Towards an MPC

Michael Reddell Reserve Bank Act reforms

A week or so ago, advertisements appeared in the major newspapers inviting applications from people wishing to be considered for appointment as external (non-executive) members of the Monetary Policy Committee.   Should you wish to apply, the advert is here, with applications closing on Friday.

All of which is quite remarkable.  The Monetary Policy Committee is to be created by legislation currently before Parliament,  and not expected to be passed until the end of the year (the select committee isn’t due to report back until early December). The appointments are not expected to take effect until April next year.  In fact, submissions on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill themselves also close on Friday.   The select committee process is supposed to involve members looking carefully at the details of the legislation, considering public submissions, and recommending any refinements or amendments the committee considers appropriate.  But you would have to wonder what the point of submitting is, at least on the MPC structure, powers etc, when the appointment process for members is already well underway.

As I’ve previously highlighted, one of the bizarre aspects of the proposed model is that the Reserve Bank Board (no doubt heavily influenced by the Governor, who is a member of the Board) get to control the appointments.  Appointees will, finally, be signed off on by Cabinet and appointed by the Minister of Finance, but the Minister will only be able to appoint people nominated by the Board.  Most of the Board members have no, repeat no, expertise in monetary policy (including its governance), and all but one of them were appointed by the previous government.  It is a weird abdication of responsibility, for a key aspect of short-term economic policy, not seen (as far as I’m aware) in any other major government appointments.  It is extraordinary that the Minister of Finance cannot directly appoint people he has judged appropriate to the role –  people who can, by their choices, have a big influence on the short-medium course of the economy.   The Minister of Finance (and his colleagues) are, after all, the only people we citizens can actually hold to account –  kick out – if things go wrong.

We’ve seen this sort of rather premature process from the Board previously.  Last year, they were advertising for candidates for a new Governor, with applications closing well before the election, even though the Board –  like everyone else –  knew that the then Opposition parties were promising reform of the Reserve Bank, including legislative change.

This time one must presume they have the approval of the Minister of Finance for kicking off the recruitment process.  After all, the advert is quite specific that there will be three external appointees, and that is a decision only the Minister can make (the legislation specifies only a range (2 or 3 externals)).  That, incidentally, guarantees that there will be four internal members –  the maximum allowed in the legislative provisions, and the bill requires an majority of internals.

That said, the process seems to have been rather rushed.  Applications are open for only two weeks, and when I contacted the recruitment firm the Bank’s Board is using to ask for the information pack and related detail, the initial response was that they didn’t yet have all the material from the client.  It took six days before the material finally arrived.

There was some interesting material in the advertisement

External MPC members need not have expertise in monetary policy or macroeconomic theory.

This is the more moderate version of what I was told the Governor had said the other day at the INFINZ function, that he didn’t want “you economists” (last I looked that was the Governor’s own background) because “we need different thinking”.

The bill itself says

The Minister may only appoint as an internal or external member a person who, in the Minister’s opinion, has the appropriate knowledge, skills, and experience to assist the MPC to perform its functions (for example, in economics, banking, or public policy).

Which is fair enough I guess, but I would hope that when the Minister finally comes to make appointments he insists that at least one of the externals in fact has a fairly strong background in monetary policy and macroeconomics.   Even the Bank’s Board –  which has no power over monetary policy at all –  has usually had such a person.  If there is no such person on the MPC, it will simply confirm from the start even more strongly what I have been arguing, that the new structure is likely to be ineffective, governor-dominated, and resembling in many ways the sort of system the Bank has had in place for the last 15 years or so (when a couple of externals  –  almost always with no economics background –  have participated in monetary policy deliberations, and provided an OCR recommendation, but have had little real influence most of time, and no accountability: any value was mostly in passing on a specific class of business anecdote).

What sort of people is the Board looking for?

External MPC members will require:

  • Exceptional intellectual acumen and communication skills
  • Experience exercising sound judgement to make effective decisions, in environments reflecting high levels of complexity and uncertainty
  • Capacity to engage with complex economic issues and make contributions which draw upon a range of relevant professional, educational and life experiences
  • Absolute integrity, reflecting genuine independence, rather than solely acting as a ‘voice’ for specific sectors or interest groups
  • The ability to operate in a manner consistent with the highly confidential nature of MPC decisions.

On the second to last of those, even the bill is a bit stronger

A person must not be appointed on the basis that the person represents a particular industry sector.

It would be quite concerning if anyone appointed to the MPC saw themselves as a representative or voice of a sector (even if not “solely”).  All members must surely be expected to operate solely from a national perspective.

But what of the first set of criteria?  I’m always a bit sceptical of adverts seeking “exceptional” anything, as there are very few people with such “exceptional” qualities anywhere.  Of the Reserve Bank’s existing senior management and Board, of those I’ve had anything to do with there are plenty of moderately capable people, but none whom I’d describe as having “exceptional intellectual acumen”.  Why does the Board think they are likely to attract such people to a part-time role, in which they will have little ability to influence policy, no independent resources, and (from what we’ve been told previously) no ability to articulate their views openly?  Oh, and not to mention people willing/able to devote 50 days a years in a part-time capacity at public sector board remuneration rates?

I’m also puzzled at the suggestion that MPC members should need “exceptional communications skills”.     Again, of management or the Board, only the Governor could possibly be considered to have such skills, and even he is often rather a loose cannon.  But more importantly, the Reserve Bank fought hard –  and the Minister sadly endorsed – a model in which MPC members will not be free to articulate anything other than an agreed MPC position on policy.  They won’t even be able to have their personal perspectives clearly recorded in the minutes of the meetings, let alone make speeches or give interviews that might seek to advance thinking or articulate a minority position, That is quite different from the situation in more open systems, notably those in the UK, the US, and Sweden: systems which function well, without any of the problems the Reserve Bank management (protecting their personal position) have tried to worry people with.

It will be interesting to see what sort of people the Board and the Minister come up with, assuming that Parliament eventually passes legislation along the lines of the current bill (and bear in mind that we have a minority government again).  It is hard to see why the roles –  probably little more than silent adjuncts to the Governor – would be attractive to really good people, or who will really be free to take them up (even an academic –  apparently not wanted by the Governor –  might struggle to commit 50 days a years, spread over the year, not just in the long summer vacation).

Potential conflicts of interest have always been a bit of an issue, and the main reason I asked for the information pack was to see how they proposed to handle that issue.  Frankly, the material I received –  which included a draft Code of Conduct –  suggested they haven’t really thought sufficiently hard about it yet.   The conflict of interest provisions look a lot like those I used to be subject to as a staff member participating in the OCR Advisory Group, but don’t really grapple adequately with the situation of part-time externals, presumably earning their living (or occupying their time) mostly doing other, non Reserve Bank, stuff.  For example, there is (reasonably enough) a prohibition on

Members must not be personally or professionally involved, directly or indirectly, in regular trading in financial markets in which the Bank has, or might have, a significant influence. This includes domestic wholesale money, bond and foreign exchange markets, interest and exchange rate futures, options and swaps markets, instruments linked to such markets, equities listed on New Zealand exchanges and prediction markets related to those issues in which the Bank might have a significant influence.

(If only the predictions market had not, in fact, been killed off by the previous government).

And under the legislation public servants and directors/employees of entities regulated by the Bank will be probibited.

But there is no sign that, say, someone in my position would be disqualified or conflicted (in terms of this specific policy), despite being a trustee of two superannuation schemes and devoting a fair chunk of my time to, at times quite vocal, commentary on aspects of economic policy.  I’d certainly regard both of those sorts of involvements as disqualifying –  even scrupulously observing confidentiality –  and I would expect most Monetary Policy Committees in other countries would do so too.

(And in case anyone is in any doubt, I have no interest in the MPC positions myself. They are set to be ineffectual figleaf positions.)

And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.

On our disappearing migration data

Michael Reddell Immigration, Statistics

Having written here earlier in the week about the reckless and irresponsible way in which the government and Statistics New Zealand are degrading the quality of our very timely net immigration data (itself a major, and quite cyclically variable, economic indicator), I noticed a couple of comments that prompted me to dig out some numbers for this post.

The first, in a comment here, was that the self-reported intentions-based PLT measure probably couldn’t be counted on as very accurate anyway.  And the second, in someone else’s commentary, was that at least we will still (I hope) have monthly reporting of total passenger movements (tourists, business travellers etc as well as the permanent and long-term movements) from which a reasonable steer might be gleaned.

The best way of looking at whether the PLT measures are reasonable is to compare them with the new 12/16 method numbers –  available with a long lag, but which involve looking back, using passport records, and checking which people actually came (or went) for more than 12 months ((the threshold for the PLT definition).   Unfortunately, SNZ is still not publishing seasonally adjusted estimates for the 12/16 method numbers, so one can only really do the comparisons using rolling annual totals.   On this chart, I’ve shown the rolling 12 month totals for (a) the 12/16 method, (b) the PLT series, and (c) total net passenger movements for almost 30 years (although the 12/16 method data are only available this century).

migration 31 Aug

All the cycles are pretty similar, at least if one takes a broad sweep of the data.  That isn’t surprising, as most short-term visitors go home again pretty quickly, leaving something like an underlying trend of permanent and long-term movements.   And it confirms that the PLT numbers have been a useful –  although not perfect –  indicator of the actual permanent and long-term movements (captured in the 12/16 numbers).  Importantly, the turning points tend to be very similar.

One wouldn’t expect those two series to be the same, as they measure different things: the PLT numbers are about intentions, and if plans change so will behaviour.  If lots of people come to New Zealand (or leave for Australia) and things don’t work out and they change their mind, ideally we would want to know.    The divergence that looks to have opened up between the grey and orange lines at the end of the (grey) series might prove to have been something like that.  But in future we won’t know because (a) we won’t have the PLT data at all, and (b) the grey line will only be available with a reasonable degree of certainty with quite a long lag.   As a reminder, here is the new SNZ chart I included in the post the other day, illustrating the huge error margins around the timely estimates SNZ proposes publishing using their new (unpublished and untested) methodology.

Provisional-and-final-net-migration-estimates2

But the other thing worth noticing is how noisy the blue line is.  There is a great deal of volatility, which makes distilling any signals (about permanent and long-term movements) very hard on a timely basis. That was why the PLT numbers have been so useful.  The blue line is thrown around in particular by big sporting events: eg the Lions tours in 2005 and 2017, and the Rugby World Cup in 2011.    There are big additional net arrivals, and then big additional net departures a month or two later, with mirror effects in the annual numbers a year later as well.  I have found the total net passenger arrivals data useful in the past –  in both 2002 and 2011 they pointed to something larger in the permanent and long-term movements than the PLT numbers themselves were reflecting, and that sense was later reflected in the 12/16 numbers (much larger net inflows in 2002/03, and somewhat larger net outflows in 2010/11).

What of the monthly seasonally adjusted data (the stuff designed for high frequency timely monitoring)?  Here is a chart of the PLT and total series, with scales set so as not to allow the flows associated with the Rugby World Cup (in particular) to dominate the chart.

migration mthyl sa

At a monthly frequency, the noise in the total passenger (orange) line totally dominates any signal, while the volatility in the monthly PLT series (that we are soon to lose altogether is very small).    What should perhaps be more concerning –  and is a bit perplexing –  is why the volatility of the total passenger series is itself quite variable across time, even outside the months associated with major sporting events.   Right now, for example, the volatility in the monthly series is quite extreme.    Here is the same chart for just the last four years or so.

migration mthly

The Lions Tour is very evident in mid-2017, but the heightened volatility goes well beyond that.

