Friday, 24 March 2017

Take advice? Moi?

Most years - they skipped 2016 - the OECD comes out with one of its Going For Growth reports. They're a big thing for the OECD: its Director General says that "Going for Growth is the OECD’s flagship publication on structural policies. Its purpose is to help policymakers set reform agendas for the wellbeing of their citizens and to achieve strong, sustainable, balanced and inclusive growth".

Don't know why they bother, frankly, if New Zealand's reactions are typical. We give the reports close to zero coverage in the media, and our governments sleepwalk on, taking too little heed of the OECD's advice. From time to time we do some patchwork or catch-up improvements, but rarely if ever deal to the issues properly. All of the recommendations in the 2013 version, for example, were still there in the 2015 one (if you want to see previous years, they're here).

And that's a real shame, because if you're in New Zealand's position, where we seem to be doing quite a lot of good things but getting little payoff by way of faster productivity growth, you'd think that we would be lapping up informed ideas on how to get more traction.

So, what are they saying we should do?

The OECD's got two approaches. One is a "what everyone should do" piece, which you can read here, and the other is a country-specific piece, which for New Zealand is here.

At the "everyone" level, the OECD has a long shopping list, some of which don't apply a lot to us, because - while we've still things left undone - we did a pretty good reform job in the Eighties and Nineties. But some do, and I was especially interested in their recommendations on infrastructure. As I've mentioned before, we're currently chronically unable to roll out enough infrastructure in good time: the OECD says that

The most direct contribution of policy to growth of the whole-economy capital stock comes from public investment and recent empirical work suggests a large positive effect on productivity. Solving infrastructure bottlenecks, such as those in transport, can also contribute to stronger labour utilisation, through enhanced labour mobility, and to better environment protection, through lower carbon emissions. Considering the post-crisis fall of government investment as a share of GDP...and the current macroeconomic context, enhancing core public capital, and in particular the capacity and regulation of infrastructure, is a priority for both member and non-member countries.

Everything we do (and we're not alone in this) is a dollar short and at least a decade late, and I have a strong suspicion that it's one of the bigger reasons for our relatively poor productivity performance by international standards (have a look here). With financing costs at historically low levels, we ought to be getting on with it in any event, but it would be nice to think that the OECD's advice will give a further rark up to the government's Budget plans on the infrastructure spend.

For New Zealand, the shopping list is:

  • Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors
  • Improve housing policies [a new one added since the 2015 report, and no surprise given what's happened to house prices]
  • Reduce educational underachievement among specific groups
  • Improve health sector efficiency and outcomes among specific groups
  • Raise effectiveness of R&D support

There are detailed policy recommendations under each of the headings. On housing, for example, the report says by way of preface that "Reducing the scope for vested interests to thwart land rezoning and development that is in the public interest would result in greater agglomeration economies and housing affordability, which would disproportionately benefit lower-income households", and it says we should

Implement the Productivity Commission’s recommendations on improving urban planning, including: adopting different regulatory approaches for the natural and built environments; making clearer government’s priorities concerning land use regulation and infrastructure provision; making the planning system more responsive in providing key infrastructure; adopting a more restrained approach to land regulation; strengthening local and central government emphasis on rigorous analysis of policy options and planning proposals; implementing pricing to reduce urban road congestion; and diversifying urban infrastructure funding sources.

That's a pretty good summary of the choke points - each of us might emphasise one rather than another, but they're all there - and of what to do to relieve them, and the same goes for their other detailed recommendations.

But our track record on responding quickly and fully is, sadly, poor. Oscar Wilde said he could resist anything except temptation: New Zealand governments can take anything except advice.

Postscript (March 24): Michael Reddell has also written about this latest Going for Growth report in his post, 'What does the OECD really have to offer us?'. As his title suggests, he's less enthused about the OECD's ideas. And that's okay: opinions make markets.

Thursday, 23 March 2017

Faster by elephant

Back in the early Nineties I went on a short business visit to Bangkok, which was infamous at the time for its traffic gridlock. Sure enough, our taxi got stuck: nothing moving in any direction, other than an elephant (with rider) which ambled past us. Elephants only go about 7 kilometres an hour, but even so it was going to get where it was headed faster than we were.

