On the trail of negative interest rates

I’m still less than entirely well, so posts here will stay less frequent and less regular than usual for a while yet.   That means things like last week’s OCR decision pass by with little comment (my only one will be, in what conceivable world five years ago would a severe global recession, the drying up of a major local export industry, falling inflation and inflation expectations here and abroad, and recognised downside risks be met with precisely no monetary policy action?).

But I see that the Governor has been out giving interviews –  the ones I noticed were with Stuff and the Herald – and some of his comments conveniently tie in with what I was wanting to write about the results of an OIA request to the Bank that belatedly turned up in my inbox on Monday, on the elusive question of what the Bank is (and isn’t) doing about negative interest rates.

You’ll recall that in the second half of last year the Governor was dead-keen on the option of negative interest rates.  It wasn’t just a passing comment, but a very substantial interview.   Who knows, perhaps the rest of the MPC didn’t agree with him, but he was supposed to be the spokesman for the Committee as a whole.  We don’t know what the other MPC members –  the ones who don’t, at least on paper, work for Orr –  think, and they seem to exist in a state of purdah, refusing ever to make speeches or give interviews.

As recently as the Governor’s speech on 10 March this year –  when he and his colleagues were still attempting to play down the economic challenges of Covid – the Governor outlined his preferred tools.  He promised then that

We will provide our full analysis of each of these tools against the principles we hold in coming weeks – so that people can fully understand our thinking and, of course, provide input.

None of that analysis has ever been published.  The list of tools was clearly organised in order of the Governor’s then preference: forward guidance (just a variant on what they always do) was first, and then

Negative OCR

Reduction of the OCR to the effective lower bound (the point at which further OCR cuts become ineffective), which may be below zero. The Reserve Bank could consider changes to the cash system to mitigate cash hoarding if lower deposit rates led to significant hoarding.

Not only did a negative OCR appear to be in play, but that really encouraging second sentence suggested they might actually have considered doing something –  they are technically easy things to do – to allow the OCR to have been cut even further below the negative levels which at present could lead to large-scale shifts into physical cash.

That was then.  A few days later the MPC decreed that in fact that OCR would not be changed, up or down, from 0.25 per cent for a year, claiming the matter was really ou of their hands as “banks weren’t ready”.

It was, and remains, a very strange argument given that:

  • several other advanced countries had had negative official rates for some years,
  • a large share of global government bonds had been trading with negative yields for some years,
  • in New Zealand the first negative yields (on indexed government bonds) were recorded last year, at about the time of that interview the Governor gave,
  • the Reserve Bank had shown revived interest in these issues for a couple of years, and
  • that eight years previously an internal working group (set up by the then Governor, chaired by me) recommended that relevant departments should ensure that (a) the Bank’s own operating systems, and (b) commercial banks’ systems could cope with negative interest rates.  Those recommendations were accepted at the time.

In other words, if the Bank’s claims now are really true, commercial banks seem to have been astonishingly (or conveniently, since banks hate negative interest rates) remiss and (more importantly, since it is a powerful public agency) the Reserve Bank ((Governor, Deputy Governor, MPC –  and the Board paid to hold them to account) had to have been asleep at the wheel.  Given a decade’s advance notice of the risk that market-clearing interest rates would go negative here too, they would appear to have done nothing.  That would be egregious neglect –  for which people at the bottom, the involuntarily unemployed, would pay the price.

The Bank, of course, likes to claim that it is highly transparent –  they have been at it again this week – even as they remain as obstructive as possible on anything they don’t want to be transparent about.    The negative interest rates situation has been one of those topics.  For example, they’ve staunchly refused to release any of the background or advisory papers the MPC received running up to 16 March, on this or any aspect of monetary policy (as a reminder, the government itself has been pro-actively open, even with papers that may embarrass some or other bits of government).

I had one go with an Official Information Act request that got nowhere.  But it is a bit harder to stonewall Parliament, and thanks to the efforts of the National Party members of the Epidemic Response Committee we got some useful material out of the Bank.    The Bank didn’t want to draw any attention to this material, but it was there on Parliament’s website, and I wrote about it here.

The Bank told MPs that they’d started to take things seriously at the end of last year

More broadly, bank supervisors raised the issue of preparedness for negative interest rates at banking sector workshops in December 2019.

In late January 2020, the Reserve Bank’s Head of Supervision sent a letter to banks’ chief executives formally requesting they report on the status of their systems and capability.

By late January, of course, Wuhan was already locked-down.

The Bank told the MPs that there had been a range of issues identified, and while they hoped banks were doing something about them, it didn’t want to put any pressure on banks because they were busy people, and had other priorities (which, even if so, would not have been the case had the Bank done its job several years earlier).

None of this was very satisfactory.  They never explained –  or were pressured to –  their own past failures, nor why these alleged readiness issues had not been obstacles in other advanced countries (the euro-area, Sweden, Switzerland, Denmark, Japan), the prevalence of negative wholesale rates abroad.

A few weeks later again, the Governor told the Finance and Expenditure Committee (hearing on the May MPS) that a letter had gone out to banks just the previous week apparently urging or requiring them to have systems ready by the end of the year.   I then lodged a further OIA request

OIA 16 may

Section 105 is the dreadful provision in the Reserve Bank Act which allows the Bank to avoid any scrutiny of its bank regulatory activities under the OIA.  When the response to this OIA arrived this week, they had invoked it to allow themselves (so they claimed) to refuse to release anything in response to item (a) in my request.    This is a provision that, to the extent it had any merit, is designed to protect highly sensitive individual institution material in the middle of a banking crisis (in fact, of course, anything commercially confidential is already protected, and reasonably so, under the OIA).  The readiness of banks’ systems and document for negative interest rates is clearly not primarily –  barely at all – a prudential issue, but primarily a monetary policy one.  But that doesn’t stop the Bank –  the ones that always claim to be so transparent.

However, the Bank did belatedly release what I was after under the second and third strands of my request.  The full response is here.

The 29 January letter is on page 4 of the response.  It is a catch-all letter from the head of bank supervision drawing attention to various issues large and small that the Bank wanted to deal with this year (among the latter, the Bank’s Maori strategy).  Here is the relevant text on negative interest rates

wood negative

Okay I guess, but with little or no sense of urgency.

There is a three page table summarising the responses from each individual bank (although remarkably one banks appears to have never even responded), complete with this interesting  somewhat defensive observation from the Reserve Bank which I had not initially noticed.

“We acknowledge the banks’ responses to our letter of 29 January were a preliminary assessment of their readiness to implement negative interest rates.”

The table is interesting.  Of the 19 banks, a fair number are described as ready, but it is fair to note that a number of issues are also highlighted, in some cases in enough detail to be genuinely somewhat enlightening.    This is all, however, material that could have been pro-actively published in March, and which the Governor –  and those commenting on his draft speech –  must have been aware of on 10 March.

Perhaps it is also worth noting that these are individual bank responses, without the benefit of any RB pushing and prodding to better understand how binding perceived constraints might be, what workarounds might be possible, let alone with any sign of the Bank itself having learned from the experience of their counterparts in countries that had operated with negative interest rates for years.

Anyway, all this was then somewhat overtaken by the new letter, dated 7 May.  It is from the Deputy Governor, Geoff Bascand to the chief executives of banks.    This must have represented the Bank’s (or MPC’s) thinking at the time of the May MPS, although there is no hint –  of course –  of it in the minutes of the MPC meeting.   The letter set out a deadline of 1 December 2020 for banks to ensure that they were capable (with status reports due yesterday).  That wasn’t news, but what was was how limited the Bank’s requirement’s (and ambitions) now are, in the middle of the deepest economic slump in a long time.

Bascand letter

In other words, they’ve just given up on negative retail interest rates.    It isn’t true that in other countries there have been no negative retail interest rates, even with policy rates slightly negative (here is story from just last year of negative retail mortgage rates in Denmark, and recall that lending rates are usually higher than funding rates).  And, of course, look back up to the quote from the Governor’s March speech –  as recently as then they were open to the possibility of taking the steps that might allow the OCR usefully to be cut more deeply than other countries have done.

Coming back to today, what also interested me was that the Governor continues to muddy the waters on this.  In his interview with Stuff there are quite a few comments about negative interest rates.

The Reserve Bank is still warning retail banks to get ready for a negative official cash rate. Rolling this out has been said to be difficult because banks systems weren’t ready and some contracts with depositors didn’t envisage a negative interest rate – effectively a charge on depositors.

