Wednesday, 23 April 2014

Pensions: another thing we've got right?

I spent last Thursday at the latest seminar run by Auckland University's Retirement Policy and Research Centre (the RPRC), "Retirement incomes policy: The future is now" (overview here, full programme here). The Centre also prepared a 'Summary of issues' background paper which gives a quick overview of our current system, the policy positions of the political parties, and the issues that look to be live ones.

I came away with the overall impression that there isn't a lot wrong with our current arrangements, and there is quite a lot right.

As it happens (and I didn't know because I hadn't got round to reading it yet), that's what the latest three-year review of retirement incomes policies from the Retirement Commissioner also said (page 6): "New Zealand has an excellent retirement income framework which achieves good outcomes for the majority of people aged 65 and over. Rates of poverty are relatively low for this group, thanks to a combination of New Zealand Superannuation (NZS), high levels of home ownership and a raft of other government policies and programmes". It's not perfect, and there are some challenges - "there are signs that in the near future outcomes may be more unevenly spread, with some people arriving at retirement in poor financial shape while others continue to do well" - but overall it's in good shape, and we even heard evidence from some of the seminar speakers that other countries are looking to aspects of our system to improve their own.

But that's probably not the view of the citizen in the street (it may not be yours, either). I'd guess that there is a perception that the greying of the population could be putting demographic stress on our ability to pay for national super at its current level - fewer paying into the tax-paying pot, more pensioners drawing on it - and the politicians have certainly been raising the concern levels around sustainability by saying super needs to be changed for one reason or another.

But the greying issue may not be as acute as it first appears. On the demographics, one of the most interesting presentations came from Waikato demography professor Natalie Jackson. She pointed us to some new demographic thinking about dependency ratios, which you can read for yourself in summary form as "Analysis: Population ageing: the timebomb that isn't?" and more fully here. The central idea is that the familiar "dependency ratio" doesn't mean so much these days, when more people are staying in the workforce for longer, and are in better shape in older age. Two demographers at the University of Edinburgh have come up with "the real elderly dependency ratio - based on the sum of men and women with a remaining life expectancy of up to 15 years divided by the number of people in employment, irrespective of age". On that basis, many countries have actually been experiencing falling dependency ratios, and Prof Jackson showed us that New Zealand is, too.

And as Matthew Bell from Treasury showed us based on Treasury's long term fiscal projections, it wouldn't take much of a change to current pension arrangements (eg by progressively raising the entitlement age by some modest amount) to offset whatever demographic pressures are on the regime. It's also worth having a quick dekko at a paper written by Michael Littlewood, co-director of the RPRC, "New Zealand Superannuation’s real costs – looking to 2060", which has looked at the various vintages of the Treasury's long-run projections and found that every time the cost of national super has been re-estimated, it has come out lower than previously thought, as his chart below shows. The 'net' cost by the way is the cost of national super less the income tax on pensions that the government gets back.

Not everything in the long-term fiscal garden is coming up rosy: the rise in the cost of super as a percentage of GDP may not be huge, but it comes at a time when other costs to the government are also rising, notably health, which on current projections rises from around 6.5% of GDP now to about 10.5% in 2060. So there may yet be some tough spending and tax decisions down the track. Overall, though, we've got a set of pension arrangements that looks pretty robust by world standards.

Tuesday, 15 April 2014

Bad economics and contemptible politics

It's election year, so maybe it shouldn't be a surprise that, according to (for example) the Herald's account, there's a "Rethink on foreign home-buying" underway, with various parties suggesting monitoring, controlling, restricting or banning it.

With the possible exception of gathering some data, this is a truly awful policy line to take.

We have an asset that's come into strong international demand (and which we're capable of building more of), and we want to stop the people willing to pay us high prices from getting out the cheque book? What sort of madness is that? It's as if the Aussies decided that their own manufacturers weren't getting coal or iron ore cheaply enough, so they won't sell any of it to the Chinese.