Since then, Bangkok has got its airport act together. There's the toll road - TripAdvisor says "The most direct route is via the raised freeway between [the airport and the CBD], which incurs toll of 70 Baht and airport tax of 50 Baht - total 120 Baht (approx [US]$4)" - plus "The much-awaited Airport Rail Link (06:00-midnight) that connects downtown Bangkok with Suvarnabhumi International Airport is a smart alternative to the airport’s express buses or taxis. The City Line makes six stops between downtown (Phayathai Station) and the airport, completing each run in 30 minutes, making this a quick and convenient transport option for getting in and out of Bangkok" (as you can read here).

The rest of the traffic is pretty much as bad as ever - TripAdvisor says "the Bangkok traffic...can sometimes appear to be a permanent traffic jam as there are about 13 million vehicles in Bangkok" - but the airport link, at least, is sussed.

Meanwhile we're on our way to become the Old Bangkok of the South Pacific. For traffic times to Auckland Airport, we're now worse than Bangkok: there's no new elevated highway, there's no rail link, and you now need to leave at least 90 minutes ahead of check-in time if you're trying to get to the airport from where we are on the North Shore. And while Auckland's overall traffic (not just the airport route) isn't as horrendous as it is in some places, it's still poor, and getting worse.

TomTom's recent global Traffic Index, for example, ranked us 40th out of 189 cities (of 800,000 population or more) for our traffic congestion. TomTom uses a colour coding system: red is awful (four cities, including Bangkok), and browny-orange is pretty bad. We're in the bad basket, ranking 36th out of 106, which means we're up there as bad goes. There's a decent sized limey-yellow group of 60 where things are meh, and then there are a green 18 where the traffic is okay (though they're all in the US).

Meanwhile I read in our local community newspaper, the North Shore Times, that "Trains are on track for Shore", because the Northern Busway "will reach its capacity in 2026 - 20 years earlier than originally expected". Jolly good - and then at the bottom of the article you read that an Auckland Transport spokesman "stresses any rail upgrade to the Northern Busway can not occur before the Additional Waitemata Harbour Crossing is built, which is projected anywhere from 2030 to 2048".

When you see timeframes like that, you're tempted to conclude that this isn't planning to build infrastructure: it's planning not to build.

I wonder if that elephant is still available?

Tuesday, 21 March 2017

Jobs and spin

Politicians everywhere spin the economic data, and the labour market data in particular. So it's no surprise that the Trump administration does it, too, nor that the Trump numpties do it with more more ineptitude and hypocrisy than most. Having claimed on the election trail that the official American employment and unemployment numbers were variously either bad measures or outright faked, the Trump team is now claiming the latest official data (a big rise in jobs and a fall in the unemployment rate in February) are mysteriously unfaked after all, and the right things to focus on.

Plus they've dissed a Federal regulation saying that Federal officials can't comment on official data until an hour after their release - a quid pro quo for the dubious practice of giving the President (via the Chair of the Council of Economic Advisers) advance access to the numbers, since it would be all too easy otherwise for incumbent Presidents to use that access to screw the first impression scrum.

We haven't followed the Americans down that path to privileged access for the executive, and good job, too. We do have pre-release 'lock ups' for the media for important statistics, which I see as a useful evening-the-playing-field device to ensure that independent, informed comment goes out at least as quickly as Executive spin. From that perspective it's also a shame that some thoughtless nerk led the Reserve Bank to cancel its lock ups for the Monetary Policy Agreements: not everyone agrees, but the Governor's take having the airwaves to itself for an uncontested hour is a step backwards, compared to the previous arrangements where journalists had a way to put out their own considered view at the same time.

Not that we're always saints and the Americans always sinners: if, for some great sin in a previous life, you listen to our Parliamentary Question Time long enough, you'll find the same smart-alecking going on about our own employment and unemployment numbers, though not to the shameless Trump standard. Some Minister will point to the low official unemployment rate, and some Opposition member will say "Aha! But if you look at the underemployment rate...". And they will of course swap positions on the data when they swap roles.

So as a bit of an air-clearer, here's how we've been travelling, based on our new and improved Household Labour Force Survey.


The graph shows three ways of looking at unemployment. The green line is the headline, official, unemployment rate. The orange line adds in people who are underemployed - people working part-time but who are available to work full-time, and would like to. And the red line adds in what Stats calls the 'potentially available' workforce, which is made up of two groups: people who aren't actually looking for a job right now but would be available and willing to take one on if it cropped up, and people who are looking and willing and will be able to take up a job in the coming month, but not right now.