Orr said most banks were in a good position to deal with negative rates.

“Some large multinational banks have been dealing with negative interest rates for a long time and some of the smaller banks, which have much simpler systems, are good to go,” Orr said.

“Only a handful of banks” were having difficulty with negative rates.

Orr appeared to downplay the extent to which a negative rate would impact all areas of a bank.

“What we’re doing at the moment is double checking with all of the banks, so they’re not trying to get absolutely everything capable of a negative [rate] because we don’t need absolutely everything.

“We’re saying it’s a small proportion; it’s the wholesale side of the business,” Orr said.

Ordinary depositors likely wouldn’t notice a difference because rates would still be positive for depositors.

“Internationally the experience has been that banks have been highly reluctant to go below zero for a deposit.

“In fact, retail banks’ reluctance to pass on negative rates to consumers are likely to act as a brake on the Reserve Bank’s appetite to push rates lower.

“There is a limit to how far negative wholesale rates can go in large part because the retail rates end up holding up,” he said.

Read that and you wouldn’t know that the Reserve Bank had told banks they didn’t need to bother about negative retail rates –  in fact, you’d get the impression it was banks that could never envisage offering such products, even though they are on offer in other countries.

But you’d also get the impression that the Governor was more concerned for banks than for the New Zealand economy and the people who become unemployed because monetary policy isn’t doing its job.  If his Committee had aggressively cut the OCR another 100 basis points, to (say) the -0.75 per cent often envisaged as an effective floor until steps are taken to disincentivise cash hoarding, not only would the banks that had prepared themselves got on with things, and presumably been advantaged, but the others would have snapped to pretty quickly and got workarounds in place.  (That, after all, must have been what happened in other countries, and is more like the way the rest of government operated –  when a wage subsidy was decided on, MSD wasn’t given nine months to do systems testing etc; when a small business loan scheme was decided on IRD didn’t months to prepare).

And there is no sign at all of the Reserve Bank taking seriously steps to remove the obstacles to a more deeply negative OCR, even though those obstacles are all of the public sector’s making.

Perhaps none of this would matter very much if you believed the spin about what good monetary policy was doing overall, including through the LSAP programme.    But it is just spin.   Benchmark term deposit rates have been falling a bit more recently, but that means they are now 85-90 basis points lower than they were at the start of the year.  But, of course, expectations of future inflation have also fallen quite a lot.  There is a range of possible measures, but a reasonable pick might be a fall of about 60 basis points.  In other words, real retail deposit rates are down perhaps 30 basis points in the midst of a savage slump for which there is no obvious end.   The exchange rate is usually a key buffer for New Zealand, a significant part of how the monetary transmission mechanism works.  It bounces around a bit, but at present the TWI is sitting almost bang-on the average level for the second half of last year.  For all the handwaving and big numbers (around the LSAP) monetary policy just isn’t doing its job, and the Bank seems to have little interest in it doing so.

On Monday I went to hear a speech the Governor gave.  In the course of that address he seemed to defend monetary policy doing not much on the grounds that “the expenditure had to be immediate”.  And at one level, for the March/June quarters no one is really going to dispute that –  monetary policy doesn’t work that fast, and there was a need (or a good case) for lots of immediate income support, especially for people rendered unable to work by government fiat.  But that was then.    Wage subsidies have replaced lost income (a large chunk of it) for a few months –  at the expense of an increased involuntary burden on taxpayers to come – but meanwhile we are still in a deep recession, still have our borders largely closed, and the state of the world economy appears to be worsening.  Monetary policy should have been positioned –  and should now be positioned, it isn’t too late –  to support domestic demand and activity through the (probably protracted) recovery phase –  much lower interest rates, and a much lower exchange rate.  As it is, monetary policy –  designed as the primary countercylical tool – has done almost nothing and the Bank seems quite unbothered about that.

It isn’t good enough.  We need better from the Governor and his Committee (including, for example, to actually hear the excuses of the rest of the Committee members), and we need the Bank’s Board –  hopeless cause I guess –  to be doing its job holding the Committee to account.  But, of course, the person who could make this all happen is the Minister of Finance, who has long-established directive powers, but seems to prefer to do nothing, content to spend taxpayers’ money while doing nothing to remove the roadblock to getting market price signals better aligned with responding aggressively to our economic plight.  Don’t rock the boat, don’t be bold, don’t worry too much about the actual unemployed seems to be the government’s approach.  Robertson and his boss like to invoke memories of the first Labour government, but it is hard to imagine those big figures in Labour’s history being happy to sit by and see a central bank wave its arms and do nothing to get us quickly back to full employment.

 

 

 

 

 

Pursuing Jian Yang, and the travesty that is NZ politics

TVNZ’s Q&A programme yesterday had a short segment (and article here) on their continuing, unsuccessful, attempt to get National list MP Jian Yang to talk to them.  It isn’t as if Jian Yang seems to have a particular thing against TVNZ –  I don’t have too much problem if an MP refuses to deal with one particular media outlet –  because for years now he has refused to talk to any English-language media, talking only to safe CCP influenced or controlled Chinese language outlets, who can be counted on to give him an easy and unchallenging time and not ask any awkward questions.

It is almost three years now since Newsroom and the Financial Times began to reveal Jian Yang’s past as a member of the Chinese Communist Party and long-serving member of the PRC’s military foreign intelligence system, where he’d been training spies.  Over subsequent weeks it emerged that, whether he or not he had been straight with the National Party when they’d recruited him in 2011, he’d lied about his past in his applications for New Zealand residency and citizenship.   In fact, challenged on the point he was quite open about it: he’d actively misrepresented his past because his CCP bosses had insisted on it when he first left the PRC.  And people with his sort of background didn’t get to leave the PRC to do foreign study without the regime and Party being able to rely him.  Jian Yang has claimed he isn’t a CCP member any longer –  as if this was just a matter of letting an annual subscription lapse –  but academic experts, including Canterbury University’s Anne-Marie Brady, have made the case that no one ever leaves the CCP voluntarily: you can be expelled, but once you’ve cast your lot in with them (and only a small minority of PRC citizens are CCP members, smaller than the proportion of Germans who were Nazi Party members) you are part of that movement for keeps.  Jian Yang could, of course, remove the scepticism by openly criticising the evil regime –  former Soviet spies who defected did that –  but never once, in all his years in Parliament has there been as much as a hint of disloyalty to the CCP/PRC.

It was good to see Q&A make a story of Jian Yang’s (now) 2.5 years of refusal to talk to any English language media –  not just about his past, but also about his present (eg his role last year in organising a meeting for Simon Bridges with Guo Shengkun, CCP Politburo member with responsibility for “domestic security” (think of those Uighur concentration camps, as just a start on intensifying CCP repression)).   Or the way Jian Yang continues to associate closely with the PRC Embassy and all sorts of CCP-affiliated or United Front groups, the sort of conduct that had the sober former diplomat Charles Finny declare on Q&A a couple of years ago that given Jian Yang’s associations with the Embassy he was always very careful what he said in front of Jian Yang (or Labour’s Raymond Huo).    Or perhaps it would be good if Jian Yang would answer questions around why several PRC migrants Q&A talked to about him refused to be identified on screen, explaining that they feared the reach of the CCP/PRC whether here or as regards family members back in China.    Perhaps these people have nothing at all to worry about. But they certainly believe the regime is running protection for Jian Yang –  a New Zealand MP.

Q&A also had a brief interview with Jamil Anderlini, the New Zealand who lived for a long time in Beijing and is now the Asian editor of the Financial Times, who claimed not just that our traditional allies look quite askance at the Jian Yang situation –  the man was on Parliament’s Foreign Affairs Committee for a time –  but that his contacts in the CCP suggested that the CCP itself treated the National Party as something of a laughing stock over this issue, the suggestion being something like “useful gullible idiots”.

Back when the Jian Yang story first broke, perhaps one could wonder if National themselves had been deceived by Jian Yang; not looking very hard, they’d not found anything, except someone to pull in the dollars for them.  The Newsroom/FT story broke on the eve of the election and by then there wasn’t much National could do about him (and his list place) even if they’d wanted to.  But that was three years ago.

Even then there was the despicable effort by a then senior Cabinet minister (Attorney General  and minister responsible for the SIS and GCSB) at a candidates’ meeting to tar as somehow “racist” any questions about Jian Yang’s CCP/PLA past, going on to claim that Anne-Marie Brady was a xenophobe (“doesn’t like any foreigners at all”).

