Two charts and a speech

A post of two unrelated graphs this morning.

Just before Christmas I wrote a post prompted by an FT story about new OECD work that attempted to standardise estimates of hours worked to improve cross-country comparative productivity (GDP per hour worked) estimates.   Before writing the post, I’d confirmed with Statistics New Zealand that they had been consulted and that there were no material implications re New Zealand data.    Reading numbers, rather roughly, off a chart I’d attempted to illustrate the implied new OECD rankings.

But the OECD has now included the new hours worked estimated in their own official published data, and (thanks to a tweet from the chair of the Productivity Commission) I noticed this chart yesterday.

OECD labour productivity 2017

As I noted in the earlier post, this revision lifts several countries (Austria, Switzerland, and Sweden) into the upper bracket of OECD countries.  It also improves the position of the UK (in yesterday’s post I noted that they were now about 30 per cent of us, but on these revised and improved data the lead is just over 40 per cent).

But it is our position relative to the emerging OECD economies that really interests me.    Not only are Slovakia and Slovenia ahead of us –  they’ve been there or thereabouts on the old measures since about 2014 –  but now so are Lithuania and Turkey.  Go back 20 years and both  – on the old measures, but presumably on the new ones too –  were miles behind us.  Based on their productivity growth performance this decade, the Czech Republic and –  a few years later –  Poland will be beating us before long.

In a way “beating us” isn’t the right word.    It isn’t a competition in the sense that their gains mean we are worse off.  We should celebrate their economic gains.

But it is the right word if we use the experience of other countries to benchmark our own performance.    In modern New Zealand history, not one of those countries in the previous paragraph has ever been richer or productive than New Zealand.  Until now.  30 years ago all but Turkey were just beginning to throw off decades of Communist rule –  with all the misallocations of resources and skewed incentives and degraded institutions that went with that dreadful system.    Lithuania wasn’t just part of the Soviet sphere of influence, it was –  by conquest –  part of the Soviet Union itself.

And 30 years ago we were a stable democratic country, with the rule of law, long-established market institutions (even if they’d been a bit attenuated in the protectionist decades) just about –  although we didn’t know it then – to enjoy decades of a significant trend improvement in our terms of trade.     And yet these are the outcomes we’ve managed, that our policy frameworks applied to available resources have produced.

And for those who’ve liked to believe that large-scale non-citizen immigration, and a larger population, were a material part of what might improve New Zealand’s productivity prospects, here is the percentage change in the population of the former eastern-bloc OECD countries and (at the other end of the spectrum) of the high immigration OECD countries.

Population growth (%) 1990 to 2017
Latvia -27
Lithuania -23.4
Estonia -18
Hungary -5.5
Poland 1
Czech Republic 2.5
Slovakia 2.6
Slovenia 3.5
Canada 32.7
New Zealand 39.3
Australia 44.3
Israel 86.1

I wouldn’t recommend the experience of the Baltics (low birth rates and high emigration).  I don’t envy them a geographic position right now to Russia either.    But the absence of much immigration, and little or no population growth doesn’t seem to have held any of those former eastern-bloc countries back from a pretty impressive resurgence.  They all have a long way to go to match the best-of-class among the OECD countries, but so does New Zealand…..and we’ve been making no progress at all towards that sort of goal.

The Reserve Bank’s Monetary Policy Statement is due out this afternoon.  Yesterday the Bank released its latest Survey of Expectations.  There wasn’t a great deal of interest in the data, but this was the series that caught my eye.

mon cond year ahead 19

The Bank has been running this question for almost 20 years now, asking respondents (on a seven point scale) their expectation of “monetary conditions” a year from now.  They also ask about perceptions of current conditions.  Perceptions of current conditions are quite loose in the latest survey, but what is striking is that almost always when respondents think current conditions are loose they expect a substantial tightening in the next year or so.   That was what the data showed in 1999, 2001, 2003, 2010, and 2013.  It wasn’t what showed up in 2015/16: then relatively easy conditions (probably then mainly a proxy for relatively low interest rates) were expected to be followed by even easier conditions.   A succession of OCR cuts followed.  As of the latest survey, a net 69 per cent of respondents think conditions are easier than neutral (not quite a record), but by the end of the year a record (see chart) 73 per cent of respondents expect things to be easier than neutral.

This result doesn’t yet show up in the OCR expectations themselves –  which are edging downwards but a year out the mean expectation is still above 1.75 per cent (the median is bang on) –  but the expected easing in “monetary conditions” looks a bit more consistent with market pricing, in suggesting the OCR cuts are becoming more likely.

(At the margin, the OCR expectations in the survey would have been a touch lower if I had actually submitted mine.  I filled in the form, printed out a copy for my records, and then must have failed to push the button to submit it.    The lowest official OCR expectation for December 2019 is 1.5 per cent, but the table in front of me says I wrote down 1.25 per cent.  We’ll see.)

And a final suggestion for journalists at the Reserve Bank’s press conference this afternoon.  The other day a reader sent me an invitation they’d received for a function you could pay to attend at which the Governor was going to be speaking next month.

This year it is Dr Adrian Orr, the Governor of the Reserve Bank who will also speak about the bank’s views of the economy in an candid off the record way.

Perhaps the organisers mis-spoke, but I’d have expected the Bank to review carefully how the Governor’s involvement in any such event was described.    When market-sensitive matters are involved –  and Governor’s/Bank’s view on the economy clearly qualifies –  it is highly inappropriate for any Bank officials (even the Governor) to be speaking “candidly” in an off-the-record environment.  Anything other than the most anodyne comment should be done in the Monetary Policy Statement (or associated press conference or testimony to Parliament) or in on-the-record speeches, to which everyone has access at the same time and the same way.   It is even worse when access to the Governor, for potentially market-sensitive material, is sold-off, even if there is a decent charity cause behind it.

I’ve written about this sort of thing previously

I notice that NBR’s Shoeshine column this week also touched on that earlier INFINZ event, describing it as an “expletive-laden speech” on all manner of topics, and observing “unfortunately, this speech was never put on the web (very strange for a Reserve Bank governor’s speech)”.    Not so strange if it were genuinely just rehearsing old ground, but the various accounts suggest it wasn’t.

Asking the Governor about the approach he thinks appropriate to his speeches  – about his commitment to openness and transparency – would aid the cause of accountability.

Challenges and complexities

Interviewed on Radio New Zealand this morning, the Prime Minister conceded that there were “challenges and complexities” in the government’s relationship with the People’s Republic of China.    Fearful, and seemingly out of her depth, she wouldn’t or couldn’t identify any of those “challenges and complexities”.   And yet she is criticised for not doing enough to keep in Beijing’s good graces by the person in New Zealand politics with an even worse record on PRC issues –  Simon Bridges, leader of the National Party.

I don’t have anything much to say about the Air New Zealand story, or any particular reason to doubt the slowly-emerging explanation (which itself seems to have a PRC-coercion dimension, dating back to last year’s PRC insistence that airlines not suggest that Taiwan –  an independent democratic country –  was in fact or in any way not part of the PRC).  It is just that were the true story to have been more worrying, it isn’t clear that Air New Zealand would have much incentive to be straight with customers or the public: they have an ongoing business to run and Beijing relations to keep smooth (and, of course, the chief executive is the chair of the PM’s Business Advisory Council).    But perhaps leaks from within Air New Zealand would mean the truth still got out?

What of the two Barry Soper stories (this one from the front page of the Herald, and this opinion piece)?   The first is introduced this way

Diplomatic links with China appear to have plummeted to a new low as Prime Minister Jacinda Ardern is given the cold shoulder by Beijing and a major tourism promotion is postponed by the superpower.

Of the visit to Beijing, we learned this yesterday

Ardern confirmed she had an invitation from the Chinese administration to meet President Xi Jinping, but the problem was finding a suitable date. She was meant to meet with the President at the end of last year.

She wouldn’t say whether or not she was confident the meeting would take place this year.