All of which leaves me not quite sure what to make of the very first chart.   The blue line (annual net inflows of all passengers) has fallen back a long way already (down from around 80000 to around 40000), and similarly-sized falls in the past have often been coincident with, or perhaps a little ahead of, large falls in the PLT numbers (and the 12/16 numbers).  There are some reasons to think we might see something similar now.  Fortunately, for the next couple of months we will still have the PLT data

PLT mthly

But after that –  thanks to government and SNZ choices –  we will be flying blind.    We’ll have good information eventually on what actually happened, but it will be available with such a lag as to be more use to economic historians than to people trying to make sense of, and respond to, contemporaneous economic developments.  And the net total passenger movements data is sufficiently noisy that it probably won’t give us much of a steer (and even then with big error margins) before the lagging 12/16 data do.

This is simply reckless behaviour around a major set of timely economic data.

Work visas for shop managers

Michael Reddell Immigration

We learned yesterday that the firm that owns Burger King in New Zealand has been banned from using migrant labour (ie people on work visas, not resident non-citizens) for a year.

The penalty was imposed on Burger King not, it is reported, because of a migration-related offence, but because the company was founding guilty of breaches of the minimum wage laws in respect of someone (reportedly not on a work visa) working as a store manager.  A company that can’t be relied on to follow some aspects of labour law probably isn’t the sort of firm that should be counted on to treat short-term migrant labour well.  So even though I think our minimum wage is (relative to nationwide productivity and median earnings) too high, I’m not bothered at all by the ban.

But surely the bigger question that should be addressed to the government is why companies are able to use “migrant labour” in such modestly-skilled low-paying roles at all.   As a reminder (and complaining again about the inordinate delays in MBIE releasing timely data), in 2016/17 these were the top four occupations for the principal applicants in the Skilled Migrant category of our residence approvals programme  (in other words, the cream of the crop).

Main occupations for Skilled Migrant Category principal applicants, 2016/17  
Occupation 2016/17
Number %
Chef 684 5.7%
Registered Nurse (Aged Care) 559 4.6%
Retail Manager (General) 503 4.2%
Cafe or Restaurant Manager 452 3.7%

 

And among those who got (so-called) Essential Skills work visas

Number of people granted Essential Skills work visas by main occupations, 2016/17
Occupation Number %
Chef 2,178 6.6%
Dairy Cattle Farm Worker 1,617 4.9%
Carpenter 1,478 4.5%
Retail Supervisor 961 2.9%
Cafe or Restaurant Manager 942 2.9%
Retail Manager (General) 767 2.3%
Aged or Disabled Carer 748 2.3%

Large numbers of people who appear to have no particular qualifications or specialist expertise, doing jobs that often don’t seem to pay much more than the minimum wage (when the law is being followed at all –  and it is widely known that there are much more egregious cases than the Burger King example, where migrant workers are required to pay back, under the table, much of any salary as a ‘fee’ for getting them into New Zealand.)

There is an argument that some economists make that we can gain economically by letting in lots of quite unskilled people.  Even economists think such an approach is likely to leave lower-skilled natives worse off.

igm lowskilled

As I noted last year, commenting on one UK academic who celebrated the possibilities of lots of low-skilled migrants (lowering the costs of cleaning, childcare and so on)

What Bateman is in fact arguing for is a policy designed to explicitly help people like her, at the expense of poorer less highly-skilled Britons (in fact, in the roles she talks of typically poorer relatively unskilled British women).  No one person is ever an exact substitute for another, but there is a great deal of overlap.    Even though she never says it, what Bateman is arguing for is a policy designed to increase the differences in incomes between the highly-skilled and the less-skilled –  for the comfort of the highly-skilled (women and their spouses).

Many advocates of a fairly liberal approach to immigration like to downplay the possibility of any costs to low-skilled natives of the recipient country, but Bateman’s argument relies almost entirely on those costs.  Reasonable people can debate how large the actual adverse effects are, but Bateman clearly believes they are large –  that is why, in her view, immigration makes things so much easier for people like her.     And she can’t even be arguing  –  as some might –  that it is just a transitional effect, or otherwise the possibility of outsourcing domestic duties cheaply would soon go away again.  So it seems to be a vision of society that involves repeatedly importing new waves of lowly-skilled immigrants to keep the relative returns to low-skilled labour sufficiently low to make life comfortable for the professional classes.

Whatever the other arguments for and against immigration, it is hardly surprising that citizens might rebel against a proposal to bring in lots of foreigners to widen the income gaps in society –  not just those between nationals and non-citizen foreigners, but those between skilled and unskilled nationals.   Sceptics of other economic reforms will argue that some of those changes also had that effect, but even if so (which I mostly dispute) it was never the intention, or the envisaged long-term effect.  By contrast, Bateman’s argument is in effect for using immigration to maintain a permanent class of helots –  not always the same specific people, but a constantly refreshed pool of people able to earn relatively little, because of the direct competition fron unskilled new arrivals.

Of course, this isn’t the (avowed) approach of the New Zealand immigration programme, which is supposedly mostly about skills –  highly able and talented people, building on what is already here (inadequate as the advocates believe that is) to lift the productivity and incomes of us all.

But that story has long been threadbare.  The evidence for the productivity gains is non-existent (in a country whose productivity continues to drift further behind that of other advanced countries) and instead we import large numbers people with few very obvious skills, too often doing jobs which appear to pay not a lot more than the minimum wage.  It is a rort against New Zealanders.

Now that the government is falling over itself to pander to business interests on anything not central to its own (mostly economically damaging) agenda, there is clearly no chance of any sensible immigration reform under this government (any more than under its predecessor). If anything, talk of regionalising immigration policy would make things even worse.  But for what it is worth I repeat my suggestion around short-term work visas, which would get bureaucrats out of the rationing business, and rely more heavily on the market.

Institute work visa provisions that are:

a. Capped in length of time (a single maximum term of three years, with at least a year overseas before any return on a subsequent work visa).

b. Subject to a fee, of perhaps $20000 per annum or 20 per cent of the employee’s annual income (whichever is greater).

If it is really worth it to a firm to pay a $20000 annual fee on top of a salary to have someone on a work visa, well and good.  But that doesn’t seem likely for very many of the sorts of jobs that top the work visa occupational list.

And recall that markets can and will adjust.  The Canadian federal Minister of Immigration spoke at Victoria University the other day (I hope to come back to his address in greater length later): Canada is in the process of over-leaping New Zealand to claim the dubious crown of largest (per capita) planned migration programme in the advanced world.  The Minister told us lots of stories about skills shortages, and “desperate” needs for workers (in a country with an unemployment rate of 5.8 per cent) –  we heard several times about an apparently desperate need for “50000 truck drivers right now”, and yet never once did the Minister address or even mention the typical market adjustment mechanism: when demand for a resource is scarce, the price will tend to rise to encourage resources to move to meet the demand.      If it is hard to staff fast-food restaurants, or dairy farms, or rest homes, it is a sign –  in an economy that is, at best, only sitting around the NAIRU – that workers in those roles aren’t being paid enough.  It really is (almost) as simple as that.

A country is not a company

Michael Reddell NZ politics, Productivity

That was the title of an article by Paul Krugman, published more than 20 years ago now, in the Harvard Business Review.  The Prime Minister might perhaps consider reading it, and reflecting on it.

Yesterday morning the Prime Minister gave her promised speech on the economy.  It was, frankly, astonishing how little there was there.   There was some mention of the problems

Our overall objective is to build a productive, sustainable and inclusive economy.

On each score we have some way to go. When it comes to productivity, the OECD has said we are “well below leading OECD countries, restraining living standards and well-being”

and

We need to transition from growth dominated by population increase and housing speculation, to build an economy, that as I said, is genuinely productive, sustainable and inclusive.

and

First we want to grow and share more fairly New Zealand’s prosperity.

That means the gap between the highest and lowest income and wealth deciles reduces, real per capita income increases; the value and diversity of our exports grows and home ownership increases.

In particular we want to build our exports and have export led growth.

Which is all well and good, but there is nothing –   nothing –  in the speech about what the government proposes to do, and how it believes that the modest measures it does propose will deliver such better outcomes.   And, of course, no mention of the government initiative which, on the government’s own consultative document modelling, would severely undermine the competitiveness of core parts of our tradables sector, and reduce GDP by perhaps as much as 10 to 22 per cent.

And this from a Prime Minister who has now been in office for almost a year.  It is extraordinary.

But in this post I wanted to focus on the new Business Advisory Council the Prime Minister announced yesterday.  Perhaps it is all just window-dressing, intended to get some favourable headlines for a day or two, and perhaps placate the odd sceptic in the business community (although one might wonder how many sceptics will be invited onto the Council).    If so, I guess no real harm done.

But such councils can be a path towards cronyism.  On the one hand, attracting sycophants who like to be able to tell their mates they have the ear of the Prime Minister.  And on the other, more concerningly, enabling selected business heads to bend the ear of ministers and put pressure on them to make decisions favourable to the specific economic interests of those involved and their employers.  That might not be direct subsidies –  although we have had all too many of them in recent years –  but might involve making the case for regulatory changes which skew the playing field against new entrants, in favour of incumbents.

But by far the bigger issue, if the Prime Minister and the government are at all serious about the lines they ran yesterday, is “what do chief executives of businesses know about overall economic management, and the challenges of New Zealand’s longstanding productivity underperformance?”.  In Krugman’s words, a country is not a company.

Here are a few extracts from his article

What people learn from running a business won’t help them formulate economic policy. A country is not a big corporation. The habits of mind that make a great business leader are not, in general, those that make a great economic analyst; an executive who has made $1 billion is rarely the right person to turn to for advice about a $6 trillion economy.

Why should that be pointed out? After all, neither businesspeople nor economists are usually very good poets, but so what? Yet many people (not least successful business executives themselves) believe that someone who has made a personal fortune will know how to make an entire nation more prosperous. In fact, his or her advice is often disastrously misguided.

and

I am not claiming that business-people are stupid or that economists are particularly smart. On the contrary, if the 100 top U.S. business executives got together with the 100 leading economists, the least impressive of the former group would probably outshine the most impressive of the latter. My point is that the style of thinking necessary for economic analysis is very different from that which leads to success in business. By understanding that difference, we can begin to understand what it means to do good economic analysis and perhaps even help some businesspeople become the great economists they surely have the intellect to be.

and

Keynes was right: Economics is a difficult and technical subject. It is no harder to be a good economist than it is to be a good business executive. (In fact, it is probably easier, because the competition is less intense.) However, economics and business are not the same subject, and mastery of one does not ensure comprehension, let alone mastery, of the other. A successful business leader is no more likely to be an expert on economics than on military strategy.

And yet here was our Prime Minister yesterday (emphasis added).

The role of the Council will be to build closer relationships between Government and business, provide high-level free and frank advice to the Prime Minister on key economic issues and to create a vehicle to harness expertise from the private sector to inform the development of the Government’s economic policies.

….

“The Council will provide a forum for business leaders to advise me and the Government and to join us in taking the lead on some of the important areas of reform the Government is undertaking,” said Jacinda Ardern.

“The Council will report to me on opportunities it sees and identify emerging challenges. It will bring new ideas to the table on how we can scale up New Zealand businesses and grow our export led wealth.

“I want to work closely with, and be advised by, senior business leaders who take a helicopter view of our economy, who are long term strategic thinkers who have the time and energy to lead key aspects of our economic agenda.