But it wasn’t just  a second-tier figure, perhaps caught on the hop in a meeting he didn’t really want to be at.   In the last three years, National has had three leaders:  Bill English (who was then Prime Minister), Simon Bridges, and now Todd Muller.    They’ve each had plenty of time to think carefully and hard about Jian Yang and where their interests and loyalties lie.  And each of them  –  there is nothing to tell them apart on this issue –  has provided complete cover for Jian Yang.   In fact, Jian Yang has been promoted.  He clearly isn’t a caucus highflier, but he keeps rising a bit further up the caucus rankings, he now chairs a parliamentary select committee (perhaps not a very important one, but we have someone with his background chairing a government administration committee?) and the National Party Board has picked him out for a favoured position on National’s list for this year’s election (recall that Jian Yang has business interests with National’s president, the ever-obsequious (to Beijing) Peter Goodfellow).  One of National’s most senior MPs shares an office in Auckland with Jian Yang.

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

It is a marker of just how deep the decline of New Zealand has become.  As I noted in a post shortly after the first Jian Yang revelations,  at no time from the 1950s to the 1980s would it even be conceivable that we’d have (any of the mainstream parties would have) allowed a former KGB/GRU officer, still maintaining close ties to the Soviet Embassy, to have served in our Parliament.  There was some moral clarity back then about what we believed and stood for, and what that evil empire stood for. (Of course, Labour in particular tolerated Bill Sutch in top positions).

But now whatever values some individuals may perhaps still have, they seem to count for less than appeasing the CCP/PRC, and prioritising party funding and the interests of a small group of New Zealand corporates (and universities) over the values of most New Zealanders.  I’m particularly hard on National, both because Jian Yang is National MP and because I’m the sort of person who might normally be expected to mostly vote National.  But also because all three of those recent National leaders have suggested that, in one form or another, they are Christians –  English at least was known to be a practising Catholic.  The PRC regime ruthlessly persecutes the Christian churches, and yet that draws forth not a word from either the senior figures in the National Party or from the lesser lights among the Christian members of the caucus (let alone prominent incoming ones like Luxon, who ran a business that chose to pander to the regime).   The persecution of the churches has not yet reached the stage of the Uighur concentration camps, but then National members won’t stand up or speak out on that either –  not even junior MPs who might be plausibly deniable for the leadership.

But it isn’t just National.    Every other party in Parliament (and those out of Parliament) seem about as bad.  The biggest of those parties is, of course, Labour.  A Labour member has been Prime Minister almost ever since the first Jian Yang revelations.  And not a word of condemnation or complaint has come from her either, not one.  No Labour MP has ever been heard to deplore the fact that we had a CCP member closely linked to the PRC Embassy sitting on the National benches of Parliament, chairing a select committee no less.  It is as if the Prime Minister is more interested in being kind to Jian Yang, kind (subservient) to Madame Wu, and utterly interested in the integrity of New Zealand politics or the values and political traditions of New Zealand.  And again, not even any junior caucus members have broken ranks, not even once.   The strong suspicion has to be that Labour cares no more about decency and integrity than National, and is probably just a bit envious that National has been better at pulling CCP-linked donations (although is that changing now that Labour is in office?) And why be surprised? After all, Labour has Raymond Huo in its ranks, with well-documented United Front involvements, and they just put another United Front person in a winnable position on their list.  And all those corrupted corporates and universities, only interested in the next dollar, will be in the ear of ministers urging them always to appease, never to take a stand.  And of course, National and Labour together have shown no interest in any serious reform of the electoral finance laws to meaningfully prevent foreign political donations, let alone the sort of self-denying ordinance that recognises that some donations –  even from New Zealand citizens –  simply should not be taken, no matter how many dollars are on offer.  And Labour was principally responsible for the travesty of the select committee inquiry on foreign interference risks (even though the biggest issue is less about foreign interference, and more craven domestic subservience).

The big issue isn’t really Jian Yang.  National could have found a way of quietly getting him to retire and found some less obviously egregious replacement.  The bigger issue is that National had no interest in doing so, and Labour no interest in criticising them for not doing so.  They pay no price for acting as, in effect, the agents of the CCP in New Zealand (even as they all no doubt tell themselves that somehow what is in their best interests is also in ours).   It was good that Q&A did the clip they did, but it is hardly mainstream TV (the programme mainly for the handful of political junkies).  Other journalists have from time to time asked Jian Yang for an interview, and been equally unsuccessful, but there is almost never any follow through. The PM and the Leader of the Opposition front up for media interviews every week, perhaps even most days, and there is no pursuit of this issue, there is no campaign in the pages of the Herald or the Stuff outlets.  Nothing.  The evils of the CCP/PRC just isn’t one of those things that exercises or concerns establishment New Zealand.  It is disgraceful.

A few weeks ago the Inter-Parliamentary Alliance on China was launched, comprising legislators from a range of western countries with concerns about the PRC, and from a range of places on the usual left-right political compass.   This was from their website

Developing a coherent response to the rise of the People’s Republic of China (PRC) as led by the Chinese Communist Party is a defining challenge for the world’s democratic states. This challenge will outlast individual governments and administrations; its scope transcends party politics and traditional divides between foreign and domestic policy.

The assumptions that once underpinned our engagement with Beijing no longer correspond to the reality. The Chinese Communist Party repeatedly and explicitly states its intention to expand its global influence. As a direct result, democratic values and practices have come under increasing pressure.

When countries have stood up to Beijing, they have done so alone. Rather than mounting a common defence of shared principles, countries have instead been mindful of their own national interests, which are increasingly dependent on the People’s Republic of China for crucial minerals, components, and products.

No country should have to bear the burden of standing up for fundamental liberties and the integrity of the international order by itself.

The Inter-Parliamentary Alliance on China has been created to promote a coordinated response among democratic states to challenges posed by the present conduct and future ambitions of the People’s Republic of China. We believe that the natural home for this partnership is in the freely elected national legislatures of our peoples. Coordination at this level allows us to meet a challenge that will persist through changes in individual governments and administrations. We firmly believe that there is strength in unity and continuity. By developing a common set of principles and frameworks that transcend domestic party divisions and international borders, our democracies will be able to keep the rules based and human rights systems true to their founding purposes

It was sadly notable that at the launch there were no New Zealand MPs, even though (so Anne-Marie Brady reported) numerous of them had been approached.    It was interesting, and perhaps a little encouraging, that last week Simon O’Connor (from National) and Louisa Wall (from Labour) joined this initiative.  O’Connor is currently chair of Parliament’s Foreign Affairs Committee and Wall is a member.

But count me more than a little sceptical.   It has the feel of some sort of deal worked out between National and Labour, for a bare minimum degree of association, announced belatedly.   There is no statement from O’Connor or Wall about the nature of their concerns with the PRC –  at home, abroad, or here –  and, of course, no journalist appears to have asked them for comment (or reported a refusal to comment).   Is O’Connor really comfortable with having a CCP affiliated member, close to the PRC Embassy, who refuses to engage with voters or the media, and who has never ever said anything remotely critical of the PRC as a member of his caucus, someone who could be a junior minister if National is elected?  MPs are usually only too ready to criticise people on the other side.  How comfortable is Wall about Jian Yang or National’s extreme deference?  Or has the Labour Party hierarchy told her to simply sign up and then keep very quiet?  I’d like to be wrong on this  –  I was briefly encouraged by the O’Connnor/Wall news –  but so far there is nothing to suggest I am.

 

Little fiscal discipline at the RB

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

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

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

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

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

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

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

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

RB OIA response Governance Strategy and Corporate group

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

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

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

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

RB corporate 1

and this one

RB corporate 2

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

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

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

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

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

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

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

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

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

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

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

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

funding agreement

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

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

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

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

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

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

Presumably

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

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

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

Measuring how much monetary policy has eased

A couple of months ago I wrote a post about the work former Reserve Bank researcher Leo Krippner had been doing – over much of the last decade –  on trying to reduce all the influences on the government bond yield curve to a single number, to represent the effects not just of changes in the OCR (or similar rates in other countries) but also what are loosely called ‘unconventional policies’ undertake in the presence of the (actual or effective) lower bound on the OCR itself, whether central bank jawboning or, for example, asset purchase programmes.

