Matt Nolan

Labour and monetary policy

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Labour has put a bunch of thought into its discussion on monetary policy – and there is certainly nothing wrong with discussing the issues and putting out a policy document, in fact there is a lot right with that.  Furthermore, over their entire document they recognise this is a multi-faceted issue we need to be careful with, I appreciate that a lot.

However, there are still a few glaring issues with the way they discuss monetary policy:

  1. They keep mixing “monetary” policy with longer-term “fiscal” policy.  It is not the RBNZ’s role to determine longer-term fiscal policy – this is undemocratic.
  2. On that note – the “external balance” is not an RBNZ target, and nothing they are suggesting actually helps that.  This is a general issue with medium-long term savings-investment imbalances, and we need to neatly define what the welfare relevant “problem” is before we go swinging around policy and reducing the ability to “judge” the Bank by giving it piles of targets.
  3. They don’t seem to appreciate how much monetary policy HAS changed during the last 25 years as institutions try to adapt to the changing world around us – their view that policy structures are no different than they were in 1989 is totally wrong.
  4. The variable Kiwisaver idea, controlled by the RBNZ, is horrible.  It comes from a good place IMO – they are looking for counter-cyclical tools that are used by an independent body.  But as I’ve explained, this is a particularly bad one, and will hurt the defacto independence of the RBNZ.  In addition, this “tool” won’t help the “external balance” – as the average savings rate should be unchanged.

Labour’s focus appears to be on exporters and manufacturers, as given there discussions with people they believe there is an issue there.  However, monetary policy, and the monetary policy choices of the Reserve Bank, are not the cause of this inherent S-I imbalance which forces NZ interest rates to be on average high.  Investigating why this is, and trying to understand it and base policy on issues in that, is the way forward.  This is why we’ve had a savings working group, a tax working group, and a productivity symposium – as all these structural issues, and the trade-offs they represent, are related.

These whys matter intensely for deciding policy – wasting time trying to mess around with one of the institutions that is working (in terms of keeping inflation in the band, and moderating the drop in output/employment, during the largest external shock since the Great Depression) to look like we are facing the issue is not doing this.

Shamubeel Eaqub

Blogging vs sensationalism – Economic Bubble?

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Social media frenzy over the news-quiet Easter weekend. Blooger at Forbes.com says NZ economy is headed for a bubble! Hat tip to Jessie Colombo for creating a media storm.

While there are reasonable and often cited risks in his analysis, the substance is lacking. You will find any number of economists, including in the RBNZ and Treasury, highlighting the risks from high Auckland house prices, high household debt and concentration risk in exports (from our increasing exposure to emerging markets, China in particular).

Here are his 12 reasons and why I think there is reason not to panic:

1)     Property prices have doubled since 2004

In Auckland and Canterbury. They have fallen elsewhere.

2)     New Zealand has the world’s third most overvalued property market

Yes. Auckland is.

3)     New Zealand’s mortgage bubble grew by 165% since 2002.

Bit selective. Household debt to income has actually been going sideways, if a little down, in recent years. Although not paid down the rapid accumulation in the 2000s.

4)     Nearly half of mortgages have floating interest rates.

Actually 73% by value. But you can fix if you want to. Which borrowers have done in the past. This is not to say that rising interest rates wont bite, but they will be spread over a long period of time.

5)     Mortgages account for 60% of banks’ loan portfolios.

I haven’t verified this number, but presumably this is bad if this will lead to high defaults. New Zealand does not have the legal structure to allow borrowers to walk away from their debts. Also, even during the recession of 2008 and the early 1990s mortgage default rates in NZ were relatively small.

6)     Finance, not agriculture, is New Zealand’s largest industry.

Like any advanced economy services are a big part of the economy. This is not surprising. Although he misstates the data. The top 10 industries as per GDP are:

  • Information Media and Telecommunications    7%
  • Professional, Scientific and Technical Services                   7%
  • Owner-Occupied Property Operation (National Accounts Only)                  7%
  • Rental, Hiring and Real Estate Services                  6%
  • Wholesale Trade              5%
  • Construction      5%
  • Health Care and Social Assistance           5%
  • Retail Trade        5%
  • Transport, Postal and Warehousing       5%
  • Financial and Insurance Services              5%

Agriculture details are:

Production approach

  • Ag 3.2%
  • Fishing 0.6%
  • Forestry and logging 1.1%
  • Food manufacturing 4.6%
  • Wood & paper product manufacturing 4.6%
  • Total 11.1%

Export approach

Or Ag related exports are 43% of total exports and 14% of expenditure GDP.

Like most advanced economies the services sector is a large share of the economy. Ag, forestry and fishing is around 7% of GDP as at 2010, compared to the OECD average of around 2%. Finance & insurance directly account for around 10%, while the OECD average is around 6%. Most debt in NZ is intermediated by the banking sector (smaller equity market etc). Details available at oecd.stat

7)     New Zealand’s banks are exposed to Australia’s bubble

Not really. Banking regulation in NZ separates our banks from direct exposure. Although our cost of funding may rise if tarnished with a Aussie housing bust. Real economy threats too from a recession in our second biggest trading partner.