In other words, she isn’t confident it will happen at all.   What is hard to understand is why any self-respecting person would put themselves through this rigmarole?   Abasement before the emperor, and all for the sake of a few New Zealand businesses (often taxpayer subsidised ones) that have got themselves too exposed to a country with a noxious regime.   She keeps telling us we are an independent sovereign state, not some tributary regime.  Why can’t she just politely walk away (and get some aide to make her a note of how constructive and useful  –  enhancing to their reputations –  foreign leaders meetings with Adolf Hitler were).    Perhaps late last year the “scheduling” excuse –  “we all have busy calendars” –  might have washed with some.  It clearly doesn’t now.  And that shouldn’t worry New Zealanders.  It shouldn’t be a cause for reproach from an Opposition leader who (a) has never distanced himself from his foreign affairs spokesperson’s defence of the PRC concentration camps in Xinjiang, and (b) who retains in his caucus, and expresses support for, a Chinese Communist Party member and former PLA intelligence official, and who (c) is understood to rely on that member as one of his largest party fundraisers.  That is where the focus should be, not on selling our souls for a meeting with Xi Jinping.

And then there is the year of the Chinese tourist,

The 2019 China-New Zealand Year of Tourism was meant to be launched with great fanfare at Wellington’s Te Papa museum next week, but that has been postponed by China.

Industry people and regime-sycophants had been very keen on this exercise.  The Contemporary China Research Centre –  funded partly MFAT, chaired by a New Zealander with a significant role in the global Confucius Institute movement – was even hosting a conference on it late last year.   But this isn’t some sort of normal country.  What Beijing giveth, Beijing can also take away.  We are told

Richard Davies, manager of tourism policy at the Ministry of Business, Innovation and Employment, said: “China has advised that this event has had to be postponed due to changes of schedule on the Chinese side.”

Officials are now working with China to reschedule the opening.

Believe all that and you’ll believe anything.  But the Prime Minister claimed to believe it, telling her RNZ interviewer that she could only go on what she’d been told, and she’d been told there was a scheduling problem.  I’m sure she doesn’t really believe it, but why can’t she come straight with the New Zealand public?   She is supposed to serve us, not a small group of business interests.    Better to take explicit credit for a slightly more distant relationship with one of the most appalling regimes on the planet.  Especially if all that talk about kindness and empathy means anything at all.  But she won’t do that –  won’t square with the public about the nature of the regime she (and his predecessors) have been pandering too, all no doubt on official advice.

You got a sense of the sort of business sector pressure she seems to be under in how she responded to the interviewer’s questions about Huawei.  Much as the China-oriented bits of the business community – and the China Council –  must hate it, almost everything that has emerged on Huawei in the last couple of months only confirms how unwise any decent and self-respecting country would be to allow Hauwei equipment to play a key role in 5G networks.   And yet the Prime Minister seemed to interpret the question as a suggestion that we should back down and just let Hauwei –  and the PRC state –  do its thing.  ‘If we did that could we really say we had an independent foreign policy?” was the gist of her response.

Barry Soper seems to be championing some of that sort of “never mind national security, never mind self-respect, never mind the advice of longstanding friends and allies, lets never ever upset Beijing” line.  It was clear in his selection of people to quote from in his article.  There was this, apparently on Huawei

Asset management and corporate adviser David Mahon, based in Beijing, said governments needed to get over thwarting Chinese economic aims in a way reminiscent of the Cold War struggle between capitalism and communism. “It’s unhelpful for politicians and a few anti-Chinese professors to feed uncorroborated McCarthyite conspiracies about Chinese spy networks in their countries and targeting anyone who doesn’t share their view,” Mahon said.

Just lie back and let Beijing have its way seems to be Mahon’s perspective.  That isn’t how self-respecting people, or nations, act.  But perhaps if you are just desperate for the next deal none of that stuff matters?

And then there was more melodramatic stuff from Philip Burdon, until recently chair of the taxpayer-funded PR outfit the Asia New Zealand Foundation, and of course a longserving senior National Party figure.

Philip Burdon,….said New Zealand couldn’t afford to take sides.

“We clearly need to commit ourselves to the cause of trade liberalisation and the integration of the global economy while respectfully and realistically acknowledging China’s entitlement to a comprehensive and responsible strategic and economic engagement in the region,” he said.

Sources in Beijing say China plans trade retaliation…..

Two-way trade with China trebled over the past decade to $27 billion. “The implications for New Zealand are dangerous at every level,” Burdon said.

Wouldn’t it be nice if the PRC seriously committed itself to the practice of liberalisation?  Doesn’t seem likely.  And “respectfully acknowledge their entitlement”?  Like true vassals?

But what’s with this “can’t afford to take sides” business?  It has been a convenient framing for some time, as if we are asked to choose between the US and the PRC.  Even if that were the choice, the United States (for all its faults) remains much more in tune with the values and attitudes of New Zealanders than the lawless regime in Beijing does.  But, of course, the choice isn’t really between the US and the PRC, but between the PRC and New Zealand, or even (charitably) the interests of a small number of New Zealand businesses (and parties reliant on donations) and New Zealand as a whole.   Given that choice, we can’t afford our governments not to take sides, not to back New Zealand and its values and long-term interests.   That includes defending the integrity of our political system, defending the freedoms of ethnic Chinese New Zealanders (whose media and community associations seem to have been largely taken over by Beijing-affiliated groups), and being the sort of nation that stands up internationally for the sort of behaviour –  treatment of other people –  we expect.

There is more from Philip Burdon in Barry Soper’s op-ed

We can’t afford to let this diplomatic tightrope slacken and that’s most certainly the view of a Peters confidante, former Trade Minister in the Bolger Government and recently the chair of Asia 2000 Phillip Burdon.

The mushroom magnate says China has constructively sought to engage with New Zealand for which we should be grateful.

It’s utterly ridiculous, Burdon contends, that China has sinister plans to subvert and interfere in our society or in our democratic institutions.

Ah, it is a debt of gratitude –  perhaps serviced with periodic offerings of tribute –  that we owe to Beijing, at least according to Burdon, for all that “constructive engagement”.     What exactly was that?

As for Burdon’s final sentence, one presumes he is so far down the track of abandoning all sense of self-respect that the presence of a former PLA intelligence official, who hob-nobs with the embassy and never ever says anything critical of Beijing just doesn’t bother Philip Burdon.  There are deals I guess, and never mind the integrity of our system.  Perhaps it doesn’t bother him that Parliament’s justice committee is chaired by someone with close ties to various United Front institutions?  It should.       It isn’t necessarily that Beijing “has” sinister plans –  as if this is something in the future. The very fact that Jian Yang in particular still sits in Parliament, challenged by no one in the entire political spectrum tells you that, by accident or design, those visions have already been coming to pass.  Or when neither the Prime Minister nor the Opposition leader will make a clear stand in defence of Anne-Marie Brady and her work.

I’m sure Beijing has no interest in toppling our formal institutions.  Why would they when those institutions have rotted from the inside.  I guess he too wants us to believe that only a “few anti-Chinese professors” are at all bothered.

All of which brings us back to the opening line of Barry Soper’s op-ed

New Zealand is feeling the heat of the Chinese dragon’s breath and if we’re not careful it could incinerate us.

Which is simply nonsense.    As an economy, we have much more to worry about from a sharp Chinese economic slowdown –  which may be underway already –  than from any sorts of specific attempts at economic coercion of New Zealand.  The PRC is a big country, and in a world with few buffers a recession there could matter a lot everywhere.   As for New Zealand, the PRC certainly has some capacity to harm some specific sectors, perhaps even quite severely.  I wouldn’t want to be a university vice-chancellor if the PRC decides to attempt to bring the government to heel. Then again, I don’t have any sympathy with those people, who have put themselves at the mercy of a known thug, all backed by dodgy immigration provisions, rather than looking to manage their exposures (as prudent businesses, unable to twist governments to their purposes, would).  I have some more sympathy for tourism operators –  who mostly are operating in an open market.  As for commodity exporters, well they are selling commodities and (to a first approximation) what isn’t sold in the PRC will be sold somewhere else.   Sometimes values and interests cost – in many ways, the only true measure of what is valuable is the price one is willing to pay to defend it.  Too many of these Beijing defenders don’t seem to have any particular interest in defending our system, our people –  let alone standing against the sheer awfulness of the PRC regime at home and abroad.