As I noted then

This work wasn’t very relevant to New Zealand itself for a long time (there were internal sceptics as to whether it should even be done)….and yet now it is. (In his speech a couple of weeks ago the Governor even suggested the Bank might publish a semi-official series of such a measure.)   Leo’s work has been recognised in various places abroad –  cited in public by at least one Fed Reserve president, and honoured by the house journal of the central banking community, Central Banking magazine ..,  Leo left the Reserve Bank last year, but is continuing to update his work and earlier this week circulated a note with a Shadow Short Rate series for New Zealand, now that we operate with a formal OCR floor (and ceiling) and in the presence of the MPC’s commitment to buy $30 billion of government bonds over the coming year.

The size of the LSAP programme has been increased substantially since then.

Still more recently, Leo has updated his models for the other advanced economies he looks at, in a way that enables us to look at consistent estimates of the extent of monetary easing across eight advanced economies/areas.

Here is Leo’s estimate of the extent of the overall easing, as reflected in the Shadow Short Rate estimates for each country, since the end of last year (to the end of May).

SSR

Perhaps three things stand out from this chart:

  • little or no effective easing in the countries/monetary areas where the official short-term rate was already negative.  Perhaps central bank interventions were relevant in other markets, perhaps for a time they stopped government bond rates rising much, but on this metric, no effective easing relative to the position just a few months back.
  • the largest easing has been in the United States and Canada.  That is no surprise: official short-term rates late last year were quite a bit higher in the US and Canada than anywhere else in this group of advanced economies,
  • Leo’s estimate of the New Zealand SSR suggests an easing equivalent to 117 basis points.    Recall that the OCR itself was cut by 75 basis points and so, if one accepts this as a good estimate for how much some mix of the LSAP programme and forward guidance is doing, all the rest is not thought to be worth more than about 40 basis points.    Not exactly consistent with the tone of the continued rhetoric from the Governor, who repeatedly insists –  he was at again on CNN yesterday (whoever runs their Twitter account seemed breathlessly excited that the Governor was on CNN) –  how much difference his MPC’s LSAP programme is making.

Leo has taken his estimates of the SSRs all the way back to the 1990s (the more yield curve information the better for trying to distill what is normal and what is not).  So out of interest I had a look at what happened in the previous severe recession.

When the recession of 2008/09 started all these countries except Japan had official policy rates clearly above zero.  In those circumstances, the SSR is much the same as the official rate.

In this chart, I’ve shown the median SSRs for (a) the big 4 central banks in the sample (US, euro-area, UK, Japan) and (b)  all eight central banks from mid-2007 to the end of 2014.

SSR2

On these measures, monetary policy kept easing (on the whole) until well into 2013 –  in some cases by official rate cuts, in some by QE measures, in some cases by forward guidance (or perhaps just growing doubts in markets about when official rates might ever need to rise).

In this chart, I’ve shown the fall in the estimated SSRs for each country from mid-2007 (about the peak in rates, including in New Zealand) to (a) mid-2009, and (b) to the lowest point in the period in the chart.

SSR3

One almost needs a different scale to compare these estimates with those for the  –  more savage –  economic downturn we are now in the midst of (see first chart).

And bear in the mind that in both episodes inflation expectations have fallen quite a lot in many most of these countries.  Adjust for that and the differences in the falls in the real (inflation-adjusted) SSRs would be even more stark.

Now it is certainly true that back in 2013 (say) longer-term government bond yields were still quite a bit higher than they are now (in the US, for example, 10 year rates in mid 2013 were about 2 per cent).  But then estimates of neutral rates have also fallen over that period.

I’m not entirely convinced by the SSR approach.  I set out some of the reasons in my earlier post, and in exchanging notes with Leo I don’t think he would disagree with any of those individual points.   Perhaps the simplest to explain point is one Leo himself included in his paper releasing the New Zealand results: the SSR is not a rate that can be transacted (unlike an OCR), and in New Zealand longer-term interest rates don’t tend to directly affect many borrowers other than the government itself (and monetary policy isn’t supposed to be about shaping the government’s behaviour –  it is a market mechanism, designed to change relative prices facing private sector firms and households).    I’m also a little uneasy about the fact that the Reserve Bank’s LSAP is explicitly targeting mainly long-term interest rates –  which, among other things, is impairing what information might be in those rates, which relate to periods well beyond the current crisis –  while, say, the Australian and US asset purchase programmes are (sensibly) targeted at the shorter end of the bond yield curve (horizons relevant to this recession, and in a sense trying to mimic what a lower policy rate itself will tend to bring about directly if those central banks were willing to cut their policy rates further).

There is also the point I noted in my earlier post that for New Zealand Leo treats the effective floor on the OCR as being 0.25 per cent.  But since that last post, the Governor has explicitly reiterated that it is a temporary floor only –  now only 9 months until the commitment expires –  as he did again yesterday in his CNN interview.  Leo advises that if the effective floor were set a bit lower, the SSR estimate itself would be closer to the OCR.  In other words, the extent of the fall in the New Zealand SSR may actually be skewed higher than is really warranted.

If I have my doubts about the indicator, it is still of some value in providing summary estimates across both time and country, it is the sort of methodology the Bank has in the past expressed enthusiasm for (without tying itself to specific numbers), his approach has received approbation from his peers in yield curve modelling etc, and Leo’s estimates are made available, including on his website.   And they leave us with the twin points that:

  • the extent of monetary policy easing in New Zealand this time is little more than that of the cut in the OCR itself,
  • the extent of the falls in the SSRs in all countries (even Japan) is much less than we saw in the period of the last serious recession.

It is fine for central bankers to talk –  as the Governor does –  of fiscal policy carrying the main load at present but

a)  there was significant fiscal support provided in all these economies (including New Zealand)  in the last episode as well,

b) fiscal policy operates coercively (relying wholly on the sovereign power to tax) and for many purposes –  other, say, than basic income support –  is inferior to monetary policy for stabilisation and recovery purposes,

c) in most if not all these countries recovery after 2008/09  –  best proxied probably by a return to normal of unemployment rates –  took (a) far longer than was expected then, and (b) far longer than most are still envisaging for a recovery now from this more severe downturn, and

d) fiscal policy has its limits (quite probably close to being reached, and more “political” than technical), in a way that monetary policy properly run –  ie not imposing an artificial floor on policy rates –  does not.  It is all the odder that central banks like ours (with the acquiescence of excessively conservative politicians) are acting so starkly to hold up interest rates at time when very  weak investment demand and a high precautionary savings demand would almost certainly deliver short-term market-clearing interest rates that are deeply negative (and while “market-clearing” might seem bloodless to you, what it means in practice is clearing the labour market and supporting a prompt return to full employment).

 

 

 

 

Me too

No, not that one.  This one is the  apparent desperate desire of the new leader of the National Party to align himself with the aims and ambitions of the current government.   It was all there in his speech on Sunday (complete with his desire to suggest that he had really become what they call in the US a “cafeteria Catholic”, and that his faith would make no difference to any government he led).

I saw a National-aligned commentator this morning commenting sceptically

Perhaps, but I don’t think that even in those sorts of circumstances opposition parties used that sort of approach in New Zealand towards the end of three term governments.  I was never a John Key fan, and there were a few issues where he actively chose to adopt questionable policies adopted under the Clark government, but even Key promised more (even if he never delivered) than just to be a more competent executor of Labour’s agenda.  I went back yesterday and read a few of those 2008 speeches just to check. (And the 2008 campaign took place amid a  severe recession and global financial crisis, both deepening by the day.)

Who knows, perhaps it will win a few votes.  Perhaps, but if you believe the stuff Labour, New Zealand First, and the Greens say they want to do, why not vote for them?   After all, if execution has not exactly been a hallmark of the government –  and Muller, of course, makes some entirely fair points there – why not vote for people who really believe it, rather than the pale imitations who just want office (or, in some cases, may just be in the wrong party).  After all, there is such a thing as learning-by-doing and some ministers at least are likely to improve with time.   Muller himself has no ministerial experience (as a reminder, a country is not a company), and his deputy was a fairly junior minister at the end of the previous National government where she was not regarded well by officials and as Minister of Education managed to deliver a speech as wordy and hard to read as a piece of legislation.

Setting aside the heartwarming biographical bits, the speech seemed to be a mix of spin, historical errors, and an utter lack of any ambition or promise.

There was, for example, the laughable description of the wage subsidy scheme as “bipartisan”.  I guess New Zealand First and Labour make up the coalition Cabinet, so perhaps that really is bipartisan, but just because you supported an initiative the government took doesn’t make it a “bipartisan” one.  It is doubly strange because a few lines later he notes that we can’t “freeze-frame our economy, with never-ending and unaffordable wage subsidy schemes”.   Were they “unaffordable” or bipartisan” or both?

