisis we get too.

First, looking backwards, one of the supermarket chain heads at the weekend said buying last week was just ahead of that in the run-up to Christmas, “but for Christmas we have a long time to prepare”.  That seemed like a fair point for him to make, but why had the Prime Minister and the government not been working with supermarkets weeks and weeks ago to emphasis the fast-building threat and urging them to increase production to cope with possible surges in demand.  Such demand was entirely foreseeable, conditioned on a recognition of the risk.  The public shouldn’t be hectored by the PM for what is her failure and that of her government.

But the bigger issue is forward- looking where she has been grossly over-promising.  It might be reasonable to suggest people slow down for a few days and let the supermarkets restock (having herself been neglectful from the start), because it probably is reasonable to assume that supermarkets will remain stocked in the early days of any lockdown.

But the Prime Minister seems not to recognise at all that in such a climate many people will prefer to avoid supermarkets if at all possible, and to have inventory in the home rather than in a public place.  That will be especially so if and when the health system becomes overloaded –  as people warn it may within a month or so –  and people reasonably fear that if they and their families get sick they may not be able to get decent treatment.

And I trust the government to keep supermarkets open in some form or another throughout, and am moderately confident the basics will be kept available –  perhaps intermittently at times, and for some goods.  New Zealanders should not starve (Irish peasants used to have adequately nutritious diets of milk, potatoes and oats).  But, frankly, most people want more than milk, potatoes and oats.  And none of us knows (a) what production the government will deem essential, (b) what factories will still be adequately staffed (and distribution channels have to hold up), and (c) what other countries will deem essential. Because, you see, although the PM talks blithely of international trade in goods continuing, that only means much if international production of things New Zealand imports continues.  As just one example, I just had a look at the back of the dishwasher powder container, and was surprised to learn it comes from……..Poland.  Hard to imagine production of dishwasher powder would be an essential in Poland if/when they are in lockdown.  It is quite plausible that lots of non-basic non-perishable goods could rapidly become quite hard to get.  Buying extra now is utterly and totally rational, whatever the Prime Minister says.  To not do so would mean putting a great deal of faith not just in the good intentions and words of the government, but in some tail-event optimistic scenario about how everything will work in a period –  that as even the Minister of Finance put it –  could last for months.

Personally, I simply have no confidence in anything they say or do anymore.

(And, please note, nothing in this is advocating any particular set of anti-virus policies now.  There are genuinely hard choices.  My kids are still at school this morning (we had the conversation yesterday).  But there is no evidence of strategy, there is no evidence of engagement with the public re what the future holds, there is no evidence they’ve thought through the limits of the state (as Matthew Hooton put it on Twitter the other day, there are some things more important than public health, but what does the PM think those are?) and so on.   It is a pretty egregiously bad performance so far, all compounded –  this is an economics blog –  by the manifest inadequacies of the economic policy response to date from government and the Reserve Bank –  and yes, I have just seen the latest RB release.)




A programme for macroeconomic stabilisation

On Monday afternoon I put out a post under the heading “A radical macro framework for the next year or two”.   There were four, intended as mutually reinforcing, strands to what I was proposing.  Those strands were, with a few marginal refinements relative to Monday’s post:

  • urgent action, legislative if necessary, to ensure that the OCR can effectively be cut to at least -5 per cent with substantial flow-through to retail lending and borrowing rates,
  • in the meantime, the Reserve Bank should stand in the market to buy any government bonds on offer (at 0 per cent yield for bonds with less than five years to maturity and perhaps 0.5 per cent for longer-term nominal bonds),
  • passing legislation to cut all wages by 20 per cent temporarily – at present for the next year (and probably reviewable rentals too –  the principle being fixed price contracts other than interest rates, separately dealt with above),
  •  urgent legislation (or, as a second-best, use of the Minister of Finance’s guarantee powers in the Public Finace Act) guaranteeing that all tax-resident firms and individuals would enjoy net income for 2020/21 no less than 80 per cent of that for 2019/2020. (For firms, that guarantee would be scaled to the extent staff numbers dropped below pre-crisis levels.)

Of these, right now something like the fourth measure is the single most important: to remove much of the downside income risk, in a legally-binding way, such that banks (and other financial institutions, but mostly only banks matter here) should be willing to (a) continue with current credit exposures, and (b) extend further credit as required to accommodate the net revenue shortfalls many businesses and lots of households will face.

No matter how much banks say they want to support customers, and probably genuinely mean it, banks are businesses too.  At present, there is no readily discernible date at which banks can assume either business or household net revenues will be back to normal, and no certainty about the nominal environment we/they will face at that point, having gone through a huge deflationary shock.    It won’t be problem if someone with a residual mortgage of 10 per cent of their house needs credit, or a firm with little borrowing and substantial physical assets.   I’m sure banks will be only too happy to accommodate such customers.  But plenty of household borrowers have large mortgages,  house prices will be falling (in a highly illiquid market), and many business customers won’t have much to offer by way of collateral at all.  In the latter case, the Crown guarantee would be structured to serve as such an asset.

As for really heavily indebted firms or households, some would probably just prefer to close down/liquidate and protect whatever equity the owners still have rather than take on large new debt for an indeterminate horizon of income loss.   For a firm with large fixed commitments, the need for additional credit (net cash outgoings in a climate of quite limited revenue) might be really large.  The underlying business might be sound, but it simply wouldn’t be worth it to the owners (and it isn’t as if M&A activity is likely to be buoyant in the coming months).     Banks know all this.   Bigger business borrowers will know it all.  Smaller ones will realise it quite soon.

If the goal is to avoid widespread, somewhat indiscrimate, closures and perhaps forced liquidations –  leaving the institutions of the economy not too badly positioned to pick up not far from where they left off in perhaps a year or two’s time –  the government needs to offer this sort of certainty –  ex post pandemic insurance (paid for later in higher taxes across the board).  Drip-feeding cash will not cut it, because expectations –  looking ahead –  matter to all involved.    And, of course, there is no serious way the government can directly lend, remotely responsibly, to hundreds of thousands of individual companies.

Is it ideal?  No, of course not.  But it might not be too far from the sort of model we might have chosen to pay for ex ante  had we properly faced up to the nature of pandemic risks decades ago (although even then each pandemic has its own idiosyncrasies, so I don’t really feel the need for us to lament that we did not have such established arrangements in advance).  Are their moral hazard risks?  Yes, no doubt.  There will be pandemics again, but if this one proves to have been a 1 in 100 year event, we may not need to worry too much about the moral hazard point (and frankly, I’d be more worried if what actually happened was that lots of firms went to the wall and the system just bailed out those who happened to be very politically well-connected or able to effectively play up the consequences of letting them in particular fail.)

I regard decisively dealing with the effective lower bound on nominal interest rates as also very important, but for different reasons and (in the particular circumstances of this crisis slightly less urgent).   As I’ve pointed out repeatedly in the typical recession in recent decades, the OCR (or equivalent) has been cut by 500 basis points or more, and this recession is likely to be much more severe than any of them.  75 basis points just does not cut it.  Similarly, the exchange rate usually falls deeply, and it has not moved that much at all so far –  not helped by the Bank promising not to cut further.   And, related to both of these, stabilising medium-term inflation expectations is vitally important in the face of a severe deflationary shock if we are not to complicate (perhaps greatly) the eventual recovery phase.

There are nuanced arguments about whether the limited experiments with negative policy rates in Japan and various European jurisdictions have done much good (it was surprising –  even more so in hindsight –  that the Governor did not even touch on this debate in his speech last week).   I find the fairly fragmentary evidence at best inconclusive, but more important not terribly enlightening.  These experiments have been adopted in relatively normal economic times (low interest rates to be sure, but economies have generally done okay in the last few years) and they have involved very small changes, still bounded by the risk of large scale conversions to cash.  There do seem to have been some psychological hurdles to facing retail customers with negative rates, and in many cases banks did not bother (there wasn’t that much in it).

But we are in quite different times at present.  On the one hand, depositors have few practical useful options in a climate of extreme uncertainty, high volatility, and generally declining (variable) asset prices.  And on the other, I am talking not about 25 basis points here and there, but about the ability to cut the OCR –  and comparable rates in other countries –  by another 500 basis points (and even that wouldn’t be exceptional: in the last US recessions some models suggested the Fed funds rate needed to have been able to be cut by 1000 basis points, not the 500 points the Fed actually cut by.   We need this policy leeway  –  to markedly ease servicing burdens of existing borrowers (this tends not to feature in a US context where there is so much fixed rate lending), to help drive down the exchange rate, to support medium-term inflation expectations, and (in time) to help set the scene for a robust recovery in spending and investment.     Enable the OCR to be effectively set at -5 per cent and retail interest rates will soon follow.  If necessary, given the exceptional nature of the time, I would be happy to see regulatory power used to jolt them down collectively.   If we do nothing on this front, we not only leave an enormous vacuum where stabilisation policy used to be, we really jeopardise those medium-term expectations (which appear to have been falling a lot in bond markets, overseas and in New Zealand – albeit accepting that the inflation breakevens are harder than usual to interpret).

The third strand –  assuming no instant action on fixing the effective lower bound –  would be to have the Reserve Bank standing in the market buying bonds at predetermined yields.  The main advantage of this is signalling –  absolute determination to keep medium-term inflation up in the face of the most powerful deflationary shock since the Great Depression –  but the real advantage (partly in contradiction to the first) is to demonstrate, including to the Governor, that these alternative instruments he talks up (even as his Chief Economist was talking them down) are no adequate substitute for lower interest rates, and will not do much themselves to lower private market interest rates when 0.25 per cent is a floor on the OCR.  There is no credible transmission mechanism in the current context that would make much difference, including little or no relief for borrowers –  in a climate where time has largely (and currently) lost its economic value.  But give it your best shot, quickly, and then got on with fixing the real stuff of monetary policy.