We can’t fix the PRC gross human rights abuses.  I’m not even suggesting we should be at the forefront of moves on those issues. But when other countries speak and our governments don’t, they shame us.   Neither our Prime Minister nor our Opposition leader will utter a word about (for example) Xinjiang, or about the abducted Canadians, even when other countries have –  otherwise reprehensible Turkey only this week in a strong statement on Xinjiang. Life – politics –  has to be more than just deals and donations if it is to have any meaning, command any respect.   Frankly, it is hard to tell at present which side of politics is worse on this issue, but on balance I’d have to give it to National –  whose only interest in all of this, in anything they say in public, seems to be placating Beijing.  In office there are hard choices and calls to make –  even if that is still no excuse for not openly engaging on the “challenges and complexities”.  In Opposition one might have hoped, just occasionally, for a slightly more principled position. But I guess their actions, their people, their words reveal what their “principles” really are in this area.

 

 

Looking towards the new MPC

Next week will bring the first Reserve Bank Monetary Policy Statement of the year. It will be the last –  after 29 years – prepared solely on the responsibility of a single individual, the Governor.     He gets to make one more OCR decision on his own and then on 1 April the new statutory Monetary Policy Committee –  established under legislation passed just before Christmas – takes over.   It is an apt date given that the new regime is designed to have the appearance of being a significant reform but is in fact likely to do little to reduce the undue dominance of a single unelected official, the Governor.   In this case, a Governor who after almost 11 months in office hasn’t managed to make a single on-the-record speech about what is still (for a few more weeks) his primary function, monetary policy (and the associated cyclical economic position).

The first OCR decision to be made by the new Monetary Policy Committee is not scheduled until May, but we can expect some important announcements in the next couple of weeks.

Under the amended legislation, there is a raft of new formal documents required.

The most important of them is the “remit”.   This replaces the Policy Targets Agreement framework, and is the mechanism that tells the Monetary Policy Committee what specific targets to pursue.

On an ongoing basis, the remit will be set directly by the Minister of Finance –  it won’t need to be agreed by the Governor or the MPC.   The Bank will have to provide advice about the possible content of the remit, and in providing that advice the Governor is required to (a) consult with the MPC, and (b) seek input from members of the public.

But those provisions don’t apply at all to the first remit.  Under the legislation, the remit is required to be agreed by the Governor and the Minister, with no input from either the public or the MPC members.  It is also supposed to be published within two months of the royal assent having been given to the legislation, which means it will almost certainly be published by 20 February.  (There is provision for the Minister to issue a remit directly if the Governor and Minister can’t reach agreement in that time, but that seems very unlikely –  it would be in neither side’s interest to allow it to happen, even if there were some differences between them.)  As there have been no hints suggesting, or preparing the ground for, anything else, I expect the first remit will have substantive content very similar to the existing Policy Targets Agreement signed when the Governor was appointed last year.

The second new document is the “charter”.  The charter is supposed to cover issues around transparency, accountability, and decisionmaking procedures for the MPC, and is required to include provisions around recording and publishing minutes of meetings.  On an ongoing basis, the charter is agreed between the Minister and the MPC as a whole. But the first charter –  which will set the terms for how the MPC first operates, and as the default operating model will be hard to deviate from  –  is to be implemented simply by agreement between the Governor and the Minister.  It is also supposed to be published by 20 February.  There is no public consultation, and no consultation with MPC members either –  who haven’t been appointed yet. They will, presumably, just be offered a “take it or leave it”.   We know the Minister’s predilections in this area –  highly summarised minutes only –  and the Bank’s previous biases against any sense of individual accountability or responsibility –  but it will be interesting to see how restrictively the document is worded. I’m not optimistic.

The third document is the “code of conduct” for the MPC (particularly as it will affect the external part-time members).  This is approved by the Bank’s Board, rather than the Minister.  It also has to be published by 20 February.   In fact, the Bank (the Governor) –  the only people allowed input here –  was required to prepare the code and submit it to the Board by 20 January.   I presume that what emerges will be reasonably sensible, but there was considerable work needing to be done on the draft code of conduct that was around at the time the Board was advertising for MPC candidates last year (when, as I recall it, activities like writing a blog or newsletter on matters macroeconomic would not have been a problem).

So within the next two weeks, we can expect to see that suite of documents published.  Even if they aren’t released before the Monetary Policy Statement next week, it would be reasonable to expect the Governor to be asked about them at his press conference.  After all next week MPS (whatever the talk about future monetary policy) isn’t at all binding about the future: the decisionmakers will ( in principle) be different, and so will the rules under which they will be working.   In principle, the transition to a new regime ushers in a period of some greater uncertainty about monetary policy decisions and (in particular) around monetary policy communications.

The biggest uncertainty, however, is about the membership of the Monetary Policy Committee.  You will recall that under the new legislation there is required to be a majority of internal (executive) members.  Indications have been that there will be four executive members, and three part-time non-executive members, plus the Treasury observer.   These appointments are formally made by the Minister of Finance, but he can only appoint people nominated by the Bank’s Board, and they in turn are likely to be heavily influenced by the Governor (who is a member of the Board, and the only Board member who knows anything much about monetary policy).

Even on the executive side, there is some uncertainty.  The Governor will be a member, and chair, as we can safely presume will the Deputy Governor, Geoff Bascand.   The newly appointed Assistant Governor for monetary policy and financial markets, Christian Hawkesby, seems certain to get one of the appointments (he’d hardly have taken the job without that sort of assurance), and the fourth slot is likely to be reserved for the chief economist.  The Bank is advertising that position at present, and unless there is an internal appointment it might be a stretch to even have someone in place by  1 April.   Under the new legislation, there is also a non-voting Treasury observer.  Since Gabs Makhlouf leaves office in a few months, that is additional (minor) source of uncertainty around how the MPC will function.  We wouldn’t expect the Secretary to have enough time to spare (or regard it as a priority) to take the role themselves (although in the transition Makhlouf has), but we also don’t know who will be nominated and quite what role they will play.

And what of the non-executives?  As I’ve noted before, these are positions that involve a significant commitment of time (they advertised for 50 days a year), and yet there will inevitably be quite significant constraints on what other activities such appointees can take on, and 50 days out at the Reserve Bank doesn’t fit easily with most other full-time jobs.  New Zealand government boards and committees don’t typically pay that well either.  But the biggest obstacle to getting decent people, who will be able to make an effective contribution, is the neutered nature of the role.     The non-executives will always be a minority of the committee.  They won’t, we are told, be able to give speeches or interviews about the economy or monetary policy (unlike, say, peers in the UK, US, or Sweden). They won’t, so far as we know, have any dedicated research or analysis resources –  and at one stage last year the Governor was talking about how he didn’t want economists anyway.  And if they disagree with the majority view, they won’t even able to make their case openly, and have that identified dissent (and the reasons for it) on record.      And they’ll be appointed by the Board, with key input from the Governor, and we know that the Board has long operated to protect the Governor.  There is little likelihood that anyone remotely awkward will be appointed.  The sort of people who might actually add value are unlikely to be seriously interested, given the way the system has been set up.

And they face the executive members.   They work closely together all the time.  And each of them work for and to the Governor (who also controls salaries and internal resource allocation).  In fact, both Hawkesby and the new chief economist will have been directly and personally chosen by the Governor, a Governor not known for welcoming challenge or dissent.  It would be a surprise if the internal members don’t maintain a pretty solid bloc vote almost all the time.  If they were a group of people with compelling skills in economic analysis and policy that might usually work okay (if being less than ideal), but by the standards of many overseas central banks the executive team itself looks under strength.

It is still anyone’s guess who they will find for these positions. But I did have a response the other day to an OIA request I had lodged last year about people being considered for MPC positions.  I had the first part of the response last year, about the applicants, but this latest response was about the second part of my request, about people who the Board had taken more seriously.  This is what I got from them

Your 23 October request under section 12 of the Official Information Act (the OIA) stated a willingness to split the response into two parts if timing of the process made this necessary. The Reserve Bank provided a response to the first part of your request on 20 November. In the final part of your request you sought:

. . . information on the applicants for the external MPC roles, (as advertised, applications having closed on 7 Sept 2018):

  • the number of applications taken further (not just immediately set aside as clearly unsuitable/unacceptable by the Board or its agents;
  • the proportion of those applications taken further from (a) women (as best you can tell), (b) people currently resident in New Zealand, and (c) people currently employed at a university.

