Savings rate across the OECD

In my post yesterday I looked at various New Zealand saving and spending series across time, drawing from the recently-released annual national accounts data.  In this post I’m looking just at national savings rates, but across the spectrum of advanced countries, as proxied by membership of the OECD.

Savings rates have been a hardy perennial in discussions of New Zealand macro data and economic performance for a long time.   It is perhaps in the nature of the case given that for much of its modern history, New Zealand has drawn fairly heavily on foreign savings (and thus has typically had quite a large negative net international investment position).  For much of our more recent (say, post-war) history, economic performance –  proxied by productivity or per capita income measures –  has also disappointed.

The stylised facts were that, by comparison with other advanced countries, our national savings rates tended to be fairly low.     Quite why wasn’t  –  perhaps isn’t – lways clear.   For most of the post-war period –  the 70s and 80s were the exception –  the government’s accounts tended to be fairly well-managed.  And although the tax treatment of household savings tends now to be quite hostile –  under the guise of (a false conception of) neutrality –  it wasn’t always so (until the changes at the end of the 1980s).

In this post, I’m concentrating on the same indicator of national savings I used in yesterday’s post: net savings as a percentage of net national income.  In other words, provisions for depreciation don’t count as saving (they aren’t available to build the capital stock, only to maintain it), and the relevant income measure is the income available to New Zealand residents after providing for depreciation. In other words, the income available to consume or to build the capital stock.

In the paper a few years ago in which I first tried to document and articulate my story around New Zealand’s economic underperformance I included a chart showing that in the early 1970s (when comparable international data date back to), New Zealand had had the sixth lowest national savings rate of the OECD countries for which data were available.    Here is a version of that sort of chart.

net savings 70 to 74

In many ways, it is quite a startling range, and not just for a single year (which can be influenced by different cyclical factors).

One of the points I made in that earlier paper was that New Zealand didn’t look such an outlier if one focused in on just the Anglo countries –  not just the ones we often compare ourselves too, but also perhaps the countries with the greatest cultural similarities to New Zealand.    In this particular snapshot, we had national savings rates higher than those in the UK, Canada, and the US, while all four countries were materially lower than Australia.

How has that Anglo country comparison unfolded since?

net saving anglo comp

We had national savings rates lower than the other Anglos in the late 70s, but since at least the early 1990s, we’ve never had a national savings rate materially lower than that of the median Anglo country and for two multi-year periods (including the last few years) we’ve been well above that median.

Now, one point I probably didn’t make clearly enough in yesterday’s post is that inflation can distort these numbers, especially for countries with large net international investment positions (particularly large debt positions).   In the presence of inflation, some of the interest paid abroad is recorded as a factor income payment when, in economic substance, it is just a compensation for inflation and thus is, in effect, a repayment of principal.  This is a well-recognised point, highlighted from time to time by agencies such as the Reserve Bank, but there are no official series making the correction.

For New Zealand in the early 80s, most probably our “true” national savings rate was below that in other countries –  there were large government deficits at the time – but at a time of heavy indebtedness and still quite high inflation (most of our debt then was denominated in foreign currency) the gap would be smaller than shown here.

What of the current position?   At present, the UK and Canada have NIIP position near zero, while Australia, New Zealand, and the United States are all around -50 per cent of GDP.     But the US net position is mostly an equity position, reflecting high share prices (foreign holdings thereof).  In the New Zealand case in particular, by contrast net debt is almost equal to (ie in net terms makes up almost all of) the overall net investment position.    With a core inflation rate of perhaps 1.7 per cent, our national savings rate would be perhaps 0.8 percentage points higher again if inflation were accounted for correctly.  But bear in mind that 15 years ago, not only was inflation (and inflation expectations) a bit higher, but that our NIIP position was also more negative (more like 70 per cent of GDP).  The appropriate adjustment then might have been more like 1.5 percentage points.

Bottom line: it is a real issue to keep in mind, but the extent of any adjustment required is less now than at any time since the early 1970s (when inflation was getting up but the NIIP position was small).

What about the simple comparison with Australia?  Australia has often been held up –  especially in New Zealand –  as some bastion of (Anglo) high savings.  Champions of compulsory private savings (as found in Australia) are fond of it, even though those champions will rarely acknowledge that the gap between Australian and New Zealand (net) national savings rates has been smaller in the years since Australia introduced compulsory private savings than it was previously.

So how do the simple New Zealand/Australia comparisons look?

net savings aus nz

There is plenty of variation in the series of course, and you can see (for example) the way the huge surge in Australia’s terms of trade boosted national savings rates up to around 2012.   But having had a net national savings rate averaging well below Australia all the way through to the start of the 1990s, we’ve since had net savings rates that are really rather similar on average.  This century New Zealand averages just slightly lower than Australia, but for the last few years we’ve had a higher net savings rate than Australia.

In fact, of the five Anglo countries, New Zealand currently has the highest net national savings rate.

(Note that these are comparisons of net savings rates –  the share of income available to build the capital stock.   Australia’s mining and resources sector is very capital-intensive and comparisons of gross saving rates –  which include depreciation provisions –  are higher in absolute terms, and Australia’s are higher relative to those in New Zealand.)

And here is the comparison for that whole group of OECD countries for which there was data right through since the early 1970s, this time an average for 2013 to 2017, the most recent five year period for which there is comprehensive data.

net saving 13 to 17

New Zealand in the upper half of the (old) OECD.    Not a chart I really expected to see.

Even if we add in the newer OECD countries and look just at the most recent year’s data

net saving oecd 2018

New Zealand is almost exactly the median country.

Now, personally, I wouldn’t get too excited about this.   When you are among the handful of countries with the fastest trend population growth rates you would expect over time that your country should also have relatively high (net) savings rates (all that capital stock, whether commercial, public, or residential, is typically owned and paid for locally eventually).  And all the countries in the upper quartile of that last chart have modest rates of population growth (or have falling populations –  Estonia).   But it is a somewhat different emphasis than we’ve been used to seeing.

Work, income, technology and all that

A few weeks ago, commenting on one of my posts on New Zealand’s relative economic underperformance, a reader (a former Treasury economist) encouraged me to read  Jobs, Robots & Us, a book published earlier this year by Bridget Williams Books and written by Kinley Salmon, an economist and consultant (formerly of  The Economist and McKinsey) raised in New Zealand but now resident in the United States.   My reader suggested that he thought “the politics will not appeal” but that there were useful insights in the book.  So I bought and read it.

It is a funny mix of a book. It is written in an enviably accessible style and has positive blurbs from an impressive range of fairly prominent  and well-regarded economists (David Autor, Lant Pritchett, Diane Coyle, Dani Rodrik, and Ricardo Hausmann).   He covers a lot of material (50 pages of endnotes/references –  including, I noticed, one to a post from this blog).  There was the odd, really interesting, fact I didn’t know.  For example, that the first solar panel was created in 1883 and that what is essentially today’s approach to solar panels was developed in 1954, or that self-driving cars managing 90 kms per hour were a thing as long ago as 1987.    And there was a lot I was nodding along to or putting ticks in the margin beside.  There is little sign that “robots are coming to take our jobs” in any very rapid or disruptive sense, and in support of that argument he uses lines I’ve used here before: labour force participation is high (thought not, contra Salmon, record highs), unemployment rates are modest, and recorded productivity growth (especially in frontier countries) isn’t exactly dazzling.

Last week I wrote, quite critically, about the Productivity Commission’s latest draft report, suggesting that it was pursuing personal political preferences of staff/commissioners around a bigger welfare state (especially for the unemployed) under the guise of (often not very persuasive) economic analysis.  In many ways, Salmon’s book is much the same sort of piece, except that –  not being a public servant –  there isn’t a problem with him championing his social democratic vision of the world (or, rather, New Zealand –  if I didn’t mention it earlier, the book is deliberately very New Zealand focused).  In fact, it is a useful contribution to the debate around such issues, helping to frame some of the issues.   It isn’t explicitly partisan and I’m pretty sure no New Zealand politician or political figure even gets a mention (unless one wants to include Adrian Orr under that heading) but his sympathies are pretty clear.  Indeed, reading the book I was left wondering if it was intended, at least in part, as a marketing exercise for a spot on Labour’s list some time down the track, if the author ever comes back to New Zealand

In fact, Salmon links to an interesting short paper he wrote for Labour a few years ago, on the Danish flexicurity system that he –  and the Productivity Commission – champion.

Advocates of flexicurity claims that the social compact that gives rise to such provisions makes for more flexible labour markets –  people will more readily move to where the new and better opportunities are.  In this chart, the higher the number the more restrictive the law.