Let's face it: this is protectionism, pure and simple, and one of the things we know about protectionism is that it is a self-defeating, negative sum game. Both the 'protecting' country and the countries being 'protected' against end up worse off than they would have been if they had been allowed to trade freely with each other.

Some other countries control access to their housing markets? Among the many possible correct responses are: (a) more fool them, (b) most of us learn as adults not to put our hand in the fire just because Little Johnny did, and (c) I'm not inclined to take much economic or political guidance from overseas countries with political and economic systems often a lot worse than ours.

And why is the politics contemptible?

Try rewriting any of the news coverage of the proposed policies with 'Catholic', 'gay' or 'black' substituted for 'foreign'.

Good money after bad? (Post mainly for telco tragics)

Last week the High Court delivered its judgement in Chorus's challenge to the Commerce Commission's initial UBA pricing decision.

If you're a telco tragic you'll be up with the play already, but if you're a normal person, UBA is the internet data feed that internet service providers buy from Chorus using Chorus's electronic gear (rather than buying access to the copper line from your house, and providing their own gear). The Commerce Commission had been told to regulate this price, initially on the basis of what it costs in places overseas that regulate prices like we do ("benchmarking") and if that didn't please everyone, then on the basis of calculating the actual costs of a New Zealand provider.

Chorus hadn't liked the result of the benchmarking, which proposed to drop the price from Chorus's current grandfathered price of $21.46 to $10.92, so it asked for the full costing exercise, as it was entitled to. But it also challenged the initial benchmarking, which you might well think was a completely moot wander down the garden path, since the full costing exercise was going to be the last word and the benchmarking was now of no practical import whatsoever, but there you are.

Chorus lost. The judge said there were basically five questions for him to decide (six if you included what remedy was in order if any of the first five were in fact justified Chorus complaints), and he decided every one against Chorus and for the Commission. Slam dunk.

While the outcome of this kind of litigation is often a crap shoot, I wasn't surprised*. I reckoned that even Chorus's QC, David Goddard, who enjoys working in the interface between economics and the law, and is very good indeed at it, would have trouble with this one. I wasn't totally sure: I was pretty certain that the benchmarking process would stand up to most challenges, except potentially for one wild card, a requirement for the Commission to take account of what impact its decision might have on big investors in new, innovative telco services (the semi-notorious s18(2A) of the Telco Act). But in the end that didn't fly as an argument, either.

The judgement is worth a read as a primer on the history of telco regulation and how the benchmarking/full costing approach got adopted in the first place. It's also left me with two thoughts.

One is on the question of how much of a regulatory shock the Commission's pricing decisions have been to the Chorus share price. There have been plenty of folks who have said that the Commission's decisions have been a destabilising bolt from the blue, with unfortunate chilling consequences for investors. I was only mildly sympathetic to this view in the first place, and am less so now. The judgement reminds us at [40] that
"Moving, after the three year freeze period, from a price based on retail-minus to a TSLRIC-based price – in effect, the costs of an efficient access provider – was structurally, and potentially economically, a significant change.  The regulatory impact statement provided by the Ministry of Economic Development at the time of the Amendment Act anticipated a drop in UBA pricing". 
It also cites at [66] the Commission's expert, Professor Ingo Vogelsang of Boston University:
"Professor Vogelsang was clear that the true UBA cost established in a TSLRIC model would be “substantially below” the current UBA retail-minus price of $21.46 per month.  This was, he said, clear from the evidence presented in the draft determination.  And it was clear from his own knowledge of other areas of the world.  As the professor put it: 
I would have expected a ballpark figure of about NZ$10 per month, based on international data, certainly nothing in the range of the retail-minus price of $21.46".
My conclusion is that Chorus was allowed three full years of gravy train pricing, and given a clear signal that the gravy train would cease from December '14. This doesn't look like a bolt out of the blue to me.

My other thought is this: why is Chorus persisting, and taking this to the Court of Appeal?