In response to the information requested in the bullet points above: nine applicants have been taken to the stage of final consideration. Of the nine, two are women, all are New Zealand resident, and one is currently employed at a university.

I was interested to learn that all those at the final stage of consideration for appointment are New Zealand residents.   There has long been a reasonable argument that the Reserve Bank could benefit from having someone from overseas on the committee, especially in view of the limited pool of potential high quality, available, candidates here.  It wasn’t obvious that the role would be particularly attractive, given the institutional design (see above) and New Zealand remuneration rates.  And so it seems to have proved.

Even with the weak statutory framework, the new MPC could have been a materially useful step forward, with a Governor and Minister who were seriously committed to greater openness and accountability, and a serious contest of ideas.  But, of course, if that were Grant Robertson and Adrian Orr, we wouldn’t have the law written as it is.  My working hypothesis has long been that the Minister and Governor want to have things look a bit different without actually being materially different at all.  Perhaps they will get one good external (at least first time round), but that person will either find it frustrating, or will just settle in to being a bit player, an honorary members of the Bank’s Economics Department.  Most likely, it will end up a lot like the system in place now for almost 20 years, when there have been a couple of part-time external advisers to the (internal) Monetary Policy Committee.  Most were business people – although a couple were trained economists –  who sat through all the meetings, provided business anecdotes and perspectives (some genuinely useful) but who had little real impact, and often found it all rather frustrating.   For them, at best it was probably an interesting experience, a diversion from the day job.  Even allowing for the statutory nature of the new positions, I don’t really expect things to be much different in future.  After all, like the current advisers, these new people will be selected at the Governor’s choosing, with a strong emphasis on “all working together”, while the Governor –  a Governor known for sounding off on all manner of things – is the only public face.

There are also some other unsatisfactory aspects of the new law.  The MPC is responsible for the content of future Monetary Policy Statements, but not for the new five-yearly reviews of monetary policy –  those are the Governor’s responsibility (surely any worthwhile review would primarily be done by outsiders, commissioned by Treasury or the Minister?).  And as I’ve noted before what the Act makes the MPC responsible for is drawn very narrowly.  It will work okay while monetary policy involves OCR adjustments, but it is much less clear that the MPC will have an effective (statutorily-based) say in the deployment of any unconventional instruments that may become necessary if the OCR hits the practical lower bound.  Parliament should have given the MPC responsibility for all matters relating to monetary policy, with the MPC able to then delegate to the Governor some operational matters.    They’d have done so if this legislation were much other than a cover for something little different than the status quo, where the Governor runs the show –  somthing like prosecutor, judge, jury, and appeal court in his own case.  In an open democratic society, no one individual should have that much untrammelled power, and certainly not an unelected person.

Perhaps some of you will be thinking that none of this much matters, as the Reserve Bank has done an adequate job.  Personally, I would dispute that –  and “adequate” –  shouldn’t be the standard we look for – but more importantly, I’d argue that key government institutions should be designed to promote substantive accountability, high levels of transparency, minimising single person exposures, and promoting the contest of ideas and evidence (in areas characterised by huge uncertainty).  These reforms look like just papering over the cracks.

This is one of those issues on which I’d like to be proved wrong. Perhaps I’ll be pleasantly surprised and a succession of high quality appointments will hope make these reforms one that make a real difference. But I’m not holding my breath.

(On another matter, scrolling for various websites yesterday I found someone linking to a post I’d written back in 2017.  I wasn’t quite sure why, but then I noticed that they were actually retweeting something from a Twitter handle called croakingcassandraredux.  Someone, unknown to me, has started a Twitter account describing itself as “Michael Reddell’s alter ego”, a “public service venture” intending to give a wider audience to my material by tweeting links to various posts.   I guess readers here have already found me, and anyone who wants can sign up to get the posts by email, but if the account is any use here is the link. )

 

Marijuana and monetary policy

You might not think the two have much in common –  and the silliest, most damaging, monetary policy decisions (think of the MCI) were all our own reasoned doing.  But one of New Zealand’s most stimulating left-wing writers, Daryl McLauchlan thinks that monetary policy offers a model for how decisions about marijuana should be made.

When I saw his article the other day, under the heading “Why a public vote is the wrong way to determine drug policy”,  I assumed it was going to be something about the (de)merits of referenda, reminding readers that we are primarily a representative parliamentary democracy, not one where most decisions are made by plebiscite.  There are some merits to that particular argument –  and some counter-arguments.  But that turned out not be McLauchlan’s argument at all.

Instead, it was a bid to get not just the public out of any decisionmaking around drugs, but MPs as well.   McLauchlan doesn’t want elected people, or those who elect them, making the decisions, but “experts”.

Advanced liberal societies often solve problems of this class, not by politicising them further but by removing them from the political system and building independent, technocratic institutions. Elected MPs used to make decisions about what the official cash rate should be and which pharmaceutical drugs should be funded in the public health system, and they were so obviously terrible at this they devolved that power to the Reserve Bank and Pharmac.   I think we need to do that with drugs.

I’m rather sceptical of the cult of the expert, at least as any sort of decisionmaker.  There are plenty of decisions –  personal and societal –  where we benefit from expert technical advice, whether it is on treatment options for sickness or injury, house renovations, or how best to conduct a war.  But advice and decisions are two quite different things: we don’t, for example, want our generals deciding which wars to fight.   I wrote a post on these general issues –  arguing that experts should be harnessed for their advice, not allowed to set policy courses –  a couple of years ago.

I don’t know a great deal about Pharmac and pharmaceutical drugs –  although I do note that the ultimate decision (how much taxpayers’ money to spend on such drugs) is very much one for MPs and ministers (those we elect, and those we can toss out again).  But I do know quite a bit about monetary policy and decisionmaking frameworks for it.  And we have the added bonus of a recent book, by a former Deputy Governor of the Bank of England, reflecting on appropriate decisionmaking structures in a democratic society, working outwards from his experiences with monetary policy and banking regulation to offer a more generic framework for assessing whether or not decisions should be handed over to independent agencies.  I wrote various posts about it last year, and reviewed the book for the international central banking publication Central Banking.

Tucker sets a list of “delegation criteria” as follows:

A public policy regime should be entrusted to an independent agency insulated from day-to-day politics of both elected branches of government only after wide public debate and only if

  1. The goal can be specified.
  2. Society’s preferences are reasonably stable and concern a major social cost.
  3. There is a problem of credibly committing to a settled policy regime.
  4. The policy instruments are confidently expected to work and there exists a relevant community of expertise outside the independent agency.
  5. The independent agency will not have to make big choices on distributional trade-offs or society’s values or that materially shift the distribution of political power.
  6. The legislature has the capacity, through its committee system, properly to overseee each independent agency’s stewardship and, separately, whether the regime is working adequately.
  7. The society is capable of bestowing the esteem or prestige that can help bind the independent agency’s policy makers to the mast of the regime’s goal.

One can mount a reasonable argument that routine monetary policy decisions meet this standard.  After all, the overarching goal of monetary policy is set by Parliament, and the specific goals (under the legislation passed late last year) are directly set by the Minister of Finance.  And that legislation is backed up by a fairly widely-accepted literature that there are no long-term adverse trade-offs between inflation and output.   The Reserve Bank still has some important discretionary choices –  those short-term trade-offs can matter – but they aren’t choices about what sort of society we want to be, or who –  which sectors/classes –  will benefit at the expense of others.

Even then, the case for an operationally independent Reserve Bank conducting monetary policy is less strong than it once seemed –  those short-term tradeoffs are more important than the designers of the 1989 Act (which bestowed operational independence) really appreciated, and whereas the long-running argument was that inflation couldn’t be kept low enough without independence, we’ve now had a decade when central bankers haven’t delivered inflation as high as society (represented by its elected politicians) asked them to.  Throw in serious doubts about the effectiveness of parliamentary monitoring and scrutiny, and it is hardly an open and shut case any longer.