The fourth strand probably appeared rather odd, or even quixotic.  I was accused on Twitter of being some sort of right-wing stooge wanting to beat up on workers.    In a typical market economy, workers (implicitly) pay firms to accept risk.  Wages are contracturally fixed and unless you are laid off or the firm fails you can count on your wages each fortnight. Profits on the other hand are highly variable, down as well as up.  It is a good system for most of us, almost all the time.  But this year the economy is going to be really substantially smaller than anyone imagined when, for example, they contracted for a price at which they would hire/supply labour this year.    It is no one’s fault (at least from the juncture of 2019 –  who knows what could have been done differently about pandemic risk in earlier years).  We could simply let the losses lie where they (legally) fall.  In that world, lots and lots of firms will fail, and lots and lots of employees will lose all their income (and have fewer other options for the time being).  Not only that, but large chunks of their fellow citizens –  beneficiaries and NZS recipients, and public service employees face almost no income risk at all.

Part of getting through this crisis is going to require a secure (through time) sense that there is some fairness about who bears the losses –  and the losses are now large and unavoidable in aggregate.  If we’d been told three months ago what this year looks like, almost no private firm would have contracted for this year’s labour at the current price.  What I’m proposing –  a statutory wage cut of 20 per cent –  simply acts as a coordinating device, that allows everyone to lose something (and know that people in similar positions are making similar sacrifices).    Of course, in the immediate sense those who benefit from such cuts are firms –  unit labour costs are cut –  but actually it won’t generally be a transfer to capitalists because of the guarantee I promoted earlier (it is likely to be binding for a majority of firms).   In practical terms, the wage cut will probably mostly benefit the Crown finances, and enable the government to deploy resources aggressively as required at different phases of this process.   In the current phase, more private sector demand is not what is sought anyway (we are closing down much of the economy).  In the recovery phase – which might yet be more than a year away  – it will.

The wage (and rent) cut isn’t vital to the rest of the package in narrow economic terms. It is about perceived fairness and sharing the load.  I can’t see a world in which large chunks of private sector employees lose jobs, while almost all the public sector sails securely onwards (and, as I noted the other day, our household’s main income is a public service salary, so when I talk about fairness here I really mean it).

Various people who read my post on Monday –  often rather quickly –  responded by challenging me as to why we should not just adopt a temporary UBI, as even some establishment figures on the right in the US (notably Mitt Romney) have advocated.   My answer is really quite simple: in these particular circumstances, a UBI is shockingly badly targeted, and would disburse huge amounts of money while still not addressing the main presenting issues.  It would be startlingly unfair –  all those secure public servants, for example, would get even more money on top of their secure incomes, in a climate in which the whole country is quite a bit poorer.  It would discourage retained labour market attachment (this might be a marginal effect, but it still works the wrong way).  And it is focused on maintaining or boosting spending at a time –  the present –  when that is about the last thing we want to be doing.  Recall, we are deliberately shutting down much of the economy more or less rapidly in an attempt to suppress the virus –  and that includes not putting more people in shops, restaurants, theatres or whatever.  And it would do nothing for medium-term inflation expectations.

Basic income support for those whose jobs won’t exist or be able to be done should of course be provided.  That is why we have a benefit system, currently with no stand-down periods.  But for most people shortage of cash coming in won’t be the immediate issue –  they will barely be able to spend what they are getting anyway.   The big focus has to be, first, on those guarantees that keep credit going and help hold firms –  and employment –  together, reinforced by actions to stabilise medium to long term expectations.  But the focus now has to be on stabilisation and relief, not on stimulus –  trying to lift the level of activity –  per se.

Again, as I’ve said before the time for stimulus will come.  If we really fix the lower bound we might not need too much additional fiscal support –  the government accounts will have taken a deep (but appropriate) hit during the crisis itself –  but if fiscal support is helpful then, there are plenty of options, at a time when people are likely to be showing renewed interest in spending.  I’ve touted a temporary cut in GST.  I’ve also noted the possibility of a temporary cut in one of the lower income tax rates (which would deliver a similarly-sized boost to most people).  But straight lump-sum payments to individuals or households could well have a useful place then –  after all, for those who think these things are just playthings of the left, George W Bush used that approach early in the 2008/09 recession.

There are probably some other points/emphases in Monday’s post, with which this could be read together.    But action really is urgent, and that need isn’t conditioned on quite how few or many coronavirus cases we happen to have –  as I heard one smart medical-oriented person argue this morning –  but on the increasingly bleak outlook, as it will appear to banks, firms, and households.   Expectations really do affect behaviour, in economies even if not in viruses.  Providing a secure foundation for credit is vitally important.  Now.



Pretty dreadful

I’m not sure why the Governor chose to hold a press conference this morning after the MPC’s announcement.  Were he an authoritative figure, perhaps it might have been some use.  Such a figure might have been able to offer thoughtful narrative, or framing, for what is going. But this was Orr, a sadly diminished figure, inadequacies fully found out in a crisis.  And the press conference only confirmed that grim assessment.   He should be replaced.

In fact, probably the only worthwhile thing to emerge from the press conference was that Deputy Governor Geoff Bascand is clearly the adult in the room, including that he was the only one of the three MPC members speaking who was willing to call a spade a spade regarding the economic consequences of what is unfolding.  He has chief executive experience.   He’d be a superior Governor to Orr (not ideal, but –  as I noted before the appointment was even made, when Bascand confirmed that he’d applied for the job –  a safe pair of hands).

As for Orr himself, there seemed to be no contrition at all for the February MPS (the one where they moved to a tightening bias) or for all that complacency in speeches and interviews just a few days ago.  He told us we should listen to the health experts etc –  quite possibly, but we should have been able to listen, and count on to act aggressively, economic and financial experts in our Reserve Bank. Instead, we got Orr and Hawkesby last week, given cover by the rest of the MPC and the Bank’s Board.

There were odd lines.  He claimed the exchange rate was acting as a buffer, and yet (a) the fall in the exchange rate is very limited compared to the experience in typical New Zealand recession, and (b) as he was talking, at least against the USD the New Zealand was higher than it was at 7 this morning (not very surprisingly, given that the Fed cut even more than the RBNZ did, on top of an earlier large cut).

And there was the confirmation of the point I highlighted in my earlier post.  They felt they couldn’t cut the OCR below zero because not all the retail banks were  “ready”.   Strangely, no journalists challenged Orr on this.  Isn’t crisis preparedness for the system a core part of what the Bank is going as regards the financial system?  Haven’t they been talking about negative rates as a possibility for a couple of years?  Haven’t other countries had negative rates for longer than that?  There is some legitimate debate about the usefulness of negative rates, but it is a gross dereliction of the Bank’s responsibilities not to have ensured long ago that all players could manage negative rates (in their systems etc).  And, of course, no contrition for that failure either.

We even had attempts to play down the coronavirus experience in New Zealand as well (“only a few very isolated cases”) something he’d surely just have been better to have shut up about.

He claimed they’d provided details of their unconventional policies in his long speech last week, even though that speech was very light on detail, and promised a series of more detailed papers to come. No word on those today.  He gushed about the capabilites of his unconventional instruments, but seemed to have no developed mental model for the relevant transmissions mechanisms.  It wasn’t exactly confidence-inspiring.

And then there was three final points worth noting:

  • asked if he was anticipating a recession, instead of simply saying “yes”, or “yes, a very serious one” –  surely the only honest answers –  he got into a debate with the journalist, apparently hung up on the (supposed) technical definition of two quarters of GDP falling.  He was prepared to concede “a period of very weak economic activity” but when pushed on a recession he would only fall back on “I don’t know”.  Every one else does.   He did finally concede that on some of the Bank’s scenarios –  really only some? – there would be a recession in New Zealand.
  • asked about his response to suggestions that the Bank had moved “too little too late”, his initial response was “Nothing”.  He simply wouldn’t engage.  And then he tried to make a virtue of MPC’s inordinate delay, claiming –  is the man serious to even raise this? –  that acting earlier wouldn’t have stopped the virus.  Then we got rhetoric about the importance of a medium-term framework for monetary policy –  a strange claim on the morning of an emergency cut –  and the value of fuller information, as if any information will ever be enough or definitive.   He then had the gall to claim that New Zealand was now in the “best possible position”.
  • and finally, there was a suggestion in Parliament a short-time ago (early last week?) that the Bank was trying to pressure banks not to be too negative in their commentary.  It was never actually confirmed, although there is reason to believe they were told-  by the Bank –  to exercise a sense of “social responsibility” in their commentary.   That was exactly the line Orr ended his press conference with today, to all the assembled media.  From an organisation that minimised the issue for so long, that really should have been a lot more alarmed and active earlier on, it is simply an unacceptable stance (more so than ever, since powerful government agencies should be welcoming, scrutiny, alternative perspectives etc – especially in uncertain times like this –  not (ever) trying to get happy-talk coverage.

It was a sadly revealing performance, as to just how unfit for office Orr is.  And of how he and Grant Robertson, Neil Quigley, the rest of the Bank’s Board, and the rest of the MPC have let New Zealand down.