Expertise on economic management, and the particular confounding challenges the New Zealand economy faces, just aren’t the sort of thing that tends to be fostered in the course of a corporate career.   Many of these people might have been superb marketers, exceptional operations managers, corporate finance whizzes, smooth operators around the edges of regulation and the tax system, and have risen to assume overall responsibility for (by New Zealand standards) fairly large organisations. They are absolutely vital skills, and business roles done well are a big part of how, in pursuing the interests of shareholders, society is also made better off.   But those skills bear no resemblance to the issues involved in addressing long-term economic underperformance.  For a start, the things businesses have to take as given are precisely the sorts of things governments often can vary, and (as Krugman eloquently notes) the sorts of constraints even a large business faces are very different from those an entire economy faces.   And so on.

There can be exceptions of course.  Sometimes people with a strong background in economics end up in top corporate roles.  Back in the day, for example, Don Brash as as private sector CEO was able to provide a valuable contribution in leading advisory groups around things like the introduction of GST.  More recently, Kerry McDonald –  former director of NZIER and later chief executive of Comalco and chair of the BNZ –  has continued to bring valuable contributions (eg here) to policy discussions and debates (although probably not ones likely to see him invited to join the Business Advisory Council).

But I don’t see many (any?) such people in the top tier of New Zealand business today. The head of Air New Zealand –  chair of the new council –  is reported to be obsessed with politics, but I don’t think we’ve ever heard his ideas on New Zealand’s longer-term economic underperformance.    Fonterra doesn’t have a permanent CEO, and Xero’s head is an Australian based in Australia.    The film industry and the export education industry survive on explicit or implicit subsidies.  And so on.  But even if there were a range of hugely successful outward-oriented businesses led by stellar CEOs lauded by their peers around the world……..it is simply a totally different skill set.

In her column in this morning’s Herald Fran O’Sullivan, who tends to articulate the perspectives of (in the Australian term) the “big end of town”, is pretty keen on the new Council.

Luxon positioned himself well to take a leadership role.

He recently hosted Finance Minister Grant Robertson to a private dinner in Auckland attended by a number of CEOs.

On the guest list were KiwiRail’s Peter Reidy, Spark’s Simon Moutter, Mercury’s Fraser Whineray and McKinsey and Company’s Andrew Grant. The Warehouse chair Joan Withers was also present.  …..

The chief executives at Luxon’s table are all “progressives” — interested in public policy, innovation and sustainability — and wanting to have a say and contribute to the direction of New Zealand.

Moutter led an innovation mission to Israel a couple of years ago to get a focus on the secrets to Startup Nation. Whineray led last year’s Go Swiss mission by business think tank, the New Zealand Initiative which delved into Switzerland’s focus on localism and vocational education — two contributing factors in that country’s success.

Kiwirail……that sink hole that absorbs billions of dollars of taxpayers’ money, contributing to our economic underperformance.

But it was convenient that O’Sullivan included this snippet, as before I read it I’d also been thinking of the cases of Simon Moutter and Fraser Whineray (the latter another head of a majority state-owned company).

As she notes, Moutter was dead-keen on the Israeli model.  I picked apart that idea in this post (followed later by this one).  As for Whineray and the Swiss trip (of which Fran O’Sullivan was part), they headed off to one of the very few countries to have had less productivity growth than New Zealand in the last 50 years (I wrote about some of the findings of the trip here).

It is great that these individuals care about New Zealand’s economic performance, but there is no particular reason to believe that in general they will have more useful perspectives to offer than the average moderately-educated voter chosen from the phone book at random.  Running a business no more equips you to provide useful advice on economic policy more generally (as distinct perhaps from specific bits around your industry) than it does to, in Krugman’s words, write great poetry or make military strategy.

Of course, the usual pushback against such business advisory councils –  again, at least if they are supposed to be anything more than window-dressing –  is that governments have access to a range of high quality contestible advice from….well…. economists (in particular those in key public sector agencies).    But that defence is weaker now that MBIE is run by an HR person with no policy or economics background (although apparently the CEO did previously work in Air New Zealand) and The Treasury seems to have given up on seriously addressing long-term productivity underperformance in favour of corralling a politically convenient, ideologically-driven grab bag of feel-good indicators into a forthcoming “wellbeing Budget”.

 

The China Council surveys New Zealanders

Michael Reddell China

Late last week the New Zealand China Council released its first Perceptions of China survey.  The China Council, you will recall, was established by the previous government, largely paid for with taxpayer money, with boards and advisory committees stuffed full of retired and current politicians, heads of government agencies, even an active journalist, and business people with interests in China to try to keep public opinion on side, and not worry their heads about the way successive governments cosy up to a heinous regime in pursuit of another dollar, another deal.  They have a hired gun –  a former MFAT diplomat – as Executive Director, who is never shy of articulating a pro- (People’s Republic of) China story, or of downplaying or attempting to trivialise any concerns about the nature of the regime, or its activities in countries like New Zealand.  I attempted to unpick one of his speeches a few months ago.   The PRC embassy in Wellington must regard him as a considerable asset, speaking in a New Zealand idiom to normalise the abnormal, downplay the risks, ignore the evil, and so on.

But survey data are usually interesting, and if the China Council is going to have a claim on our taxes, a decent survey is less bad than some of things they could spend money on.  There were a few interesting snippets in this one.    The first question asked “Would you say your general opinion of New Zealand’s relationship with these countries is positive, negative, or neutral”

china survey 1

The China Council was, of course, keen to highlight that 43 per cent of respondents answered “positive” and only 14 per cent “negative”.    But I’m not at all sure what to make of the results, partly because I’m not sure what to make of the question (I’m not sure how I’d answer it) and partly because of the cross-country comparisons.

For example, who is “New Zealand” here –  the government or individual citizens?  And, on the same note, who is “China”?  And is one being asked to describe or evaluate?  From what we see and hear, the New Zealand government and the People’s Republic of China have a generally good relationship (Comprehensive Strategic Partnership and all that), but that is something that I think is inappropriate and not in the interests of New Zealanders.

But I also found it striking that the results for China were so similar to those for Japan and for Fiji.  Japan is now a stable democratic prosperous First World country, no longer any threat to anyone.  Fiji is a semi-free small state, perhaps a nice place for a holiday, but poor and also no real threat to anyone other than its own people.   And then there is the People’s Republic of China – expansionist, aggressive, brutally suppressing the freedoms (political, religious or whatever) of their own people, without the rule of law,  engaged in economic coercion of any country that gets offside with them, and so on.  But, I suppose, there is a fair amount of trade between New Zealand firms and PRC ones.      Survey responses are what they are, and readers can only try to make sense of them, but on this occasion I suspect they can’t mean much.   Perhaps much of it is just about trade.  Perhaps the China Council has just been doing its propaganda job very effectively.

These were the results of the second question

china survey 2

I found these results interesting, and more than a little surprising (in fact, they go against the idea that trade explains the China answers in previous question).  But again, how would I answer?   Since trade is usually (not always) mutually beneficial, that would incline me towards “equally”.  And I put no weight on the spin, beloved of the previous government, that China had somehow “saved us” during the last recession.  I suppose I would answer “China”, but that is because I think New Zealand governments are excessively deferential, scared of their own shadows when it comes to China, and are selling out the interests of New Zealanders as a whole (around the integrity of our system, and the sort of values most New Zealanders espouse) for the business interests of a handful of firms (that somehow convince governments that what is good for them is good for us).  That’s my view, but it is a bit puzzling why the survey respondents both think China does best from the relationship, and that the relationship is positive.

There are some questions about trade, in which it turns out that people are aware that, for the moment anyway, China is our largest trading partner (well, Chinese firms and New Zealand firms –  trade isn’t government to government), and know that dairy is the largest export from New Zealand to China.  More New Zealanders want trade with China to increase than want it to decrease (and I’d probably be one of them – if China were to finally remove restrictions on services exports etc it would be particularly welcome).  But then there was this surprising (to me) result, in which respondents were asked about individual export sectors.

china survey 3

My own view would be almost exactly the opposite of this.  Export education is substantially a rort, cross-subsidised by access to work rights and immigration points, and it and tourism are two types of exports particularly vulnerable to the sort of economic coercion the PRC is now establishing a track record for.  By contrast, if firms can sell more fruit or fish to China, good luck to them (so long as they aren’t bending the ear of government – to go quiet on the PRC –  to do so).  Slightly off-topic, it is perhaps a telling reflection on New Zealand’s overall economic underperformance, what sorts of products aren’t on the list at all (eg advanced manufacturing).

What of foreign investment from the PRC in New Zealand?

china survey 4

Most respondents are only happy with foreign investment from the PRC with “strict vetting or controls”, and an overwhelming majority want restrictions to prevent majority ownership from the PRC.   I’m generally much more open to foreign investment than the median New Zealander, but regard PRC-sourced investment (where all firms have to be treated as, in effect, arms of a hostile state) as different.   But even so, I can’t see a case for (say) preventing majority PRC ownership of an office block in Queen St or The Terrace, or a hotel in Queenstown, or even a milk powder plant in Canterbury. On the other hand, allowing Huawei a role in New Zealand telecoms infrastructure seems reckless.

And then, presumably in the cause of defending Confucius Institutes in New Zealand (something the Executive Director has previously championed), there was a question about languages in schools.

china survey 5

I was mostly surprised that Japanese still scored so highly (a language spoken in only one, large but shrinking, country).  Whether Mandarin is really more “useful” than French or Spanish is anyone’s guess –  and how one defines “useful” is surely wholly in the eye of the respondent –  but learning a foreign language, whatever it is, is generally a useful discipline.  On the other hand, very few people who do several years of language study at high school ever emerge with much more than the ability to read a menu.  But the bigger point remains the one I made in a recent post on Confucius Institutes: when we teach foreign languages in our schools we should pay for, and resource, that ourselves, just as we do with maths and science teaching, not rely for support on foreign aid from a considerably poorer country, pursuing its foreign policy agenda.

Overall, some interesting data, with a few surprises and quite a few questions. It will be interesting to see how responses change, if at all, over coming years.

As for the China Council itself, the full prostration seemed to be on display late last week when they (a body largely funded by New Zealand taxpayers) held a “Gala dinner” to welcome the new PRC Ambassador to New Zealand.   I’m sure our authorities need to have formal, but distant, diplomatic relations with the PRC, but the “gala dinner” (not even just a “dinner”) is sickening to contemplate: people apparently so willing to set aside any values, any decent morality, any hardheaded assessment of the nature of the regime, to celebrate the arrival of today’s equivalent of the ambassador from the Soviet Union, Nazi Germany, late 1930s imperial Japan, Mussolini’s Italy (or a host of smaller, more modern, examples).    New Zealand once had the decency and moral sense to take some sort of stand against these regimes and their activities.  But…there is a dollar to be earned no doubt.

As often, one turns to the Chinese Embassy website for more information than one gets from the China Council.  There is no record of the speeches of the China’s Council Executive Director (or any other “worthy”), but the Embassy published the Ambassador’s speech.   Here is part of it

While we celebrate our achievements, we should also be sober-minded that the world is undergoing profound and complex changes. We need to deal with the economic and social divide in many countries, address the international divide between the existing powers and the emerging countries, and to handle the divide between 21st century realities and outdated policies. How do we respond to these profound challenges we face? What kind of vision should we have for our two countries and for our relationship? The choices we make today will not only influence our own development, but also have an impact on the long-term development of our relations and even the evolution of the world order.