I’m not arguing to remove operational independence from the Reserve Bank –  although our system in particular still leaves far too much power in the hands of a single unelected official, who isn’t even appointed by people who were elected.  But if day-to-day monetary policy decisions possibly pass the Tucker test, I can’t see how decisions about the legal status of marijuana (or other drugs) could possibly do so.

After all, to set up such a regime –  in which some independent board (presumably appointed by ministers) would make decisions around which drugs should be legalised, for whom, and under what terms and conditions –  authorising legislation would need to be passed by Parliament.  And that legislation would –  under decent principles of legal drafting and institutional design –  need to outline criteria that the independent agency would have to use to make their decisions.   Of course, those principles could be waffly, non-specific, with no clear sense of which tradeoffs matter or which considerations should get the greatest weight.  Some might perhaps even be mutually inconsistent.

But that is no decent basis for delegating power in a democratic society.   And to get to a serious list of goals and constraints, one would have to go through much the same sort of contentious political process involved in either legislating directly or using a referendum to make decisions about legalising (or not) marijuana.   A goal might be able to be specified –  although I doubt it –  but there is no way that, at this point in society’s evolution, social preferences around these issues could reasonably be described as stable.  We can’t even agree on what the relevant criteria, or relevant sets of expertise, might be.  There are libertarians at one hand, people opposed to allowing any intoxicating substances at the other, and all manner of intermediate positions, shaped by all sorts of different considerations (be it about health, crime, freedom, responsibility, nature of society etc).   That is the stuff of politics.  Competing visions, competing philosophies, competing values, competing intepretations of evidence (or even of what evidence is even relevant).   It is what politics is about, and only political processes have the legitimacy to make such decisions (messy as they often will be).

And even if legislation were able to be passed, handing these big decisions over to unelected unaccountable people sitting on a committee, what is gained?   There is no stable agreed body of expertise relevant to making these decisions –  some will emphasis criminal aspects, some health and mental health aspects, some political philosophy, and some…..  By contrast, given a specific inflation target there is a reasonably specific set of expertise relevant to monetary policy decisions. And boards and committees don’t just appear out of thin air: the members are appointed, by elected politicians.  And so, most likely, you policy set depending on the preferences of the politicians who happen to be doing the appointment at the time, and yet without any direct accountability.  Or appointees purusing their own interests, ideologies or preferences – again with no direct accountability.

And, as I’ve mentioned previously around monetary policy, the willingness and/or ability of our parliamentary select committees to provide serious scrutiny and accountability for indepedent agencies is…..to put it politely…..limited at best.   Limited time and limited resources matter, but so do does careerism –  making life awkward in a select committee might be just what the public interest demands, but it isn’t a reliable path to the next promotion into the ministry.

I’m not wedded to referenda in preference to Parliament itself making final decisions (although in general I quite like the model in which referenda are used to give a final yes or no to specific legislation, so that we know exactly what we are –  and aren’t – voting on) but I can’t see how appropriate policy around drugs is, by almost any test, something that should be decided by people we haven’t elected –  whether judges (the unelected committees that have too much policy say in the US in particular) or statutory boards and committees.  Why preference the preferences and biases of those people over our own, especially as we have ample opportunity to hear –  and follow or discount –  their advice anyway?

I ended my previous post, responding to Sebastian Mallaby’s call for more powers to be handed to “experts”, this way

Like most cults, the “cult of the expert” is more dangerous than Mallaby – or most of the expert class – acknowledges.[ partly because “experts” have a track record of badly misjudging all sort of key issues] And hotly contested political debate, messy as it often, wrong directions that it sometimes takes, are how we make the hard choices, the trade-offs, amid the inevitable uncertainty. Abandoning that model is akin to gutting our democracy of much of its substance. So I still want an expert operating on my child, but I want parliaments making laws and setting taxes (not officials) and parliaments taking us to war (not generals).

And I want MPs –  who we can toss out –  or the voters making to key decisions around whether or not to liberalise drugs.  As slowly as is necessarily to thrash through all the details and alternative perspectives relevant to such decisions.

The road to ruin

Venezuela has, of course, been much in the news in the last few days.   Fascinating as the politics and geopolitics seems, there is also an economic story – about one of the greatest economic catastrophes of modern times, perhaps of almost any time.  And all the more sad for being entirely manmade.

Go back 100 years and Venezuela didn’t stand out from the countries around it.  Angus Maddison’s collection of historical GDP estimates suggests that in 1913 real GDP per capita in Venezuela was just a bit higher than that in Brazil and just a bit lower than that in Colombia.   The southern cone countries of Latin America –  Chile, Uruguay, and Argentina-  were much more prosperous.

The presence of oil in Venezuela had been known for centuries.  According to one paper I found

The presence of oil was known in Venezuela even before the Discovery of the Americas in 1492; back then, Indians were aware of the existence of hydrocarbons that appear on the surface of their lands. They used them for medicinal and illumination purposes. Also, they collected oil from small creeks near seepages by impregnating blankets and then wringing them out. They also found asphalt, and they used it for caulking their canoes and impregnating the sails of their boats.

In 1499 Spanish conquerors were impressed with the natural occurrences of hydrocarbons in Venezuela. They learned from Indians to use them for medicinal purposes. They also used it for caulking their ships, illumination and lubricating their weapons.

But the modern history of the Venezuelan oil industry appears to date to the granting of a concession in 1913 to Shell, and after 1919 oil exports became a major element in the economy.     And here is a picture, using Maddison’s data showing GDP per capita for the period 1900 to 1960 for Venezuela and for New Zealand, the United States, and Uruguay (as a representative Latin American country, that happens to fascinate me) and Australia (another resource-rich country).

venezuela 1

You can see how relatively poor Venezuela was early on, and then the really rapid growth in the 1920s –  catching Uruguay – and in the 1940s.    By the end of World War Two, on this measure real GDP per capita in Venezuela was matching that in Australia and New Zealand.  Another decade on and it was heading towards matching the United States.  It was –  according to a fascinating article in Foreign Affairs – about the time democracy and economic liberalisation came to Venezuela (so the authors claim, a very rare example of a resoure-rich autocracy, in which the state owns the resources, making a transition to democracy).

The period from the early 1950s onwards wasn’t particularly good for New Zealand.  None of the traditional advanced countries has done worse than us over that full period.  But consider Venezuela.

venezuela 2

This chart is from the Conference Board’s Total Economy Database, which only goes back to 1950, for the same group of countries.  The earlier chart was expressed in 1990 prices (and relative prices), while this chart uses 2017 international dollars.  Levels comparisons at any point in time are affected by which set of prices is used to convert data from national currency measures.   The period around 1957 still shows up as being Venezuela’s best relative performance, but on this set of relative prices Venezuela then was even more prosperous than the United States.  The key point is that in the late 1950s, Venezuela was right up there, in or around the very top tier of countries on a GDP per capita basis.

But whereas since 1957 even New Zealand’s real GDP per capita has more than doubled (and Australia and the US have done better again), in Venezuela there were only a couple of years when GDP per capita even matched 1957 levels.  At the most recent peaks a decade or so ago, the average Venezuelan was barely richer than their parents/grandparents had been 50 years earlier.   And all that was before things began to fall apart almost completely over the last decade.  No one can have much confidence in the most recent estimates, but if today’s Venezuela isn’t Somalia, it is no Uruguay either.

If one knew nothing more someone might suggest that perhaps Venezuela had had limited natural resources that had now been depleted and its former prosperity was never sustainable.   In fact, Venezuela today has more proven oil reserves than Saudi Arabia and substantial natural gas reserves as well.   This is a manmade catastrophe.   The optimistic take, of course, would be that when the manmade destruction ends, Venezuela can have a bright economic future ahead of it.  Perhaps –  and no doubt the decline of the last decade could be relatively easily reversed – but the allure of those state-controlled oil and gas resources will still be there, and the risks and temptations that took Venezuela down the self-destructive path of the last 50 years.