Coronavirus economics: 10 March

Yesterday afternoon we had the latest round of official comment from the Prime Minister and the Minister of Finance, at the post-Cabinet press conference (transcript here).  It was really just more of the same.  The Prime Minister, in particular, tends to play down the risks to New Zealand, and offers little effective leadership.  Then again, the journalistic questioning didn’t seem very searching – no one, for example, asked about the rate at which Australian case numbers were growing and whether, with an open border and lots of travel (30000 arrivals a week from Australia) we aren’t really just in a Common Virus Area with Australia. “Wash your hands and carry on” seems to be the gist of her message –  as, no doubt, it was for many of her overseas peers….until it wasn’t.  There is still no pro-active discussion with the public about how the government is thinking of handling things just a little way ahead (do or don’t school closures play a part in their thinking, as just one example).

Much the same criticism can be mounted of their approach to the economic costs and dislocations, which will already be mounting by the day.   There are signs –  including in an RNZ interview this morning –  of some greater degree of realism from the Minister of Finance, but he must be constrained in his public comments by the apparent political imperative to play things down, and focus on the China-related disruption rather than on the widening and deepening global situation, and the implications of that for New Zealand.

The Prime Minister and Minister of Finance announced the gist of the package of measures they will actually announce next week (the Minister’s statement is here).   Even setting aside the lack of specifics, what they did announce still seems almost entirely backward-looking.

The Business Continuity Package includes:

  • a targeted wage subsidy scheme for workers in the most adversely affected sectors.
  • training and re-deployment options for affected employees; and
  • working with banks on the potential for future working capital support for companies that face temporary credit constraints;

As if the biggest disruptions and dislocations are not still yet to be, and when they unfold their effects will be pervasive –  almost every firm in the country will be hit to a greater or lesser extent.

Now, the Minister has said that he has officials working on longer-term options (and he is somewhat stymied by having a central bank –  his Monetary Policy Committee –  that isn’t doing its job).  And that leaves me thinking that this “package” to date is as much about politics and being seen to be doing stuff –  especially six months out from an election –  as about a serious response to a worsening situation.    Perhaps that is too cynical, but between Ministers and officials surely there is a recognition of what is near-certain to be, not far down the track?

It isn’t at all clear what sort of sensible dividing line the government has in mind for who is and isn’t going to be eligible (even now, won’t every business in Queenstown and Rotorua being feeling the effect?).  “Training options” must have seemed like a good idea to someone, but if far-reaching social distancing is coming soon –  as Siouxsie Wiles put it yesterday – it is hard to see polytechs etc effectively doing much of such training.

And, on the other hand, there seems to be no urgency around measures that might ensure adequate income support if/when we get to point where large numbers of people –  across a whole range of sectors – simply can’t work (quaratined, self-isolated, or whatever) and their employers’ can’t afford, or won’t pay them.

Then, of course, there is what they won’t do

Media: ANZ’s chief economist says scrapping next month’s minimum wage increase in response to coronavirus is a no-brainer. Are you considering that?

Robertson: No.

PM: No.

Media: Will you consider it at all?

Robertson: No.

PM: I think, in fact, one of the benefits that we have—perhaps relative to other economies—is not only are we well placed in terms of low debt; our position around surpluses, the upgrade package, so that stimulus already going into the economy. Also we have to keep in mind what we need people to keep doing, of course, is continue to spend and consume. And so also the adjustments we’ve already had to benefits, and I would say, of course, what people are anticipating in their wages, is all part of continuing to keep the economy ticking over.

So they might a good talk about maintaining labour market attachment, but they won’t even consider postponing the next minimum wage increase.  Minimum wage increases tend to have their most visible effects in downturns, amplifying the difficulty marginal new entrants and less-able workers have in getting (back) into a job.     As I say, so far the economic policy response looks more like politics.

The one bit of the ‘indicative package’ that was new was this

  • working with banks on the potential for future working capital support for companies that face temporary credit constraints;

That seems to be all we know for now.

But there is likely to be a significant issue there, one which is likely to get much bigger quite soon.

Hamish Rutherford has a piece in the Herald about this, drawing in part on a chat we had late yesterday.  I suggested that one option officials might have in mind could be some sort of guarantee scheme.   As far as we know, banks themselves don’t currently face funding constraints, so there shouldn’t be any need for direct government lending. But banks will become increasingly uneasy about continuing to extend new credit – increased overdrafts etc –  to firms that already have a lot of debt, and where it isn’t clear when (or even if) normality in business conditions and cash-flows will resume.

One other reason why we really don’t want direct government lending is that government (Treasury, Reserve Bank or whoever) has few or no credit evaluation capability, and even less so in extremely uncertain unsettled times.  If something is going to be done along the lines the Minister suggests, it needs to harness the interests and expertise of the banks themselves, who actually know about the businesses –  and key individuals – they’ve been lending to.

I drew some parallels with the guarantee schemes the government put in place –  supported by the Bank and Treasury – in 2008/09 for financial institutions.  The retail deposit guarantee scheme generated a great deal of controversy, but the wholesale guarantee scheme –  designed to help banks tap international markets –  was pretty well-designed (in my view, but I was the principal designer): we didn’t guarantee what didn’t need guaranteeing, and we charged a fairly significant price to banks using the guarantee to ensure they had incentives to graduate from it as soon as possible.  Broadly speaking, they were sensible interventions.  But it is important to remember the context.  Officials and ministers were pretty confident of the credit standing of New Zealand banks –  finance companies were a different issue – (and, where relevant, Australian parents) – we were providing guarantees into an environment where the credit quality of those we were dealing with wasn’t materially impaired, but rather global funding markets had dried up almost indiscriminately.   For what it was worth, we could also cross-check our judgements with market pricing –  CDS spreads – and with the views of external ratings agencies.

None of that is on offer if the goverment is serious about taking on business credit risk now.  Few New Zealand companies are externally rated, few have quoted CDS spreads.  Most just are not that big or (their finances) visible to anyone much other than their banks and owners.  And, of course, in many cases it would be the riskiest credits that banks would be looking to the government to support, creating major incentive and monitoring issues.  For a firm that has next to no debt and substantial physical assets, support from their own bank isn’t likely to be much of a problem for some considerable time.  But for the firms that were straining the tolerance of their bankers anyway, why would it be attractive for the government to take the risk?  Most firms will be somewhere in the middle, but remember that those with the higher current debt levels and those now bleeding cash fastest will be the ones eyeing up the possibilities of government support.  I really wish officials well trying to devise something workable, sensible –  oh, and scalable when things get a lot worse.

(I haven’t really touched on the Reserve Bank’s new capital requirements.  They will be accentuating the difficulties borrowers face this year, exactly as the Bank was warned in consultation last year –  whack on large new capital requirements with the likelihood of a severe downturn in the next few years and you will materially exacerbate problems, when there are few other effective tools.)

On matters re the Reserve Bank we are to get from the Governor this afternoon some thoughts on how the Bank might approach non-traditional monetary policy when/if the limits of the OCR are reached.  No doubt I will write about that material in the next few days, but in meantime as reference here is link to my post about an article the Bank published on the issues and options the Bank published a couple of years ago.

And finally, inflation expectations. I’ve been making the point that there really isn’t a great deal economic policy can do to limit the immediate costs and dislocations over the next few months, and that the focus should really be on getting in place early and decisively policies that will support a recovery as rapid as possible.  Part of that –  and a theme of mine throughout the life of this blog –  has been avoiding any sharp slippage in inflation expectations, which risks “trapping” economies in a very difficult position even after the worst is over, given the current limitations on monetary policy.  Real interest rates could be rising, not falling –  and in the current environment it is probable that real retail rates should be zero or even negative.   I’m sure all that seems quite abstract to many readers, so I wanted to end with a couple of concrete illustrations of the risk.

In this chart I’m sure the breakeven inflation rate for US government 10 year bonds (gap between yields on conventional and indexed bonds) as at the US close this morning.

US IIBs mar 20

These aren’t record lows, but the implicit expectations are much lower than they were averaging just a few months ago.  Much of last week’s 50 basis point cut, simply stopped real interest rates moving higher.   Now, sure, in tense periods these indicators can be thrown around changing (unobservable) risk premia, but this isn’t a time for complacency, when everyone knows there are severe limits to what more central banks can do.  Rational agents will be revising downwards their future expectations, and to the extent they do that poses big risks –  accentuating the deflationary climate that has been building for more than a decade now, not just in the US but throughout the advanced world.

What about New Zealand?   This chart simply shows the gap between the Reserve Bank’s 10 year bond data and the yield on the September 2030 indexed bond.  The latest observation is as at yesterday, but New Zealand 10 year bond rates don’t seem much changed this morning.

nz iib mar 2020

The recent movement isn’t as dramatic as for the US but (a) the starting level –  not much above 1 per cent –  was far too low already, and (b) the direction is clear, and concerning.

We need a much more pro-active central bank, doing its core job.

(In closing, it is curious to reflect that the biggest single form of stimulus to demand/activity in New Zealand since coronavirus become prominent is the spat between Mohammed bin Salman and Vladimir Putin and the resulting collapse in world oil prices.  Who knows how large the stimulus effect will be –  or how significant any countervailing havoc wreaked on, eg, US corporate credits –  but whatever the effect it is larger than anything/everything our goverment and central bank have done.)

Jami-Lee Ross’s speech

A couple of weeks ago I wrote the National Party, Jami-Lee Ross, and the party’s funding from PRC-linked sources.  Of Jami-Lee Ross –  and the desire of some in the media (and, of course, the National Party) to pile on to him, or to gloat – I wrote

Whistleblowers have a wide variety of motives, and not all of them are noble –  and even those with elements of nobility are not infrequently tinged with more than a little of the less savoury side of things.   And yet we rely on whistleblowers to uncover lots of wrongdoing: in specific circumstances, we even have statutory protections for them  (but whistleblowing often comes with costs to the whistleblower, perhaps especially if they themselves have been directly involved in the alleged wrongdoing).