China has made its own choice. The 19th Party Congress held last October drew a new blueprint for China’s development for the decades to come. China will continue to follow the path of socialism with Chinese characteristics. China’s development has entered a new era with the main task of addressing imbalances and inadequacies of our development, in order to meet growing needs of our people for a better life. China will continue to maintain a strong economic growth, guided by the new vision with greater emphasis on innovation, coordination, green growth, openness and inclusiveness.

This year marks the 40th anniversary of China’s reform and opening up. Tremendous achievements have been made over the past 40 years. As put in his keynote speech at the annual conference of the Boao Forum for Asia last April, President Xi Jinping reaffirmed that China would adhere to its fundamental national policy of opening-up, and pursue development with its door wide open. President Xi also announced a series of major measures for further opening up.

A stronger and more confident China will be able to make even greater contribution to the international community. China will stay as determined as ever to build world peace, contribute to global prosperity and uphold the international order. China will continue to follow the path of peaceful development, implement a strategy of opening for mutual benefit and win-win outcome. What China seeks is global partnership, instead of global dominance. Our aim is to build a new model of international relations and a community of shared future for mankind.

(That last phrase is apparently one of Xi Jinping’s specials.)

Presumably the audience lapped it up or (if ever inclined to a little scepticism about this rose-tinted, not to say tendentious, description of the world as seen from Beijing) said nothing.  This the regime that is today’s Soviet Union, today’s Nazi Germany –  whether in the way it treats its own people at home, lays claim on the loyalties of ethnic Chinese in other countries, pursues expansionist agendas abroad, seeks to silence critics and so on.

Gala dinner indeed…..

 

The Fed looks to options in the next serious recession

Michael Reddell zero lower bound

I’ve written quite a bit recently about the apparent complacency of the Reserve Bank (and The Treasury and the Minister of Finance) around the ability of monetary policy to adequately cope with the next serious recession (here, here, and here).

Against that backdrop, it was interesting to see a substantive report of a recent discussion of exactly these sorts of issues in the minutes of a meeting a few weeks ago of the Federal Open Market Committee, the arm of the Federal Reserve that makes monetary policy decisions.   One might reasonably suggest that the discussion is happening several years later than it should have –  the problems and the limitations of conventional monetary policy have been apparent for some years now (especially in countries like the US that reached the effective lower bound in the last recession) – but better late than never.   And in the US context, some individual members of the FOMC have felt free to speak openly (eg here) on the issues and some possible policy responses.  It is the way open monetary policy committee systems can work.

Here are some extracts from the FOMC minutes

Monetary Policy Options at the Effective Lower Bound

The staff provided a briefing that summarized its analysis of the extent to which some of the Committee’s monetary policy tools could provide adequate policy accommodation if, in future economic downturns, the policy rate were again to become constrained by the effective lower bound (ELB). The staff examined simulations from the staff’s FRB/US model and various other economic models to assess the likelihood of the policy rate returning to the ELB and to evaluate how much additional policy accommodation could be delivered by the current toolkit.

Somewhat surprisingly, a footnote indicates that the staff modelling was still based on an effective lower bound of 12.5 basis points (the actual low the Fed went to for years after 2008), even though other countries have gone modestly negative (and our Reserve Bank has taken the view that the OCR could go to, say, 0.75 per cent.  There is no hint in the minutes of the FOMC discussing a lower effective floor, or what steps might be considered to lower it.

The staff’s analysis indicated that under various policy rules, including those prescribing aggressive reductions in the federal funds rate in response to adverse economic shocks, there was a meaningful risk that the ELB could bind sometime during the next decade.

Hardly surprising, given that the current Fed funds target is 1.75-2.0 per cent, and recessions seem to come round every decade or so.

In the discussion that followed the staff’s briefing, participants generally agreed that their current toolkit could provide significant accommodation but expressed concern about the potential limits on policy effectiveness stemming from the ELB. They viewed it as a matter of prudent planning to evaluate potential policy options in advance of such ELB events. Many participants commented on the monetary policy implications of the apparent secular decline in neutral real interest rates. That decline was viewed as likely driven by various factors, including slower trend growth of the labor force and productivity as well as increased demand for safe assets. In such circumstances, those participants saw monetary policy as having less scope than in the past to reduce the federal funds rate in response to negative shocks. Accordingly, in their view, spells at the ELB could become more frequent and protracted than in the past, consistent with the staff’s analysis. Moreover, the secular decline in interest rates was a global phenomenon, and a couple of participants emphasized that this decline increased the likelihood that the ELB could bind simultaneously in a number of countries. A few other participants raised the concern that frequent or extended ELB episodes could result in expectations for inflation that were below the Committee’s symmetric 2 percent objective, further limiting the scope for reductions in the federal funds rate to serve as a buffer for the economy and increasing the likelihood of ELB episodes.

There was clearly a range of views round the table, but it was encouraging to see some members highlight a variant of a point I’ve made here: because firms, households and market participants know that central banks will have relatively more limited firepower in the next recession, it may be harder to keep inflation expectations near the target, which may compound the challenges.

In the US, high government debt and large deficits are likely to be a constraint on the scope for active fiscal policy to complement monetary policy.

Fiscal policy was viewed as a potentially important tool in addressing a future economic downturn in which monetary policy was constrained by the ELB; however, countercyclical fiscal policy actions in the United States may be constrained by the high and rising level of federal government debt.

That might be on “technical” grounds –  genuine risks of bond market sell-offs –  or the wider political constraints that I highlighted in my post the other day, and which are likely to apply even in less-indebted countries like New Zealand.

Participants generally agreed that both forward guidance and balance sheet actions would be effective tools to use if the federal funds rate were to become constrained by the ELB. In the Addendum to the Policy Normalization Principles and Plans statement issued in June 2017, the Committee indicated that it would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing  the federal funds rate.  However, participants acknowledged that there may be limits to the effectiveness of these tools in addressing an ELB episode. They also emphasized that there was considerable uncertainty about the economic effects of these tools. Consistent with that view, a few participants noted that economic researchers had not yet reached a consensus about the effectiveness of unconventional policies. A number of participants indicated that there might be significant costs associated with the use of unconventional policies, and that these costs might limit, in particular, the extent to which the Committee should engage in large-scale asset purchases.

The uncertainties seem considerable.

The FOMC discussion concluded this way

While the Committee’s current toolkit was judged to be effective, participants agreed, as a matter of prudent planning, to discuss their policy options further and to broaden the discussion to include the evaluation of potential alternative policy strategies for addressing the ELB. Building on their discussions at previous meetings, participants suggested that a number of possible alternatives might be worth consideration and agreed to return to this topic at future meetings. Several participants indicated that it would be desirable to hold periodic and systematic reviews in which the Committee assessed the strengths and weaknesses of its current monetary policy framework.

As one reader noted in sending me the link to these minutes “refreshing (at least directionally)”,   which sounds about right to me.   The FOMC still seems quite a long way from really grappling with the severity of the next serious recession, when they (and all their major peer central banks) will have (it appears) little conventional monetary policy leeway, there is a great deal of uncertainty about the potential of unconventional instruments, and everyone –  especially in the financial markets –  will know it.

But it is to their credit that they are willing to have a discussion of this sort, publish fairly substantive minutes highlighting some important differences of emphasis and uncertainties, and are open to independent (named) perspectives from members in speeches.    That said, it should disconcert people that the FOMC is not already rather better prepared for the next serious recession –  like all central banks, their ability to anticipate the timing of the next such event is non-existent.

The Governor of the Reserve Bank has apparently been at the Jackson Hole retreat for central bankers this weekend.  Perhaps he could compare notes with his US counterparts and come back ready for some more open and substantive engagement on these issues in a New Zealand context (after all, in a day or two, he’ll have been in office for five months and we’ve still not had a substantive speech from him on any topic the Bank is responsible for).  Encouragingly, the Governor is reported as telling an interviewer in the margins of Jackson Hole that

The “biggest challenge” is to “get inflation to rise”

But it will be much more of a challenge in the next serious recession if people can’t be confident that central banks, here or abroad, can do all that needs to be done.  At present, no one can reasonably be that confident.  New Zealand can’t fix the world’s problems, but our policymakers can ensure our economy is well-positioned.  Not doing more just because others are still not doing enough should be no more excusable than when all too many countries drifted to the limits of conventional monetary policy at the end of the 1920s.  It wasn’t as if no one then was highlighting the risks.

I have a few other substantial commitments over the next two or three weeks, which means that blogging here may well be quite light for a while.

 

 

Political ructions and a better economic performance

Michael Reddell Australia, New Zealand economic performance

Years ago we in New Zealand sometimes had the gruesome spectacle of governing party coups (and the like).  There was the failed (“Colonels’ coup”) attempt to oust Muldoon in 1980, the ructions that led to Lange’s departure in 1988 and then (unelected) Palmer’s a year later, and the ousting of Jim Bolger in late 1997, and then the break-up of the governing coalition a year later.  But you have to be a certain age to remember any, let alone all, of those.

In Australia, by contrast they’ve been two a penny in the last decade.   It isn’t exactly the rate at which Italian governments used to turn over until relatively recently, or French governments in the ill-fated Fourth Republic (22 prime ministerships in 12 years) but it is quite extraordinary by Anglo country standards.  Has there ever been a time previously –  in New Zealand, the UK, Ireland, Canada, Australia – when four people in a row who successfully led their party to an election victory –  limping home in Turnbull’s and Gillard’s cases –  didn’t complete the subsequent (three years) term?  Perhaps Turnbull will, in fact, limp on, but even if he does it is hard to see to what end.

A mere three years ago, when Turnbull ousted Abbott I wrote a post about the strange phenomenon then gripping the Australian centre-right: New Zealand envy.  Here was Turnbull speaking just after his coup.

“John Key has been able to achieve very significant economic reforms in New Zealand by doing just that, by taking on and explaining complex issues and then making the case for them. And I, that is certainly something that I believe we should do and Julie and I are very keen to do that again.”

As I noted, it was very hard to think of such “very significant economic reforms”.  Moreover, as I illustrated in that post, New Zealand seemed to have drifted a bit further behind Australia economically over the previous few years.

I noticed Julia Gillard yesterday engaging in a bit of New Zealand envy, suggesting (probably tongue in cheek) that Australians might well consider moving to New Zealand.  Only, surely, if they wanted to be colder as well as poorer.  Recall that Australian incomes are far higher than those in New Zealand, the main reason why for the last 40 years so many New Zealanders (net) have gone to Australia, and so few Australians have come to New Zealand.   Even just since 1991, a net 470.000 New Zealanders have gone to Australia, and only 49000 (net) other passport holders have come to New Zealand from Australia.

And, like it or not, political instability (including ructions in successive ruling parties) doesn’t seem to have been a material factor impairing economic performance.  That was so for France and Italy after the war, and if –  as I illustrated last week –  if Australia’s economic performance hasn’t been great, given its resource bounty, it has still been better than New Zealand’s.

Here I’m going to focus on the period since the end of 2007, for two reasons.  First, it was about the time the Rudd government took office which –  although it wasn’t apparent at the time –  was the beginning of the era of Australian political instability.  And, second, because it is just prior to the recession of 2008/09.  In New Zealand, Labour was still in office for most of 2008, but comparisons from troughs of recessions are rarely very meaningful (and if Australia didn’t have a recession in the sense of a couple of negative quarters of GDP, it still had a big fall in income measures –  as commodity prices fell –  and a material rise in the unemployment rate).

First, there is an important background feature that governments don’t have any material influence over; the terms of trade.

aus nz tot

Australia’s terms of trade have been much more volatile than those of New Zealand over the last decade or so, but taken over the whole period there hasn’t been that much difference.  Both countries have benefited from the movement in world prices to about the same extent (Australia had also had a substantial lift from about 2002, not mirrored in the New Zealand numbers).