On a final note, here is the chart showing population growth in each of the five countries.

venezuela 3

From 1950 to about 1990, Australia’s population roughly doubled, but Venezuela’s population quadrupled.    Rapid population growth certainly isn’t a major element in the story of Venezuela’s relative economic decline, but when your economy rests almost wholly on fixed natural resources, exceeedingly rapid population growth tends to constrain the rate of growth in income per head (in ways not paralleled in economies –  such as most of western Europe –  little reliant on natural resources).   Things get rapidly worse when the population keeps on growing fairly rapidly, even as the production and sale of the natural resource goes sideways or backwards.   Despite all those reserves, Venezuela produces less oil now than it did in 1980, despite supporting more than twice as many people (those who haven’t fled across the borders to other Latin American countries).

 

Critics of the PM, left and right

I was going to write something short but serious, but then I noticed that Wellington economist (and economics blogger) Keith Johnson had been having another go at me.

I’ve never met Johnson but did rather admire his independent run for mayor of Wellington in 2016, campaigning (as much as anything) against the wildly uneconomic proposal for the ratepayers of Wellington to fund an extension to the runway at Wellington Airport.   From memory, in the STV system used in Wellington, I voted for him (well) ahead of the winner, Justin Lester –  who commits public money as if it is confetti (and whose council is apparently still trying to sort out a traffic management plan to fix leaking pipes in a dead-end street, now leaking for a whole month).   Quite possibly the only thing we have in common is living in the same suburb –  from the occasional photo posted on his blog I reckon I can see his house from where I’m typing.

Anyway, Johnson is clearly not a fan of yours truly.  There was a whole post a couple of years ago rather more sympathetic to Graeme Wheeler in the matter of the OCR leak (which I had alerted the Bank to, only to have Wheeler attack me in a press release).

There has never been any doubt that he comes from the left.   I don’t.     That said, I was very glad to see National ousted in 2017.  They’d done almost nothing in their nine years and, at very least it was time for a change.  No one would have been more pleased than I had the new government actually followed through on the campaign talk about lifting productivity growth and fixing the systematic dysfunction that is the housing market.   I even wrote a post at the time Jacinda Ardern became leader offering some specific suggestions.

Sadly, there has been so sign of anything serious.  Instead, there is a great deal of Prime Ministerial blather, interviews with foreign media, walking and talking with celebrities. But not much sign of real governing, in ways that might make a real difference to (at least) economic and housing outcomes.  And then there is the shameful silence on matters PRC –  I wonder if any of the media will ask her what she made of George Soros’s Davos speech –  he these days a doyen of the global centre-left –  calling on the West to take much more serious Xi Jinping’s threat to free societies.

So, yes, I don’t have much time for Jacinda Ardern.  As I suggested in a previous post, she might be well qualified to be Governor-General.  It is less clear that she is equipped to be Prime Minister.   They were her own words –  published in one of most esteemed serious newspapers in the world –  that I had a go at in my post the other day: lightweight, grossly misrepresenting history, and –  for all the rhetoric –  not offering anything of much substance that appears much different from what has gone before.

Which prompted Johnson’s first post.  He started with some (favourable) comments that economic historian Gary Hawke had apparently made about this blog.

Not that I am totally in awe of either Reddell or Hawke, both of whom are typical of the NZ Establishment – in my view at least being among the Tall Poppy Scything denizens that a young consultant colleague of mine once called a ‘bunch of arrogant bastards’.

I’ll take engagement with ideas and arguments over “awe” any day.

Apparently, I can’t really criticise the PM on productivity or housing

The first and most obvious objection to Reddell’s castigation of Ardern for perpetuating House Price Inflation and Failing to Address our Low Productivity is that He is Part of the System.

One might well ask then ‘What the hell did he do during his career to tackle the problems he identifies?’

That’s easy.  The Reserve Bank doesn’t do productivity or land use regulation.

He goes on

The second major objection of Reddell’s ‘analysis’ is that it is just plain rude.

You can reach your own view on that, but fortunately this is New Zealand not Thailand (lese-majeste and all that), and when you take the job of Prime Minister you should (she probably does) expect all manner of scrutiny.

And getting fully into his game we get this

Purporting to be an erudite independent-minded economic commentator, he nevertheless let slip his disdain of the so-called ‘left-liberal elites’ thereby placing himself firmly in the Alt-Right / Neo-Liberal camp.

Essentially he is arguing in favour of the plutocratic nationalism – in the form of the NZ National Party, the UK Conservative Party and the US Republican Party and Big Businesses Lobbies – and against the possibility of young people rediscovering hope in politics.

This Cassandra sounds to me like a jealous, covetous, exclusive bitch whose ears have been caressed by the Vipers of Malice.

Not sure how much overlap there is between the so-called Alt-Right and the so-called Neo-Liberal camps.  I don’t identify with either.   And, as I noted yesterday, I’m sure the National Party has never mistaken anything I’ve written here for support for them. (Republicans chose as their candidate a man totally unsuited by character and temperament to be President, and if they are more or less sound on abortion, have debuached the public finances and promoted interventionist foreign policies with which I have no truck.

And yet

Not that I disagree with everything that his says about the NZ Economy and its management. He is a smart fellow with whom it would be challenging to engage in a structured discussion on NZ economic policy.

And he is right to warn that rhetoric is no substitute for substance and that pretending to reinvent the wheel of Welfare Economics – while battening down Public Sector borrowing – simply raises expectations that cannot be reconciled or delivered.

I’ll take that.  It was a big part of my point.  There is – so far –  no “there” there amid all the talk of “kindness” and “wellbeing”.

But having, it appeared, largely conceded my substantive point, he presumably thought it necessary to finish with abuse

What I thoroughly disagree with him over is his misunderstanding of the difference between Policy Advocacy by a politician who openly declares her preferences and allegiances, and Policy Assassination by a biased, back-biting pseudo-academic with axes to grind and panties to bunch.

In this regard Mr Reddell should remember that the exercise of power without responsibility is the prerogative of the whore – not of the critic – panties bunched or off.

Never having had an ambition to be an academic, pseudo or otherwise, I’m not quite sure what he’s on about.  Where there is an important difference is between politicians who talk a good talk, and citizens who might reasonably ask for evidence of substance.

As for the weird conception that I wield “power” –  with or without responsibility……..

I came back to Johnson’s blog today to find two more posts.    One runs under the title “Croaking Cassandra: Making NZ A Country for Angry Old White Men” –  which is a bit odd really as, as far as I know, Johnson is white, and quite a bit older than me.   Personally, I’m keen on improving the country for young New Zealanders –  people like my kids who will soon face the prospect of unaffordable housing costs, in an economy heading towards upper middle income status.

The entire post consists of extracts from readers’ comments on my post on Ardern’s op-ed run together.    I’m not sure what the point is, although I have left a comment on the post to ask.  I’m bemused, but I thought some of you might be interested to find bits of your comments popping up somewhere else.

And then there was a third post headed “Jacinda Ardern: When Kindness May Not Be Enough”.   That sounded like music to my ears.

But before he got to his own substantive points, there was another go at me.

Apropos of my defence yesterday of our NZ Prime Minister Jacinda Ardern against the harridan drag artist blogger Croaking Cassandra,

“Harridan drag artist blogger”: well, that’s a new one.  Surely it must offend the sensitivities of some oppressed minority?   (But not me –  it just seems weird.)

But that was just a lead-in to an important observation from someone on the left

“I nevertheless feel the need to sound a note of caution on the gushing approbation that our girl is receiving in the world’s media from those of leftward tendencies.”

Hard to disagree, although personally I try to avoid describing adult women holding responsible accountable offices as “girls”.

He goes on to include lengthy extracts from an article on a local left-wing website, and cautions against paying too much attention to Helen Clark’s gushy promo for the Prime Minister  in Foreign Policy.   And then offers his editorial

“Of course, I massively endorse the sentiments behind Kinder Government –  as well as being more than ready to support Women Warriors against the Baddies who are often authoritarian. reactionary, and male.

But much of what is being said is Not New….

In fact, it may all be perceived by many as yet another illustration of what I have termed The Big Lie.

So Jacinda –  Go for It – But retain some humility.

Don’t get caught in your rhetoric and over-promise.

And kindly take account of the realities [including] you lead a front bench that is very short on real talent.