Perhaps he just generally was not a very nice or admirable person –  there are, for example, those reports of his flagrant, repeated, violations of his marriage vows etc.  But the fact remains that this wrongdoing (as alleged by the prosecutors for the SFO) would not be known had Ross simply stayed silent, whether that had involved continuing his efforts to climb National’s greasy pole, or just moving on quietly.     Either might have suited the National Party.   But it isn’t clear why such silence – about these specific donations, or about his involvement with others (Todd McClay and the PRC billionaire) that aren’t illegal but aren’t universally regarded as proper either – would have been in the wider public interest. 


And to Ross’s credit, since the story first broke (and all the drama of that time) Ross does seem to made some effort to contribute constructively to the public debate on some of the policy issues around donations to political parties.  He participated in the Justice committee’s (rather lame) inquiry into foreign interference, and spoke very forcefully in the House when the government was pushing through its travesty of a foreign donations law in December (the one that accomplished almost nothing useful,but perhaps looked/sounded to some like action).    Who knows quite what mix of motivations he has.  Perhaps some desire to bring down the existing National Party leadership (in Parliament and outside) with whom he previously worked so closely.   Perhaps some element of genuine remorse, or recognition of how far he himself had been part of the system degrading.    In a way, his motives don’t matter –  it is the facts and the merits (or otherwise) of his arguments. 

We heard from Ross again this week.  Or, strictly speaking, Parliament did.  Few of the general public will have heard of his speech or, more particularly, its contents.  From what I could see there was very little media coverage –  I should have been able to say “astonishing little” but, sadly, there wasn’t much astonishing about the relative silence of our media and the complete and utter silence of the rest of our politicians and political class.   All of them appear to prefer to look the other way, and wish the issue would simply go away, whether for fear of upsetting Madame Wu and the PRC, upsetting the CCP’s local associates, or of revealing to the public just how tawdry and sold-out to Beijing’s interests so much of our politics seems to have become.

I could just link to the speech, but not many people click through to links.   So here, as permitted by Parliament, is the whole thing.  It isn’t long. I encourage you to read and reflect on it

JAMI-LEE ROSS (Botany): Facebook memories reminded me this morning that today marks nine years since I was first elected to Parliament. I certainly never expected nine years ago that I would be the centre of a debate over foreign political donations, and I’m using that term deliberately. Foreign political donations and foreign interference is what I want to focus my time on here.

In the Prime Minister’s statement, that we are debating, the Prime Minister lists as one of her Government’s achievements the banning of foreign political donations. It’s true that the new $50 threshold for overseas donations is an improvement. But, as I’ve said previously in the House, I doubt it will do very little to deter those determined to find other ways around the ban, including—

SPEAKER: Order! Mr Jackson leave the House.

JAMI-LEE ROSS: —using the wide open gap we still have where foreign State actors can funnel funds through New Zealand registered companies.

The foreign donation ban is one of the few recommendations that has spun out of the Justice Committee’s inquiry into foreign interference activities in New Zealand elections. That has been picked up. Probably the most important submissions that we received through that inquiry were those from Professor Anne-Marie Brady of Canterbury University and what we heard from the Security Intelligence Service (SIS) director, Rebecca Kitteridge. It was all eye-watering and eye-opening stuff and sobering for us to hear and read their evidence. We have not, and I think we still do not, take seriously enough the risk of foreign interference activities that we’ve been subjected to as a country. Ms Kitteridge rightly pointed out in her evidence that the challenge of foreign interference to our democracy is not just about what occurs around the election itself. Motivated State actors will work assiduously over many years, including in New Zealand, to covertly garner influence, access, and leverage.

She also specifically pointed out the risks we face from foreign State actors through the exertion of pressure or control of diaspora communities and the building of covert influence and leverage, including through electoral financing. After Pansy Wong resigned from Parliament, I was selected as the National Party candidate for the 5 March by-election nine years ago. It was made very clear to me at the time that I had to put a big emphasis on getting to know the Chinese community. It was also pointed out to me very early on that I must make good connections with the Chinese consul-general. Madam Liao at the time was very influential with Chinese New Zealanders, and important to my own success as well. In hindsight, it was naive of me to not think carefully about the pull that a foreign diplomat had on a large section of the population in my electorate.

The consul-general in Auckland is treated like a God, more so than any New Zealand politician, except probably the Prime Minister of the day. Each successive consul-general seemed to be better and more effective at holding New Zealand residents and citizens of Chinese descent in their grasp. Consul-generals Niu Qingbao and Xu Erwen were also treating us, as MPs—not just myself, others—as long-lost friends. All this effort, if you read Professor Brady’s paper called Magic Weapons, is a core plank of the Chinese Communist Party’s deliberate and targeted efforts to expand political influence activities worldwide. It’s also the very risk that Rebecca Kitteridge warned the Justice Committee about. Professor Brady’s paper is a 50-page academic work. I can’t do it justice here, but I recommend all MPs read it.

The activities of the Chinese Communist Party here domestically, where Chinese New Zealanders have been targeted, should be concerning enough for all of us. But the efforts that Chinese Communist Party – connected individuals have been making over the years to target us as politicians, and New Zealand political parties, also needs to be taken seriously. Every time we as MPs are showered with praise or dinners or hospitality by Chinese diplomats, we’re being subjected to what Professor Brady calls “united front work”. Every time we see our constituents bow and scrape to foreign diplomats, it’s a result of their long-running efforts to exert influence and control over our fellow Kiwis.

Both Professor Brady and director Kitteridge have warned about the risk of foreign interference activity where funding of political parties is used as a tool. This isn’t necessarily unlawful provided the donations meet the requirements of the Electoral Act. In 2018, I very publicly made some allegations relating to donations. I have said publicly already that the donations I called out were offered directly to the leader of the National Party at an event I was not in attendance at. I did not know at the time that those donations were made that they were in any way unlawful. I never had any control over those donations and I have never been a signatory of any National Party bank account in the time that I’ve been an MP. I never benefited personally from those donations. I was never a part of any conspiracy to defeat the Electoral Act. And the point at which I blew the whistle on these donations—first internally, then very publicly—that point came after I learned new information that led me to question the legality of the donations.

After raising these issues publicly, they were duly investigated first by the police and then the Serious Fraud Office. The result of those allegations is already public and I can’t traverse much detail here, but I will say that I refuse to be silenced and I will keep speaking out about what I know, and have seen, goes on inside political parties. I refuse to be quiet about the corroding influence of money in New Zealand politics.

Last year, I learnt, off the back of concerns I myself took to the proper authorities, that the National Party had been the beneficiary of large amounts of foreign donations. These donations are linked back to China and linked to the Chinese Communist Party, and with ease entered New Zealand. I didn’t go searching for this information. I was asked if I knew anything of the origins of the donations. I didn’t know. It was all new information to me, and I was surprised by what I learnt.

What I learnt was that large sums of money adding up to around $150,000 coming directly out of China in Chinese yuan over successive years ended up as political party donations. Two individuals, _________, were used as conduits for the donations.

These funds eventually made their way to the New Zealand National Party. The New Zealand National Party still holds those funds. The National Party is still holding at least $150,000 of foreign donations received in two successive years. I call on the National Party to return those foreign donations that it holds or transfer the money to the Electoral Commission. I doubt the National Party knew at the time that the money was foreign—I certainly didn’t either—but now that they will have that information to hand, they need to show leadership and do the right thing.

To avoid doubt, this $150,000 dollars’ worth of foreign donations is not the same as the $150,000 from the Inner Mongolia Rider Horse Industry company that they raised last year.

The warnings sounded from academics and spy agencies are not without reason. These two examples I give are very real examples of foreign money that has entered New Zealand politics. Professor Brady, with reference to the list of overseas members of the overseas Chinese federation, which is part of the Communist Party’s infrastructure, listed three top united front representatives in New Zealand:

_____, _____, and Zhang Yikun. All three are well known to political parties.

In a recent press statement from a PR agency, representatives of Zhang Yikun highlighted the philanthropic approach that he takes in New Zealand. The press statement on 19 February specifically said that he has been “donating to many political parties and campaigns.”, except his name has never appeared in any political party return. When asked by the media if political parties had any record of donations from this individual, all said no. But a quick search online will find dozens and dozens of photos of Zhang Yikun dining with mayors and MPs over the time, inviting them to his home, and his recent 20th convention of Teochew International Federation had a who’s who list of politicians turning up, including a former Prime Minister.

The foreign donations I mentioned earlier all have connections to the Chao Shan General Association. The founder and chairman of Chao Shan General Association is Zhang Yikun. To summarise these two bits of information, the largest party in this Parliament has been the beneficiary of large sums of foreign money. That money is linked to an individual who was listed as one of the top three Chinese Communist Party united front representatives in New Zealand. That individual’s PR agents say he has donated to many political parties and campaigns, yet he’s never showing up in any donation returns in the past.

One of Professor Brady’s concluding remarks in her submission to the Justice Committee was that foreign interference activities can only thrive if public opinion in the affected nation tolerates or condones it. We must not tolerate or condone any foreign interference activities. We must also not stay silent when we see problems right under our nose. It’s time for the political parties in this Parliament to address seriously the political party donation regime that we have.

I realise that both the two main parties in this Parliament often have to agree, but perhaps it’s time to put that out to an independent body. It’s too important for us to ignore, and it’s not right that we should allow these things to go on under our nose.