Then there are the headline national accounts comparisons: real GDP per capita.

real gdp pc aus nz

On that measure, at the end of the period there has been no change in the relative position of the two economies  (although the gap between the two lines for much of the period is lost output that is never likely to be got back).  No sign of any catch-up, although also no falling further behind either.

The terms of trade can make a material difference to economic wellbeing, and terms of trade gains are not directly reflected in the real GDP numbers (although the indirect effects – any increases in consumption or investment etc in response –  are there).   But on this occasion we don’t need to worry too much about that point because, as the first chart illustrates, over the full period both countries’ terms of trade have risen by about the same amount.

But if real GDP per capita in the two countries has grown by about the same percentage in each country over the last decade, there has been a really big difference in the composition of that growth, and not one that is positive for New Zealand in the longer term.   I have shown the labour productivity chart previously, but here it is again anyway.

aus nz rgdp phw

Some years we match Australian productivity growth, and occasionally even exceed it, but over the period since the end of 2007, labour productivity growth in Australia has exceeded that in New Zealand by about 8 percentage points.  That is a lot, especially when New Zealand was starting from so far behind.

And here is a large component of the difference.  I’ve set hours worked per head of population equal to 100 in both countries in 2007q4, and shown how that measure has changed in each country since then.

hours worked per head

It looks a lot like that old story: New Zealand (in orange) more or less manages to “keep up” (not see real GDP per capita drop further behind) simply by working more hours.  That is no sustainable route to greater national prosperity, especially when hours worked per capita are already quite high by advanced country standards.

Of course, some will probably want to claim this as some sort of New Zealand success story –  “look at all those people we have in work etc etc”.   But working more hours isn’t some “good thing” for its own sake, and the unemployment rate is the best summary measure of whether there is slack in the labour market.   If Australia’s unemployment rate had increased materially more than New Zealand’s then one probably could tell a (cyclical) New Zealand success story.  But here are the two unemployment rates.

nz aus U rates

Most people reckon Australia’s NAIRU is higher than New Zealand’s (and that is a long-term negative for Australia, and the wellbeing of Australians), but that was so before the crisis too. In fact, the gap between New Zealand and Australian unemployment rates now (around 1 per cent) is exactly the same as the gap at the end of 2007.   Just as is the case in New Zealand, most Australian residents who actually want jobs have them.  So I don’t count the increase in hours worked here as any sort of mark of success.

None of this –  higher productivity growth in Australia in particular –  should be any great surprise.  If one looks across the OECD’s Going for Growth structural indicators (for example) the two countries score about as well, or poorly (on some indicators), as each other.  But Australia has seen come on stream huge new mineral production –  a new endowment they could tap –  and we’ve had nothing comparable (to what extent that is because similar resources aren’t there, or because policy choices prevent them being utilised is a topic for another day).  But with no other new opportunities apparent to match the new minerals –  and see the shrinkage in our foreign trade shares – our structural position relative to Australia has weakened further.

I’m not going to illustrate housing markets –  in any case mostly a state matter in Australia as I understand it –  but in both countries the best that can be said is that the outcomes, for ordinary people, have been lamentable, and disgraceful.

There is an argument sometimes mounted that the earthquakes were a significant drag that Australia didn’t have to face.  In terms of the existing stock of wealth, there is some truth in that (even recognising that much of the loss was reinsured abroad).  And the rebuild process –  which peaked several years ago now –  did take resources that couldn’t be used for other things.   But (a) on official estimates we had utilised capacity (output gap and unemployment gap) for most of the time, and (b) if there really were abundant international opportunities for firms here, bidding for capital and labour resources, we might have expected to see persistent upward pressure on our interest rates relative to those in the rest of the world, and associated inflation pressures.  We’ve not seen the inflation pressures at all (any more than in Australia) and the upward pressure on our interest rates relative to the rest of world occurred only while our Reserve Bank was messing up –  driving up the OCR before having to about-face and more than fully reverse themselves.

There isn’t a choice between chronic political infighting (of the Australian sort) and improved prosperity, but if there were I reckon I’d take the prosperity.  As it is, at least relative to New Zealand, Australia looks to have had both.  If there is an understandable tendency to rather look down on the political machinations, we should at least pause to ponder (again) our own long – and continuing – relative economic decline.

And now back to watching the gruesome spectacle across the Tasman.

 

Options for the next serious recession: fiscal policy

Michael Reddell Fiscal policy, Monetary policy, zero lower bound

I’ve run various posts over the last few years urging the authorities (Reserve Bank, Treasury, and the Minister of Finance) to get better prepared for the next serious recession (and lamenting the relative inaction on this front in other countries too, many of whom are worse-positioned than New Zealand is).

As a reminder, we went into the last recession with the OCR at 8.25 per cent, while the OCR now –  years into a growth phase, with resources (on official assessments) fairly full-employed –  is 1.75 per cent.  In that last recession, the Reserve Bank cut interest rates a long way, the exchange rate fell a long way, there was really large fiscal stimulus cutting in as the recession deepened, and there were lots of other interventions (guarantee scheme, special liquidity provisions) and it was still as severe as any New Zealand recession for decades, and took years to fully recover from (on official output and unemployment gap estimates perhaps seven or eight years).   Lives were blighted, in some cases permanently, in an event where there were no material constraints on the freedom of action of the New Zealand authorities.  In fact, our Reserve Bank cut the OCR (over 2008/09) by more than any other advanced country central bank.

Next time, whenever it is, it seems very unlikely that the Reserve Bank will have that degree of freedom, particularly around monetary policy.  On current policies and practices around bank notes, it seems unlikely that the OCR could be usefully cut below about -0.75 per cent.  Beyond that point, most of the action would be in the form of people shifting from bank deposits etc to physical currency, rather than buffering the economic downturn.

Our Reserve Bank has long appeared disconcertingly complacent about this issue/risk.  The latest example was comments by the new Governor and his longserving chief economist following the latest Monetary Policy Statement.    They talk blithely about the unconventional policy options other countries have used, but never confront the fact that almost no advanced country could have been comfortable with the speed of the bounceback from the last recession.   Output and unemployment gaps of eight or nine years (the OECD’s estimate for advanced countries as a whole) aren’t normal and shouldn’t be acceptable.

Quite why the Reserve Bank is so complacent is something one can debate.   My hypothesis is that it is some mix of assuming we will never face the problem (recall that they have spent years hankering to get the OCR back up again) and of noting that other people/countries will most likely face the problem before New Zealand does.   They also like to remind us that New Zealand has a floating exchange rate as if this somehow differentiates us (as a reminder so do Australia, Canada, Norway, Sweden, the US, the UK, Japan, Korea, Israel, and even the euro-area as a whole).  Whatever the explanation,  robust contingency planning, and building resilience into the system, is what we should be expecting from the Reserve Bank (and Treasury).  There is no sign of it happening.  Meanwhile, the Governor plays politics in areas (eg here and here) that really aren’t his responsibility.

In my post on Saturday, I touched again on the desirability of doing something –  specific and early, consulted on and well-signalled –  about removing the effective lower bound on nominal interest rates.   That would tackle the issue at source.    Monetary policy has been the primary stabilisation tool for decades for good reasons.  Among other things, it is well-understood and there is a fair degree of (political and economic) consensus around the use of the tool.  And confidence that the tool is at hand in turn proves (somewhat) self-stabilising, because people expect –  and typically get – a strong monetary policy response.

Perhaps the other reason why authorities –  perhaps especially in New Zealand – have been so complacent is the view that “never mind, if monetary policy is hamstrung there is always fiscal policy”.  After all, by international standards, public debt here is low (on an internationally comparable measure from the OECD, general government net financial liabilities, about 1 per cent of GDP, which puts us in the lower quartile –  less indebted – among OECD countries.)

The implicit view appears to be that, with such modest levels of debt, if and when there is another serious recession, New Zealand governments can simply spend (or cut taxes) “whatever it takes” to get economic activity back on course again.   After all, the upper quartile of OECD countries have net general government liabilities in excess of 80 per cent of GDP.

I’m sceptical for a variety of reasons.

One of them is the experience of the last recession.  For this, I had a look at the OECD data on the underlying general government primary balance as a per cent of potential GDP:

  • general government = all levels of government
  • underlying = cyclically-adjusted (ie removing the impact of the fluctuating business cycle on revenue (mostly), and adjusted for identified one-offs (eg recapitalisations of banking systems)
  • primary balance =  excluding financing costs, so that comparisons aren’t affected by changes in interest rates themselves
  • as a per cent of potential GDP =  so that a temporary collapse in actual GDP doesn’t muddy the comparison

The numbers aren’t perfect, and there are inevitable approximations, but they are the best cross-country data we have.  Changes in this balance measure are a reasonable measure of discretionary fiscal policy.

Here is how those underlying primary balances changed from 2007 (just prior to the recession) over the following two or three years.  I’ve taken the largest change I could find, and in every case that was over either two years to 2009, or over three years to 2010.

fisc stimulus

Some countries (Hungary, Estonia) were engaged in severe fiscal consolidation from the start.  Several others experienced almost no change in their structural fiscal balances.

Quite a few countries saw 5 percentage point shifts in their underlying fiscal balances.   Spain –  a country with no control over its domestic interest rates –  is recorded as having gone well beyond that.  I don’t know much about the specifics of Spain, but for those who are upbeat about the potential scope of discretionary fiscal policy I’d take it with at least a pinch of salt – on the OECD numbers, the Spanish primary deficit dropped again quite sharply the next year (and Spanish unemployment didn’t peak until several years later).

Note that both Australia and New Zealand are towards the right-hand end of that chart.  In Australia’s case, most of the movement resulted from deliberate counter-cyclical use of fiscal policy (the Kevin Rudd stimulus plans).  In New Zealand, by contrast, the change in the underlying fiscal position was almost entirely the result of discretionary fiscal commitments made by Labour government at a time when Treasury official forecasts did not envisage a recession at all.  From a narrow counter-cyclical perspective, those measure might have been fortuitous, but they were not deliberate discretionary counter-cyclical fiscal policy measures.  In fact, at the time they were seen in some quarters as exacerbating pressure on the exchange rate, and limiting the scope of any interest rate reductions.

Perhaps it is worth stressing again that in not one of the OECD countries did the reduction in structural fiscal surpluses (expansion in deficits) last more than two years.  In every single country, by 2011 structural fiscal policy (on this measure) had moved –  sometimes modestly, sometimes quite sharply –  into consolidation phase.  In most countries, either conventional monetary policy limits had been reached or (as in individual euro area countries) there was no scope for conventional monetary policy.  And it was to be years before output and unemployment gaps closed in most of these countries.

What is my point?   Simply, that it looks as though the political limits of discretionary fiscal stimulus were reached quite quickly, even in countries where there was no market pressure (any of the established floating exchange rate countries other than Iceland), and even though the economic rebound in most was anaemic at best.   That is why so many countries needed more conventional monetary capacity than in fact they had (and QE in various forms was not much of a substitute).

The OECD table on underlying primary balances only has data going back a few decades.  No doubt experiences in wartime were rather different –  in those circumstances huge shares of the nation’s resources can be marshalled and deployed in ways which (incidentially) stimuluate demand and activity.  But looking across the OECD countries over several decades, I couldn’t any examples of discretionary fiscal policy being used as a counter-cyclical tool materially more aggressively than happened over 2008 to 2010.  In Japan, for example, the structural fiscal balance worsened by about 6 percentage points over seven years after 1989.