All these are valid ways of looking at unemployment and underemployment, and depending on what you're most interested in, you'll follow one rather than another. But what's also very clear is that the trend is almost exactly the same across all three series. So next time you hear a politician saying, "Well, the official unemployment rate may be betting better, but the underemployment rate isn't", or some variation thereof, you'll know that you've got a gasbag talking his partisan position, just like the Yanks have been doing.

The other thing that occurred to me as I trawled my way through the data is that I'm left unsure about the solidity of estimates of the 'natural' rate of unemployment. That's the rate when the labour market has become so tight that employer competition for scarce staff starts to bid up pay rates and eventually the national rate of inflation.

There are sophisticated ways of measuring it: the latest I'm aware of is Weshah Razzack's Treasury Working Paper 'New Zealand Labour Market Dynamics: Pre- and Post-global Financial Crisis', which estimated the natural rate in recent years to be around 4.5%. But I wonder. Let's suppose that the official unemployment rate did indeed start going below 4.5%: is it really likely that wages/inflation would start accelerating at that point, when there are currently 115,000 people who are working part-time and would like to work longer hours? A more likely initial response is more employers wanting, and more employees agreeing, full-time hours.

Or another way of putting it is that I suspect the sky would not fall if our unemployment rate went into the low 4s or even below. Sure, institutional arrangements vary, and you can't always (or even often) say that what works in one country will work everywhere else. But there are countries, as you cans see in the table below, which have got their unemployment rates down to lower levels than ours, without inflation starting to roar away (or even raise its voice much).

Monday, 6 March 2017

Gone but not forgotten

Remember that court case Spark took last month, to put a delay on the proposed merger between Sky TV and Vodafone? Spark wanted the merger put on hold until the Commerce Commission's reasons for approving it were available, and Spark would have had an opportunity to see the reasoning and potentially appeal against it.

Spark won: the judgement is here, for competition law tragics, but in the event the whole thing became moot when the Commerce Commission declined to approve the merger.

Even so, the whole thing has left me thinking, and thinking in particular about the Commission's practice of issuing a decision first, and the full written reasons later. And while I didn't think it was odd at the time I was there, now I do.

For one thing, it doesn't fit with what other judicial bodies do, and normally the Commission tends to follow legal practice (in recent years, for example, it has adopted standard judicial citation style for its decisions). You don't get High Court decisions first, and reasons later: the judgement is the judgement is the judgement.

For another, there's an element of justice being seen to be done. Parties are entitled to know, at the time, why a decision went the way it did. The Commission likely feels that the gap in timing is kept as short as possible - in its latest Statement of Performance Expectations it aims for 10 business days - and so isn't such a big deal. But that really doesn't cut it: in principle, I'd now argue, decisions and reasons together are a fairer way to go, and in practice the gap causes real problems.

There's the one Spark identified: by the time Spark gets round to challenging the Commission's reasoning, it might be too late, and the omelette can't be unscrambled. And there's the opposite problem: merging parties left in limbo, when 10 days can be an eternity in the capital markets and the market for corporate control. Last month Kraft's US$143 billion hostile bid for Unilever was announced on a Friday, called off on a Sunday: while that deal was more high farce than high finance, the reality is that there can indeed be brief windows of opportunity that won't survive two weeks (or more) of swinging in the wind.

And finally I think that it might improve the Commission's own internal decision processes. "Here's the decision as it will look in the shop window" is a better document for Commissioners to sign off on than "Here's a likely decision. There'll be more supporting stuff later".

There are arguments both ways: some will see the trade-off of decision quicker, reasons later as a reasonable package, and indeed I used to, too. But having had a rethink, I now prefer make a decision and publish the reasons at the time. It avoids the vacuum problem that the Spark case pointed out, and I think it's a bit fairer to all parties involved.*

*In an earlier version I had said that "Anything else" - other than reasons at the time - "falls short", but that was too black and white. People (as I mention in a reply to a comment below) can reasonably put different priorities on tradeoffs between speed versus transparency.

Friday, 3 March 2017

Slow, slow, slow

Reading a new biography of Paul Keating, I came across a good example of how the Aussies in recent years are pushing on with reform while we dilly dally. It's in an area close to my heart - competition policy.