Hard to disagree really, although personally I don’t much care whether Prime Ministers are male or female. Performance is what should matter.  And we aren’t getting it.

But apparently never content to end with a rational mildly-sceptical take on his own sainted leader, Johnson feels the need to hit out again.  This is the final paragraph of that post:

Quite apart from that, you need to spend a bit more time covering your derriere. You can’t expect those accustomed to power who are authoritarian, reactionary, and male [i.e people like Croaking Cassandra Michael Reddell] to let you do your thing unmolested.  Believe me –  they are coming for your girl.

So  –  on his own terms –  his leader has a front bench without much talent, appears to be over-promising and underdelivering, and what she has to watch for is people like me.     It would be the voters I’d be more worried about if I were her.  New Zealanders seem to rather like their Prime Ministers being feted by overseas media and celebrities (whether Ardern or Key) but there will come a time when they are impatient for results.  Better results need better policy.  Johnson himself more or less makes that point.

And then I noticed a more-eminent commentator from the left, Chris Trotter, also had some new comments on the Prime Minister under the heading “The Jacinda Problem”.

It would seem that we misunderstood the Labour leader when she promised us a transformational government. Our naïve assumption was that she intended to transform New Zealand society when, clearly, it was herself she was determined to transform.

There will, of course, be a great many Kiwis who cannot get enough of their PM’s global celebrity status. Seated on the same stage as Sir David Attenborough. Discussing mental health with Prince William. What’s not to like? Jacinda is only going where Bono has so boldly gone before.

He goes on to make various policy points –  serious stuff not being done – where I might differ on specifics while endorsing general thrust, but this is his conclusion.

Jacinda is the most accomplished ambassador for New Zealand to have graced the global stage since David Lange bowled-over the Oxford Union. That is not, however, enough. Jacinda is not New Zealand’s MC, she’s our PM.

It’s time for her to start acting like one.

There is lots of rhetoric, lots of moving among the echo chamber of the like-minded overseas elites, but not much substance, all underpinned by even less robust analysis.

Keith Johnson can call me all the names he likes –  perhaps “harridan drag artist blogger” should now appear on the banner for the blog?  – but it doesn’t change the unease that thinking people from both left and right are beginning to feel.  Where’s the beef?

 

 

 

 

 

 

 

On a troubled, hugely-distorted, economy

The latest GDP numbers for China were released yesterday.  If they probably got more attention than they deserved in the international financial media, there appears to have been no coverage at all in the two main New Zealand newspapers –  surely there is some sort of happy median, as regards one of the two biggest economies in the world, one of the two economies with which New Zealand firms trade the most?    There has long been a sense that the PRC’s statisticians smoothed the national accounts data for political purposes, but in recent years there has been a growing sense that many of the numbers are, to a greater or lesser, extent, just made up.  Among the straws in the wind has been the remarkable stability in the reported GDP growth rates over the last few years.

More recently still, there has been a growing disconnnect between the reported GDP numbers and perceptions on the ground.   Here is how Michael Pettis, a leading analyst of Chinese economic developments and professor in Beijing, put it a few days ago

According to the National Bureau of Statistics, China’s economic growth in every quarter last year exceeded 6.5 percent. While that is much lower than the heady growth rates China has experienced for most of the past forty years, it is still, by most measures, a very brisk rate of growth.

And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth. Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations. In my eighteen years in China, I have never seen this level of financial worry and unhappiness.

“Perceptions” don’t help much in working out whether an economy really grew at 6.5 per cent or 6.2 per cent, but those aren’t the sorts of differences people are worrying about.

But what prompted this post wasn’t yesterday’s GDP release but rather finally getting round over the weekend to reading the translation of a speech given last month, marking the 40th anniversary of the PRC’s economic liberalisation, by a prominent Chinese economist.   It is introduced this way

On Dec. 16, Prof. Xiang Songzuo (向松祚) of Renmin University School of Finance and former chief economist of China Agriculture Bank, gave a 25-minute speech during a CEO class at Renmin Business School that was apparently applauded by the audience but immediately censored over the Chinese internet. Singling out 2018 as the year when China comes to a large shift unprecedented over the past 40 years, the speech can be seen as a landscape survey of Chinese economy, and obliquely, also of politics. Just as Tsinghua law professor Xu Zhangrun’s (许章润) broadside “Imminent Fears, Immediate Hopes”, which was superbly translated and widely talked about among China watchers, Prof. Xiang’s speech is another rare burst of Chinese intellectuals’ discontent with the direction the country is taking under Xi Jinping.

He begins with the economic slowdown

China’s economy has been going downward this year, as everyone knows. The year 2018 is an extraordinary year for us, with so many things taking place. But the main thing is the economic slowdown.

How bad are things? The number that China’s National Bureau of Statistics (NBS) gives is 6.5 percent, but just yesterday, a research group of an important institution released an internal report. Can you take a guess on the GDP growth rate that they came up with using the NBS data?

They used two measurements. Going by the first estimate, China’s GDP growth this year was about 1.67 percent. And according to the other calculation, the growth rate was negative.

(These latter suggestions were reported last month.)

It is a remarkably forthright speech.  For example

Second, what was the cause for the economic downturn? Why did private enterprises suffer setbacks in 2018? Looking at the data, investment by private businesses has dropped substantially, so what made private business owners lose confidence? On November 1, the national leaders convened a high-profile economic conference, which some interpreted as a signal that the government wants to win back the confidence of private businesses as the economy worsens.

Since the beginning of the year, though, all kinds of ideological statements have been thrown around: statements like “private property will be eliminated,” “private ownership will eventually be abolished if not now,” “it’s time for the private enterprises to fade away,” or “all private companies should be turned over to their workers.” Then there was this high-profile study of Marx and the Communist Manifesto. Remember that line in the Communist Manifesto? Abolition of private property. What kind of signal do you think this sends to private entrepreneurs?

Or

When we buy stocks, we are buying the profits of the company, not hype and rumors. I recently read a report comparing the profits of China’s listed companies with those in the U.S. There are many U.S. public companies with tens of billions dollars in profits. How many Chinese tech and manufacturing companies are there that have accomplished this? There is only one, but it’s not listed, and you all know which one that is. [Xiang is referring to Huawei, the Chinese tech company.] What does this tell us? As Yale professor Robert Shiller said: stock market performance may not work as a barometer of the economy in the short run, but it does for sure in the long run.

So I think that the terrible stock performance only demonstrates one thing, which is that the real economy in China is in quite a mess. Where is the stock market rebound? I think it’s obvious that investor confidence has yet to recover.

Or

I’m acquainted with many bosses of listed companies. Frankly speaking, a large part of their equity pledge funds did not go into their primary business, but used on speculation. They have many tricks. They buy financial products; they buy housing. The government said listed companies have spent 1-2 trillions on speculative real estate. Basically China’s economy is all built on speculation, and everything is over leveraged.

Starting in 2009, China embarked on this path of no return. The leverage ratio has soared sharply. Our current leverage ratio is three times that of the United States and twice that of Japan. The debt ratio of non-financial companies is the highest in the world, not to mention real estate.

Macro policies can be short-term palliatives, but they don’t deal with the basic issues

Moreover, these credit and monetary policies can only make short-term adjustments that are incapable of fundamentally solving the “imbalances” I mentioned earlier. We are still trapped within the box of the old policy and the old way of thinking. The key to whether transformation will be successful is the vitality of private enterprises—that is, whether policy can stimulate corporate innovation.

We have been making a game of credit and monetary tools for so many years. Isn’t this the reason we are saddled with so many troubles today? Speculation has driven housing prices sky-high.

Ending thus

I hear that the day after tomorrow, there’s going to be a grand conference to mark the 40th anniversary of the “reform and opening up.” I sincerely hope that we’ll hear something about further deepening of reforms at that conference. Let’s wait and see if any real progress can be made on these reforms.

If this doesn’t happen, let me conclude on these words: the Chinese economy is going to be in for long-term and very difficult times.

In some ways, what has been remarkable about China over the last year is that not only has there been no serious structural reform (of the sort that might actually position the economy to get towards material living standards in places like Korea, Japan, Taiwan or Singapore) but there has not been much counter-cyclical stimulus either.