So from revealed behaviour patterns, I’m sceptical as to just how much practical capacity there is for fiscal policy to do much, and for long, in the next serious recession, even in modestly-indebted New Zealand.    The limits aren’t technical –  they mostly weren’t last time –  but political.   Perhaps people will push back and run some argument along the lines of “oh, but we’ve learnt the lessons of unnecessary premature austerity last time round”.     To which my response would be along the lines of “show me some evidence, or reason to believe that things would, or even should, be much different next time”.   When – outside wartime –  has it ever happened?  And what about our political systems makes you comfortable that it is likely to happen next time?     We could probably run large structural deficits for a year or two, but pretty quickly the pressure is likely to mount to begin reining things back in again (especially if, for example, the next recession is accompanied by heavy mark-to-market losses on government investments –  eg NZSF).

And recall that here in New Zealand we had almost as much fiscal stimulus last time as any country, and even supported by huge cuts in interest rates (and without a home-grown financial crisis), we had a nasty recession (even a double-dip in 2010) from which it took ages to recover.

And all of this is without even examining how effective realistic fiscal policy is likely to be.    The easiest fiscal stimulus is a tax cut (or even a lump sum cash handout).   You can do clever ones, like the UK temporary cut in GST, which not only put more money in people’s pockets, but actively encouraged them to shift consumption forward –  only to then create problems as the deadline for raising the value-added tax rate loomed.   But putting money in people’s pocket –  in a recession, and often explicitly temporarily –  doesn’t guarantee they spend much of it.  The most effective demand-stimulating fiscal policy (supply side measures are another issue –  but lets just agree that deep cuts in company tax and related rates will not happen in the depths of a recession) is direct government purchases of goods and services.  Most talked of is government capital expenditure, infrastructure and all that.

But, approve or otherwise, no government has a reserve list of projects, designed and consented, just waiting to get starting the moment it is apparent the next deep recession in upon us (that moment usually being several months after the recession has begun).  It is almost certainly politically untenable for them to do so –  if the project is so good, so the argument will run, why not do it when times are good?  And so realistic government fiscal stimulus through the capital expenditure side will take months and years (more probably the latter) to even begin to get underway.   Faced with the actual physical destruction in Christchurch, look how long it took for major reconstruction to get underway.

What of income tax cuts?   Either the cuts are focused on those who pay the most taxes (in which case there is quickly one form of political pushback) or perhaps they take the form of a tax credit paid as a lump sum to everyone (in which case there is likely to be pushback of another political type –  ideas around “everyone becoming a welfare beneficiary).  I’m not attempting to defend either type of response, just to anticipate the risks.

By contrast, monetary policy –  the OCR –  can be adjusted almost immediately, and often begins to have an effect before the central bank even announces its formal decision (market expectations and all that).  And if monetary policy changes don’t affect everyone equally, they affect the entire country –  a borrower/saver/exporter in Invercargill just as their counterparts in Auckland.  In the line from a US Fed governor, monetary policy gets in “all the cracks” (although he was contrasting it with regulatory interventions).  Government capital expenditure is, by its nature, very specific in location.  There probably isn’t a natural backlog of major (useful) capital projects in Invercargill or Dunedin.

I’m not saying fiscal policy has no useful place in the stabilisation toolkit –  although my prior is that it is better-oriented towards the medium-term, with the automatic stabilisers allowed to work fully –  but that we should be very cautious about expecting that it is any sort of adequate substitute for monetary policy in the real world of politics, distrust of governments and so on, in which we actually dwell.    It is well past time for the Reserve Bank and the Treasury, led by the Minister of Finance, to be taking open steps towards ensuring that New Zealand has the conventional monetary policy capacity it would need in any new serious recession.

 

Reflecting on the government and the PRC

Michael Reddell China, NZ politics

Early last month, the government published its Strategic Defence Policy Statement.   That was the one that caused a bit of a flurry because of the inclusion of the odd, rather mild, honest statement that appeared to that put noses out of joint among the tyrants of Beijing and their representatives and advocates (not all PRC citizens) in Wellington.

And that was so even though early on the document reminded us that

New Zealand continues to build a strong and resilient relationship with China. Defence and security cooperation with China has grown over recent years, supported by a range of visits, exchanges, and dialogues.

It isn’t clear what values or interests the People’s Republic of China and New Zealand would share.   We knew better 50 years ago when we didn’t do military exchanges and joint exercises with the Soviet Union.

The pandering goes on with talk of how “China is deeply integrated into the rules-based order” (one of those much-used but very ill-defined phrases that seems to bear little relationship to reality).

Moving along, the report gets a little more frank, but in repeating lines that are news to no one.    China is not  –  and shows no sign of or interest in becoming – a liberal democracy, and its “views on human rights and freedom of information…stand in contrast to those that prevail in New Zealand”.   The document notes also growing Chinese military power and a disregard for international fora in dealing with “the status of sovereignty claims” in “disputed areas of maritime Asia”.     There is, rather brief, reference to attempts to “disrupt and influence Western nations’ political systems from the inside”, although those comments aren’t specific to China.

And (in a statement of what one would have hoped would have been blindingly obvious) there is this

Developments in Europe and Asia have crystallised a sense that non-democratic and democratic systems are in strategic competition, and that not all major powers’ aspirations can be shaped in accordance with the rules-based order [whatever the government means by that], in the way that had been hoped until recently.

And yet, if this is partly in reference to China, what have the presidents of both the Labour and National parties been doing praising Xi Jinping and the contribution of the PRC?  There has been no sign of them recanting.

A little later on in the document, there are two paragraphs specifically about China.  They are purely descriptive, with not a word of disapproval to be found among the descriptions of China’s aggression in the South and East China Seas, the construction of military bases on artificial islands in contested waters.  Remarkably –  but no doubt pleasingly to both Beijing and our Ministry of Foreign Affairs and Trade –  there is apparently no mention of Taiwan, a key potential flashpoint, at all.

You could perhaps read the document more charitably than I have done –  for example, hints of unease about Chinese activity in Antarctica –  but it is still a pretty anodyne document.  There is no explicit or outright criticism.   Even China’s major geopolitical initiative, the Belt and Road Initiative, is described in positive terms.

But Beijing didn’t like it

At a press conference in Beijing on Monday, China Foreign Ministry spokeswoman Hua Chunying said the country had taken note of the defence policy statement and “lodged stern representations with New Zealand on the wrong remarks it has made on China.”        …

“We urge New Zealand to view the relevant issue in an objective way, correct its wrong words and deeds and contribute more to the mutual trust and cooperation between our two countries.”

Quite telling that wording.  Not a matter, apparently, where reasonable people might disagree, but rather “wrong words” (and “deeds”) that need correcting.   New Zealand should abase itself.   And the PRC sometimes wonders why it doesn’t have more genuine friends….

The document itself is now rather old news.  But what struck me in the days and weeks after its release was that, anodyne as it was, it was made even weaker by the complete silence of the Prime Minister and senior Labour Party figures (and, for that matter, the Greens).  Labour is by far the largest component of the government, and not a peep has been heard from the Prime Minister (conveniently on leave when the policy statement was released).  But that is par for the course from the Prime Minister –  I wrote here about a speech she gave earlier in the year to the China Business Summit in Auckland.   There was no sign of any moral core to her views.   Not surprisingly, since her own party president has been in Bejing, since she became leader, praising Xi Jinping.   It is sickening.

Incidentally, for anyone inclined to look favourably on New Zealand First’s involvement in all this, I stumbled on an article on the PRC Embassy’s website about an event in Wellington a couple of weeks ago to celebrate the 91st anniversary of the People’s Liberation Army.  Among the speakers were our Defence Minister, Ron Mark, and our new Chief of Defence Force, Kevin Short.  Various other senior New Zealand officials also attended.  Neither man published the text of his remarks, but the Chinese Embassy reported them.

Here was Ron Mark

The New Zealand Minister of Defence Ron Mark extended his heartfelt congratulations on the 91st anniversary of the founding of the PLA and expressed his admiration for the contribution of the Chinese army towards safeguarding world peace. The Honourable Ron Mark noted that China is New Zealand’s strategic partner and that the relationship with China is one of New Zealand’s most important and valuable relations with foreign countries. Over the past 30 years since Royal New Zealand Navy frigates visited Shanghai in 1987, China-New Zealand military-to-military relations have continued to develop on the basis of openness and mutual respect.

What planet is the man on?  He’d probably have had a good word for the Wehrmacht and the Luftwaffe in 1938 as well.

As for the Air Marshal

Mr Short noted that over the past 91 years since its founding, the PLA has made tremendous contributions to China and the world.

A decades-long civil war, enabling one of the brutal and murderous regimes on the planet, and now  –  according to our own Strategic Defence Policy Statement

China’s military modernisation reflects its economic power and growing leadership ambitions. China’s growing military capabilities raise the costs of any potential internvetion against its interests and include stronger expeditionary capabilities, including a military presence in the Indian Ocean.  China has expanded its military and coastguard presence in disputed areas of maritime Asia. It has determined not to engage with an international tribunal ruling on the status of sovereignty claims.

Perhaps all that had slipped the Air Marshal’s mind when he made the kowtow before the PRC Ambassador, presumably with the approval of his Minister?

Distasteful as the PRC regime is, at least there was a bit more honesty in some of their reported remarks

In his speech, Defence Attaché Li Jingfeng stated that as socialism with Chinese characteristics entering a new era, the building of the PLA has also reached a new stage. With the deepening of defence and military reforms, the entire army adheres to the absolute leadership of the Chinese Communist Party and resolutely implements President Xi Jinping’s thought on building a strong military. By constantly advancing the policy of developing the military through political work, strengthening it through reform, and governing it according to law, the PLA’s combat effectiveness has been significantly enhanced

Against what external threat, other than those generated by the PRC’s own aggression, one has to wonder?

As the PRC Embassy reported it

The atmosphere at the reception was cordial and friendly. The participating New Zealand guests spoke highly of the achievements made by the Chinese armed forces and their contribution to world peace,

I guess we can take such propaganda with a pinch of salt, but it clearly wasn’t a remotely awkward occasion for such an expansionist power just a few weeks after that defence policy document had been released.  It should be a cause for shame among our ministers, officials and senior defence force officers.

And if I’m critical of our government and its officials, the Opposition is no better.  After all, they still have former PLA intelligence staffer Jian Yang –  the man who acknowledges he misrepresented his past to get into the country –  as one of the lesser lights of their parliamentary caucus.    Their leader was the man who, as a senior minister last year, signed New Zealand up to the Belt and Road Initiative, in a document full of nauseating and ingratiating rhetoric (next steps of which are due, in terms of the agreement, in the next six weeks).  Perhaps worse, when the government came out with its rather mild Strategic Defence Policy Statement, mostly just stating –  barely even criticising –  the blindingly obvious, Simon Bridges was all of a flutter.  The government couldn’t possibly say such things: it might upset Beijing.  There would be consequences he ominously warned.    Does the man have no respects for the values and systems of his own country at all?  Is he only interested in the perspective of a few businesses (including universities) that want better trade terms, never mind the character of the regime they pander to?  Never, ever, apparently must a disrespectful word be uttered.

There have been a few interesting articles around from abroad in recent weeks that are worth reading.  Perhaps most directly salient was a substantial piece in the Australian magazine The Monthly by John Garnaut, formerly a senior Fairfax journalist (and long-term China correspondent), more latterly an adviser to the Australian government.    His article is on the challenge PRC influence strategies pose in many countries –  in Asia, the Pacific, Europe and the Americas.