Its press statement mentioned s18(2A), which is probably the only argument it's got that has any chance at all. But I can't get past the pointlessness of it. As I mentioned, this sort of litigation is highly uncertain, and maybe the appeal will indeed succeed in throwing pixie dust in the eyes of a Court of Appeal bench - maybe one that mightn't be as conversant with the competition and regulation landscape as the High Court judge was (Stephen Kós knows his way around). It might happen, though going into the rematch 5 - 0 down from the first leg isn't a promising sign.

But even if they do go through on away goals - so what? Chorus says the "so what" is that there's a bigger picture and that we need clear guidance on s18(2A), which "is a critical part of the regulatory regime and affects both current and future industry outcomes". But if the Archangel Gabriel descended tomorrow morning, with a judgement graven on tablets of gold saying that Chorus's view of s18(2A) was right in every particular, it wouldn't make a blind bit of difference to anything. We're still on our way to a cost based price (which, to be complete, Chorus says it is still committed to working towards).

Maybe there's some long game here I don't understand. Maybe there's some value to Chorus in discrediting any document that had a $10.92 price in it. Maybe there's value in having a judgement that might support a change in the regulatory regime. And everyone's obviously entitled to take their case as high as they like if they believe right is on their side. But from the outside, all I see is perhaps a million dollars or two in direct and opportunity costs at the High Court, and maybe quarter or half a mill more about to go down the Court of Appeal gurgler, and all this at a supposedly cash-strapped company, for obscure or even non-existent payoffs, and I seriously wonder about good money after bad.

*(Added on April 16). I'd forgotten about an earlier post I'd written, but if you wondered whether I was rationalising after the event, I'd picked early in the piece that Chorus was pushing its luck - "I rate Chorus's chances of success at low".

Thursday, 10 April 2014

Our strong fiscal performance

There was the usual argy bargy over the past day or two when the latest Treasury numbers showed that tax revenues in the eight months to end February were lower than anticipated. Opposition folks used it to beat Bill English about the head  (one sample from Labour's David Parker here) and even Bill himself gave the issue some legs when he said that lower than expected tax would mean ongoing discipline over spending.

I couldn't see any real issue issue, myself. Every man and his dog knows that the economy, currently, is a good deal stronger than anyone was picking when the original tax forecasts were made, and there's a very high probability that any tax shortfall will be made up. Which is pretty much what the government's chief accounting honcho said in the media release - "it is anticipated that a stronger outlook for the economy will further boost tax revenues from their current position, largely offsetting the current weakness in revenue outturns".

If you really wanted to know how well we're managing our fiscal position, though, a much better guide came out yesterday, and it was the IMF's latest Fiscal Monitor (press release here, whole thing here).

Here's one interesting graph (it's part of Figure 1.1  in the Monitor). It's not the most immediately obvious graph to read, but what it is showing is this: it measures how countries' 2013 and 2014 primary fiscal balances are now looking, compared to what they looked like being when the previous Fiscal Monitor was published last October (primary balances are the fiscal balances less net interest, which among other things give you a better picture of what's happening to the fiscal levers you can actually pull). The higher up on the graph a country is, the more the 2014 fiscal position is turning out better than previously thought, and the further right a country is, the better 2013 turned out compared to what looked likely last October. Ideally you want to be in the north-east quadrant. The numbers are percentages of GDP.

Et voilà - there we are, well dug into the north-east quadrant. There isn't the slightest backing, in short, for suggesting that things are going worse than expected. Quite the reverse: most countries have seen either 2013 or 2014 turn out worse than expected (note Australia's significantly worse than expected 2014 outlook), but we're among the virtuous (or lucky) minority that haven't.

This logically means that our government debt hasn't risen as much as originally thought, either, and you can see it happening in this graph (also part of Figure 1.1). This is the same style thing (how did 2013 and 2014 evolve compare to earlier predictions), and this time you want to be in the south-west quadrant where debt is lower than expected in both years. As indeed we are.