The biography tells me that in Oz the National Competition Policy Review (the 'Hilmer' review) started on October 4 1992 and was published on August 25 1993: ten and a half months. It got buy-in from Australia's state premiers on February 25 1994, six months later, and essentially went live from April 11 1995. Start to finish, two and a half years. Call it three years to allow for pre-Review debate on whether to press the green button.

The latest Aussie Competition Policy Review (the 'Harper' review) was announced on December 4 2013, got underway on March 27 2014, and published its final report on March 31 2015: sixteen months. Legislation to implement its big recommendation (reform of the abuse of market power) is well underway: last month it got through the Aussies' Senate Economics Legislation Committee. There's horse trading to come, but it could well pass this year. Start to finish, call it four years.

Meanwhile, in New Zealand there's been no comparable root and branch review at all.

The best we've managed is some useful recommendations from the Productivity Commission (again featuring reform of abuse of market power) in May 2014. The government decided on a follow-up 'targeted review', and in November 2015 MBIE produced an issues paper on three issues (market power, market studies, cease and desist). The consultation and submission process wrapped up in July 2016. And then the trail goes cold. There's been no further news: it'll soon be three years since the Productivity Commission set the ball rolling, and we don't even have policy decisions, let alone laws passed.

And on another part of the battlefield, we thought we had some bright ideas to reform how we treat cartels (notably criminalising them). A bill was introduced to that effect in October 2011. Over five years later, it hasn't reached the floor of the House for a final vote, and has had the criminalisation bit dropped.

So here's the tally. Australia: two major competition reviews, one done and dusted in good time, the other well on its way. New Zealand: no decision on a limited subset of issues, and five years delay (and counting) on a hamstrung cartel bill.

Let's recall that the Hilmer review alone was worth many billions of dollars to the Aussie economy. The Aussie Productivity Commission had a go at measuring it in 2005, and found (pXII) that
National Competition Policy (NCP) has delivered substantial benefits to the Australian community which, overall, have greatly outweighed the costs. It has:
– contributed to the productivity surge that has underpinned 13 years of continuous economic growth, and associated strong growth in household incomes;
– directly reduced the prices of goods and services such as electricity and milk;
– stimulated business innovation, customer responsiveness and choice; and
– helped meet some environmental goals, including the more efficient use of water 
and (pXVII) that
Previous model-based projections by the Industry Commission suggested that the major elements of NCP could potentially generate a net benefit equivalent to 5.5 per cent of GDP. More selective analysis, undertaken for this inquiry, indicates that the observed productivity and price changes in key infrastructure sectors in the 1990s — to which NCP and related reforms have directly contributed — have increased Australia’s GDP by 2.5 per cent, or $20 billion....And such modelling does not pick up the ‘dynamic’ efficiency gains from more competitive markets 
So we've spent years navel-gazing on the fine differences between cease and desist orders and injunctions, and missed the opportunity (which the Aussies seized) to add at least 2.5% to our GDP.

Nice work, guys!

Books for politics junkies

With our mainstream media generally undercovering our closest geographical and philosophical neighbour, you'll have to educate yourself about Australia. For your latest edification, try Troy Bramston's Paul Keating: The Big-Picture Leader, which as the author says "offers a broadly favourable but not uncritical account of of Keating's public life and legacy". It's well written, convincing, highly informed: Bramston has talked to everyone who was anyone. I didn't know, for example, that Keating was the ultimate 'numbers man', with a Lyndon Johnson ability to steer issues through factions, caucuses and Cabinets. It will get you thinking, in particular about the future of once successful combos of social liberalism and economic reform - Hawke/Keating, Lange/Douglas, New Labour in the UK (Blair was influenced by Keating) - who now find themselves uncomfortable coalitions of Chardonnay socialists and the old union-centred left, and have yet to work out a renewed, electorally viable role.

As you read, you'll find many parallels with New Zealand. Critics of our 'Rogernomics' like to think we went on a weird extremist trip of our own, but as this book shows, Australia started before us (1983), as did the UK and the US, and although we blitzed the Aussies for a while with the speed and depth of our own reform programme, and in some respects (eg fiscal policy) we're still ahead, by and large they've kept going while we've slacked off. Few would doubt that (as this book demonstrates) Australia's reforms in Keating's time formed the bedrock for the recession-free period Australia has enjoyed since, and conversely our low productivity record suggests unfinished domestic agendas.