I seek leave to table two charts that show a flow of money from China into New Zealand and to the New Zealand National Party.

SPEAKER: I seek an assurance from the member that these charts are not integral to any matter currently before the courts.

JAMI-LEE ROSS: These charts have been prepared by the Serious Fraud Office and I cannot give you that assurance.

SPEAKER: You cannot give me that assurance. Well, I’m not going to put the question.

Source: Office of the Clerk/Parliamentary Service. Licensed by the Clerk of the House of Representatives and/or the Parliamentary Corporation on behalf of Parliamentary Service for re-use under the Creative Commons Attribution 4.0 International licence. Full licence available at

Anne-Marie Brady fills in the gaps –  names – Hansard chose to omit from Ross’s speech.

I thought three things were particular interesting in what Ross said:

  • the explicit guidance given to him as a new candidate/MP about currying favour with the PRC Consul-General et al,
  • the allegation about the new large, apparently disclosed, donation from people with very strong PRC/CCP ties
  • and the suggestion, not verified in what we have there (tho perhaps in that SFO schematic he tried to table) of the funds for these donations having come initially from the PRC  (whether or not National initially knew that).

Quite possibly, none of that activity was illegal.  But even if so, none of it is proper –  at least in a political party that cares anything about the values and interests of the vast mass of New Zealanders.  Then again, this is the same party that just re-selected the former PLA intelligence trainer, (former?) CCP member, clearly still in the very good graces of Beijing, Jian Yang for their list –  the same MP who refuses to face questions from the English langauge media in New Zealand, the same MP in business with the party president who himself has been free with his praise of tyrants of Beijing.

But just as bad is the apparent determination of ever other political party –  but most especially Labour, the alternative main party –  to simply ignore all this. In some cases, perhaps, to envy National’s ‘success’ (until now).   Where is the leader of the Labour Party on these issues (you know her, she happens to be the Prime Minister).   Where are the Greens, who once could have been counted on to deplore this sort of thing?   Where, even, are the tiddler parties trying to convince us they offer something different and better than National and Labour?  ACT?  TOP?  New Conservative?  Maori?  Not a word.

I’m sure there is some sensitivity about not jeopardising the prospects of a fair trial in the specific cases the SFO has taken against three donors and Ross himself.   But there is no way that is anything like the whole story.   After all, all those other parties have been very very quiet on the Jian Yang story, ever since the first of it broke 2.5 years ago.  Prominent National and Labour figures, including Jian Yang, got together to have the Crown honour Yikun Zhang for, in effect, services to Beijing only 18 months ago.  There has been no action on closing the legal window for donations through companies owned by foreigners, let alone the (im)moral window that has had NZ citizens who are CCP affiliates donating heavily.  I’m quite prepared to believe that National is deeper in all this stuff than the other parties, but those other parties lose any excuse, any sympathy, when –  most especially the Prime Minister –  simply sit quiet and walk on past. In doing so, they demonstrate their own standards –  or lack of them.

It certainly is important to ensure a fair trial. But voters are also entitled to a fair election, where the sorts of material Jami-Lee Ross has highlighted, allegations made, are properly scrutinised and the actions of parties and key individuals contesting the election are put under the spotlight before the election.  The trial isn’t going happen before then, Simon Bridges refuses to answer even basic factual questions, and the media and his political opponents seem happy to just let it pass.   That is little more than a betrayal of the public interest.


Take a macro approach

There has been quite a bit of coverage in the last few days of business lobbies calling for special assistance to cope with the economic effects of the coronavirus to date, and signs too that the government is proving at least somewhat responsive.  In the Herald the PM is quoted as saying that the government will waive the standdown period –  typically a week – for those seeking to move onto a welfare benefit “because of the impact of Covid-19”.  In Parliament yesterday (emphasis added):

Rt Hon JACINDA ARDERN: I’m not going to make a prediction that no other economist is currently making or, indeed, Treasury. We are not predicting, but we are planning and preparing, because that is what we, of course, need to do in order to support those regions, in particular, that are most likely to be affected. We know those are likely to be—Gisborne, Hawke’s Bay, Tasman, and Marlborough are amongst the most exposed, particularly looking at the—

Hon Simon Bridges: It’s every small business in New Zealand.

Rt Hon JACINDA ARDERN:—impacts in China. But some analysis, obviously, Mr Bridges, demonstrates those impacts are particularly acute there, and then across the board for the likes of tourism and hospitality. In each of those regions we are looking to create tailored packages of support. That’s something that our Minister for Economic Development is currently working on.

In addition to all the other firms/sectors looking for assistance, there is a full page article in the Herald on the difficulties facing the tourism and hospitality sectors, including calls for wage subsidies.

Unfortunately, much of the way the Prime Minister talks about the issue –  and the Minister of Health on the health side –  suggests that the government is still acting as if coronavirus is a very bad thing (which, of course, it is) which has already happened somewhere else –  affecting our economy of course – and now it is really just a matter of time, albeit perhaps quite some months, until things get back to normal.  (It all seems consistent with the tone of the Director-General of Health who continues to play down the health risk in New Zealand, and – in public anyway –  to take the most short-term positive spin on almost every story/risk.  That matters because it suggests something of a government-wide mindset, with implications for the economic and economic policy issues that are my focus.)

In all the talk of this subsidy, that specific assistance, this tailored regional programme, no leading politician or official seems willing to front the fact that, difficult and costly as things have been so far for some individuals/firms/sectors, the only prudent approach is to plan on the basis that things will most probably get a lot worse before they get better.  It is fine to work on the basis that in a couple of years time things are likely to be more or less back to normal (as regards health/virus etc).  But two years is a long time away, and there is likely to be a great deal of disruption, uncertainty, and loss before we emerge safely on the other side.

Even if somehow the Ministry of Health was right and significant community outbreaks really don’t happen here, there still seem to be plenty of new and worsening ones abroad.  Even if China inches back towards normality –  and you could check out the new Caixin article on people just making stuff up there, about economic activity, to comply with top-down expectations –  much of the rest of the world seems to be heading in the opposite direction.  It isn’t just supply chains involving China, or tourists from China etc that we –  and others –  need to worry about.   If we do get significant outbreaks here we will have a whole new level of domestic disruption and loss (economic and other) as the measures –  imposed and self-chosen –  to manage the situation take hold.   Whole cities could come to a near-halt for non-trivial periods.

Frankly, it seems bizarre to be focusing on “tailored region specific packages” in this environment.  It looks remarkably backward-looking (focused on the stuff that has already happened), and to be not taking anywhere near enough account of the wider risks.  I presume somewhere in the Beehive or the upper levels of officialdom some people actually realise the magnitude of the issue/threat, and are taking it into account in their advice on specific policy proposals.  But there is no sign of that stuff in any of the outward-facing talk –  least of all from the Prime Minister.

Much of the talk seems influenced by the earthquake experiences, both Christchurch (especially after February 2011 and Kaikoura).   In particular, people talk positively about the short-term wage subsidies offered to some firms to help keep people connected to the labour market etc.  I think that, in passing, I have even referred favourably to that experience myself.  But it is a bad way of framing the current issue for a number of reasons:

  • trivially, Kaikoura was/is very small.  Whatever was done for people/firms there had no economywide implications,
  • second, and much more importantly, the nature of the shock and economic loss being dealt with was known.  Thus, although people fairly point out that there were aftershocks, and even worries about severe ones, when there were major earthquakes in Christchurch no one worried that there would be a big one –  or Rangitoto erupting –  the followng week/month in Auckland.
  • third, allowing for the aftershocks point, the worst event had already happened by the time the special programmes were launched.  We couldn’t be 100% sure of that at the time, but it is still a stark contrast to the situation we face now re Covid-19,
  • fourth, the earthquake shocks were known, from day 1, to be going to trigger a really significant boost to aggregate demand (repair and reconstruction) in and around the severely affected regions.  Activity might not resume quickly in some individual and specific sectors, but before too long there would be lots of jobs in total, and thus lots of wider demand.
  • fifth, even Christchurch was only about a tenth of the country.

By contrast this time, we know very little, and what we do know does not portend any great boost to demand and employment just a little over the horizon.   There could –  quite probably will – be very serious disruptions to come, perhaps across the economy as a whole.  Individual sector interventions are unlikely to scale effectively, and interventions announced now –  perhaps in some generous cast of mind – could very quickly be overwhelmed by the pressures of more serious widespread disruption and losses, whereby those “lucky” enough to be hit first-  in this case those who made themselves most dependent on one market, the PRC –  get the easiest largesse.

(I’m not even convinced of the case for suspending the standdown period.  This is a recession. We might hope it is brief.  It might be no one here’s fault. But most recessions aren’t in any way the fault of most of the individuals who bear the brunt of the downturns, and actually the best thing for people thrown out of work early is to reconnect to the labour market as soon as possible, perhaps before the labour market in aggregate gets much worse.  But this particular policy, because it can presumably be applied more or less with the flick of a switch (if it is avowedly temporary, and not tied to proving a Covid-19 connection), bothers me less than suggested admin-heavy targeted interventions, which might make good political theatre this week, but which could quickly look rather beside the point.)

And it isn’t as if these sort of tweaked tools are going to go to the heart of the issues either.  As I noted yesterday

Even direct short-term assistance won’t do much to slow the deterioration of economic aggregates –  won’t summon up more tourists, won’t fill gaps in supply chains, won’t offset the decline in spending if/when social distancing becomes more imperative.  By and large, we are stuck with whatever deterioration in economic activity the next few months bring, most of which will be events almost totally outside our control (overseas economic activity and the spread of the virus abroad and here).