There's a huge amount of interesting analysis and data in this publication - too much to readily reproduce here, so I've made a quick digest of some of the forecast fiscal and debt numbers for us, the Aussies, and the advanced economies as a group. Here it is (it's from Statistical Tables 2 and 4 at the back of the Monitor. The forecasts in the Tables go out to 2019 but I reckon the numbers are getting a bit iffy that far out, so I've truncated the forecasts to 2017).

It's a pretty good picture, isn't it? The two numbers I'd pay most attention to - the cyclically adjusted primary balance, and the net debt - are unequivocally heading in the right direction (so are the other two, if it comes to that), and are much better than the developed economy average. So next time there's a beat-up over whether a couple of months' tax revenues have fallen short, remember the big picture: in absolute and relative terms, we're actually one of the world's better fiscal performers.
Always assuming, of course, that something broadly like our current fiscal reconstruction policies remains in place, and that another GFC-style event doesn't loom out of the blue.

Incidentally, while I'm on the subject of the IMF, did you know that the IMF had a blog? Me neither, but now that I've found it, I can see that it is an interesting guide to the hotter issues in international macroeconomics, so I've added it to my list of "The latest from these interesting blogs".

Friday, 4 April 2014

Followup from the Stats' User Forum

I mentioned that I hoped to get hold of an excellent infographic that James Mansell from the Ministry of Social Development had presented at the Statistics NZ User Forum last week, and he's kindly sent it through: here it is. The chart says it anyway, but just to be clear, 'Marc Smith' is not a real name.

James' point was not so much that frontline staff don't or can't see some of these connections: they often will. But there's still real value for people at all levels of social policy and delivery from being able to see the full picture. And they'll only see it by combining different databases in smart ways.

The infographic has also been included in the first discussion paper put out by the NZ Data Futures Forum - have a look. They're asking for responses to the high level ideas they've put out: "What do you think about New Zealand’s possible data futures? What kind of benefits and opportunities should we be aiming for? What risks and challenges need to be managed?". Your ideas will need to be with them by the end of May.

The Brits have had a very good idea

God knows it's simple enough, but how many governments clearly show you where your tax dollars went? Yes, yes, you can find it if you really want to, sort of - good luck if you try to find out how much went on current spending as opposed to investment in assets - but why aren't the taxpayers routinely told, in an easy to understand way, rather than having to go look for it?

Cue for Her Majesty's Treasury, with these, which you can explore yourself on the UK Treasury Flickr site.

Isn't that neat? Note that it is personalised, too, so the £4,542 in the middle of the pie chart links to the £4,541.76 actually paid by this hypothetical taxpayer (NICs, by the way, are National Insurance Contributions).

We don't have the same palaver as the Brits do over the whole annual tax return performance, as we (rightly) have a simpler system that happens automatically in the background for many people, so if we wanted to do this, we'd have to find another occasion to trigger distributing the info. But it wouldn't be hard, and it's got lots of attractions.

Politically, you'd think it is one of the most basic accountability statements any government could provide to its citizens. And economically, it presses several buttons. For a start, it tells people how much of their pre-tax income was taken up by tax - our system may work well in the background, but precisely because it does, people don't readily see how much has been skimmed off the top. Yet it's the most basic bit of info to enlighten the debate on whether government or the tax take is too big or too small. And for another, the pie chart is very informative, not least because it deals to some myths. Civil servants eating their heads off in Whitehall? The Brussels bureaucracy costing the UK a fortune? Too much spent on overseas aid when we could be spending it at home? The short answers would be no, no, and no.

Good stuff. And I should credit the UK's Telegraph for reporting on it. The link is here - the Telegraph is paywalled but casual browsers can access a rationed quantity of its material, so the link should work.

Tuesday, 1 April 2014

Why can't you get a 30 year fixed rate mortgage?