Muller is clearly keen on selling the merits of the Key-English government, and I know it is a commonplace to say they “got us through” the “global financial crisis” as if (a) there was much specific to get through (the crisis itself was mostly other countries’ problems, and (b) it had not taken 10 years –  10 years –  for the unemployment rate to get back to pre-recession full employment levels.   Might not be a very promising line for suggesting National is well-placed to handle this recession/recovery better.

There was the strange claim too that the previous National government did not raise taxes.  Even if you allow for the GST/income tax switch as roughly neutral, this was the government that raised effective corporate tax rates, imposed a brightline test (and thus tax) on housing, dramatically increased tobacco taxes, increased the taxation of Kiwisaver, and so on. And and there was fiscal drag too.   The emphasis of the fiscal adjustment might have been on the spending side, but there were increased taxes.

There was also the weird claim that “Bill English developed the Living Standards Framework”, except….he didn’t, Treasury did.  And all while not offering the sort of analysis and advice that the Minister and his office often claimed to really want.   Pledging to use it in future National Budgets is just another example of the me-too ism and the same avoidance of the hard issues –  productivity failure –  that seemed to drive The Treasury in the first place.

As a young man Muller worked for Jim Bolger when the latter was Prime Minister…..but only after the reform era had already ended.   Now he is desperate to distance himself and National from the reform era –  sounding a lot like Grant Robertson used to sound re the Reserve Bank Act, even as his actual reforms made next to no difference.   Thus we read

I was in for a bit of a shock when my own party took over in 1990 and moved even faster, allowing unemployment to reach 11 per cent in 1992 – the worst since the Great Depression, but a record that will probably be broken over the next year.

I think both Labour and National could have done those economic reforms more gently, more caringly and with a greater sense of love for our fellow Kiwis.

If we look across the Tasman to our sibling rivals in Australia, it pains me to say that Bob Hawke, Paul Keating and John Howard managed the reform process better than David Lange, or my friend and mentor Jim Bolger.

I believe the speed and sequencing of the economic reforms did terrible harm to the institutions of our communities, and to far too many of our families.

The same Australia whose unemployment rate in the 1991/92 period peaked at almost exactly the same (11.1 vs 11.2 per cent) as New Zealand’s, and whose unemployment rate has been higher than New Zealand’s for most of the subsequent 30 years.     Quite what does Todd Muller think  –  specifically –  should have been done differently?   This cartoon is from the late 80s.

douglas

And yet despite disowning his own party from its second to last term in government, Muller expects us to believe that we can count on them to handle the recovery better because  “economic management is in our National DNA”.  The same party that (a) was happy for the unemployment rate to stay unnecessarily high for 10 years, and (b) which made no progress at all (rather the contrary) in closing the glaring productivity gaps, reversing the decades of underperformance.  Oh, and which promised to fix the housing market and did almost nothing.   Why would we?

It was sad and sobering to get through Muller’s speech, reread it again slowly and carefully, and find not a hint of any concern about productivity (however expressed) or housing.  It isn’t that long ago since National put out a discussion document on the economy which did actually seem to recognise the productivity failings, and that those failings mattered for whatever else individuals or governments might want to do.  No more apparently, even though the failure hasn’t just been magic-ed away with the virus.   And if house prices may fall back a bit during the current recession –  as they did (15 per cent or so in real terms) in the last recession –  that isn’t fixing the underlying problems is it?  No ambition, no promise, not even any mention.

All we seem to get is the promise of a bigger welfare state.   But again, if that is what you want why vote National?

If you were really erring on the generous side, determined to find a silver lining, there was this line near the end of the speech.

I’m proud of what National and New Zealand has achieved since then [when he joined National in 1988], but I do not yet see an economy that is truly internationally competitive or agile enough to maintain and improve our standard of living.

And yet there is not even a hint of what he means, or what he or his party proposes might be done.   You wouldn’t know, for example, that the productivity gaps are larger than they were, that foreign trade as a share of GDP is smaller than it was.  And with no serious policy, it looks as feels just as empty as when current government ministers, then in Opposition, suggested things could be better –  but offered no serious clue as to how that might happen.  They are as vacuous as each other.

Oh, and then there was the truly weird attempt to appropriate the legacy of Michael Joseph Savage

We would not use this term in today’s more secular and diverse age, but, in the 1930s, Michael Joseph Savage spoke of “applied Christianity”. As I’ve said, something like that will guide my Government.

Savage faced the last economic crisis of the magnitude of what is ahead of us, and was forced to borrow. He launched a major public works programme. At the end of it, New Zealand had the first of many state houses for low income workers, and significant infrastructure to power an improving economy – including large-scale hydroelectric schemes on South Island rivers and lakes.

It sort of makes some sense when Labour does it.  Whether or not there is much truth to what they (Ardern, Robertson) say, at least he was the first Labour Prime Minister –  some Labour figures still like to display his photo in their offices and homes.  It is pretty weird when National does it, and even worse when their “facts” are so misleadingly bad.

Thus, the Great Depression –  New Zealand style, where it was bad –  was largely over the time Labour took office in December 1935 (as it was in Australia and in the UK –  the latter overwhelmingly our major market).  Real GDP had recovered to pre-Depression levels and the unemployment rate was falling.   Through the Depression, governments had not been “forced” to borrow, they had largely been unable to borrow –  as National’s finance spokesman knows well –  and had actually defaulted on some of their debt.    And although Muller swears by his macroeconomic orthodoxy –  and thus professes himself entirely unbothered about a Reserve Bank doing almost nothing to counter this recession –  the first significant legislative act of the incoming Savage government was to nationalise the Reserve Bank and give the government progressively more power to use Reserve Bank credit.     The Savage government did borrow domestically, it did build state houses (all while doing little to actually prepare for the coming war) but……it also ran New Zealand into crisis in late 1938 and early 1939.  Unable to borrow internationally, and yet with a fixed exchange rate, the foreign reserves held by the Reserve Bank and the trading banks fell away very sharply (variety of influences), and government’s response was to slap on exchange controls and import licensing, regimes that didn’t finally disappear until the 1980s.

And then there was that interesting claim about hydroelectric capacity.  I hadn’t heard of that before, so I went looking.  There was a good reason I hadn’t heard of it before: it just didn’t happen. Muller seems to have simply made it up.

I went to the old yearbooks and found nice detailed tables of (what they called) public works spending (which does not include state houses).  Combine that with some historical GDP estimates, and you get something like this chart.

public works

Public works spending was held up in the early stages of the Depression –  including, the record shows, the Waitaki hydro scheme, partly to keep people in work –  but were cut deeply as the situation worsened and the foreign borrowing constraints became tighter.  The trough was the worst year of the Depression for New Zealand –  that to March 1933 –  and thereafter public works spending increased.  It is certainly true that the rate of increase picked up with Labour in office but even at the end of the period was no higher as a share of GDP (about 2 per cent) than it had been a decade ago under Forbes and Coates.

And what of hydro developments.  To my pleasant surprise, the data for those were broken out separately.  Here is public works spending on “Development of water power” as a share of  total public works spending.

public works2

So the hydro share of public spending works spending actually peaked in the year to March 1933, and it was pretty much downhill thereafter.   Of course, total spending on hydro also increased but in the last peacetime years (to March 1939 and 1940) it  no higher –  in real terms, or as a share of GDP –  than it had been in 1928 ( and less than it was 1932) –  this for a technology where underlying demand  was increasing very rapidly, and for which the state had taken effective control of the development of new power generation.

I don’t know where Muller got his story from.  But surely they have people who can do the basics like fact-checking an important speech by a new leader?  Then again, perhaps it really didn’t matter, because all they wanted to do was to swear allegiance to the Labour legacy, real or imagined, past or present.

Muller suggests that he would be a one-of-a-kind Prime Minister

In my lifetime, New Zealand Prime Ministers have tended to be kind, competent or bold. Some have managed to be two of those things. My background in business and politics, and my grounding here in Te Puna, mean I plan to be all three – kind, competent and bold.

There was no sign of any boldness in the substance of the speech, and not much evidence that he has basic competence nailed either.

Oh, and he’s promoted  his Chinese Communist Party member, former part of the PLA military intelligence system, who acknowledges lying about his past to get into New Zealand, further up the caucus rankings.  If that qualifies as kind, competent, or bold he must have a different dictionary to mine.   Shameful is a better word for it.