In his Labour Party note, Salmon also notes that 25-35 per cent of the Danish labour force change jobs each year.  In the New Zealand LEED data about 15 per cent of workers change jobs each quarter (you can’t simply multiply those numbers by four to get an annual rate, because some people will do several jobs in the course of the year).   Either way, of course that rate of turnover is (much) faster than the underlying technologies are changing.   And advocates of flexicurity –  protecting people involuntarily displaced –  often seem to overlook pointing out that most job changes, including those associated with technological change, occur voluntarily (were it otherwise there would be no new-tech firms/jobs in France, given their scores for employment protection legislation.)  Large scale multi-year unemployment problems are much more often the consequence of recessions – or, more rarely, major structural policy changes –  than of technological change.  And, of course, the ability to handle recessions –  and associated unemployment –  is much more constrained in a country like Denmark, which has a fixed exchange rate and thus no ability to use discretionary monetary policy.

But back to the book.  Here, his bottom line message seems to be that we (New Zealand) can, to a considerable extent, make our own future, and can make collective choices about how as a society we respond to new technologies.    He devotes two chapters to alternative visions, each built –  in easy to relate terms –  around individual families 30 years hence.     One, to be honest, looks a lot like now (only richer) –  but might have been just slightly more persuasive if the family concerned wasn’t generating its main income from an industry (film) that exists here now only because of heavy taxpayer subsidies.  The other was one in which most people choose not to work, but live comfortably on some mix of a UBI and a state allocation of equity shares to all when they turn 18.

Perhaps it is a useful expositional device, but I’m a bit more sceptical about quite how much choice individual societies collectively really have.  After all, technologies today are hugely different (and more advanced) than they were 100 years ago and yet –  despite reasonably significant differences in the size of government –  in important respects most advanced countries really do look pretty similar (eg no society has chosen to settle for 1950 living standards and taken the improved possibilities in dramatically shorter working weeks/lives).  And, despite Salmon’s attempt to be New Zealand specific, it is striking that “Australia” doesn’t appear once in his index (although I do recall one mention) and there is no discussion at all of how potential political choices here might be reflected in, for example, changes in the net flow of New Zealanders to Australia (the much richer exit option for decades now).  In fact, much of his discussion is really quite North Atlantic in focus –  perhaps reflecting Salmon’s own education and employment, and the authors he cites (eg those who blurbed the book) –  and he doesn’t seem to engaged in any depth with the severe limitations New Zealand’s geographic remoteness poses, or the steadily widening gaps between the productivity performance here and that in the leading OECD countries.  I guess one can’t cover everything in a single book.

Perhaps where I would be more critical is that on some issues he doesn’t seem quite sure what line he is taking from chapter to chapter.  Tax is a good example, where at some points he worries about advanced countries being too reliant on taxes on labour, and taxing capital too lightly, making the point that firms will seek to economise on expensive inputs.  But later in the book he is openly talking up the possibilities of higher (labour) income taxes, the use of payroll taxes “consistent with incentivising greater automation”.    He also can’t seem to make up his mind whether low interest rates are dreadful –  encouraging too much use of capital –  or something really positive, from a pro-active set of central banks.  Whichever he wants to plump for, he substantially overstates the importance of central banks (or fiscal policy) in influencing medium-term real economic outcomes.  He cites (approvingly) Adrian Orr urging firms to invest, without showing any sign of having thought hard about (a) why interest rates might need to be so low, or (b) why business investment rates in New Zealand have been so low for decades.    And perhaps there is a similar tension between his enthusiasm for something like flexicurity and the way he (rightly) highlights just how serious the implications for individuals (mental health etc) of prolonged unemployment can be.

Salmon comes down on the side of expecting that decades hence things will look much as they do now, in that most adults will still get up and go to (paid) work. I suspect he is right about that.  But I was somewhat puzzled by his paid-employment focus. He talks about how “it is at work where we most often find ourselves in a state of flow: that feeling of being totally immersed in an activity, energised by it and enjoying the process”.  He goes on to assert that (paid) work is a good thing because someone tells us what to do, and in the process we rise to challenges etc.  We need, on his telling, external mechanisms that force us to commit.     To be honest, it seems like the perspective of someone with a particular set of skills that are very valuable in paid work, without community involvements, and someone without too many ties elsewhere (no kids as far as I can see, his own family thousands of kilometres away).

I take his point about some retirees blobbing in front of the TV and going into decline.  But the energy and engagement and commitment of being a stay-at-home parent –  particular of very young kids –  seems something alien to his world.  And as someone who has got up each week day for almost five years and written something here, not because I have to but because I enjoy doing so, it all seems a little alien to me. Or I look at the energy and activity (often more than a little exhausting) of my (formally retired) in-laws. Perhaps these days plenty of people do need the structure work imposes, and there is certainly an ongoing demand for the services/goods paid employment provides the ability to purchase.   But it didn’t seem quite the open and shut case Salmon makes it out to be.

There is quite a bit more in the book including on climate change and a bit on immigration, where his views seem to be pretty conventionally North Atlantic centre-left (including the failure to recognise the role that rapid population growth –  or lack of it – plays in explaining why, for example, New Zealand’s emissions were rising while those of, say, Denmark and Germany were flat or falling).

It was, as I said, a funny mix of a book.  Perhaps it was really two quite different books.  One was a fairly useful survey of the issues and literature around technological change and the options, possibilities, risks etc.  That book wasn’t really very New Zealand focused at all.  And the second, woven through the first in the book we actually have, was his own policy preferences and political inclinations.   Fair enough. It was his book, But I read books I don’t really expect to agree with to be challenged and extended, to understand where others are coming from, and perhaps even to at times change my mind on some things.  Perhaps I wasn’t the target readership, although the fifty pages of notes/references suggests it wasn’t mainly a mass market publication either.  But I didn’t come away from the book particularly challenged or extended. In a way that’s a shame, because Salmon clearly has thought quite a bit about a number of the issues, and he isn’t just a partisan hack.    Despite the blurbs, perhaps the book would have been better for having taken a bit more time to test the argumentation on the policy side a bit more robustly.  And, of course, any book thinking about the New Zealand economy and its prospects needs to grapple much more seriously with the actual experience of decades of relative decline.


Spin….just spin

I suppose all Prime Ministers these days feel the need to spin.

Ours was at it again yesterday.   She was talking over breakfast –  a vegetarian one the Herald account tells us – to the Trans-Tasman Business Circle.  Her topic?

The topic I have been given for today – ‘The Future of Work and how the government is preparing for the economic challenges of the future’

It is pretty much downhill from there.

Countries the world over are currently grappling with digital transformation, and transitioning their economies, and New Zealand is no different in that regard.

Even if you pardon that abuse of the language (“transitioning”), does anyone have any idea what this means. Individuals and firms are getting on with their lives, looking for opportunities, as it long has been and no doubt long will be.  Are technologies different than they were fifteen years ago?  Of course.  But is our economy that different than it was fifteen ago?  Sadly, probably less so than one would hope.

That isn’t the prime ministerial spin though

Where we are different, I believe, is in the way we are responding to those challenges, turning many of them into opportunities.

The country with weak productivity growth, drifting further behind the rest of the advanced world, and with declining shares of GDP accounted for by trade with the rest of the world.

As it happens, the annual national accounts were released later yesterday morning.   I was playing around with the data and might use it for various posts in the next few days, but since the PM was talking about “digital transformation”  I thought this chart was interesting.

cap stock 19.png

Now not all of these, by any means, are about the narrow “digital transformation”, but if such a thing were happening on a large scale, in which new world-beating opportunities were being developed and seized, these indicators are among those where we might expect to see it.  As it is, over the last few years things to have been more or less going sideways.

The PM went on to first offer some context

Firstly, the NZ economy is in good heart amid the global challenges and what many believe are new economic normals,

Well, okay, believe that if you want.  But most respondents to surveys don’t share your positivity, and in general they are less likely to be motivated reasoners than a PM.  And

Secondly, the Government and Reserve Bank are doing their bit to ensure that fitness endures and it’s important business continues to work with us too – after all, we mustn’t talk ourselves into a funk

We are right, you are wrong.  Get with the message.  Or at least that seemed to be what she was suggesting.  Just a shame the data don’t tend to support her.  I’m still not sure what the Reserve Bank has to do with “that fitness” (whatever it is) –  presumably she hasn’t had it schooled into her that the OCR is typically cut (in an economy without big positive productivity shocks) because demand is weak and things aren’t going that well.  Oh, and is she perhaps aware of those big new capital requirements the Governor is wanting to impose on banks, and hence on the availability of credit to the economy?  If she is embracing those, that would be an interesting call –  her Finance Minister has been very careful to disown all responsibility.

Anyway, she gets into her stride in a section headed “It’s the economy”.

All of you in this room will know that this Government’s approach to the economy is that it is not an end it itself but, rather, a means to an end.

Which might be news if, just perhaps, she could point us to any government in history, or even just New Zealand history, for whom that was ever not so.

That of course means building strong economic foundations. And on that front we’re doing pretty damn well actually, especially amid global uncertainty.