If one takes a highly stylised view of China’s economic growth this century, there are two broad phases.    The first involved a huge increase in China’s exports, and in the export share of China’s economy.

china exports

From 2000 to 2007, exports as a share of (fast-growing) GDP rose from around 20 per cent to around 35 per cent  (imports also rose substantially, but this was the period when the current account surplus –  in a developing country –  peaked at almost 10 per cent of GDP).  Of course, not all of that was value-added by Chinese firms – many products are recorded as final exports from China, but may only have a relatively limited amount of Chinese value-added in them (i-phones are the most often-cited example).     In a country as  large as China, trade shares anywhere near 30 or 35 per cent were never going to be sustained –  large countries (see the US or Japan) mostly trade within their own borders –  and with the sharp rise in China’s exchange rate, and the slowdown in growth in demand from advanced economies, the “export engine” has lost power.  In fact in USD terms China’s exports have grown only quite modestly over the last five years (and consistent with that the export share of GDP has shrunk markedly).

After 2008, GDP growth has been underpinned by a massive domestic credit and investment/construction boom.

china capex

During that period, investment of GDP –  already absurdly and inefficiently high – reached new highs, in an economy that had neither strong population growth nor, any longer, was making big new inroads competing in world markets.   You can do that sort of thing for a while –  on a much smaller scale, one could think of the Think Big massive boost to recorded investment and activity here in the early 1980s, or of the construction booms in Spain and Ireland earlier this century.  But the economic returns to doing so tend to be quite severely diminishing, and the risks (associated with sustained misallocation of resources) mount.  It seems to take more and more additions to credit to get the next dollar increase in GDP.   And private borrowers/investors –  even aided and abetted by over-eager lenders –  get more uneasy, and only the most risk-loving are still keen to take on new projects.  To the extent that GDP still rises, productivity rarely does.  Excess capacity forms, even as the most deluded fails to recognise the symptoms,

Indications are that the Chinese authorities recognise that the credit boom and associated wasteful investment wasn’t sustainable, but there also seems to be a possum-in-the-headlights dimension to policymaking at present.   What are the feasible alternatives after all?

For a long time, my approach to China was that of course the state could prevent a financial crisis (of the sort in the US in 2008/09) if it chose to.  After all, there are few technical obstacles to a totalitarian state just guaranteeing all the liabilities of banks and other financial institutions.   Perhaps they still could, although the complex web of channels of financial intermediation –  combined with starting levels of debt and deficits –  make that a lot harder than it once was, and even guarantees don’t allay all the fundamental unease about the misallocation of resources and associated risks (you might not panic –  running on your bank – but you might be reluctant to invest or spend anyway).

Conventional mechanisms in a market economy rely heavily on cuts in official interest rates.  Chinese interest rates could be cut, but (a) the transmissions mechanisms aren’t the same as those in market economies, and (b) as we saw in the West after 2008, even big cuts in interest rates can –  when times are tough –  often only act to lean against the depth of a recession, not necessarily doing much to put growth on firmer sustained foundations.

There is fiscal policy of course.  Given the China is already starting from a deficit position (on OECD numbers, Chinese government net borrowing as a per cent of GDP is projected to be about 3.5 per cent of GDP next year) perhaps the possibilities there are more limited than they might seem, especially against the magnitude of the slowdown China seems to be experiencing.   But –  and these are the sorts of options we used to debate in western economies when we thought about the exhaustion of conventional instruments – there is always, at least in theory, the option of large scale directly government-financed construction and related projects: unsterilised fiscal policy, directly financed by the central bank: building bridges to nowhere, more empty apartments, airports that are little used and so on.   It could be done no doubt, although simply freeing up liquidity requirements and encouraging banks to lend isn’t likely to bring such outcomes about.   And PRC technocrats seem as uneasy about unconventional macro policy as many of their western counterparts were (it is, after all, only 70 years since China was experiencing hyper-inflation).  But even if it were done, it would have the feel of simply buying time, storing up bigger adjustment problems further down the track.

The other strand of a conventional transmission mechanism involves the exchange rate.  Economies experiencing difficulties will typically experience an exchange rate adjustment, which lifts returns to domestic producers, encourages more investment in the tradables sector, and so on.  It was one thing for China to engage in a massive domestic-focused credit boom starting from a position of a 10 per cent current account surplus (and massive –  relative to the then size of the economy –  foreign exchange reserves).  It is quite another now, when (a) the current account is near balance, (b) reserves are at unspectacular levels, and (c) the private sector seems increasingly distrustful.   Significant fiscal or monetary stimulus will, all else equal, boost domestic demand but not foreign demand, and would increase materially the pressure for an exchange rate adjustment (and the perceived returns to illegal capital outflows).   That would be rational and sensible adjustment in a normal economy –  places like Greece and Portugal would almost certainly have benfited from having the option, as New Zealand does in its downturns –  but it is nowhere near that easy an option for China, for economic and political reasons.    Such a devaluation –  let alone a float –  would only intensify that economic conflict with the United States, but might well be seen more widely (at a time when the world economy is not strong) as exporting deflationary pressures to the rest of the world, and potentially bringing renewed global economic stresses (the amount of USD borrowing by Chinese entities is also not an irrelevant consideration).

This isn’t an attempt to offer all the answers, more about identifying some of (very real) constraints that PRC economic policymakers now face.  I’m very much with the learned professor, quoted earlier, that what –  in some abstract longer-term sense –  China needs is serious thorough-going market-oriented reform and liberalisation.  But even in small advanced economies those sorts of programmes can be very disruptive, even costly, in the shorter-term, whatever the substantial longer-term gains on offer.  But in a society where the Party in charge has spent the last half-dozen years asserting increasing control, in an economy now one of the largest in the world (when the global economic environment is insipid at best), starting from all that debt, and in an increasingly tense global political environment how plausible is it to expect step-changes in policy for the better?   And how credible would either domestic or foreign investors even regards indications of such change as being?

What might it all mean for New Zealand?  The terms of trade is typically the main channel by which slowdowns abroad affect our economy, but one might reasonably be pretty nervous about the outlook if one were a New Zealand exporter of education services, construction products, or even (year of the Chinese tourist notwithstanding) tourism.  Fortunately for us, we do have a flexible exchange rate and fluctuations in our exchange rate don’t matter much to anyone else, but don’t forget how little conventional monetary policy firepower even our Reserve Bank has now, compared to what it had in previous downturns.

To end with just a couple of snippets.  This from the same Pettis commentary I linked to earlier

These concerns have even breached academia. One of my students told me yesterday that there was a huge increase last semester on the university website in the number of students selling their belongings because they are hard up for cash. They are selling their phones, computers, clothing, and lots of other possessions. He said the amount of selling is noticeably higher than last year, enough so that everyone is talking about it. And he indicated that this is apparently happening at other schools too. It seems that the poor and middle-class kids are squeezed for cash because they are getting much less money from home than they have in the past.  This isn’t what you’d expect to hear from an economy growing at more than 6.5 percent.

And this from a story I noticed over the weekend

“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us,” said Nidec CEO Shigenobu Nagamori. “What we witnessed in November and December was just extraordinary.”

Nidec, a Japanese company with $14 billion in revenues last year, makes a wide range of electric motors, from tiny devices that make the iPhone vibrate to industrial motors. It’s the world’s largest manufacturer of motors for disk drives. For the automotive industry, it makes things like engine and transmission oil pumps, coolant pumps, control valves, and fans and blowers. It makes motors for industrial robots, etc.

It’s a supplier to Apple, other electronics makers such as hard-drive makers, but also appliance makers, automakers, robotics manufacturers, industrial equipment manufacturers, etc. In other words, the company is a key supplier of advanced parts to Chinese factories.

The company slashed production at the end of 2018 for Chinese automakers and appliance makers by over 30% because of weak demand, Nagamori said.

This slowdown seems to be very real, and China is large enough now it is likely to really matter across the world economy.  As my former colleague Kirdan Lees has it (in a column I don’t fully agree with, but might comment on in a separate post), Grant Robertson needs a recession plan.  So does Adrian Orr.  Not because such outcomes are certain –  they never are (until it is too later) but because the risks are rising.