Still on politics, the upcoming French presidential election is in the near term one of the bigger risks to currently richly-priced financial markets and in the longer term to the prospects for the eurozone and the global economy. If, like me, your knowledge of French history goes a bit hazy between the French Revolution/Bonaparte and the World War Two Resistance, then the book for you is Jonathan Fenby's The history of modern France: from the revolution to the present day. He's got some sharp insights: "Successive presidents and governments had applied a self-serving logic in refusing structural change to the economy - if times were hard and growth was low, reform was impossible; if things were going better and there was no expansion, there was no need to change anything. It was an evasion of reality, and of necessity" (p484), which explains why France has been running a Nordic social welfare system but not paying for it (the fiscal budget been in deficit for 35 years).

Does history give us any tips on how the election might go? If you're worried about Le Pen (as you should be), you won't take much comfort from Fenby's conclusion that "the various narratives of the last two centuries have shown that the country invariably opts for right over left with occasional eruptions to prove that its revolutionary legacy is not dead" (p463). Nor from "The idea of the Hexagon [France] as a model for the world is not one which many people could objectively defend in the twenty-first century, but it remains a potent reason to repel change of foreign influences. The French want to see their country as the bearer of a special mission bequeathed by their history...If the present really contradicts such a vision...this leaves them deprived of what they believe should be theirs by historic right and opens them to the temptation of extremist illusions" (p461).

History also reminds us of the suicidal factionalism of the French Left. In 2002 Marine Le Pen's dad Jean-Marie came second (with 16.8%) to Jacques Chirac (19.8%) and made the run-off second round, principally because the Left split between Lionel Jospin (16.1%) and 10 (!) others. And guess what? This year the Left has fielded two big name candidates - the official Socialist, Benoît Hamon, polling around 13%, and independent far-left Jean-Luc Mélenchon (around 11-12%). Unsplit, the left vote could see off the right's François Fillon (around 19%) and give the independent Emmanuel Macron (low to mid 20s) a real run for the second run-off slot, behind Le Pen. What is it about déjà vu the French left doesn't understand?

Wednesday, 22 February 2017

Are interest rates really biting?

"Increasing mortgage interest rates", the Reserve Bank said on page 18 of its latest Monetary Policy Statement, "combined with a tightening of loan-to-value ratio (LVR) restrictions in late 2016, have contributed to a slowing in the housing market".

Moderating the heat of the housing market may be welcome - though previously low interest rates are far from being the only thing that's been inflaming the market - but otherwise I got a bit worried that higher rates might be crimping the economic outlook. If the average or marginal household is now carrying a bigger mortgage, and mortgage interest rates go up, the impact on already cramped family budgets could see unpleasant things happening (via consequent necessary cutbacks in household spending) to the currently strong state of the economy.

And then I thought, hang on a sec. Yes, it's true that some mortgage interest rates have started to increase. The chain of events is, US bond yields have risen, especially after Trump was elected; NZ bond yields and other local long term interest rates have gone up as well (they tend to track the US rates plus a credit premium); and this has fed through with a lag (via higher funding costs for the banks) to higher fixed mortgage rates. The graph below shows the past year's trends for some of these rates*. Rates bottomed out around the middle of last year and have risen a bit since.


But how much these increases have been contributing to a slower housing market (or indeed slower anything else) is debatable. The first time borrower may be finding it slightly tougher going. But for existing borrowers, most folks these days are on fixed rates - at the end of December last, there were $182 billion worth of fixed rate mortgages compared to $53 billion of floating rate - and they won't have noticed anything, because they haven't come to the end of their existing fixed rate arrangement.

And then I wondered, well, what happens when they do roll over from their existing fixed rate? Will they roll over into something that will have the household worried about how to balance its books?

Quite the reverse, actually. Here's what a borrower who took out an x-year fixed rate mortgage x years ago would pay to roll over into another x-year fixed rate mortgage today (or at least at the end of December, the  latest available RBNZ data, though today's rates are very similar).