The argument must be weak so lower the tone of the language.  No one is going to dispute that successive New Zealand governments have successfully focused on budget balance and a modest level of debt.  What about her other claims?

So far our policies have delivered growth of 0.5 percent in the June quarter and average growth of 2.4 percent in the year ending June. That shows that the New Zealand economy continues to outperform those of Australia, Canada, the Euro area, the UK, and the OECD average – basically those we compare ourselves to.

That tired old line so beloved of whoever is in office, right or left, and their champions.  Never mind that we have substantially faster population growth than all of those countries except Australia and that any reasonable and honest use of GDP statistics in a a discussion about success, wellbeing or whatever, starts from a discussion of GDP per capita.    On that score, there is nothing impressive about even our recent record, let alone the longer-run picture.

Also, recent data shows New Zealand’s manufacturing and services sectors are both expanding.

Well, yes that is probably so, but…..when your population is growing by 1.5+ per cent per annum if those sectors (ie the bulk of the economy) were actually contracting it would be really quite alarming.

We have record low unemployment and annual wage growth is at its highest level since the 2008 financial crisis. Average wages have increased by 4.2% in the last year alone.

Yes, relatively low average unemployment –  consistent with the typical person being unemployed for “only” two years in a working life –  is one of the successes of the New Zealand policy framework.  But the current rate is nowhere near a “record low” –  not even during the 30+ years of the HLFS (that was just prior to the last recession), let alone the post-war decades prior to the quarterly survey getting going.

New Zealand continues to be a good place to do business, topping the World Bank’s 2019 Ease of Doing Business index. Our globally competitive economy is underpinned with stable political and regulatory systems, an innovative well-educated population and our proximity to 60 percent of the world’s population. We are a safe place to invest.

Such a great place to do business in fact that (a) business investment remains persistently weak, especially given the surge in the population, (b) our economy is becoming more inward-focused (trade shares have been falling) and (c) another tired old line –  we are close to 60 per cent of the world’s population –  that bears just no relation to reality whatever.  Yes, we are closer to the centre of gravity of world economic activity than we were 100 years ago – when we traded mostly with the then-dominant power the UK –  but these days the UK is still closer to India and as close to China as we are.  In both cases, far away.  Oh, and we are also a long way from those leading productivity economies in Europe and North America.

And last on this list

And you’ll note that when the Reserve Bank announced its decision to hold the Official Cash Rate at 1 percent last week, its analysis confirmed the economy is in good shape, amid global economic headwinds. The Bank pointed out that employment is pretty much at its maximum sustainable level, residential investment is increasing and that economic growth is expected to rise next year, due to the Government’s investments. While the RBNZ noted that global headwinds have impacted business confidence in New Zealand, it also said that our investments are forecast to support and grow the economy next year.

When the Prime Minister says “investments” here she really just means more government spending, most of it consumption or transfers.  Probably she didn’t read the Reserve Bank’s statement, but she will have had a personal briefing from the Governor.  He too is inclined to spin, but his document had a rather lot on the downside risks –  in fact they explicitly noted, and formed policy on the basis of, the balance of risks being to the downside.  And while the Bank had rather upbeat growth forecasts, few private economists shared their optimism.

I am not wanting to suggest things are disastrously bad, at least in a short-term cyclical sense in New Zealand, but at very very least the PM is gilding the lily.   Perhaps you might think that is her job, and on a bad day I could share the cynicism, but we really should expect something better from people who hold office as leaders.

But her own summary is this

Ultimately, we have a positive story to tell, including to investors, and one of my consistent messages is that we are a stable, reliable  investment option, with plenty of success stories. Now, domestically, we  all need to act like it.

I’m right, you are wrong, get with the message.   Or so it seems.     And, yes, we do have a fair measure of political stability –  no Brexits, no civil wars etc, no impeachment hearings (just the ongoing stench of the political donations scandals) –  but that doesn’t markus out from most advanced countries, those that have been performing pretty strongly –  actually securing the productivity gains on which so much else rests –  and those, like New Zealand, that haven’t.

The next section is headed “Govt doing its bit”.  Here there is a lot about capital investment

It won’t surprise you to hear me say – infrastructure, infrastructure and infrastructure. There’s no question that we have a range of deep policy issues to address as a nation, but unless we get the basics right of providing decent housing, transport and health and education services, we’ll only compound those more complex issues. That’s why the Government’s Economic Plan, which you will have heard many Ministers talk about, is designed to build an economy that protects and improves the living standards and wellbeing of all New Zealanders through ensuring we get those most basic fundamentals right.

That’s why we are investing record amounts in hospital and school building programmes – including the fact that in our first two Budgets we’ve invested $2.45b into upgrading and building new hospital and health facilities- that’s twice as much as the previous government managed in nine Budgets – alongside large investments in transport safety, regional roads, and public transport, and we’ve done that while maintaining a responsible budget surplus.

“The Government’s Economic Plan“: that’s a good line.  I hope it got a laugh.  But perhaps the audience were more polite than that.  Infrastructure?  Well, shame about the roads that aren’t getting built, even as the population grows rapidly.  And here is another chart from the annual national accounts, showing general government investment spending as a share of GDP.

govt GFCF

Nothing startling about spending in the first full year of this government.  But perhaps it will be different in years to come.

And then the empty boasts about housing

Not to mention our comprehensive plan to fix the housing crisis which includes delivery of: more state houses than any Government since the 1970s, banning offshore speculators, expanding Housing First to end homelessness, a $400 million package for a progressive home ownership scheme, and making saving for a house deposit easier by lowering the deposit required for a Government-backed mortgage or first home grant from 10 per cent to five per cent. These are real, tangible, things that will help New Zealanders and their families.

“Comprehensive plan” and yet not a mention of the only thing that would make a durable, substantial and sustainable difference, lowering prics of houses and urban land, land use reform.  Allowing people to borrow 95 per cent LVR loans – even as her Reserve Bank keeps on LVR restrictions on private credit –  is at best papering over the cracks of the failures, chosen, of successive governments, including her own.  But give her credit for consistency:  Labour leaders (whether Little or Ardern) have never been willing to champion serious land use liberalisation.

A little further one and we get this recapitulation

Ultimately, this [Infrastructure Commission report] should all be sending two really strong signals. That we are planning for the future and that now is the time to invest. New Zealand is doing well and there are enormous opportunities if we act now. The best thing for the NZ economy at the moment is optimism, planning and investment action. We’re doing some pretty heavy lifting to shore that up in terms of spending and infrastructure investment, the RBNZ is doing its bit with record low interest rates – the private sector needs to ensure it’s on board too.

But, our economy (a) isn’t doing that well (see above) (b) and firms –  people with shareholders’ money on the line clearly aren’t seeing “enormous opportunities” to invest, either now or (in fact) for decaders past.  If it were otherwise now then, all else equal, interest rates just wouldn’t be this low –  as a macro 101 reminder to the PM, interest rates are low because demand for resources at any higher interest rates would be even weaker.

But the PM enjoins us to “only believe”, to join some sort of cheerleading squad building castles in the air.

In fact, one of my staff members asked an economist earlier this week to sum up the economy in one sentence and was told – “it’s ready for lift-off”.  I could not agree more.

Perhaps there is such an economist.  Perhaps he/she doesn’t even work in DPMC/PMO. Perhaps there even will be a bit of a recovery next year.  But just nothing suggests this economy is “ready for lift-off”.  The basic imbalances and severe structural problems haven’t been addressed, haven’t changed.

She goes on.  There is the claim

we have laid out a clear agenda. Yes, it includes change, but by now you’ll all know what that agenda entails and how we’ll deliver it.

Somehow, I suspect the farmers angsting about the current water proposals don’t see it that way.   And the government might have passed a Zero Carbon Bill, but (whatever its merits) it involves almost no substantive certainty about anything affecting business.  Do we know what is happening about Fair Pay Agreements?  And so on.

The speech goes on into a variety of other areas.  The last I wanted to comment on was this –  something to look forward to next week

Today I am also able to provide you with some insight into an upcoming announcement for the Forum. On November 25 the Forum will publish its Strategic Assessment of Future of Work Priorities. This presents four initiatives as priorities:

  • The first is Industry Transformation Plans which will ensure we add value to key sectors of our economy and leverage new opportunities. These plans – for the food and beverage, digital technology, forestry and wood processing, and construction and agritech sectors will describe an agreed vision for the future of each sector, and set out actions required to realise this vision.

(So actually, some of the “clear agenda” isn’t laid out yet, but will be next week?)

Presumably the Prime Minister takes this stuff seriously, but really who supposes that a bunch of central planners, bureaucrats and their corporate equivalents, are really likely to come up with anything useful in these “industry transformation plans”.  Haven’t we had numerous such plans before, stretching back many decades, and precisely what useful has come of them?    Market economies just don’t succeed with “agreed visions” across government and the upper tiers of existing industry players, but by competition, trial and error, creative destruction, unexpected discoveries…..all supported perhaps by governments willing to do what it takes to put a supportive overall policy environment in place.   Our goverment, much like its predecessors, is all too fond of the status quo, and unwilling to –  probably uninterested in –  getting to the bottom of why that continues to produce such mediocre economic results.