Garnaut writes

The CCP’s international influence system is a complex, subtle and deeply institutionalised set of inducements and threats designed to shape the way outsiders talk, think and behave. The modus operandi is to offer privileged access, build personal rapport and reward those who deliver. It seeks common interests and cultivates relationships of dependency with chosen partners. The Party uses overt propaganda and diplomacy, quasi-covert fronts and proxies, and covert operations to frame debates, manage perceptions, and tilt the political and strategic landscape to its advantage.

Beyond the foundational assumption of a single, civilisational “China”, the specific demands of United Front work are framed by permutations of three narratives: China is inherently peaceful and beneficent, the growth of Chinese power is inexorable, and China is vengeful and dangerous if provoked.

These narratives are internally contradictory but consistent over time. The first two are delivered openly by leaders, diplomats and state propaganda. The third is usually delivered via back channels with plausibly deniable connections to the state: PLA “hawks”, specialist military hardware websites, academic forums, personal meetings with top leaders, editorials in the Global Times. Together, this messaging orchestra is designed to condition audiences into believing that the rewards are great, resistance is futile, and outright opposition may be suicidal.

The meta-narrative of Beijing’s ever-growing power is the drumbeat that accompanies China’s policies of territorial coercion across its southern and eastern seas. It is the subtext that persuades foreign governments to remain silent as Beijing abandons restraint in the restive borderlands of Tibet and Xinjiang. It is also the incentive for economic beneficiaries to avoid seeing, or to rationalise, or to even actively support the Party’s efforts to degrade the values and institutions of civil society.

That final sentence sounds a great deal like the New Zealand situation.

But Garnaut isn’t just writing about distant places like New Zealand and Australia.  Of Taiwan he writes

In May I attended a closed-door forum hosted by the Taiwan Foundation for Democracy that was publicly opened by the deputy foreign minister, François Chih-Chung Wu. He set aside diplomatic platitudes to issue this plea for international help:

“In Taiwan, and in countries elsewhere, China moves from soft power to sharp power, and then to hard power. And it is becoming more brazen every day … In other countries, this process may begin with a Confucius Institute, scholarships, grants, but the next thing you know you must self-censor discussions China considers sensitive … In the face of this authoritarian onslaught of China’s misinformation, cyber hacking, bribery, economic coercion, theft of technology, and intrusion in internal politics – Taiwan is crucial. If it can hold on, other democracies will be able to hold on. But if it fails, there will be no security for the democratic governments of the world.”

He also writes about the Singaporean government’s expulsion last year of a resident Chinese-born US citizen, a reasonably prominent academic, for being an “agent of influence for a foreign country”.     Garnaut writes

What is striking about this official statement is that it makes detailed allegations relating to a form of espionage that sits a long way from the traditional Western counterintelligence agenda. The intelligence officers who were allegedly behind this operation were not stealing secrets. And nor were they aiming to directly control any policy lever. Rather, they were allegedly planting or nurturing a series of words and ideas in order to tilt the strategic decision-making landscape in a particular direction. They didn’t want to force Singaporean policy makers to make decisions in their favour. Rather, they wanted to condition policy makers to make such decisions of their own volition.

He quotes a recent speech from a retired top Singaporean diplomat (reprinted in the government-managed media in Singapore)

“China does not just want you to comply with its wishes. Far more fundamentally, it wants you to think in such a way that you will of your own volition do what it wants without being told. It’s a form of psychological manipulation.”

As I read that, it brought to mind Beijing’s description of the New Zealand defence document: “wrong words”.

Garnaut reports his own experiences, and the attempts of the regime to suborn his reporting

At first, my exposure to United Front work was all about inducements, with an occasional warning to keep me on my toes. I was offered red envelopes, neatly packed with US$100 bills. And sounded out for a lucrative “consultancy” arrangement with a Hong Kong bank. In one encounter, I was offered air tickets, hotel accommodation, a five-star family holiday, a job, and a gift bag containing bottles of Bordeaux wine valued at up to US$2000 each. These were all reciprocity traps, to be avoided at all costs. Gradually, over time, the ratio of carrots to sticks was inverted.

Garnaut was recently the subject of legal action by one extremely wealthy PRC resident in Australia,  put out by his open and sceptical reporting.

Another recent piece people might like to read was piece by Didi Kirsten Tatlow, long-serving (and then China-resident) journalist, and currently visiting fellow at the (German) Mercator Institute for China Studies, on some of the ideas, values, and language (often ancient) that seem to guide PRC actions today, including around the United Front activities  (“Imperial philosophy meets Marxist orthodoxy in Beijing’s global ambitions”).

In one quote, resonant of Beijing’s descriptions of the defence policy document,

A direct consequence of this worldview is that, from the party’s point of view, China’s sovereignty applies everywhere in the world. The party-state reserves for itself the right to negate values such as freedom of speech anywhere if it feels these challenge its sovereignty.

This stance is often expressed in terse demands to “outsiders” to apologize for getting things “wrong,” such as classifying Taiwan as a nation, or referencing the Dalai Lama in an advertisement, as happened recently to western airlines, hotels and car companies. These demands are increasingly coupled to direct threat to trade, in a classic example of jimi.

Rarely is the rationale behind the demand spelled out, but it was, in January, in an article in Global Times. The article responded to a previous New York Times article that documented how Chinese diplomats and soccer officials were interfering in political and speech freedoms in Germany. (That article was by this author.)

Efforts in Germany to support the rights of Tibetans were not a question of free speech, wrote Zhang Yi in Global Times: “What the author fails to understand is that the Tibet question is a matter of Chinese sovereignty; the Tibetan separatists aimed at splitting China and they should not use freedom of speech as an excuse,” Zhang wrote.

In that quote the underpinnings of the democratic order are removed and the intrinsic value of free speech negated everywhere. This isn’t simply change. This is revolution, in the sense of overturning. While the Global Times is not the party or government, the sovereignty argument expressed by Zhang cleaves to official thinking.

Towards the end of her paper, Tetlow notes

How can an anti-democratic, universalist China be accommodated and managed?

Firstly, a mental reset is needed. In a time of system competition it is of utmost importance to understand one’s competitor. Chinese officials and official commentators often talk about “changing and improving” global governance – pluralist societies must assume they mean to do it. Open societies must stop seeing the People’s Republic of China as a paler copy of themselves, merely lagging in terms of democratic modernity. Such teleology is unjustified, barring major political change in China.

By seeing the threads that the party is picking from the past and weaving into the future, we see China as it is – human yet totalitarian, strong yet weak, defensive yet aggressive, and ultimately a great challenge to democratic nations. When China calls for a tianxia-esque, civilizational system such as the “commonwealth of human destiny,” we must listen carefully, analyze closely the historical context and development of the term, identify the techniques used to achieve it, and assume party leaders mean to implement it if they can.

And what of the vaunted Belt and Road Initiative, that local taxpayer-funded PR outfits like the China Council and the Asia New Zealand Foundation are constantly keen to talk up (and on which the New Zealand government soon has to make decisions)?  I noticed a new short piece out of a US think-tank suggesting that all might not be well with the programme even inside the PRC.

the PRC’s policymaking apparatus appears to have already responded to concerns of BRI overreach by adjusting the scale of lending to limit possible financial risk. BRI lending by major PRC banks has dropped by 89% since 2015, and lending by commercial banks—who are dealing with their own financial issues domestically—has ceased almost entirely. Policy banks have also scaled back, despite their status as arms of PRC government policy.

What are these concerns?

On July 20, Sun Wenguang, a retired professor of physics at Shandong University, penned an open letter criticizing China for “offering almost CNY 400 billion in aid to 166 countries, and sending 600,000 aid workers” (Canyuwang, July 20). On August 1, as he expanded on his concerns in an interview with the US-based Voice of America, police forced their way into Sun’s apartment. As he was taken away, Sun could be heard saying, “Listen to what I say, is it wrong? Regular people are poor, let’s not throw our money away in Africa … throwing money around like this doesn’t do any good for our country or our society.” (VOA Youtube, August 2)

Ah, the character of the regime our politicians and officials pander to…..

As the author notes

Although a Western observer might dismiss a few professors’ unhappiness with the BRI as ivory tower grumbling, PRC academic critiques are worth noting, since outspoken academics are often the channel through which other PRC societal elites communicate their dissatisfaction with the CCP.

And draws atttention to one much-better-connected leading academic’s recent essay.

Although Sun has long been a government gadfly, he is also long retired, and resides far from the center of power in Beijing. But similar criticisms have found voice much closer to the corridors of power. On July 24, Xu Zhangrun (许章润), a professor at Beijing’s elite Tsinghua University, published an extraordinary essay entitled “Imminent Fears, Imminent Hopes” (我们当下的恐惧与期待). Among many other criticisms, Xu excoriates Xi’s government for its profligacy abroad, saying:

At the recent China-Arab States Cooperation Forum [on 10 July 2018], [Xi Jinping] announced that twenty billion US dollars would be made available for ‘Dedicated Reconstruction Projects’ in the Arab world, adding that [China] will investigate offering a further one billion yuan to support social stability efforts in the [Persian Gulf]. Everyone knows full well that the Gulf States are literally oozing with wealth. Why is China, a country with over one hundred million people who are still living below the poverty line, playing at being the flashy big-spender? (China Heritage, August 1)

Xu Zhungrun’s essay is a fascinating read (the readily available, and extensively quoted, translation was done by the Australian China scholar living in the Wairarapa).   As the translator notes in his introduction

On 24 July 2018, Xu published a lengthy online critique of China’s present political and social dilemmas. In issuing his Jeremiad, Xu, who is something of a latter-day rú 儒, locates himself in the Grand Tradition by effectively addressing a Memorial to the Throne, 諫言 or 上書. Given the relentless police repression and intensifying ideological clamp-down in Xi Jinping’s China, this is a daring act of ‘remonstrance’ 諫勸.

The professor doesn’t pull his punches

Over-investment in international aid may well result in deprivations at home. It is said that China is now the world’s largest source of international aid; its cash-splashes are counted in billions or tens of billions of dollars. For a developing country with a large population many of whom still live in a pre-modern economy, such behaviour is outrageously disproportionate. Such policies are born of a ‘Vanity Politics’; they reflect the flashy showmanship of the boastful and they are odious. The nation’s wealth — including China’s three trillion dollars in foreign reserves — has been accumulated over the past four decades using the blood and sweat of working people, in fact, it has actually been built up as a result of successive policies and countless struggles dating from the time of the Self-Strengthening Movement [launched during the Tongzhi Restoration during the 1860s when, following its defeat in the Second Opium War, the court of the Qing-dynasty adopted the first modernising reform agenda in Chinese history. By saying this Xu, to an extent, indicates that he does not completely embrace the Communist narrative or its soteriology]. How can this wealth be squandered so heedlessly?

The era of fast-paced economic growth will come to an end; how can such wanton generosity be tolerated — a generosity which, in many ways, replicates [the vainglorious Maoist-era policies when China boasted that it was the centre of world revolution to] ‘Support Asia-Africa-Latin America’ [which meant that an impoverished China was generously giving aid to Third World countries in an effort to gain political advantage and counter the influence both of the American imperialists and the Soviet revisionists] that led to countless millions of Chinese being forced to tighten their belts simply to survive, and which even saw the corpses of those who had starved to death scattered in the fields.

Recall that New Zealand too –  far richer than China per capita –  is a recipient of this lavish PRC “foreign aid” –  paying for language teaching assistance in numerous of our state schools,  all encouraged by our government at the expense of poor Chinese.