Other than for the 1-year fixed rate, where it's effectively the same, the household with an expiring fixed rate mortgage will be rolling over into a lower borrowing cost for another mortgage of the same maturity as before. Large falls in fixed rates in recent years dominate the small increases in the last few months. For most borrowers in coming months, the mortgage rollover will boost disposable income, not restrain it.

There's also the possibility, though, that local fixed rates will keep on rising and upset the calculation. Let's suppose that US interest rates rise by 0.5% during the course of this year (roughly in line with what the latest, February, Wall Street Journal poll of US forecasters expects for US 10-year yields). And let's assume all local rates rise by the same amount. By the end of this year, 3-, 4- and 5-year fixed borrowers would still be rolling over into cheaper loans, but 1- and 2-year borrowers would be paying a bit more, as would first time borrowers. Overall, this wouldn't represent a big squeeze (or possible any squeeze) on household budgets.

So I'm inclined to think that rising mortgage rates will not be any near-term threat to the economic outlook, and somewhat unconvinced that they can have have played much part to date in a slowing housing market. There may be other reasons for a national cyclical slowdown - the latest BusinessNZ/Bank of New Zealand survey of manufacturing had a hint of the construction sector hitting capacity constraints, though on the other hand the equivalent survey of services showed there is still "swift, broad-based, growth occurring in the services sector" - but interest rates, to date, don't look like much of an actual or potential brake.

*Local fixed rate mortgage rates come from the RBNZ's site, but they're not where might think they are (you'd likely expect in 'Statistics', 'Exchange and interest rates', 'B3: Retail interest rates on lending and deposits'). However you can find the full range of fixed mortgage rates in 'Statistics, 'Registered Banks', 'S8: Banks' mortgage lending ($mn)'; they're in section E6. For the very latest rates, if you go to the bottom of the 'Mortgage Rates Table' in the 'Mortgages' part of the Good Returns website, you'll find the up to date median floating and fixed (1,2 and 3 year) rates.

Thursday, 9 February 2017

Bits and bobs from the Bank

We all know the big news from today's Monetary Policy Statement - the official cash rate stays on hold, as unanimously expected by the forecasting community, and, assuming the world pans out the RBNZ thinks it will, an eventual rate rise is a bit closer than before.

But there's always less important, but still interesting, stuff to be found in the nooks and crannies of the MPS and in the Governor's 10.00am press conference afterwards.

Here's one thing worth noting from the MPS, as a corrective to anyone who thinks our big rise in net immigration is mainly or wholly because we're being swamped by Asians.


In 2012, we had essentially a breakeven net immigration position (for the record, a small loss of 1,165 people). Since then net immigration has soared to last year's net intake of 70,588. That's a turnaround of 71,753. By far the biggest moving part in the turnaround isn't Asian at all. It's what has happened trans-Tasman, Over the same period, fewer Kiwis decided to go to Australia, and more Kiwis (and some Aussies) decided to come here, as our economic cycle picked up and theirs slowed down. As a result we moved from a net loss to Australia of 38,796 people in 2012 to a small net gain of 1,563 in 2016, a turnaround of 40,359. That's 56% of everything right there.

From the press conference, John McDermott, the Bank's Head of Economics, picked up on a question from the NBR's Rob Hosking, who had asked about the multiple references to 'uncertainty' of one kind or another, and said we should all have a look at "Nick Bloom's website".

This is what (I reckon) he meant - the Economic Policy Uncertainty website, which has some wonderful indices measuring the level of economic policy uncertainty in various economies, and globally. Here's the latest global picture, as at November 2016. No wonder people are talking about high levels of uncertainty: while the index hasn't been going forever (it starts in 1997), current global policy uncertainty is at an all-time high for the period.


Fascinating site - you can read their methodology, and download the data for quite a range of countries (sadly not including us). But the Aussies are there: here's what they look like.


And finally there was a casual reference from the Governor, responding to a question about the future track of interest rates, where he said that in the November MPS, there had been a 20% probability of an OCR cut built into the OCR forecast, but it has now been removed in this latest one.

I don't recall ever reading (or hearing) about these probabilities before. I don't have a problem with them - they would seem to be an eminently reasonable way of thinking about things - but if they are indeed an established part of the policy thinking, I'd quite like to have more detail at future Statements. Central banks seem quite comfortable these days indicating an easing or a tightening bias: sharing some probabilities around it wouldn't go amiss.