As a hint, the real exchange rate –  a key relative price that never seems to make it to the PM’s upbeat economic speeches –  remains well out of line with what you might expect for a country with such a disappointing long-run trade and productivity record.  It might be consistent with that performance, but simply isn’t consistent with delivering something much better, that “productive and sustainable” mantra ministers always keep reciting, while never doing anything much to bring about.

I guess Prime Ministers feel the need to spin, perhaps especially those who aren’t willing to do much substantial.    But it is a shame there isn’t a lot more honesty about the underwhelming state of the New Zealand economy and the reluctance of our policymakers and their advisers to do anything much about changing it.  Sheer spin might get a good headline in the next day’s newspaper, but longer-term it just feeds the growing cynicism about politicians and the political process.  It is cheap, has some short-term sugar-high effect, but is pretty deeply corrosive.  Why take seriously anything they say?

Good in a few parts….pretty poor otherwise

There were some good aspects to yesterday’s Reserve Bank Monetary Policy Statement:

  • the Bank has abandoned its long-running over-optimism about future productivity growth and has thus revised down its estimates of potential (GDP) growth to more reasonable rates.  Nothing in the economic strategy –  this government or its predecessor –  seemed set to deliver better, and it is good that the central bank has stopped spinning candy floss numbers (at least on that count),
  • the Governor also seemed less effervescent, and perhaps consistent with the previous point there was little or no spin about just how well the economy was doing,
  • in the document there weren’t even further direct calls for more government spending/borrowing.  This change was defended on the grounds that the message had already been given, but I doubt that was all there is to explain the change (having said something once, even loudly, rarely discourages central banks from saying them again),
  • oh, and the folksy Maori salutations at the start of the main statement –  beloved by the tree-god Governor when it was his statement alone –  seem to have quietly disappeared.  Perhaps we might hope for the eventual quiet discontinuance of the cartoon version of the statement too?

But that was about all that could be said for it.

The document itself was weak on substance, building on consistently poor (largely non-existent) communications from the Bank.

You can tell that there are problems with communications when the Governor is reduced to repeating (numerous time in the parts of the press conference I saw) “we are trying to be as transparent as possible”.  He isn’t seriously trying, and certainly isn’t succeeding.  We’ve not yet had a serious speech on the economy and monetary policy from the Governor, after seven months we’ve heard not a word from four of the MPC members (including all the externals), background papers aren’t released even with a long lag, the MPS documents themselves offer ever-less insight or sense of how (or even whether) the MPC thinks in depth about the economy, and the Bank holds data close to its chest when it could release it more promptly (asked about this latter point yesterday the Governor did undertake to review their practice).

When two successive MPS OCR wrongfoot those paying closest attention to the data and to the Bank, it suggests the problem is with the Bank, not the observers.      It would be interesting to know what advice the Bank’s financial markets staff gave the MPC about the market movements that were likely to occur as a result of yesterday’s decision.

It was only a few weeks ago that the Assistant Governor, Christian Hawkesby, gave a speech on central bank communications, probably mostly trying to fend off criticism of how they’d done in August.    In that speech he highlighted –  and overstated, at least in practical terms –  the risks if central banks do what markets expect them to do

In this scenario there is a danger that markets end up paying too much attention to our communications for what we have said ‘we will do’, leaving no one left to analyse the incoming economic data for what ‘we should do’. As a central banker, I am far more interested in listening to what ‘we should do’.

And yet, yesterday’s MPS suggested that Hawkesby and his colleagues actually had no interest in that perspective either.   As I noted in yesterday’s post, the MPC has had available to it throughout its deliberations the results of the Bank’s survey of expectations, the macro views of several dozen informed observers of the New Zealand economy. I wrote about the results yesterday.  Those respondents expected the Bank to cut yesterday (and again next year) and even so they didn’t expect two-year ahead inflation to get above 1.8 per cent and expected no rebound in GDP growth either.    Implicit in those numbers (and consistent with the mandate given to the MPC by the government) is a pretty clear view that the Bank should have cut the OCR, and should probably do so again next year.  The Bank, apparently uninterested, chooses to ignore this weight of opinion and runs with its own idiosyncratic view that even with higher interest rates they were still get the growth rebound the outside observers couldn’t see (either three weeks ago when they completed the survey or –  judging by comments from market economists in the last day –  now).  In the end, the MPC is charged with making decisions, but having got things wrong –  below target inflation –  for the last decade, the onus is surely on them to explain why they (mostly non-experts themselves) are so willing to back an away-from-consensus call.   But they made no effort to.

In fact, if you started into the document without knowing the bottom line you’d think the case for easing yesterday was pretty unambiguous.  They told us that the economy had slowed and risk were to the downside, the world economy was slowing, inflation expectations were very low and/or falling and, of course, core inflation was below target.  And all that without even so much as a single mention –  in the entire document, includung the minutes –  of the apparently significant tightening in credit conditions respondents to their own credit conditions survey were foreshadowing, those same respondents having highlighted regulatory changes (ie most likely the coming big increases in minimum capital requirements) as a big issue.

credit 4 Or perhaps the MPC is back to thinking that credit conditions really don’t matter at all?  Surely, either way it would be reasonable to explain their perspective.  Instead they seem to have simply ignored the issue (or tried to pretend the Governor’s whim wasn’t an issue –  I heard Hawkesby on the radio this morning saying they had in fact taken account of credit conditions issues, in which case the OCR decision is still more mystifying, and the absence of any reference in the official documents looks even worse).

One of the disappointing features of yesterday was that there were signs of the Wheeler Reserve Bank returning.   Under the former, not widely lamented, Governor we heard endlessly from the Bank about how stimulatory monetary conditions really were –  even as inflation just kept on falling below their forecasts.  There was a lot of that line yesterday.    As then, so now, the Bank does not have a good read on where the neutral interest rates are, and the best guide is really something like the rear-view mirror: all else equal, look at what is happening to demand (and early indicators like business activity measures) and inflation.   In the Wheeler years, there was also a strong tendency to constantly be focusing on the merest hint that something might be picking up, because of the strong belief (see above) that conditions were “highly stimulatory”.  It was all rather circular –  we think we are right because we think we are right.     There was quite a bit of that sort of flavour in yesterday’s statement too: both the forecast pick-up in growth (that few other observers appear to believe) and the repeated mysterious suggestions that inflation itself was picking up now.

In the MPS the Bank shows five core inflation measures, and also highlights as a preferred measure the (highly persistent and stable) sectoral core factor model measure

core infl nov 19

Across the wider suite of measures, there has been no lift since 2016.   And the sectoral core factor measure has been flat at 1.7 per cent for more than a year.  And core inflation is a lagging indicator in a climate where (to quote the Bank) the New Zealand economy has been slowing and the world economy has been slowing).

What about core non-tradables inflation?  The headline non-tradables inflation rate did rise recently.

core infl NT.png

The blue line is an official SNZ series, while the orange line in an RB series.  Again, no sense of any pick-up in core domestic inflation pressures –  and nor, really, would one expect there to be in an economy where activity growth has slowed, unemployment has levelled out, confidence is low, policy uncertainty is quite high, and inflation expectations (remember them) are low.

In short, there was a (welcome and overdue) pick-up in inflation a couple of years ago, but there is no sign it is continuing.  And –  since the OCR cuts this year were against the backdrop of materially deteriorating fundamentals –  there isn’t much reason to expect further increases in inflation from here on current policy (perhaps especially not when credit conditions are tightening, and RB announcements are pushing up interest and exchange rates).

Incidentally, one line –  used several times yesterday – that you shouldn’t be fooled by was the one that “the projections were consistent with either choice –  a cut or leaving the OCR unchanged”.  Well, of course…….    Unless practice has changed very very markedly from the way things were when I was closely involved in these processes, the final projections track –  especially the interest rate track –  is tailored to be consistent with the policy options and messages the decisionmakers (in my day the Governor, these days –  at least on paper –  the MPC) want to send. If the MPC wasn’t clear in its own mind last week what it was finally going to do, they’d prudently have ensured that the final track was consistent with either option.  If they’d been clear but wanted to send a message that they’d been open to a possible cut, they have done the same thing.  There is no independent evidence or perspective in (the first few quarters) of that track.

I want to circle back to the claims around the (asserted) high degree of transparency.  One of the innovations in the new monetary policy governance model is the publication of the summary record of the meeting (aka “minutes).    These are typically a bit longer than the initial policy announcement statement itself, and do provide the opportunity to note a few issues there wouldn’t otherwise be room for.  But they are proving even less enlightening than one might have feared (given the way the Governor and the Minister got together to oppose a more genuinely open model, of the sort seen in central banks in places like the US, the UK, Japan, or Sweden).