Interest rates

There was a quite odd paper released yesterday by the New Zealand Initiative –  the business-funded think tank, that has done quite a range of work on coronavirus-related policy issues –  on monetary policy, fiscal policy, interest rates, and asset prices.  I know some of my readers will agree with at least some of Bryce Wilkinson’s paper.  I disagree with it almost entirely, unlike the previous paper on some related macro issues the Initiative released under Bryce’s name (where my reaction was my along the lines of “yes, but…” or “perhaps, but that isn’t the whole story”.  On Bryce’s telling in this latest paper, central banks appear to be little more than wreckers and debauchers, driving the world inexorably towards its next (real) economic and financial crisis.

If I were fully well, I would devote a lengthy post (or two) to the paper.   Bryce is a smart guy and there is a range of material there that really should be carefully unpicked and scrutinised.  As it is, for today there will be just something brief.

Bryce seems to hold it against our Reserve Bank that it has cut the OCR to 0.25 per cent.  This is from pages 7 and 8

First, the sharp reductions in policy discount rates are an active response to hurtful economic shocks rather than a passive response to secular trends. Think of it as a response to signs of financial market stress – falling share prices, rising bond yields, a ‘dash for cash’ and market turnover drying up – causing step reductions in policy discount rates, with limited reversals for fear of triggering renewed signs of stress.

Second, policy discount rates still differ considerably around the world. They are the lowest by far amongst European and Scandinavian countries, Japan, the UK and the US. Outside that group, the Bank of International Settlements shows only Israel has a policy interest rate lower than New Zealand and Australia’s 0.25%. Of the 38 central banks in its dataset, half had policy discount rates in April of 1% or more.

and this footnote appears a page or so earlier

The Bank of International Settlements database shows that in April 2020 the policy rates of 29 of 38 central banks around the world were higher than for these four central banks. Israel, with a policy rate of 0.1%, was the only non-European central bank to be below New Zealand and Australia’s 0.25%. Almost one third of the central banks had policy rates of 2.5% or higher in April.

The first paragraph is mostly just out of step with the actual historical record.  Policy rates around the world have not been cut this year mostly because of financial market stresses –  which didn’t even really appear until mid-March –  but in response to rapidly deteriorating economic situations and emerging downside risks to inflation.

But what of those policy rates?  Here is the chart of nominal policy interest rates from the BIS.

policy rates BIS

(I capped the scale at 10 per cent –  Argentina actually has a policy rate of 38 per cent, but I guess Bryce won’t be commending their example to us.)

One can quibble about precisely which policy rate to use –  most reckonings for the ECB would probably use the deposit rate of -0.5 per cent, and although New Zealand and Australia are shown here as having the same rate in fact the effective rate in Australia is 15 basis points lower than it is here.   One could reasonably delete a couple of entries from the chart altogether –  Hong Kong and Denmark have long-term fixed exchange rates, and Croatia describes its monetary policy as keeping the exchange rate to the euro stable.  Korea cut by another 25 basis points last month.   But these are small institutional details: the main point is that pretty much the entire group of advanced economies have nominal interest rates of less than 1 per cent.  In almost all those cases, real interest rates –  which central banks do not control –  are negative.

On the other hand, Bryce is right to note that there are still countries with higher rates.  In fact, I could link to a longer list with many more countries with higher interest rates (Pakistan 8 per cent, Uzbekistan 15 per cent, Ukraine 6 per cent, Zambia 9.25 per cent).

But it is hard to see what is appealing about almost any of those countries’ macro management.    Quite a few have higher inflation targets (Turkey, for example, has a notional target of 5 per cent, and actual outcomes last year of almost 12 per cent).  Of all those higher interest rate countries,  only Iceland really counts as an advanced economy and it is the country in the chart with (by far) the largest cumulative fall in its policy interest rate since just prior to the 2008/09 recession (where, on the Wilkinson telling, the rot really began to set in).    There’s China of course, but (a) interest rates aren’t a key part of the transmission mechanism in the PRC, and (b) whether it is public or private credit one worried about, China took the great-debauch path more than most.

I don’t know all those countries to the right of the chart at all well, but I can’t think of a single one that I’d exchange for most of the countries on the left of the chart, New Zealand included, whether it was macro management or political stability (often somewhat connected) that I had in view.  In fact, even Japan and the US –  for all their faults and all their debt –  easily look a better (nominal) bet than any of those on the right of the chart.

And although one wouldn’t really know it from the New Zealand Initiative piece all the OECD countries with the lowest net government debt are also bunched towards the left hand end of the chart.

2019 govt net debt (% of GDP)  (OECD)
Finland -48.9
Luxembourg -47.6
Sweden -33.5
Estonia -24.2
Switzerland -12.4
Australia -11.5
New Zealand -2.8
Denmark -2.5
Czech Republic 8.8
Latvia 9.9
Lithuania 12.4

Plus Norway of course, with huge net financial assets.   Any of them could readily borrow more –  much more –  with no central bank hand on the scale, but they (probably responsibly) chose not to.

Two final brief thoughts.

First, what I always find striking among the critics of central banks from the side Bryce comes from is how powerful they seem to think central banks are over very long-term real interest rates.  I think central banks have quite a degree of influence over economic activity over perhaps a 1-3 year horizon, but beyond that their only real influence is on inflation.  I’m pretty sure that would probably have been the view of a younger Wilkinson –  Muldoon might, as the story went, juice the economy in the short-run for electoral purposes, but before long all we’d be left with was higher inflation.  Thus, Bryce declares himself scandalised that in its LSAP programme the Reserve Bank bought long-term inflation-indexed bonds at negative real interest rates but (a) long-term real interest rates have been falling for decades (I always recall the funds manager who for years afterwards proudly boasted of having bought New Zealand inflation indexed bonds at a real yield of 6 per cent) and (b) market real yields for New Zealand indexed linked bonds first went negative in August last year, way before there was any talk of RB asset purchases.   There are deeper forces at work –  real savings and investment preferences –  which Wilkinson’s paper seems not to address at all.

Second, related to this Wilkinson appears to have a hankering for deflation.  I’m not unsympathetic –  although not wholly persuaded –  by the case that if there was rapid trend productivity growth it could be attractive to take the gains in a lower general price level rather than higher nominal wages.   But that bears no resemblance to the world in which we actually live today.    Productivity growth in the frontier economies has slowed materially – and on many reckonings was slowing even before 2008/09 –  and, of course, the New Zealand productivity record has been particularly dire.   And there tends not to be a huge demand for investment when firms don’t perceive substantial profitable –  often productivity-enhancing –  investment opportunities.   When investment demand is weak and savings preferences are relatively strong, real interest rates will be very low, perhaps even negative.  There is no iron-law of nature that says that the market-clearing price for using savings need be positive (in nominal or real terms).  That doesn’t saving unwise or imprudent at an individual level –  one of Wilkinson’s concerns –   but does suggest you can’t expect much, if any, of a low-risk return to such savings.  That is, of course, true of many prudent things we do in life (insurance most notably).

 

Failing

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

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

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

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

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

gunther 1

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

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

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

gunther 2

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

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

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

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

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

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

gunther 3

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

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

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

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

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

 

 

Recovering

It is very difficult to get a good sense right now of how much excess capacity there is, here or other countries  In New Zealand’s case, part of that is about the gross inadequacies of our official statistics.  We are one of only two OECD countries without official monthly employment/unemployment data (the other is Switzerland) –  and if this has been a long-running deficiency, it seems more striking than ever from a government that amended the central bank act to highlight the focus it wanted on avoiding as much as possible excess labour market capacity.

Of course, there is a variety of less formal, or less fit-for-purpose, partial indicators.  We know how many people get the unemployment benefit but many people looking for work are not (rightly in my view) eligible for the unemployment benefit.  There is a new SNZ indicator using IRD data and providing a monthly employment indicator which should be quite useful in normal times, but isn’t when the government is paying firms to keep people notionally on the payroll, even if doing little or no work.   And although SNZ collects HLFS survey data steadily through the quarter, they seem uninterested in making even that partial monthly data available (larger margins of error as it would inevitably have).    We’ll only finally get the June quarter HLFS data in August.

There are other hints of excess capacity.  The wage subsidy scheme paid out in respect of some staggering share (around half) of New Zealand workers and the self-employed, but that is now very backward-looking since the bulk of the eligibility related to the severe regulatory restrictions on many/most business during the government’s so-called “Level 4” period, from late March to late April.     Most of the employees covered would not have been made unemployed even if no wage subsidy had then been on offer.