If specific tailored micro policies aren’t the thing, that isn’t to suggest policymakers should be sitting idle.  Rather, macroeconomic measures with systematic whole economy effects should be in play, either deployed decisively right now –  in the case of monetary policy, which is easy to reverse later if necessary – or ready to go almost instantly as/when the full severity becomes a bit more generally apparent.  If it were me, I’d be suspending the forthcoming minimum wage increase as well –  whatever demand effects champions of high minimum wages might tout, in this environment raising already-high minimum wages will worsen the labour market ruptures politicians etc purport to be concerned about.

I don’t have a full suite of measures.   I still think a temporary reduction in GST has a lot of merit.  Perhaps a temporary (but significant) reduction in one of the lower income tax rates might have appeal –  and would ensure that the income effects to households were distributed relatively evenly.  (Incidentally, for any MMT champions out there, financing is pretty much a non-issue for now present, with long-term nominal bond yields at 1 per cent.)    And despite my general and long-term support for a substantial reduction in New Zealand’s permanent non-citizen migration numbers, I would be very careful to do nothing now to drive those numbers further down (they are likely to fall anyway), consistent with my point that the short-term demand effects of migration materially exceed the supply effects.    And there needs to be some hard-thinking about the potential private debt consequences of the (likely) substantial income losses –  that doesn’t just involve heavying the banks.  Banks, quite reasonably, will be more cautious, many borrowers will inevitably be less able to meet their debts. (The Chicago academic John Cochrane has a piece worth reading on some of those issues.)  (Hobbyhorse issue of mine, but very relevant: there should be action as a matter of urgency to addres, and greatly ease, the effective lower bound on nominal interest rates.)

I’m sure there are other options, that are focused, can readily be kept temporary, and which might plausibly have significant demand effects concentrated this year and perhaps next.    The design of a package with such measures –  econonywide in focus –  is where our economic boffins and their ministers really should be devoting all their design etc efforts at present.

If I’m underwhelmed at the political leadership around these issues, it is perhaps even more worrying to look at the officials and agencies supposed to support the Cabinet.   Our Treasury is led by someone with no New Zealand experience and (more concerningly, as I noted when she was appointed) no experience or background in national economic policymaking.  Our Reserve Bank is led by someone with little demonstrated capacity for deep and innovative thought, who has displayed more interest in things he isn’t responsible for than those he is.  MBIE is led by a former HR manager, and I could go on.  Perhaps there are some exceptionally able people the next tiers down, helping frame big-picture thinking and proposing well-thought-out specifics, but the names don’t really spring to mind.   Our public service (led from SSC, enabled by governments) hasn’t encouraged the fostering of those sorts of capabilities.  Our institutions have been allowed to run down, under successive governments, and we pay the price for that in tough and highly uncertain times.

I suppose I once got the idea that getting on the front foot might unnecessarily scare the horses (voters) and look “panicky”.  That might have seemed a plausible story a month ago, just like the “contained to China, to all intents and purposes” story might have seemed plausible then to some.   But it doesn’t now.  Politicians, officials, and the public need to recognise that things –  including economically –  are likely (few things are ever quite certain) to get much worse at times in the next few months before they get enduringly better.  Policy planning needs to be done on that basis, and “tailored region specific plans” don’t really seem like to cut it, or to be a wise use of scarce policy and adminstrative talent (or political capital for that matter).

Why economic policymakers need to respond aggressively

Yesterday I dug out some discussion notes I’d written while I was working at The Treasury during and just after the last New Zealand recession.  One of them –  written in June 2010, already a year on from the trough of the global downturn (although as the euro-crisis was really just beginning to emerge) – had the title “How, in some respects, the world looks as vulnerable as it was in 1929/30”.     The point of the “1929/30” was that the worst of the Great Depression was not in the initial downturn from1929 –  which, to many, seemed a more-or-less vanilla event – but from 1931 onwards.    It was only a four or five page note, and went to only a small number of people outside Treasury/Reserve Bank, but in many respects it frames the way I’ve seen the last decade, capturing at least some of issues that still bother me now, and lead me to think that  –  faced with the coronavirus shock –  macro policymakers should err on the side of responding aggressively (monetary and, probably, fiscal policy).

The more serious event –  akin to the 1930s –  didn’t happen in the last decade, at least outside Greece.    At the time, much of the focus of macroeconomic policy discussion  –  including in New Zealand –  was around ideas of rebalancing and deleveraging.    My note pointed out that, starting from 2010, it was very difficult to envisage how those processes could occur successfully over the following few years consistent with something like full employment.     To a first approximation it didn’t happen.  There was fiscal consolidation in many advanced countries, but not material private sector deleveraging. In most OECD countries it took ages –  literally years –  to get the unemployment back to something like the NAIRU.  And, of course, there was a huge leveraging up in China.  In much of the advanced world investment remained very subdued.

There were twin obstacles to getting back to full employment.  On the one hand, short-term policy interest rates in many countries had got about as low as they could go.  And on the other hand there was a view –  justified or not –  that fiscal policy had done its dash, and whether for political or market (or rating agency) reasons, further fiscal stimulus could not be counted on (even in a New Zealand context: I found another note I’d written a year earlier just before the 2009 Budget, which noted of “scope for conventional market-financed fiscal easing” that “our judgement –  more or less endorsed by the IMF and OECD – is that we are more or less at that point [scope exhausted]”.

The advanced world did, eventually, get back to more-or-less full employment.   But the world – advanced world anyway –  never seemed more than one severe shock away from risking dropping into a hole that it would be very hard to get back out of.  The advanced world couldn’t cut short-term interest rates by another 500 basis points.   For a time that argument didn’t have quite as much force as it does now –  when excess capacity was still substantial one could tell a story about not being likely to need so much policy leeway next time –  but that was then.  These days we are back starting from something like full employment.   There was also the idea of unconventional monetary policy instruments: but while some of them did quite some good in the heat of the financial crisis, and in the euro context were used as an expression of the political determination to hold the euro-area together come what may, looking back no one really regards those instruments as particularly adequate substitutes for conventional monetary policy (limited bang for buck, diminishing marginal returns etc).  And then there is fiscal policy.   Few advanced countries are in better fiscal health than they were prior to the last recession –  and New Zealand, reasonably positioned as we are –  is not one of the few, and the political/public will to use huge amounts of fiscal stimulus for a prolonged period remains pretty questionable.

Oh, and there is no new China on the horizon willing and able to have its own massive new credit/investment boom – resources wisely allocated or not – on a global scale to support demand elsewhere.

How about that monetary policy room?  Here are median nominal short-term interest rates for various groupings of OECD countries.

short-term 2020

You can see where we are 10 years ago.   Across all the OECD monetary areas (countries with their own monetary policy plus the euro-area) the median policy rate is about where it was then (of the two biggest areas, the US is a bit higher and the euro-area a bit lower).  Same goes for the G7 grouping.  And as for “small inflation targeters” (like New Zealand) those countries typically have much less conventional monetary policy capacity than they had in 2010 (New Zealand, for example, had an OCR of 2.75 per cent when I wrote that earlier note, and is 1 per cent now).

Back then, of course, the conventional view –  not just among markets but also to considerable extent among central banks –  was that before too long things would be back to normal.  Longer-term bond yields hadn’t actually fallen that far.  Here are the same groupings shown for bond yields.

long-term 2020

One could, at a pinch, then envisage central banks acting to pull bond yields down a long way (and with them the private rates that price relative to governments).  These days, not so much.  Much of the advanced world now has near-zero or even negative bond rates.  A traditionally high interest rate country like New Zealand now has a 10 year bond rate around 1 per cent.   Sure those yields can be driven low, but really not that much if/when there is a severe adverse shock.

And 10 years ago if anyone did much worry about these sorts of things –  and there were a few prominent people –  there was always the option of raising global inflation targets.  In the transition that might have supported demand and getting back to full employment. In the medium-term it would have meant a higher base level of nominal interest rates, creating more of a buffer to cope with the next severe adverse shock.   It would have been hard to have delivered, but no country even tried, and now it looks to be far too late (how do you get inflation up, credibly so, when most of your monetary capacity has gone, and it would hard to convince people –  markets –  of your sustained seriousness).

My other point 10 years ago in drawing the Great Depression parallels was that the Great Depression was neither inevitable nor inescapable.  But it happened –  in reality it might have taken inconceivable cross-country coordination to have avoided by the late 1920s –  and it proved very difficult (not technically, but conceptually/politically) to get out of.  The countries that escaped earliest –  the UK as a prime example –  did so through a crisis event, crashing out of the Gold Standard in 1931 that they would have regarded as inconceivable/unacceptable only a matter of months earlier.  For others it was worse –  in New Zealand the decisive break didn’t come until 1933, and even then saw the Minister of Finance resigning in protest.    If we get into a deep hole in the next few years –  international relations generally not being at their warmest and most fraternal, domestic trust in politicians not being at its highest –  it could be exceedingly difficult to get out again.  Look at how long and difficult (including the resistance of central banks to even doing all they could) it proved to be to get back to full employment last time.

In the Great Depression one of the characteristic features was a substantial fall in the price level in most countries.   The servicing burdens of the public and private debt –  substantial in many countries, including New Zealand/Australia –  escalated enormously, and part of the way through/out often involved some debt defaults and debt writedowns.