Here are four examples from yesterday’s minutes.  First, fiscal policy

The Committee discussed the impact of fiscal stimulus on the economy. The members noted that fiscal stimulus could be greater than assumed. The members also discussed the potential delays in implementing approved spending and investment programmes.

So far, so banal.  As I noted earlier, in the official documents the Bank was back to staying in its line re fiscal policy (as the Governor said, “we take fiscal policy as announced and run on that basis” –  which is how things are supposed to work).   And yet this morning on Radio New Zealand Christian Hawkesby was heard stating that “we think more fiscal spending would be helpful in stimulating the economy”.     If that is the Committee view, why isn’t it in the MPS or the minutes, if it was substantively discussed why isn’t it in the minutes, and if it is true then – given that the, as the Governor said, the Bank takes fiscal policy as given – isn’t Hawkesby’s statement further evidence that they should in fact have cut the OCR yesterday (if they think the economy needs more stimlus, and they are responsible for deploying the primary counter-cyclical tool)?

Then, the work programme on how the Bank might handle reaching the limits of conventional monetary policy

The Committee noted the Bank’s work programme assessing alternative monetary policy tools in the New Zealand environment, as part of contingency planning for an unlikely scenario where additional monetary instruments are required.

A statement which tells readers precisely nothing (especially as it is now three months since the Governor told a press conference that the work then was “well-advanced”).  As it happens, reality seems a bit better than the minutes imply because when he was asked about this work programme yesterday and bringing it to light, the Governor revealed  that they will release a document on frameworks and principles in the new year, and will (he says) be keen on feedback and discussion.  That sounds more promising, but then where does the MPC fit into all this given the unrevealing comment from the minutes (and there are longstanding doubts about just who has power over any unconventional instruments –  whether the MPC will get much say at all)?

Then we are told they had a discussion on an important immediate policy issue

In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.

But that’s it.  We are given no insight into the arguments deployed, the competing cases made, or the conclusion.  Given their OCR decision we are left to deduce that the Committee would be quite worried indeed about (core) inflation getting above 2 per cent.  But we are given no hint of why –  despite 10 years now below that midpoint.   And this is what the Governor calls being as transparent as possible?

And finally, the OCR decision itself

The Committee debated the costs and benefits of keeping the OCR at 1.0 percent versus reducing it to 0.75 percent. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.

And, again, that is it.  No hint of the competing arguments –  which could readily be done without identifying individuals –  and no hint of why they chose to come down where they did?  What were the key costs the Committee saw to cutting the OCR (especially when both market expectations and observer implict recommendations were to cut).  There is no insight into the current decision or, importantly given the absence of speeches etc, no insight into the reaction functions/loss functions members (individually or collectively are using).  It simply isn’t very transparent at all.    The mantra overnight “just watch the data, just watch the data” isn’t really much use at all –  especially when the MPC is going to run with such a non-consensus view of the data (and/or the risks around policy reactions).

It is all pretty underwhelming and confidence-draining.   The point isn’t that a huge amount macroeconomically hung on any specific OCR decision. Nor for now is the economy in cyclical crisis –  we aren’t in recession, inflation isn’t falling away sharply.   The concern is that we have a central bank led by pygmies (no offence to the central Africans).  Not one of the MPC members –  all of whom are probably pleasant people (even the Governor if people aren’t challenging him) –  command any great respect for their insight into the economy, their judgement or intellectual leadership, or for their willingness/ability to communicate a persuasive story or a sense that they themselves have a good and robust framework for thinking about the economy.   In the case of the Treasury observer – who gets to participate not vote – it might have been her first ever significant meeting on advanced economy macro issues, but in the end responsibility rests with the voting members.  They are failing us, corralled by the unconvincing Governor.    Having substantially surprised the market (deliberately and consciously so) two MPSin a row, and chosen to ignore consensus opinion on likely economic developments, you’d have thought we’d be hearing a lot from the MPC members –  minutes that clearly outlined the issues and judgements, speeches articulating mental models and perspectives on the New Zealand economy, wide-ranging interviews (of the sort senior Fed officials give).  Instead, we have weak official stories (the MPS), unrevealing minutes and –  seven months into the new model –  not a word in public from any of the external members nor from the Bank’s chief economist.

It isn’t good enough.  The Bank’s Board should be demanding better, as should the Minister of Finance (including when he comes to appoint new Board members and the Board chair in the next couple of months).   Transparency and communications aren’t about publishing forward tracks –  one of the Bank’s own recently-departed researchers published research last year suggesting they make little difference – but about open and honest engagement, laying out the uncertainties and (inevitable) differences of possible perspective in a business characterised by so much uncertainty.  How decisionmakers demonstrate that they handle uncertainty, competing narratives and even disagreement, is the sort of thing that helps build confidence, not rote publications (let alone poor, surprising, decisions) or Soviet-style phalanxes of grey bureaucrats all lined up with the Governor.


You might think I sometimes put things fairly strongly (if often at considerable length).  I wouldn’t have wanted people to miss this comment on my post left by a banker. It was both strident and succinct.




Threadbare analysis and ideological causes

Last week a group calling themselves the Sustainable Finance Forum –  itself a creation of the self-selected left-wing environmental/political lobby group The Aotearoa Circle –  published an interim report.   The report is 70 pages long, but don’t let that deter you as there really isn’t much there.

Of course, this is not just any lobby group.  On the board of the Aotearoa Circle, for example, sits Vicky Robertson, chief executive of the Ministry for the Environment, and supposedly an apolitical public servant, advising ministers of whichever political stripe.  Oh well, never mind those old conventions…..   And one of the two co-chairs of the Sustainable Finance Forum is Matt Whineray, chief executive of the New Zealand Superannuation Fund, and supposedly an apolitical public servant charged with managing a large pool of taxpayers’ money from one government to the next.   Somewhat surprisingly (but welcome) the Reserve Bank Governor isn’t a full participant in this body –  although we’ve been left in no doubt of his ideological/political colours –  but the Bank (together with the FMA and the Ministry for the Environment itself) is described as an observer.

Of course, the participants aren’t all (or even mostly) public servants.   Woke left-wingery isn’t confined to the public sector and the second co-chair is a senior manager at Westpac, a bank which goes out of its way to advertise its enthusiasm for all such modern “worthy causes”.  There is a “technical working group” of 33 people and probably 85 per cent of them are employed in the private sector (it does seem rather a large technical working group for a report with only about 50 pages of text).

What there isn’t is much substance or much rigour.  There are dozens and dozens of grab-bag factoids –  some real, some not –  but little context.   There is no sense, for example, that these people have any real understanding of how our current levels of prosperity were achieved.  Perhaps more concerningly, given their breathless enthusiasm for stuff to be done, is that they demonstrate no awareness of the limitations of knowledge, the pervasiveness of uncertainty, or of the well-demonstrated capacity for governments to get things badly wrong.  There isn’t much sign either that they have read any economics beyond Kate Raworth.  And there is no sign either that they’ve engaged with Chesterton’s fence

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

Perhaps the zealots are right and the end of the world is nigh, all that we have known must be up-ended etc, but it would be more reassuring if they showed signs of actually understanding why things are as they are.

The bottom line goal seems to “the transition to a sustainable economy” and yet this goal is simply not defined.   Since these peope are from the financial sector, they talk a lot about a “sustainable financial sector”.   In the media coverage of the report there was some coverage to the factoid that 95 per cent of respondents believed that the current financial system was not sustainable.  I was one of the people interviewed as part of the project and I was one of the 5 per cent –  partly perhaps because I was taken aback by the question: what on earth did “a sustainable financial system” actually mean?    As the financial system didn’t seem likely to fall over (even the Reserve Bank used to tell us that before the Governor when chasing capital whims), it had been with us in much the same form for a long time, and had proved adaptable as market demands and regulatory structures changed, it seemed a pretty obvious answer to me.   But clearly I wasn’t part of the inner sanctum, because in the report itself defines “a sustainable financial system” rather idiosyncratically as one that serves the ends favoured by the authors:

The aim of the project is to produce a Roadmap for Action on how to shift New Zealand to a sustainable financial system – from one which focuses primarily on (often shortterm) financial wealth creation, to one that supports long-term social, environmental, and economic wellbeing and prosperity for all  New Zealanders, protecting natural resources for future generations.

Strangely, there is no mention of the fact that –  relatively poor as New Zealand’s performance has been –  material living standards here are hugely higher than they were 100, let alone 200, years ago, and for most people the day-to-day experience of pollution is also much less serious than it was 100 years ago.  Technology, innovation, and finance have all contributed to those outcomes.   There is lots and lots of talk in the report about Maori perspectives and ways of thinking –  a better economic model we were told, one with no externalities apparently……. – but no apparent recognition –  or concern –  that Maori systems and worldviews (pre Western contact) had not exactly been tending towards the sort of high material living standards, and functioning financial system, that we take for granted today.