The new wage subsidy scheme comes into effect this week.  The rules were tweaked again last week, and although this scheme only covers eight weeks (rather than twelve in the original scheme), the expected cost (close to $3.5 billion) suggests a lot of excess capacity still exists, or is expected to exist.  Not, of course, that we have any official data on that.

Of course, other countries have also had the mix of regulatory restrictions (“lockdowns”), self-chosen reductions in social and commercial activity, and the impact of the sharp disruption to world economic activity.   Labour is generally not being particularly fully-employed at present.  But in most advanced countries, even those with monthly labour force survey data, this excess capacity does not really show up in the official unemployment rate at present –  after all, most other countries have deployed some form or other of fiscal support designed to keep workers attached to firms, even if for now they are doing little or nothing.   In most countries, the monthly official unemployment rate has risen this year, but mostly not by much (and there are vagaries in the statistics such that in Italy the official unemployment rate has fallen).

Only three OECD countries are reporting really large increases in their official unemployment rates.  These are percentage points changes this year to date.

Canada                                                  +8.1

Colombia (new to the OECD)           +9.5

United States                                       +9.8

The US numbers came out on Friday night.  There is some controversy about the monthly change, but all the caveats (including those from the BLS themselves) suggest that the “true” or “underlying” number is even higher than the reported number.

I’m not putting much weight on Colombia (knowing almost nothing about it), but we have every reason to suppose that the dislocation of the economy in New Zealand over recent months in New Zealand was at least as large as those in the US and Canada (whether one looks at a regulatory restrictions index, mobility data, or stylised indicators like the degree of dependence on the labour-intensive foreign tourism sector).  Forecasts of the drop in June quarter GDP are higher for New Zealand than for most other advanced countries.

The “true” increase in excess capacity to last month (the US and Canadian data are for May) in New Zealand is almost certain to have been at least as large as those in the US and Canada.    One might think in terms of an unemployment rate equivalent of at least 13 per cent, which would be (by some margin) the worst New Zealand had experienced since the 1930s.

One can debate the merits of the wage subsidy scheme –  and even more so the extended version, which seems focused on tying workers to firms that are least likely to recover any time soon, if ever – but without it we would have a much clearer sense of just how severe the labout market excess capacity actually is.  (Even if, as I have favoured, one took a more generous approach to individuals facing serious income loss this year.)    Perhaps even when all the wage subsidy schemes have passed the official unemployment rate will be “only” in the high single figure range –  although if the schemes expire in September I’m still sceptical of that –  but for now it is all but certain that the excess capacity in the labour market, that needs reabsorbing one way or the other, is well into double-digit percentages.  And political debate about what needs to be done should operate with those sorts of numbers in mind.

On which note, I’ve been reflecting over the last few days on what it takes to see full employment restored.   It isn’t like, for example, everyone simply coming back to work after the summer holidays.   Everyone –  individuals and firms –  planned on summer holidays and planned on returning.  By contrast, even in New Zealand with (for now) almost no Covid, that isn’t the parallel at all.  The income lost over the last couple of months – probably well in excess of $20 billion, relative to normal expectations – isn’t coming back.  The border is still largely closed. The virus still stalks the earth, with associated heightened uncertainty.  The world economy is in a severe recession and (rightly or wrongly) almost all forecasters think it will take several years for activity levels to get back to normal.  So if wealth has taken a hit already, and some significant sources of external demand are either restricted (by regulation) or impaired, where is the demand going to come from to quickly reabsorb workers who are either already displaced, or who are hanging in some temporary wage-subsidy limbo.

You see occasional talk of people “doing their bit” for New Zealand businesses by going out and spending more than usual, but it is a bit hard to envisage it happening on any significant or sustained scale.  I tried some introspection.  My household hasn’t been materially adversely economically affected by Covid shocks, and there doesn’t seem to be any material employment risk.  And yet we aren’t spending any more than usual, possibly a bit less.  Why would it be otherwise?   We’ll have a break in the school holidays, but then we always do (and when we booked the other day it was a bit shorter than it might have been, Auckland Museum having had to cancel/postpone the exhibition we hoped to see). Many shops are still a pain to go in to.   And I find myself still slightly shell-shocked after the last few months and a bit more cautious and abstemious than otherwise.  And if I thought about “doing my bit” on any serious scale – there are always jobs around the house than could be done –  then I’d contemplate the dramatic change in the fiscal position.  I’m not suggesting some full-blown Ricardian effect here, but (whether I approved of the scheme or not) it seems rather less likely than it was a few months ago that my kids will get fees-free tertiary education, and even if a centre-right government were to be elected  tax cuts seem less likely than they did.  And even prospects for the kids to get part-time jobs don’t seem what they were (and there are probably people needing the jobs more anyway).  Oh, and I’m conscious that another round of Covid restrictions, and economic dislocation, isn’t impossible or even unlikely.

Perhaps you are different.  Perhaps you are energetically contemplating spending more aggressively.  But I suspect most people won’t be, even those (notably in the public sector) fairly confident of keeping their jobs).

In a typical serious recession, changes in incentives (relative prices) do quite a lot of the work.   Lower real interest rates ease pressure on the most-indebted but (more importantly) they draw spending forward.  Often those changes in real interest rates have been rather large.  Sometimes, tax rates (income or consumption) are cut.  And, particularly in countries with a fair bit of foreign debt and not typically treated as international safe-havens (or home bases for pools of savings), the exchange rate falls a lot, drawing demand (from locals and foreigners) towards New Zealand.  Oh, and of course sometimes the government itself does a lot more direct spending on goods and services.

(Oh, and of course there is always pro-productivity and pro-investment micro reforms but…….this is modern New Zealand.)

The key point is that if, at some like current real wages, we are to get back fairly quickly to full employment (which, in my view, should be a high policy priority, given the dreadful scarring effects sustained periods of unemployment can have on some individuals) it needs quite a lot of people to spend quite a bit more than they otherwise would, to replace the demand that has (for now at least) disappeared or been somewhat impaired).

Of those mechanisms:

  • real interest rates have barely changed.    The Reserve Bank can huff and puff all it likes about possible portfolio balance effects etc from its LSAP programme, but if they don’t change prices in ways that encourage more spending than was happening at the start of the year (and they haven’t) it is really little more than sound and fury (and, just possibly, having stopped things getting worse),
  • the exchange rate is now about the same level it averaged last year,
  • consumption tax rates haven’t changed, and although there have been some business tax changes (a) most of the effects will be intra-marginal (flowing to people who woin’t change their behaviour, and (b) uncertainty is very bad for business investment (ie even if the effects are in the right direction, they are likely to be very weak for now)

The government is, of course, spending a lot.  Most of that isn’t direct spending on goods and services  (consumption and investment) but income transfers in one guise or another.  Even there however, the largest and most concentrated spend has already happened over the last three months (with some more in the next couple of months).

From the “fiscal hawk” side of the debate, one hears quite a bit of worry about fiscal excess and heavy future burdens.  I come and go on how sympathetic I am to those complaints and warning, but mostly I end up not being that sympathetic (and I noticed over the weekend a centre-right UK think-tank, Policy Exchange, taking what appeared to be a similar stance, of for different reasons).  And why?  Because if we are concerned at all about getting people back into work faster than simply allowing nature to take its course –  recessions will heal themselves eventually, but it could take quite a few years (perhaps tourism will be back to normal levels in 2025?) –  someone (many actually) have to be willing to spend more now than they were otherwise planning to.  I’d much prefer that monetary policy were doing its job –  not just here, but in Australia and most other developed countries –  because I think much lower interest rates and a much lower exchange rate would do a lot (as they did after 1933, 1967, 1991, 1998, and 2008/09), by changing relative prices/incentives, but it isn’t.   And with a hole this deep –  and borrowing costs this low (which don’t make fiscal policy a “free lunch”) and on-market borrowing this easy – it would imprudent for fiscal policy to be doing no more than just letting the automatic stabilisers work.  And, in truth, at least on the domestic interest rate leg, letting monetary policy do its job also involves people taking on more debt now than they’d otherwise planned to (voluntarily chosen and all that, but debt nonetheless).