Substantial drops in the price level seem unlikely in our age.  Japan, for example, struggled with the limits of monetary policy and yet never experiencing spiralling increases in the rates of deflation (of the sort some once worried about).  But equally, inflation expectations ratcheted down consistent with the very low or moderately negative inflation, meaning real interest rates were never able to get materially negative.  Japan at least had the advantage that in the rest of the advanced world, nominal interest rates and the inflation rate were still moderately positive.

That could change in any new severe downturn.  A period of unexpectedly weak demand, with firms, households and markets all realising that authorities don’t really have much useable firepower, could see assumptions/expectations about normal rates of inflation dropping away quite sharply (in New Zealand they fell a lot, from a too-high starting point, last time round, even with unquestioned firepower at our disposal).  In that scenario, authorities would struggle to lower real interest rates at all for long –  falling nominal rates could quite quickly be matched with falling inflation expectations.  As people realise that, it becomes increasingly hard to generate a sustained recovery in demand, and very low or negative inflation risks becoming entrenched.  It isn’t impossible then to envisage unemployment rates staying very high –  unnecessarily and (one hopes) unacceptably high –  for really prolonged periods (check the US experience in the 1930s on that count).  An under-employment “equilibrium” brought by official negligence is adequately dealing with the effective lower bound on nominal interest rates.

I cannot, of course, tell if the current coronavirus is that next severe adverse shock.  But it looks a great deal as though it could be, and the risks are sufficiently asymmetric –  not much chance of inflation blowing out dangerously –  that we shouldn’t be betting that it won’t be.  Some people argue that since the virus will eventually pass for some reason it isn’t as economically serious as other shocks.   That seems wrong.  All shocks and recessions eventually pass –  many last not much more than a year or two  –  and the scale of disruption, and reduction in activity, we are now seeing (whether in the New Zealand tourism and export education industries, or much more severely in northern Italy, Korea and the like) has the potential to markedly reduce economic activity, put renewed downward pressure on inflation and inflation expectations (we see the latter in the bond market already), all accompanied by a grim realisation of just how little firepower authorities really have, or are really politically able to use.  (Ponder that G7 conference call tomorrow, and ask yourself how much effective leeway the ECB has now, compared to 2007, or even 2010. )

Against that backdrop, it would seem foolhardy now not to throw everything at trying to prevent a significant fall in inflation expectations, by providing as much support to demand and economic activity as can be done.   That means monetary policy, to the extent it can be used –  in New Zealand for example, a central bank that was willing to move 50 points last August, on news that was weak but not very dramatically so, should be champing at the bit to cut at least that much this month.  The downside to doing so, in the face of a very real threat to norms around inflation –  and a likely material rise in unemployment – is hard to spot.  And since everyone knows monetary policy has limited capacity –  and those who haven’t realised it yet very soon will –  we need to see fiscal policy deployed in support, in smart, timely, and effective ways.   In some countries it is really hard to envisage that being done well –  the dysfunctional US in the midst of an election campaign, starting with huge deficits –  but there really is no such excuse in countries such as New Zealand and Australia.  (Oh, and of course –  and after all these years –  something needs to be done decisively re easing the effective lower bound.)

(There is, of course, widespread expectations of a huge Chinese stimulus programme.  That is as maybe, although it will bring both its own risks –  domestic ones just kicked a little further down the road –  and the risk of new immediate dislocations, including the possibility of a significant exchange rate depreciation, exporting (as it were) deflationary pressures to the rest of the world.)

We are only one serious adverse shock away from a very threatening economic outlook, where the limits of macro policy would mean it would be difficult to quickly recover from. By the day, the chances that we are already in the early stages of that shock are growing.  Perhaps it will all blow over very quickly, and normality resume, but (a) even if that very fortunate scenario were to eventuate, the risks are asymmetric, and (b) we’d still be left sitting with very low interest rates and typically high debt, one serious adverse shock away from that hole.


Thinking about fiscal policy

A few weeks ago the Minister of Finance announced that the government’s Budget would be delivered on 14 May.    That really isn’t far away now.  I noticed the Minister, on TVNZ’s Q&A yesterday, suggesting the timing was opportune in light of the coronavirus.     Perhaps, but contemplate some relevant dates.   Last year’s Budget was delivered on 30 May and according to the documents these were the relevant deadlines

budget 19

Assuming much the same sort of timetable holds this year, the economic forecasts the Budget draws on will have to be finalised in not much more than three weeks from now.  The tax and other fiscal forecasts are finalised later but they draw on the economic forecasts.  And who supposes that there will be any meaningfully greater certainty in three weeks time than there is now?  In truth, the Budget economic forecasts will be little more than (well, really less than given the long publication lags) one potentially useful scenario.     They simply aren’t going to be –  and can’t be –  any sort of useful guide for policy in the current climate, and I hope the Minister and the Treasury Secretary (the forecasts are Treasury’s and the Secretary has to sign off on them) start making that clear soon.    Consistent with that, in setting budgetary policy no one should be getting hung up on (for instance) whether the bottom line is a small surplus or small deficit.   Any such forecast number –  in a period of extreme uncertainty –  will be just meaningless.

In his interview yesterday the Minister of Finance seemed to be saying much the same sort thing as in his speech on Thursday.   Much of it was, at one level, sensible enough, but to me it fell a long way short in grappling with the likely severity of the issues, and the related uncertainty, and with the vulnerability of the world economy and the limitation of current macro policy.   Perhaps it was partly what he was (wasn’t) asked, but he is an experienced politician and knows how to get across the messages he wants to convey.    When community outbreak becomes a significant thing here, there is going to be a lot of economic disruption (even in the most optimistic cases abroad, eg Singapore, containment so far has appeared to rely on extensive social-distancing –  voluntary and compulsory –  none of which is conducive to holding up short-term GDP (or similar indicators).

But even pending that, what will be happening to tourism right now?  We know tourism from China collapsed a month ago –  first PRC restrictions and then our own –  but what about travel from other markets.  How many people are going to be keen on booking new trips, or even – if they have the option –  embarking on new trips now? I don’t know about you but I flicked through the travel sections of newspapers yesterday and today, wondering quite how many takers there would be.  Allowing for both direct and indirect effects, tourism is estimated to be about 10 per cent of the economy and about 55 per cent that is international tourism.  Even if international tourism only halves for the duration –  and it would be a lot lower than that if there is significant community outbreak here, that alone is equivalent to taking almost 3 per cent out of GDP.   Sure, there is scope for some switching –  more domestic tourism, as New Zealanders pull back on their foreign travel –  but a couple of nights in Picton is for most hardly a substitute for the trip to Disneyland.     And, of course, there are more and more reports of business travel –  typically higher-end – being cancelled.   And all of that is just one sector of the economy: that associated with foreign travel.   It takes no account of scenarios in which people are unable to work, whether because of illness, movement restrictions, school closures or whatever.

There is simply no way of knowing how long or how deep the economic effects will be, or (for example) what public psychology –  including eagerness to spend and to travel –  will be like as the world gets through the other side.  But with strongly asymmetric risks I reckon there is a pretty strong for an aggressive macro policy response.  And some part of that clearly has to be fiscal, especially given the failure of authorities –  here and abroad – to deal with lower bound constraints on monetary policy (covered in my post on Friday).  If you are sceptical that I’m over-egging the monetary policy limits point, I’m not nearly as pessimistic as the local ANZ economics team

Not as pessimistic only in that I think the OCR can usefully be cut further than they believe.  But if they are right and we really will be at the conventional limits of monetary policy by May (the day before the Budget in fact) people really should start worrying, because the ANZ economic scenario is not as bad as it could get.  And there are few additional buffers that people can really count on in planning and forming expectations (including of inflation).

There has been quite a bit of talk about how monetary policy (and aggregate fiscal policy for that matter) can’t solve immediate problems –  even bizarre articles from people who should know better suggesting there is some sort of either/or dimension between medical solutions and macro policy responses.  And that is true, of course.    Macro policy can never deal with the sectoral effects of sectoral-focused shocks.  Macro policy is about stabilising the wider economy.  Macro policy also can’t do a great deal in the very midst of a crisis –  financial or otherwise.  But what it can do in the midst of a crisis –  perhaps especially a disease one, where moral hazard concerns are less of a worry –  is better than nothing (easing servicing burdens, easing the exchange rate, signalling activity, leaning (a little) against collapses in confidence etc).  Perhaps more important is the value of such tools when either the immediate crisis passes and we are left with chronic weakness in demand (perhaps for a few quarters, perhaps longer) and during the recovery phase.   Macro policy tools work with a lag, and it is well to get adjustments in place pretty early (which is why monetary policy flexibility is so good to have: it is a very easy instrument to adjust, including to unwind when the need has clearly passed).

What sort of fiscal policy?   I’m not that interested in specific assistance packages to individual sectors.  In some cases, that sort of action might be justified, but much won’t really be –  and the announcement a couple of weeks ago of funding to promote non-Chinese tourism looks even sillier now.  Realistically, political considerations are likely to be more important than anything else in shaping those sorts of handouts, but (fortunately perhaps) such specific interventions/distortions/bailouts aren’t likely to be large enough to materially respond to wider weaknesses in aggregate demand.

And whatever you think of the case for more – even much more – government infrastructure spending, there are long lags to getting any such projects up and going.  The case for a second Mt Victoria tunnel in Wellington might be rock-solid –  and it is even in Grant Robertson’s constituency – but it is no sensible part of a response to a coronavirus-induced recession, even if (say) you worried about several waves of the virus over a couple of years.

Generalised tax cuts in income tax rates –  which might or might not make sense longer-term –  aren’t particularly effective because (a) the overwhelming bulk of any cut would go to higher-income households, (b) there is no particular incentive to spend (and some of the things higher income people might othewise spend on –  an extra overseas holiday –  aren’t likely to be so attractive in the next few months, and (c) as the Minister observed in his interview yesterday, such cuts tend to be permanent.