None of which is to be cavalier about where we stand now.  There are outstanding issues around water, for example. But it isn’t obvious what role the financial system has to play there –  regulatory issues around pricing, definition of property rights, access etc provide the backdrop against which borrowers/investors raise funds and other provide them.    And, of course, there is a climate change, but if anything is characterised by uncertainty it has to be that area.  One of the bugbears of the SFF (and the Reserve Bank Governor) is the (alleged) short-termism of the financial system, but they never seem to grapple –  including in this report –  with the fact that a relatively short-term approach is a prudent response to the risks created by uncertainty.

Pretty much every left-wing cause of the decade gets reference in the report.  Inequality is a big one for them, but with no substantial analysis one is left with the impression that it is mostly for effect, and mood affiliation.   Early in the report there was a referenced claim, for example, that  “New Zealand’s income inequality gap has impacted GDP by more than 15%”, but when I looked up the reference it was to a North and South article which itself claimed –  without a citation –  that

OECD researchers have suggested our gap has hobbled GDP by more than 15 percentage points in recent decades, largely because of disadvantaged families bailing out of education.

Well, perhaps….but since OECD statistics also show that New Zealand employee skill levels are among the very highest in the OECD it seems unlikely.  Oh, and returns to education in New Zealand appear to be quite low.  And what it had to be with a “sustainable financial system” wasn’t clear at all.  Being, apparently, a bunch of lefties they want a “comprehensive response to inequality” but what they mean, or what (if anything) it has to do with the financial system is left totally unspecified.   It was the feelings that mattered apparently.   They do claim the “current financial system” is contributing to “growing inequality”, but make no effort to justify either limb of that claim.

We got similarly feeble references to the so-called “gender pay gap”.  There was a whole page on modern slavery and labour exploitation, some of which was interesting, some of which was fair, but none of which had any discernible relevance to the New Zealand financial system.  Hard to disagree, I suppose, with the banner quote on that page that “a financial system cannot be sustainable if it undermines the basic human rights we all hold dear” but even if true –  and I’m thinking of exceptions as I type –  it isn’t overly helpful or offer any great insight on how the financial sector should adjust/evolve.

At the very front of the document the Aotearoa Circle told us about their vision which includes

They aim to achieve this by reversing the decline of our natural resources.

Which also seems pretty incoherent. I get the impression they have waterways in mind –  which is fair enough I suppose, within limits (the benchmark can’t be say pre-1000AD conditions) –  but natural resources include coal, gold, oil and gas, timber, ironsands and so on.  Did they not notice?   Are they proposing to put the coal back in the mountains –  the same coal burned in the process of generating the living standards we have now, and the potential to move towards newer (cleaner) technologies?    It is a small point in a way, but it is the sort of thing that is likely undermine any good a report of this sort might do among those who aren’t uncritical “true believers” to start with.

There is all the talk about rising sea levels and what this might mean.  That partly involves using scary numbers about the value of affected buildings, but without any reference to the twin facts that (a) the dates they are quoting are mostly many decades away, and (b) existing structures depreciate.   And then, of course, there is the talk about access to finance and insurance.  Which are real issues no doubt, but they don’t unfold overnight –  they are some of the better-foreshadowed risks companies have ever faced –  and no reason (identified in the report) why existing market participants (and perhaps new entrants) can’t/won’t respond and adjust, in response to their own incentives, as they’ve always done.     Same goes for wider climate change issues: the report claims ‘financial markets in New Zealand..are still largely misaligned with climate change and other sustainability imperatives”, but they offer no evidence for this –  not a shred.

These people also have a bunch of other ideological causes.  They appear to champion the Living Wage as a policy response to New Zealand’s poor productivity.  Not only is that incoherent, but there is no obvious connection to the financial system (“sustainable” or otherwise)     They rightly lament the high cost of housing –  although never point out that were these government-driven distortions ever to be reversed and the market able to function well that housing finance would be a much much smaller part of bank balance sheets in future.  Oh, and they are dead keen on Australia’s compulsory private superannuation system –  but I guess we should mostly just put that down to (consciously or unconsciously) pure self-interest (it is a great system for financial industry service providers, while our own retirement income system generates very low rates of elderly poverty with a pretty modest fiscal burden).

And we get the best part of a full page on the Reserve Bank/FMA crusade around bank culture and conduct, all of which skated over the fact that when those agencies reported back (on their largely ultra vires activities) the bottom line was that there was little evidence of any sustained problems.  But I guess that wasn’t the narrative these left-wing crusaders wanted to channel.

Buried amid the blather there are probably a few sensible paragraphs on a few specific regulatory issues, but what might be valuable is largely lost amid the rhetoric, and the rhetoric itself is of much-diminished value because there is so little hard-headed substance.  We know for example that the Orr/Whineray NZSF could get away with making a big active punt on climate change, and so mask the punt that we can never properly hold them to account for it.  But that is the weakly-accountable government for you.  Most investors, most savers, want more than idle calls for the financial system to work for the “good of society”, however ill-defined that may be.    All manner of chancers and opportunists  (public and private sector) will tell you their project, their plan is “the one”.  The challenge of anyone –  especially anyone investing other people’s money –  is to be able to recognise the good from the bad, manage the risks etc.  And none of that is easy.  None of us knows what the economy will look like 30 years hence, let alone this time next century.  Not even Whineray and Silk.

There is an opportunity to submit on the interim report (link here). I’m not sure I’ll even bother.  It is so bad (and so ideological) they’d really be better off ripping up the report and starting from scratch with a much more hard-headed approach to thinking through the issues and challenges, constraints and opportunities, including demonstrating a thorough understanding of the strengths and weaknesses of the current system   But I guess that wouldn’t suit their mates in the Labour and Green parties, for whom reports like this help provide cover, even when largely devoid of substance, insight, or sustained robust argument.


2019 vs 1969

I was listening to a thoughtful podcast discussion yesterday between one of my favourite US commentators, Jonah Goldberg, and Marian Tupy of the Cato Institute (where he a responsible for the Human Progress website)    This morning I read a column by economist Noah Smith along very similar lines.   The bottom line: life just gets better and better (the podcast discussion was more wide-ranging, across history and across countries, and somewhat more reflective, while Smith’s –  much shorter – piece was comparing life in the US in the 1950s and now).

I’ve read numerous books and articles along similar lines: as just two examples, Steven Pinker’s Enlightenment Now and Matt Ridley’s  The Rational Optimist. I’ve even run some of these arguments myself in a New Zealand context, illustrating just how different material living standards are now relative to those 100 years ago.

You won’t get any disagreement from me to the proposition that a market-oriented economy is the best mechanism known to man –  although its innards, which bits matter most, still have elements of mystery –  for generating material prosperity.  You also won’t get any disagreement from me that some times/places in human history have been better than others (on almost any aspect conceivable).  Then again, there have been times and places worse –  sometimes materially so – than those that went before.   Any society in the midst of a civil war is almost inevitably in a particulary undesirable situation.   1970s Cambodia was almost certainly worse than, say, the colonial era, 1940s Germany worse than most times in German history (notwithstanding the fruits of material progress), and so on.

Material gains –  whether things, life expectancies, or whatever –  aren’t everything but they aren’t nothing either.   Even abstracting from the war going on at the time, I was sympathetic to the proposition that no amount of money would make any modern American change places with John D Rockefeller 100 years earlier (except of course that some things of value have no price). I don’t even suppose there are too many takers for 1969 Czechoslovakia (Tupy is of Slovak ancestry) over today’s Czech Republic or Slovakia (not even all those US millenials who answered a recent survey suggesting they had a favourable view of communism).

But some choices –  not ones actually open to us, of course, but thought experiments –  are much less clear-cut.   I got to reflecting on life in New Zealand 50 years ago and that now.

At a material level, even as a woeful underperformer on the productivity front (although yesterday’s release from SNZ suggests they may have found another 1-2 per cent of productivity –  level, not growth rate), real GDP per capita or per hour worked are significantly higher than they were 50 years ago.  But to what end is less clear.

Fifty years ago I lived in Kawerau, which was probably as prosperous a town, if new and a little raw, as could be found in the country –  fruit of the Think Big project of the 1950s.  (From all I’ve seen and read, life in Kawerau today is probably worse than it was then.)  But that isn’t really my comparison.   We didn’t have a great deal –  my father had just taken up a role as pastor of the local Baptist church –  but two of my uncles were partners, apparently reasonable successful, in professional practices in central Christchurch (one law, one accounting).   And if I contrast the lives they, and aunts and cousins, had then with the life my family lives now –  I was a well-paid public servant for decades, my wife now is a well-paid senior public servant –  it is hard to spot the nature of the substantial gains (which isn’t a complaint at all).  That is probably even more true if I contemplate the prospects for my children, given what successive governments have done to the housing market.