I was re-reading Charles Wheelan's excellent Naked Economics: Undressing the Dismal Science - one of the best books I know for explaining to non-specialists what economics is all about, as well as being a good reminder to those in the trade that you can actually write professionally about economics in accessible and entertaining English - when I came across this (on p232, in the chapter on the Federal Reserve and monetary policy):
Massive inflation distorts the economy massively...Fixed-rate loans become impossible...Even today, it is not possible to get a thirty-year fixed mortgage in much of Latin America because of fears that inflation will come roaring back.
And then I thought, hang on a sec, you can't get thirty-year fixed rate mortgages in New Zealand either. Nor twenty, nor ten: five years fixed looks to be as far as it goes, as you can see (for example) in the mortgage rates quoted at Good Returns. And it's not just mortgages that are relatively short term: our government bond market stops at 10 years, when many other countries' go for far longer.

Here's a table I collated (from the useful data on government bonds at showing the longest conventional (i.e. fixed coupon, not inflation-indexed) government bond in most of the usual comparator suspects.

No doubt about it - we're right down the short end with a maximum bond maturity of 10 years. So what's going on? Why can't someone in New Zealand do what people can routinely do in the US - get a 30 year fixed rate mortgage (current rate 4.5%), or buy a 30 year Treasury bond (current yield 3.6%)? Or if 30 years sounds a bit outlandish, a 15 year fixed rate mortgage (it costs 3.5%)? Do we have some kind of fear of resurgent inflation that is preventing the development of markets in long duration assets and liabilities?

Interestingly, we do have a long-maturity market in one kind of government bond. In recent years the government has issued 12-year, 13-year and 17-year inflation-indexed bonds, where the capital value gets adjusted for movements in the CPI. They've been quite popular, with an issued face value of $9.75 billion, and in recent bond tenders they've been bid for pretty solidly.

But that kind of makes the same point again - we're only prepared to buy long-dated assets with explicit inflation protection. We don't look at all happy to incur, or offer, longer term uninsured interest rate risk, though it's perfectly common behaviour elsewhere. At least one side, and maybe both sides, of really long-term borrowing or lending transactions don't look prepared to strike a deal in New Zealand. Why is that? Is it, as Wheelan noted about Latin America, a subliminal fear of Muldoon-style inflation returning?

Among financial market professionals, there doesn't seem to be much of a concern. The AON Hewitt survey of economists asks for their expectations of inflation seven years out (shown below), which is the longest forecast of inflation that I'm aware of: the numbers in bold are the latest reading, the italics the previous survey's. It gives the All Clear. But it's a very small sample of insiders, and it's the general public's perceptions that matter more.

We do have some evidence that the citizenry as a whole aren't as relaxed. The Reserve Bank tracks households' expectations of inflation, and in the chart below I've shown what people believe inflation to be, what it actually is, and households' expectations of inflation one year ahead and five years ahead (the furthest looking measure, surveyed since December '08). I've used the median measure from the survey results.

This may be typical of households everywhere, and not just in New Zealand, but even so it's kind of disquieting. As a summary, households generally believe inflation is higher than it actually is (a perceived 2.9% over the period, versus the actual 2.3%), and they expect it to be higher in a year's time (by 0.5% on average, with an expected 3.4%). And the five year inflation rate says much the same thing - on average people expect the long-term inflation rate to be 3.5%. Both the one year and five year forecasts are above the top of RBNZ's inflation target band. Even if you knock off 0.6% as some kind of inherent subjective over-reading of what inflation has been, you still get to the point where people apparently believe inflation is always going to be very close to the top of the RBNZ's target band. And this after over a decade of generally successful inflation targetting.

I'm not too sure where all this leads to in its implications for monetary policy or the development of the capital markets, other than to the obvious and well-known conclusion that inflation-fighting credibility takes forever to accumulate, but can die overnight. I do wonder, though, about our short electoral cycle: every three years, we get one political group or other threatening to change the inflation targetting regime. Baldrick couldn't have improved on it as a Cunning Plan to undermine stable inflationary expectations.