One could do, as Hong Kong announced last week, some sort of lump sum distribution –  perhaps $1500 payment to each adult.  It is much more concentrated ($ value) towards people likely to spend additional cash, but it is still less likely to be spent at the height of a crisis than in other circumstances, just because people will be (eg) staying away from shops.  But perhaps a more significant issue is precisely that it is one-off –  you might get a one-month lift to demand and activity, but the situation is reasonably likely to require longer-term support than that.

The point of this past was really to explore one other option I haven’t yet seen mentioned: an explicitly temporary reduction in the rate of GST.     The idea has been around for a while, it was tried by the United Kingdom as part of their macro policy response in 2009, and was discussed in some detail in a paper presented in New Zealand almost 15 years ago by the (then) academic economist Willem Buiter, who had also served as a member of the Bank of England Monetary Policy Committee.

Buiter was invited to New Zealand as part of a focus in the mid-2000s (including this work) looking at possible tools that might enable more downward pressure to be maintained on aggregate demand –  keeping inflation in check –  without the concomitant upward pressure on the real exchange rate; the latter having become something of a sore point with both the Governor and the Minister of Finance.    One element of that involved inviting four international experts to offer advice.  The resulting papers, and discussant comments, are here.  Buiter was invited to focus on fiscal policy issues and his specific paper is here.  One of the options he explored (from p51 at the link) was using a temporary change in the rate of GST.

As a stabilisation option, supplementary to whatever monetary policy can do, a variable GST rate has one very big advantage relative to most fiscal options that are often touted.  Not only does a temporary cut put more money in the pockets of households –  and do so in a moderately progressive way (whatever lifetime consumptions patterns, in any particular period low income people typically spend a larger proportion of that period’s income, and face tighter credit constraints) –  but it provides an active incentive to spend now because you know that prices will be more expensive later.   Take as an example, an announcement that the rate of GST would be lowered by 2.5 percentage points for a year.  For a person/household facing the choice between saving and spending now, at the start of the period, it is akin to a 250 basis point cut in interest rates.  As the year goes on, the (annualised) effect gets even stronger (as we’ve seen with past GST increases, spending is brought forward to just before the increase).

There are all sorts of drawbacks with this instrument in general, whether used for temporary increases or temporary cuts, including judging when it would be appropriate to deploy the instrument (relative to, say, using monetary policy). Buiter favoured an independent committee –  akin to an MPC –  having the power to adjust the rate (something which I’m old-fashioned enough –  only Parliament should change tax rates –  to find abhorent).    But this is an unusually stark situation (and may well be starker still by Budget day) –  as, in a different way, was the UK financial crisis in 2008/09.    It is not just a matter of slowly accumulating pressures (or lack of demand pressures) but a stark, truly exogenous (to the New Zealand economy) event.  Defining a trigger for action shouldn’t really be a problem.  And we are very close to the limits of conventional monetary policy, so the tradeoff-among-instruments questions also presents less starkly than Buiter would have imagined.

One of the other drawbacks –  which the UK ran into –  is defining an exit point.   The period of weak demand around the world lasted much longer than any authorities expected in 2008 when they were devising responses to the financial crisis/recession.    The extent of that weakness was hard, perhaps impossible, to foresee.  With a pandemic virus perhaps it is a little easier – these things tend to sweep through in perhaps 12-18 months (even in 1918) so –  for example – a cut in the GST rate announced/implemented in May, to end at end of 2021 might seem reasonable (while still providing a substitution effect signal).  And if, spare us, at the end of the next year severe problems still faced us, then realistically choices could still be made then about whether to proceed with raising the GST rate or not (to not do so should require new legislation) –  there shouldn’t be (but who can really imagine) the same debates about whose fault it was the banks had failed etc.

One other drawback in the risk to inflation expectations.   Cut the rate of GST by 2.5 percentage points and the level of the CPI will fall by perhaps 2.1 per cent –  and the reported annual rate of inflation will be that much lower than otherwise for a year.   With a heightened risk of inflation expectations sliding away, there is a risk that those headline effects could accentuate the problem, even though none of the core inflation measures –  the ones most analysts emphasise –  would fall.   There is no easy way to know how large this effect would be, and it would be quite circumstance-dependent.  If, for example, the New Zealand dollar fell sharply –  as it usually does in severe adverse global events –  the direct price effects of more expensive imported tradable goods would lean against the GST effect on headline inflation (the UK, for example, had a sharp fall in its exchange rate around 2008/09).  And if the temporary GST cut was part of an aggressive multi-faceted (monetary and fiscal) stabilisation package, the (helpful) demand effects might well outweigh any risks of adverse headline effects on expectations.

The other downside concern might be implementation lags.  When I was around these sorts of discussions, IRD used to emphasise that these sorts of changes couldn’t be done overnight.  Announce on Budget day a GST cut starting three months hence, and the risk is that you worsen things in that three month period.   But when I went back to check the UK experience, I found that the policy had been announced on 24 November 2008, to come into effect on 1 December 2008.    If a change can really be implemented that quickly –  and hard to see why New Zealand IRD should be less capable than HMRC – a one week disruption might be tolerable.

Finally, relative to using monetary policy more heavily, fiscal options will tend to hold up the exchange rate more than otherwise.  That might be less of concern in a scenario in which it has fallen a lot anyway and –  as importantly –  monetary policy options are approaching their limits.

I am not, repeat not, recommending that the rate of GST be temporarily cut, even on the assumption that the economic situations looks as bad or worse late next month when final Budget decisions have to be made.   But, in a highly policy-constrained world, it looks like an option that should be pulled out of mothballs and looked at fairly closely by the Minister’s advisers, including a closer review of the strengths and pitfalls of the UK experience.   In situations like the one we seem to find ourselves in –  with the world one shock away from exhausting normal macro policy capacity, and that shock now seeming to be upon us –  it is probably better to err on the side of doing more rather than less, and to consider taking risks with instruments that would not normally count as ideal (in which category I put the variable GST).

And whether or not the Minister of Finance thinks it an option worth exploring, I’d welcome comments here, including from those closer to the operational details of GST than I am.



Government spending and revenue: some comparisons

I had to look up this morning where New Zealand ranked among OECD countries in the total share of GDP taken in taxes.   The answer (for 2019) was 11th lowest, or 10th lowest if you (as you should, and as I do in the chart) use the denominator for Ireland (modified GNI) that the Irish authorities use.

taxes 2019

Among the English-speaking countries we often compare ourselves to, New Zealand and Canada are in the middle of the bunch, with the UK and Ireland higher and Australia and the United States lower.  Note that these are “general government” figures, including all levels of government in each country.

What about the spending side of the picture?  This is the chart for current spending across all levels of government.

spending 2019

New Zealand is towards the very bottom of that chart.  It is, however, fair to point out that when you have a low level of public debt you don’t face much an interest expense:  in terms of current purchases or transfers our overall level of current government spending goes a little further relative to most other OECD countries (with higher debts) than it might first look.

The big outlier, of course, if you compare that two charts is the United States, with yawning budget deficits.

What about the changes over time?  These OECD data only go back to 1986 for New Zealand, so I’ve started the chart from then showing (a) New Zealand, (b) the median of all OECD countries, and (c) the median for the OECD countries for which there is complete data from 1986 onwards.

spending time series

The gap between New Zealand current government spending and that in the median OECD country opened up 30 years ago.  In fact, the gap between New Zealand and the consistent-sample grouping (the orange line) has fluctuated around a fairly constant mean since the early 1990s, with no obvious differences based on which of the major parties was leading the government.

Of course, at the start of the period we still had fairly high debt and fairly high interest rates.  But that factor doesn’t look to explain much about comparisons for the last couple of decades.  This chart is of net interest expenditure as a share of GDP.

interest net

And what about changes in taxes (and social security contributions) over time?

taxes over time

On this measure, the gap between New Zealand and the complete-sample group of OECD countries (grey line) has widened further over the last decade or so.  Partly in consequence, whereas for the OECD as a whole (either series) the median country now has a higher tax share of GDP than it had in the late 1980s, we have lower taxes.  Consistent with that, of course, we also have lower current outlays than we had then, but it looks as though much of the difference will be accounted for by (a) in particular, lower (real and nominal) interest rates, and (b) lower debt.

I’m not attempting to draw any strong conclusions, just presenting the numbers.  They aren’t the only numbers that are relevant.  For example, as I understand it, the current disbursements series does not include depreciation, so in some respects it would be better to look at total outlays (in New Zealand, with a fast-growing population, government capital expenditure tends to be quite high).   Similarly the taxes and social security contributions series –  while important in its own right – is not a measure of total government revenue.  And I could track down the gross interest data and subtract that from the current disbursements series to get a consistent series of current primary spending.   Perhaps another day.

For now, I think one can safely say that New Zealand government spending and revenue are below those of the typical OECD country.  That wasn’t always the case, although much of what changed was servicing costs.  Whether that relatively modest size of government (spending and revenue) is a matter for concern or celebration will, I guess, depend on your ideology, your view (implicit or explicit) of various key elasticities, and perhaps your sense –   which should be detachable from ideology –  as to how wisely and well existing spending is being done.  For myself, I think there are areas where our government should probably spend more (health, access to justice, administration of justice, and statistics as just some examples), but I’m not convinced that even taken together they would amount to a strong case for higher taxes (when I think of potential savings –  on NZS, free tertiary education, the PGF as just some high profile examples).