If we are starting from (effectively) perhaps double-digits effective rates of unemployment, it is far from clear that anything like enough macro policy stimulus is being done.  If fiscal policy hasn’t reached its political limits –  it is nowhere near the market limits, but neither should we test those –  it must be much closer than it was and, on the other hand, monetary policy is doing almost nothing.  That is really inexcusable, If Orr and the rest of the MPC want to take on themselves some sort of mantle of Hayek or Mellon (as caricatured) as do-nothing liquidationists, Robertson, Ardern Peters, Shaw (and, it seems, Muller and Goldsmith) shouldn’t be standing idly by, by default offering their imprimatur.

(The post was headed “Recovering”: unfortunately, I am doing so only slowly from some bug I’ve picked up, so posts this week may continue to be patchier than I’d like.)

Small economies

The Productivity Commission last week released a report done for them by David Skilling on “frontier firms”.  That is the topic of the Commission’s latest inquiry, handed to them by the Minister of Finance.  Personally, I reckon the topic is mis-specified and will tend to drive people to focus on symptoms more than causes, but I’ll come back to that in more detail at some point.

Skilling was formerly Executive Director of the former (somewhat centre-left) New Zealand Institute and these days runs a consultancy, based in the Netherlands, with a focus on small advanced economies.  I’m a bit under the weather today so in this post, I wanted to touch on only two points from his report.

The first was to draw attention to footnote 10

10 The one policy foundation setting that I identify as having had a meaningful impact on New Zealand’s productivity performance and the development of frontier firms is with respect to immigration (or more precisely, the absence of a strategic migration policy).  The substantial net migration inflows that New Zealand has received over the past 25 years has been a strong source of support for headline GDP growth, but has created a series of distortions and pressures in the New Zealand economy: infrastructure and cost pressures, greater residential real estate demand (with implications for allocation of investment capital), downward wage pressure that deters business investment, as well as upward exchange rate pressure.  An explicit immigration policy that was focused on quality and filling skills gaps, with lower gross inflows, would create a more supportive environment for higher levels of international engagement by New Zealand firms (although the transmission mechanism to outcomes is more indirect than those discussed in the body of this paper).

There isn’t much about policy that I agree with Skilling on  –  and find it strange that in a 30 page report with an emphasis on the tradables sector, this is the only mention of the exchange rate –  but, as you can imagine, I agree with much of that.

And the second was about this chart

Forbes 2000

of which he observes

This seems to be the case in small advanced economies also.  One of the striking characteristics of successful small advanced economies is their reliance on large firms, with a disproportionate representation of small economy MNCs in measures such as the Forbes Global 2000 (Exhibit 6).

I wasn’t particularly familiar with this listing, so went and had a look.  But I also had a look at a wider range of countries.  For his paper, Skilling uses the IMF classification of advanced economies, focusing on those with a population under 20 million.   However, that grouping leaves out the central and eastern European countries (the Baltics, Hungary, Czech Republic, Slovakia, Slovenia) that are both OECD and EU members, and which are either catching or already overtaking New Zealand in terms of labour productivity (all but Hungary have had faster productivity growth than New Zealand since, say, 2007 – just prior to the last recession).

I’m not really going to dispute what I take to be one of Skilling’s propositions, that a successful New Zealand would probably see more large and internationally successful firms.   Nonetheless, it is perhaps worth noting a few things:

  • the Forbes listing is of public companies.  That’s fine; it is what it is.  But the implied market capitalisation of Fonterra makes it large enough that were it be tomorrow transformed fully into a listed company, it would almost certainly make the list (five Greek banks, with a combined market cap less than Fonterra make the list).  If anything, Skilling is too kind about Fonterra –  which has woefully underperformed the marketing pitches of 20 years ago –  but big and international it still is,
  • while we are the only advanced country in Skilling’s chart not to have a company in the list, none of the Baltics nor Slovenia nor Slovakia has an entrant either.   The Czech Republic and Hungary (both about twice our population) have one and two  respectively, in the Czech case a power company that appears to have a market capitalisation not much larger than that of Meridien,
  • Iceland and Luxembourg are both small successful advanced countries; the former has no entrants on the Forbes list, and the latter quite a few (more per million than any of the countries shown).
  • Portugal and Greece are not that successful small advanced countries, and both have several entrants on the list.

I guess A2 and Xero are increasingly not New Zealand companies, but appear large enough that they could well have shown up on a listing like this.

There are always going to be pitfalls in any illustrative indicator –  this one simply happened to catch my eye –  but if I agree with Skilling that it makes sense to pay attention to other small advanced economies in trying to make sense of the New Zealand story (and of our constraints and policy options), starting from where we are now, it is probably at least as useful to think about the central and eastern European countries –  and Israel, which does quite well on various of Skilling’s indicators but has productivity very similar to ours –  as the more traditional western European ones.

queen 4

.

Regional economies

Some months ago, when all was coronavirus, Statistics New Zealand released their regional GDP data for the year to March 2019.  I didn’t even open the spreadsheet at the time, but went looking for some data the other day and remembered I hadn’t written about the regional GDP numbers this year.

SNZ has been publishing the regional GDP data, by regional council area, for some time now.  The first data are for the year to March 2000, meaning that we now have 20 annual observations.

Here is how per capita (nominal) GDP for each of the regions relative to national (nominal) GDP per capita has changed since 2000.

regional GDP 20 yrs

I suppose it is convergence of sorts.  Even in the very poorest region –  Northland – per capita GDP has increased very slightly relative to the national average, while the three highest GDP regions (Auckland, Taranaki, and Wellington) have all dropped back relative to the national average.    The gap between the South Island and the North Island has more than halved and –  if one is to believe the numbers –  GDP per capita in Marlborough now isn’t much behind that in Auckland.

I’ve discussed previously the relative underperformance of Auckland.   There aren’t many OECD economies where the biggest city has per capita GDP only about 12 per cent above the national average (let alone where that gap has narrowed this century).  But it is only fair to note that Auckland had been staging something of a recovery. Here is the time series chart of Auckland’s per capita GDP relative to the national average.

auckland GDP

Population surges and associated building tend to be good for Auckland –  but there is no sign of productivity leadership, when per capita incomes in Auckland are still a bit lower (relatively) than they were 20 years ago.  I think it was the economist Andrew Coleman who suggested, only slightly tongue in cheek, that the business of Auckland was building Auckland.  Here is construction as a share of GDP for Auckland (these data lag another year behind).

auckland construction

Having said that, I was a little surprised to stumble on this chart.

akld popn

Of course, if the Auckland economic performance this century has been underwhelming –  especially relative to the rhetoric and political capital invested in talk of our “one global city” (the one just a bit smaller than Columbus, Ohio) it is as nothing compared to the relative decline of Wellington, despite all the puffery from the Wellington City Council, its “economic development” agencies, and the like.  Here is GDP per capita for the Wellington Regional Council area (largely greater Wellington).

Wellington GDP

Recessions might be good for Wellington’s relative position –  not many public servants get laid off in downturns (including the current one) – but otherwise it is a pretty stark and consistent decline.   Wellington’s share of the national population has also been falling steadily – albeit perhaps more slowly than the decline in per capita GDP might suggest was warranted.

At least if you live in Wellington, one often hears talk of the Wellington IT sector and, of course, the heavily-subsidised Wellington film industry.  The regional GDP breakdowns don’t show either directly, but the red line in this chart remains somewhat sobering.

wgtn sectoral

Last year SNZ decided to discontinue its annual screen industry statistics –  claiming (no doubt fairly) budgetary pressures, although it must have been convenient for the government (this one, like its predecessors) keen to talk about the alleged economic benefits of their massive subsidies to the film sector, even as what evidence there is rarely offers much support for their claims.     The last such data came out a year ago for the 2017/18 year.  Here is a snippet from the gross revenue table, by region.

gross film revenue

And here is the same snippet for 2012 and 2013.

gross film rev 2012

So gross revenues of Wellington production and post-production facilities/services –  mostly feature films (unlike Auckland) in the most recent year were not even three-quarters of what they’d been in 2012.

(There is a longer series of earnings for jobs in the total production and post-production sector – including the domestic-oriented bits – of the screen industry: relative to GDP it was no higher at the end of the period than when the series started in 2005. And estimated number of jobs in the sector has gone from 20400 to 20300 over the same longer period.   It looks like a classic infant industry  –  remaining infant and kept going by massive subsidies that keep the rest of us poorer.)

All this is, of course, against a backdrop in which national-level productivity growth remained very weak, and New Zealand continued to drift behind more and more countries that, not too long ago, we never even thought of as relevant comparators.

queen 4