Perhaps it is something about my/our tastes, and I’m certainly not suggesting the average material standard of living is worse than it was, just that the gains don’t count for that much with me (unlike, say, the gains in the 50 or 100 years prior to that) –  mostly nice-to-haves rather than things which have me celebrating leaps and bounds in human progress.  Are the cars fancier?  Well, yes of course, but I’m not one of those who greatly values cars.  Is the internet nice to have?  Well, of course (and I’d not be writing this without it), but in what ways would we be substantially poorer without it (it offers an improvement on weekly news magazines and newspapers, but not that much of one most of the time)?  Mightn’t most parents prefer a world in which schools weren’t pervaded by smartphones and their distractions.   There is immense choice of eating out options I guess, but frankly I like to cook, as did my mother.  Again, perhaps it is a matter of tastes.   But the proposition of the evangelists of “progress” is that even the material gains are self-evident and (at least by implication) substantial.  I’m not disputing there are gains, but how much weight one might put on them is another matter.  For materialists, I guess quite a lot, unless diminishing marginal utility sets in for them as well.

(This isn’t, of course, an original point, and is –  among other things –  something of a variation of the story US economist Robert Gordon tells, in suggesting that the real lifestlye-improving gains happened decades ago.)

Perhaps the gains in life expectancy for those born seem less arguable.  And I’m certainly not going to dispute that they are real.  But it brings us closer to the deeper questions about the purpose of life. And about which lives.  And what life.

As compared to 1969, New Zealand now legalises –  and has the taxpayer fund –  13000+ abortions a year, and this ability to have one’s own child put to death is deemed by our leaders some sort of basic human right, a matter of “health”.

As compared to 1969, our society grapples with disconcertingly high suicide rates, especially among some of our young people.

And, as compared to 1969, our system is on the brink of legalising assisted suicide.

In some parts of other Western societies, even adult life expectancies are falling, fruit of some mix of drugs, isolation, despair or whatever.

And for any Christian –  and Christianity has shaped the culture from which the bulk of our population comes for perhaps 1500 years –  this earthly life is just the foretaste, the preparation, for eternal life with God.  That doesn’t make life on earth unimportant –  far from it –  but creates a different perspective on the value one might attach to a few more years here.    Societies in which there is nothing more are also ones in which it is much harder to envisage a cause, a choice, worth dying for.

Why else might one legitimately be underwhelmed by what has become of the country since, say, 1969? I could list:

  • the rise of welfarism,
  • the normalisation of birth outside marriage,
  • the abandonment of any societal recognition of the importance of marriage as a bedrock institution of society.
  • the coarsening of our culture (each Saturday I’m still astonished that the Herald runs a column celebrating what were once vices, in some traditions even “deadly sins”,
  • easy and extensive access to pornography (flip side of the advantages of the internet), that degrades all those involved,
  • the normalisation –  nay celebration – of the vice of homosexual practice,
  • the current transgender mania,
  • the loss of any sense of a unifying day of rest.

And, at the heart of it, the decline in Christian faith and observance (there were never “golden days”, but everyone recognises the difference between then and now.  Every society has a “religion” of sorts –  the taboos and understanding by which societies operate and people interact –  and I find almost nothing appealing about modern New Zealand’s provisional replacements for Christianity.

I could go on and add that in 1969 our main political parties and their leaders were pretty clear about the nature of Communism and the evil represented by the regimes in the Soviet Union and the People’s Republic of China.  The Soviet Union has, mercifully, gone, but the evil represented by the PRC/CCP is as real as ever, and more threatening to us, since our “elites” have abandoned all sense of right and wrong where the PRC is concerned, pursuing (it seems) only money, whether through trade or party donations.

And there is the increasing power of the state, enabled by technology.  Surveillance, and coercive, states aren’t just a threat in China.

And so on and so forth.

Are there alternative perspectives?  Well, of course.  Perhaps as many as there are “religions” or world views.   Some will regard where we’ve got to in the last 50 years as a giant step forward.  For all the material and (often double-edged) technological advantages, personally I’d exchange 2019 New Zealand for 1969 New Zealand.  It isn’t a choice or an option, but to me what we’ve gained is small compensation –  not even really directly comparable –  to what we’ve lost.

Monetary policy communications and the lack of transparency

The Reserve Bank’s Assistant Governor for monetary policy and financial markets, Christian Hawkesby, went off to Sydney earlier this week to talk to some investors about New Zealand monetary policy communications.  Hawkesby now has tenure and independence –  at least in principle – as a statutory officeholder, a member of the Monetary Policy Committee, appointed directly by the Minister of Finance.

It was perhaps telling that (a) the speech was delivered on a New Zealand public holiday, (b) the text wasn’t released for another 24 hours, and (c) we have no record of what Hawkesby actually said, including in response to questions.  That is no way to do monetary policy communications.

Perhaps while he was in Sydney Hawkesby dropped in on his peers at the Reserve Bank of Australia.   The RBA has about 45 speeches/presentations from senior managers showing on its Speeches page for 2019.   For all but three of them –  and none of those three on topics that appear market-sensitive –  there is video, audio or a Hansard transcript (several of the Governor’s appearances were to parliamentary committees).  It doesn’t seem to make any difference to the RBA whether the speeches etc are given overseas, out in the provinces in Australia, or in downtown Sydney or Melbourne: the standard they set for themselves is that when they say something, it is made generally available.    Anything else poses a risk –  actual or in appearances –  of unequal access to potentially market-moving, or just insightful, official information and perspectives.  That is just one aspect of communications on which the Reserve Bank of New Zealand falls a long way short of best practice.  There are 12 speeches from senior managers on the Reserve Bank of New Zealand’s Speeches page for 2019, and for only of them is there video footage (that a puff piece by the Governor –  which I wrote about here).

Hawkesby’s speech came in two parts.  The first was devoted to repeating longstanding Reserve Bank spin about how transparent it is, supplemented by some Orr-esque lines about how surprising the market is no bad thing (the second part was defensive play around the surprise August 50 bps OCR cut).  There were no fresh insights or arguments, which in itself was a bit disappointing from so senior a figure, relatively newly returned to the Bank  –  despite the relatively junior-sounding title, Hawkesby is, in effect (and in Wellington public service lingo) a deputy chief executive responsible for half the Bank’s core functions.  Anywhere else in the world he’d carry a Deputy Governor title.   Those are the standards his speeches should be held to.

The Reserve Bank (longstanding) main claim to being highly transparent is that it publishes a future track for the policy interest rate (the OCR) for a period two to three years ahead.  We were the first central bank to do so, in 1997.  As Hawkesby notes, despite 22 years experience, only a handful of other central banks  (four small advanced country ones) have followed our lead.  Reasonable people can debate whether publishing a forward interest rate track is the best way to do things (I’ve never been convinced myself) but when none of the world’s leading central banks have taken that path –  and all will, quite seriously, proclaim a commitment to transparency –  it probably isn’t something to put quite as much weight on as the Bank has done (through successive Governors/staff).

I’ve characterised the publication of the forward interest rate track as being highly transparent about something the Bank (now, at least formally, the MPC) knows almost nothing about.  Economic forecasting is a mug’s game, and there is little evidence that anyone can usefully forecast economic developments more than perhaps a quarter or two ahead….and yet, monetary policy works with a lag, so a medium-term OCR projections (for, say, 2.5 years ahead) implicitly requires –  to be meaningful – some intelligent view of inflation prospects perhaps four years hence.  No one can do it in a way that has any useful substantive information.

And if the Reserve Bank is pretty transparent about the stuff it knows almost nothing about –  and has to divert scarce resources to generating such tracks –  it is really quite strikingly non-transparent about the stuff it does know more about.  For example:

  • we have a Governor, clearly the most important player in the system, who has not yet given a particularly substantive speech on monetary policy, the economy, and inflation (which would otherwise offer insights on his thought processes, his mental models, his ability to process and analyse data etc),
  • we have a Chief Economist –  also a statutory appointee as member of the Monetary Policy Committee –  who has not given a speech or said a substantive word in public since he was appointed,
  • as above, the Bank isn’t particularly transparent around the speeches it does give (and especially around answers to questions),
  • we have three non-executive members of the Monetary Policy Committee from whom not a word has been heard since they were appointed.  We know nothing about how any of them think about the policy targets towards which they are working, about how economic developments are unfolding, or about the “reaction functions” they use  (and this is so even though the rules allow them to speak), and
  • the Bank is totally untransparent about the background analysis produced to support monetary policy decisionmaking.   The current government –  not naturally particularly transparent –  has adopted a practice of pro-active release of Cabinet papers, many Budget-related papers have long been pro-actively released, but ask for any background papers re monetary policy decisions –  even with quite a lag –  and the Bank will simply refuse (and, sadly, they have the ineffectual Ombudsmen –  over several appointees – wrapped around their little finger in clasping this taxpayer-funded analysis tightly to their chest).  Perhaps it is lawful, but it simply isn’t transparent.   (A few years ago, after many months of trying, I managed to get them to release background papers for an MPS from 10 years previously –  but no one supposes they would release such material from, say, two years ago.  If there is a decent argument for any confidentiality around this material, it could only credibly mounted for the period from one MPS to the next –  ie three months or so – at most.)