8)     Australian and Chinese buyers are inflating the property bubble

Really? I still haven’t seen evidence of this. So cant comment.

9)     New Zealand has a household debt problem

Same as number 4.

10)  Government overseas debt has nearly tripled since 2008

Government net debt to GDP is less than 30% of GDP and denominated in NZD. Whats the issue?

11)  The New Zealand dollar is overvalued

NZD is high relative to history. Export share of GDP is at a historically high level. A fall in the NZD would spur exports and reduce imports.

Here is what to expect when New Zealand’s economic bubble truly pops:

The property bubble will pop.

Sure in Auckland.

Banks will experience losses on their mortgage portfolios.

Like they did in the GFC? More than half of the housing market in NZ crashed in the GFC and bad debts peaked at a very low amount. Don’t buy this argument.

The country’s credit boom will turn into a bust.

We haven’t had this already?

Over-leveraged consumers will default on their debts.

Why? Its not America. You cant walk away from your debts. This did not happen in the GFC.

Stock and bond prices will fall; the New Zealand dollar may weaken.

Good.

Economic growth will go into reverse.

Ok. Thats what happens in a recession.

Unemployment will rise.

Ok. Thats waht happens in a recession.

 

Infometrics

Is the ‘Chicago Plan’ the way forward?

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David Grimmond writes about the old Chicago Plan, written up following the Great Depression (Infometrics link).  Given the way it is described by the IMF he believe it:

There are many other examples of low lying fruit in the policy domain where a combination of entrenched interests and innate conservatism inhibits movements to welfare enhancing changes (eg a flat tax/guaranteed minimum income tax benefit system, redesigning GST on a origins basis, and global free trade).

The claimed benefits of adopting the Chicago Plan are truly profound, and if true would have a larger impact on the welfare of New Zealanders than most other issues that dominate political debate.

It would seem to be a good use of government resources to have this issue investigated thoroughly to, either put to bed the claims if they are illusory or to begin implementing a change if they are indeed genuine.

The potential benefits David notes are:

1. Having to obtain outside funding rather than being able to create it themselves would reduce the ability of banks to cause business cycles due to potentially capricious changes in their attitude towards credit risk.

2. Having fully reserve-backed bank deposits would completely eliminate bank runs, thereby increasing financial stability and allowing banks to concentrate on their core lending function without worrying about instabilities from the liabilities side of their balance sheet.

3. Allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances.

4. Allowing a reduction in private debt levels as money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets.

5. It generates long term output gains from a lower interest rate profile, lower tax rates (as the government can earn more from seigniorage), and lower credit monitoring costs for banks.

6. It can allow steady state inflation to drop to zero without posing problems on the conduct of monetary policy. A critical underpinning to this result is the greater ability to avoid liquidity traps as the quantity of broad money would be directly controlled by policy makers and not dependent on bank’s willingness to lend, and because the interest on Treasury credit would not be an opportunity cost of money for asset investors, but rather a borrowing rate for a credit facility that is only accessible to banks for the specific purpose of funding physical investment projects, it could become negative without any practical problems.

This does sound to good to be true.  Hence why, as always, there are trade-offs.

Read more

Infometrics

Are we reaching “peak Jetstar”?

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Benje Patternson has been keeping an eye on the air travel statistics, and found that Jetstar’s share of the New Zealand domestic market in the December year was down on the year to June.  This raises the question, have we reached peak Jetstar and what does this mean (Infometrics link)?  After noting that there is only so much we can read into the change, especially after the phenomenal growth of recent years, Benje notes it is more important to think about these issues with regard to the domestic economy as a whole:

Regardless of whether you are an Air New Zealand loyalist, or just choose whichever airline is cheapest, it is to be hoped that Jetstar’s recent set back is not the beginning of a slow decline for the airline.  After all, for consumers and businesses alike, the competition between these two airlines is vital for keeping domestic air travel prices low and regional air connectivity high.  Even in regional centres where Jetstar does not fly, a lid is still kept on Air New Zealand pricing by factors such as the proximity of main-trunk airports with low-cost connections and even the threat of Jetstar investing in its own regional turboprop capacity.

Matt Nolan

Taxing: Choice and policy consistency

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Offsetting recently posted about a tweet by Gareth Morgan on eating and control, including a reply I popped up.  Essentially, Gareth’s tweet implied that the way individuals make choices indicates we have no choice over how much they eat.  I disagreed talking about precommitment – he stated I assumed perfect information, which is both a touch untrue and (surprisingly to many) irrelevant.

It did get me thinking though.  The two of us actually have almost exactly the same model of choice in our heads for this issue, and as a result any differences of view of on the appropriateness of policy that we might have are not due to differences in the underlying model. Read more

Matt Nolan

New Zealand’s sexiest economist: The results are in!!

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Wow.  What a roller-coaster ride that was.  The lead changed hands countless times (as I wasn’t counting), but in the end our sexiest economist poll did have an outright winner.

It is my privilege to announce that the deserved winner of the 2014 New Zealand sexiest economist competition was Read more