Average Chinese are most frequently offended by the way the state scatters large sums of money through international aid to little or no benefit. China is still slowly making its way up the steep slope of development. In terms both of basic infrastructure and social facilities, as well as in regard to people’s ability to access welfare, we are confronting massive problems; our burden is great and the road ahead leads far into the distance. And I make this point without even mentioning the crisis in aged care, or issues related to employment opportunities and education.

Or

Even the most commonplace international meeting organised in China involves extraordinary levels of expense. There is no regard for budgets; fiscal waste and the heedless loss of human work hours is considerable. Such activities are content-free and superficial. It’s all about pursuing ‘Vanity Politics’ not ‘Practical Politics’, let alone ‘Hard-edged Politics’. Such events have nothing to do with the so-called ‘venerable traditional of warmth and hospitality demonstrated by the Chinese people from ancient times’; only the most vain and self-serving [leaders and bureaucrats like to] indulge in such things. If foreigners were to copy what we ar constantly doing here, then the VIP-filled headquarters of the United Nations in New York would be on police lock-down 24/7, and the headquarters of the numerous international organisations based in Geneva and Paris would perforce have to stage nightly fireworks displays with their personnel expected to be decked out in all their finery all the time.

One might think of cocktails to celebrate the 91st anniversary of the PLA.  But more tellingly one might think of PRC gifts to PNG (a fancy convention centre and a new six lane highway for example) to enable it to host APEC this year.

Or

An emergency brake must be applied to the unfolding Personality Cult. Who would have thought that, after four decades of Reforms and the Open Door, our Sacred Land would once more witness a Personality Cult? The Party media is going to extreme lengths to create a new Idol, and in the process it is offering up to the world an image of China as Modern Totalitarianism. Portraits of the Leader are hoisted on high throughout the Land, as though they are possessed of some Spiritual Mana. This only adds to all the absurdity. And then, on top of that, the speeches of That Official — things previously merely to be recorded by secretaries in a pro forma bureaucratic manner — are now painstakingly collected in finely bound editions printed in vast quantities and handed out free throughout the world. The profligate waste of paper alone is enough to make you shake your head in disbelief.

Didn’t former Labour leader Phil Goff pay for a large chunk of his mayoral campaign auctioning off collected works of Xi Jinping, to PRC-based donors?

It is a bracing read, and one can wonder at the likely fate of the courageous author.

Meanwhile, our Prime Minister –  and her Opposition counterpart – refuse ever to utter a critical word about the regime, or what it represents here  (Jian Yang, the infiltration of Chinese community groups, control of the Chinese language media), abroad (South and East China Sea), or back home.    The most egregious recent example is around the mass concentration camp (actual detention, and extreme surveillance for those not detained) in Xinjiang.    What would it take for Jacinda Ardern, Simon Bridges, Winston Peters, Ron Mark, James Shaw, Marama Davidson to speak up and speak out.   Does nothing but a dollar matter in their world nowadays?  It looks a lot like civilisational decadence taken to whole new levels.  So well-schooled it doesn’t even occur to them to speak up.     Another cocktail party perhaps?  Pass the canapes, and quietly ignore the great evil Beijing and the CCP are responsible for –  not just in decades past, but (in more refined, and perhaps unnerving) forms right now.

These were parties that once prided themselves on standing against (variously) apartheid South Africa, French nuclear testing, the Soviet Union, Nazi Germany, mass murder in Cambodia or Rwanda, and so on.  Is there anything left they believe in enough, or care about enough, to speak up, take a stand, or do something?

 

 

Towards a (physical) currency auction

Michael Reddell Monetary policy, zero lower bound

A week or so back, at the Monetary Policy Statement press conference, veteran Herald economics journalist/columnist Brian Fallow asked the Governor about how well-situated New Zealand was to cope with the next recession, given how low the OCR is now (1.75 per cent, as compared with 8.25 per cent going into the previous recession).

As I recorded in a post the same day, the Governor and his offsiders responded with a degree of confidence that wasn’t backed by much substance.  It all smacked of a worrying degree of complacency.

Fallow also apparently wasn’t persuaded, and returned to the issue in his weekly Herald column yesterday.  I wanted to pick up today on just one of the topics he touched on in that column.

The key issue is the effective lower bound on nominal interest rates.  The Reserve Bank has indicated that it believes the OCR probably couldn’t usefully be taken lower than -0.75 per cent (I agree with them, and that assessment of the effective lower bound is consistent with the lowest any other country has set its policy interest rate).  Beyond that point, it seems likely that an increasing proportion of holders of short-term financial assets would transfer into holdings of physical cash.  There is no direct cost of conversion, although there are storage and insurance costs for physical cash (which is why large scale conversion doesn’t occur at, say, -5 basis points).

When official interest rates were dropped below -0.75 per cent it still probably wouldn’t affect very much much (or how) little cash you hold in your wallet/purse.  If you hold much cash at all, it is probably for convenience (or privacy), balanced against (say) risk of loss/theft.  And a secure physical storage facility for even $10000 of cash would be much more inconvenient –  and probably expensive – than holding a short-term bank deposit.  You might well, grudgingly, live with an interest rate of -2.0 per cent per annum (as it is, since the last recession, marginal term deposit rates have been well above the OCR anyway).   Or you might seek to shift your money to riskier (potentially higher-yielding assets) –  in which case the lower policy interest rate would still be somewhat effective.

But the big issue here isn’t so much what the ordinary householder does.  Most don’t have that many financial assets that could be converted directly to cash anyway.  The bigger issue is institutional investors (resident and foreign, including –  for example –  Kiwisaver funds).   The funds management market is pretty intensely competitive, and (risk-adjusted) yield-driven (as an example, I was in a meeting yesterday where we looked at a restructuring option to save perhaps 3 basis points).     So if the Reserve Bank tried to cut the OCR to, say, -2.0 per cent (and it was expected to remain at least that low for a couple of years), there would be big incentives to find alternative assets yielding a less-negative (or positive) return.  The most obvious example is physical cash.   And if there are incentives for fund managers to find such alternative options, there are incentives for trusted operators to provide them (secure physical storage for large quantities of physical currency).   Willing buyers and willing sellers usually find a way to get together, at least if regulators don’t come between them (in this case the regulator –  the Reserve Bank –  actually creates the problem.  People sometimes talk about a lack of secure storage facilities, but $1 billion in $100 bills doesn’t take much space (nor, really, does $100 billion).  (On US note dimensions, the calculations are here.)  If conversions of this sort happened on a large scale, a lower OCR won’t have any material effect –  other than encouraging remaining asser holders to convert to cash.  It wouldn’t lower retail interest rates (much) and wouldn’t lower the exchange rate (much).

These sorts of conversions wouldn’t happen overnight.  Probably most funds managers and the like won’t have physical cash in their list of approved assets.  Some will be able to change that faster than others. Those that can will be able to offer better returns than those that don’t.   And such conversions would be much more likely in the next recession precisely because the starting point –  initial low interest rates –  is so bad.  It is quite likely that official rates could be negative for years.  Or perhaps the conversions will just never happen because central banks (here the Reserve Bank) just don’t lower their official rates far enough to make conversion economic.  But, if so. they will have made the point: conventional monetary policy will have very quickly exhausted its capacity.

And so various people, including me in the New Zealand context, have been arguing for some years now that something needs to be done –  and needs to be done early, to condition expectations about the next recession –  about the effective lower bound.  Brian Fallow refers to this in his article

Overseas experience suggests that at most, a negative policy rate might move the effective lower bound for interest rates 75 basis points into the red. Moving it lower still would require, economist Michael Reddell suggests, imposing a fee on banks switching from virtual to physical cash.

It wouldn’t be difficult.  There are more complex models on offer –  see Miles Kimball or Citibank’s Willem Buiter – but the desired results looks to me to be able to achieved quite simply by setting a cap on the regular holdings of physical currency (say 10 per cent above current levels).  It might need to be a seasonally adjusted cap (currency demand rises around Christmas and the summer holidays, and then falls back again).  The cap would need to rise through time (currency demand rises with the size of the nominal economy).  But the key point is that any net issuance beyond that level would be auctioned (perhaps fortnightly or monthly).   Any creditworthy entity –  the sort of institutions the Reserve Bank deals with routinely –  could participate in the auctions, and the marginal exchange price between settlement cash and wholesale volumes of physical cash would then be established quite readily, and could alter through time.  If the state of the economy and inflation meant the Reserve Bank needed to cut the OCR to -5 per cent (and in the US context, there are estimates that such a – temporary –  rate would have been desirable in 2009), there would be a lot of demand for physical currency, and no more supply.  The market-clearing price would rise, perhaps sharply.

Of course, banks supply currency to retail customers on demand, mostly through ATMs.   Banks would be free to respond to the rise in the marginal cost of obtaining new notes by passing those costs onto customers (retail or wholesale).   A (say) 5 per cent conversion cost of obtaining cash would encourage retail customers to economise on cash holdings (using EFTPOS etc instead), while allowing those who put most value on having physical currency to pay the price.  These days very few domestic transactions strictly require much cash.

Perhaps there are pitfalls in such a scheme.  If so, now is the time to be identifying them, not in the middle of the next serious recession.  Now is the time to be socialising –  including with the public – possible solutions, not in the middle of the next serious recession (when putting a premium price on physical currency suddenly announced might actually be seen as a negative signal about the soundness of banks –  ie discouraging people from holding cash).   Perhaps there even legislative obstacles – I’m not aware of any, but all sorts of obscure issues can arise when one looks into anything in depth. But, again, now is the time to identify those issues and fix them, not in the middle of the next serious recession.  There would probably need to be an override mechanism to cope with a genuine financial crisis driven run to cash.

And if there are better, workable, models, now is the time to identify them, and to test the alternative models in open dialogue, to ensure things are easily pre-positioned to cope with the next serious downturn.

Unfortunately, there is no sign of any of this sort of preparation occurring.  Certainly, nothing has been signalled by the Reserve Bank or by the Treasury or by the Minister of Finance.  If they aren’t doing the work, it is (complacent) negligence.  And if they are, but simply aren’t telling us, it would be quite unwise.

After all, as I noted in the earlier post, a key consideration the authorities need to be addressing is expectations (about inflation and policy).  In a typical serious downturn, inflation expectations fall but not too much, as all market participants expect that the downturn will be relatively shortlived, partly because of aggressive cuts to official interest rates.  But going into the next recession –  whenever it happens –  it seems increasingly likely that few central banks will have the interest rate adjustment capacity they would like.  And all economists and market participants will recognise the constraint, and are likely to factor it into their expectations are seen as a downturn in underway.  A rational response would be to cut inflation expectations (actual or implicit) much more sharply than usual  –  in turn, driving up real interest rates (for any given nominal rate), worsening the downturn, and worsening the reduction in inflation.  This issue doesn’t seem to get the attention it deserves even in the international discussions of these lower bound issues, but it looks to me like a pretty straightforward implication of the current situation.

Since none of us knows when the next severe recession will hit –  it could be years hence, but it could be next year –  this isn’t the time to let the issue drift.  Too many people paid the (unemployment) price of central bankers reaching their limits last time around to contemplate with equanimity going into the next recession starting from a situation where current low official interest rates are still only consistent with inflation at or below target in most countries, including New Zealand.  Dealing with the lower bound issue should be treated a matter of urgency.

(For those who are quite relaxed because of fiscal policy options, I might do a post next week on why it shouldn’t be very much consolation at all.)