That isn’t good monetary policy transparency, nor is good open government (the latter not being a consideration that ever weighed much with the Bank).

Hawkesby attempts a defence of the Bank’s preferred practice, in which only the Governor speaks about monetary policy (no speeches of course, just MPS press conferences) and to the extent that underlings like Hawkesby speech they largely parrot the Governor.   This is the best he can manage

A third limitation of transparency is the noise that it can create – an example of this is how to capture the diversity of views of individual members of a committee tasked with setting interest rates.

An example of this is how to capture the diversity of views of individual members of a committee that sets interest rates. Each individual member regularly sharing their views on the economic and policy outlook can make it harder for financial markets to interpret the reaction function of the collective group. While I worked at the Bank of England, I always remember the head of communications bemoaning the cacophony of voices. More transparency around the perspectives of individual members could also create incentives for those individuals to hold on to a previously published position even as new information emerges, for fear of being seen as ‘conceding’ their position.

A paradox of these limitations is that greater transparency does not necessarily equate to increased clarity for market participants and the general public. Just because more information is available does not necessarily mean the audience will have a greater understanding of how and why central banks make decisions.

But there isn’t much there.  Of course Communications managers are keen on message discipline –  always have been, always will be –  and at the Bank of England management was long not very keen on the independence of the external MPC members anyway.  But isn’t it striking that whereas the Reserve Bank seems to believe that New Zealanders –  public, markets –  can’t cope with a diversity of views (about a highly uncertain business), the national central banks for the largest advanced economies –  the US, Japan, and the UK –  in fact do cope quite well with having MPC members explicitly voting against a majority view, or articulating a model or analytical insights a bit different from that of others on the relevant committee.   Sweden is a succesful small country example.  The ECB is a bit different –  and there are some reasons why, around minimising pressure on members to act for their own country’s national interests –  but even in the ECB there is plenty of open recognition of differences of view among the monetary policy decisionmakers.   It isn’t as if central bankers know from year to year –  often not from quarter to quarter –  what they are going to do: events happen, interpretations evolve, and particular hypotheses are openly challenged and scrutinised (including those of monetary policy decisionmakers, when we are allowed to see them).

So, no, the Reserve Bank of New Zealand really isn’t particularly transparent at all.  And the newly published minutes really represent not much of a step forward at all.

One of Hawkesby’s points is that the Bank is keen to learn from outsiders –  yes, even “bloggers”.

When private sector economists, analysts, commentators or bloggers don’t agree with our policy decisions or our projections for the economy, it can be an uncomfortable message to hear. But it is an invaluable exercise to test our assumptions and reasoning, even if we don’t agree with their conclusions, we inevitably learn something along the way and strengthen our analysis of the issues.

Good to know (although it is a bit to take seriously when we see how the Governor responds to challenge, criticism, or alternative perspectives on another of those highly complex and uncertain issues –  appropriate bank capital requirements).

But this line is really used to buttress a rather silly line the Governor has run on a few occasions about the (alleged) dangers of the markets paying too much attention to trying to guess what the Bank is up to, in turn (allegedly) reducing the information the Bank itself can get from market prices.   This is, we are told, one reason why it is just fine for the Bank to do things that take markets totally by surprise (notably, the 50 basis point OCR cut in August).

It really is a nonsense argument, even if he can find a couple of footnotes to attempt to buttress his case. In fact (and in effect) he more or less concedes later in the speech when he highlights things like falling medium to long-term inflation expectations (including from the indexed bond market –  a welcome Hawkesby innovation to have the Bank even acknowledge the indicator) that were concerning the MPC when they made their decision.  Almost certainly those indicators –  eg from 10 year bonds – would have been just as they were whether markets thought the Bank was going to cut 50 bps in one go, surprising almost everyone, or (say) spread the cuts over two 25 bps cuts.

I’m not one of those who think that monetary policy decisionmakers should always deliver on market expectations. But usually if market expectations are very wrong (not –  eg –  just 10 expected a cut, 12 expected no change) it is the fault of the monetary policy decisionmakers themselves.   In those circumstances, they add noise and volatility that is simply unnecessary and has no redeeming societal merit.

And as I noted at the time of the August MPS, the 50 point cut looked a lot like a rather rushed last minute decision, that wasn’t really supported by other the numbers (they themselves produced) or the MPS text.

And what makes it a bit more concerning is that it is pretty clear the Bank itself wasn’t intending to move by 50 basis points even a few days ago.  The projections they published yesterday were finalised on 1 August (last Thursday).   On those numbers, the projections for the OCR (quarterly average) were:

September quarter 2019    1.4 per cent

December quarter 2019     1.2 per cent

March quarter 2020            1.1 per cent

With the next OCR review in late September and the following one in md-November, those projections –  adopted by the whole MPC – clearly envisaged not getting to a 1 per cent OCR even by the end of the year.

The bulk of the Monetary Policy Statement itself is written in the same relatively relaxed style, with no hint of a change in policy approach, and thus no proper articulation of the reason for it, or (hence) for how we should think about how the Committee will react, in principle, at future OCR reviews.   The Bank has added to uncertainty around policy, not reduced it.    In a similar vein, there is a new two page Box A in the statement on “monetary policy strategy”, intended to run each quarter, which is so general as to add nothing to the state of understanding of what the MPC and the Bank are up to.

And you will look in vain for any real insight from the minutes of the MPC meeting.   We are told

The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. [a claim that demonstrably isn’t true –  see above] The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

But nothing about the considerations Committee members took into account in belatedly lurching to a 50 point OCR cut, or how they think about the conventions and signalling around using 25 point moves vs 50 point moves (when things aren’t falling apart here –  and it was the Governor yesterday who announced, oddly, of New Zealand that “the country is in a great condition”).

That wasn’t good or effective monetary policy communications.  It wasn’t a transparent insight on how the Committee is operating, the sort of reaction functions members are using, their view of MPS reviews vs the other OCR reviews.    It was –  or came across as –  a lurch (even if, like me, you thought that the OCR needed to come down quite a bit, quite quickly).

I’m going to end with two more examples of a lack of serious transparency.  Near the end of his speech Hawkesby observes

There are plenty of communication challenges ahead, especially if monetary policy in New Zealand moves into a less conventional territory, and we end up adopting new tools and approaches.

These will need to be explained clearly to both financial markets and the people of New Zealand.

No doubt, but would be an open and transparent central bank, wanting to build and maintain confidence in (a) its potential instruments, and (b) its actual decisionmakers and their advisers want to be much more open than the Reserve Bank has actually been?  Wouldn’t discussion documents outlining potential issues and options be a good idea?  Wouldn’t seminars and workshops with outside experts and market participants be a good idea?  Apart from anything else, at least in principle (as the Assistant Governor said) the Bank learns something from such engagement, challenge, and critique and in the process improves its own understanding and analysis.  It isn’t as if anyone is suggesting they pre-commit to when particularly instruments might be used, so this stuff shouldn’t really be market-sensitive, but it is quite important, potentially to us all (and was we know the Bank’s own research capability has been gutted this year).  And it isn’t as if the Bank’s background analysis on other matters –  bank capital again –  should fill us with confidence and willingness to simply “trust us, we know what we are doing”.

And on a smaller note, the next Monetary Policy Statement  and OCR decision is on 13 November.  As the Assistant Governor highlighted, inflation expectations are quite a significant influence in Bank thinking at present (rightly or otherwise).  And yet the main inflation expectations series –  the two year ahead measure in the Bank’s own survey –  isn’t scheduled for release until 12 November.   I participate in that survey.   Responses were due by midday last Tuesday (22nd). It is an electronic survey and if the results are not already in the Bank’s hands, they assuredly could be (it is pretty simple survey with fewer than 100 respondents, taking a matter of hours to compile at most).  And yet the Bank is sitting on this information until the very last minute.  By the time we get it, their decision will have been all-but-finally made, their MPS document completely written. If they were really serious about the desire to listen and learn, from markets, commentators, nay even “bloggers”, they’d have made sure the information was compiled and published quickly, allowing the Bank itself to listen to the response of outsiders in processing the significance of such important (to them) economic data.

If they were really serious…..instead, they mostly seem interested in fending off critics and keeping to themselves the stuff they know, while distracting us with their transparency about the stuff they don’t know much about at all (and where most central banks have not thought it advisable to follow the New Zealand lead).