Friday, 29 August 2014

Don't put the safety net on the credit card

New Zealanders - or maybe just the males of the species - are stoic folk. An eye isn't working too well on Tuesday? She'll be right. Wednesday - hmm, worse, never mind, mustn't grumble. Thursday - can't really use that eye, bit of a nuisance, that. Until finally pain and dysfunction drive us into seeking help.

So I'm hugely grateful to all the professional folks at Green Lane Hospital who, when I at last fronted up, reattached a retina, solved some later complications, and sent me back out with two good eyes and only slightly pained reactions to my 'will I ever play the violin again' half-witticisms.

You'll hear people saying there's a crisis in our health system: I didn't see it.  Yes, the emergency eye unit is very busy, especially, I gather, on a Friday, when people like me finally give in after trying to struggle through the work week. But the throughput is pretty heavy 24/7: you'd be surprised how many people have eye injuries. Even so, the place copes well, gets the delicate surgery done, and all with friendly staff in a modern facility.

Even if I hadn't just been a recent beneficiary, you wouldn't have found me bad-mouthing the safety nets of a modern welfare state. As Thomas Piketty says (p481) in his Capital: "Modern redistribution, as exemplified by the social states constructed by the wealthy countries in the twentieth century, is based on a set of fundamental social rights: to education, health, and retirement. Whatever limitations and challenges these systems of taxation and social spending face today, they nevertheless marked an immense step forward in historical terms", and I wholeheartedly agree.

Which (and if this seems like a swerve, bear with me) is why it's good to see National, Labour and the Greens all committing - albeit with varying degrees of credibility - to running fiscal surpluses in years to come (I don't know about NZ First, having been unable to find anything in the policies on its website about its stance on fiscal surpluses or deficits, and I haven't bothered with any of the others).
Because if there's one single thing that most threatens to undermine the foundations of a modern welfare state, with its provision of of educational opportunity and health and income support safety nets, it's fiscal indiscipline - letting the welfare state blow out to an unaffordable,unmanageable, ineffective leviathan, or (even if it's kept to a fit for purpose size) not raising the money from taxpayers to fund it.

Ironically, Piketty's France is a fine example of what not to do.

First, the French let the size of the welfare state get out of hand. Government spending was an already fairly sizeable 46% of the economy in 1980: it's 57% now.

And second, they never paid for it. Not once, since 1980, did the French run a balanced budget, and on occasions it got very unbalanced indeed: in the first half of the 1990s, deficits were running around 5% of GDP a year.

What happens if you expand the welfare state over 35 years, but never once pay for all of it?

Your debts explode.

Back in 1985 (the first year that I've got IMF data for both France and New Zealand), we were just emerging from the wreckage of Muldoon's economy, and our gross government debt was an unpleasantly high 67% of GDP. France by contrast was in quite good shape, with government debt less than half our level, at 31% of GDP.

But fast forward to 2014, and three decades of not paying their way have blown French debt out to a worrying 96% of GDP. We, on the other hand, got our act together. We ran surpluses pretty much all the way from 1993/94 to the GFC. As a result, our debt (even after the impact of the Christchurch earthquakes) is down to 33% of GDP. Relative to GDP, French debt has trebled: ours has halved.
And it's not even as if the French got a whole lot of obvious extra value for the immense sums they put on the credit card. Life expectancy is a bit better than ours (83 to our 81), but then we don't drink enough Côtes du Rhône. On a lot of other social measures, though, we're at least as good. The latest (March quarter) French youth unemployment rate was 22.9% (and it's been over 25%, in late 2012): ours for the same quarter was 13.1%.

Because they didn't have the political honesty or courage to raise the money to pay for the benefits, the French have now painted themselves into a dead end: something has to give. We, on the other hand, still have lots of options to cope with whatever the global economy sends us next, and we don't have any issues about the sustainability of our safety nets.

I wouldn't rule out backsliding and apostasy later on, but for now it's encouraging that all our major parties plan to stay on a responsible fiscal track.

Friday, 22 August 2014

The payoff from deregulation

There are still lots of people who are in two minds about our big burst of deregulation - 'Rogernomics' - in the second half of the 1980s and first half of the 1990s. Even the name suggests that it might have been the Frankenstein-like work of one individual crazed zealot - though the reality is that most OECD countries were doing the same. Indeed, lots of countries started earlier than we did, did more, and kept on doing it long after we'd called a halt. And if we ended up having to do a lot in a short period of time, it was because there was a lot to do after the fossilised days of Kirk, Rowling and Muldoon. Our more flexible and efficient competitors were scampering off into the distance, and ultimately we had to run very hard to try and close the gap.

Why are we having all this potted history of a Friday afternoon? Because I've just read a very interesting paper that looks at the payoff from doing all this sort of thing; because I'm aware that there are closet re-regulators who'd like to go back to some of the bad old ways, because there are plenty of folks who don't want to finish off the last bits of unreformed business; and because it ties in with some recent work our Productivity Commission produced.

Their big report into the services sector noted that a lot of our manufactured and commodity exports actually embody a lot of services - they have the example of the value of an export log, which is basically 50% a log and 50% assorted services used in getting it to the ship and ending it on its way - so the relative efficiency and competitiveness of our domestic services sector and of our domestic infrastructure can have a big influence on the relative competitiveness of our exports overseas. If our exporters have to use relatively expensive lawyers or accountants, or have to buy relatively expensive electricity or use relatively expensive airports, they're at a competitive disadvantage (I've posted about some of the report's pro-competition suggestions here, and also posted about New Zealand's high services prices here and here).

This research I've just read looks at Spain - there's a summary here at the Vox site, and here's a link to the full article.

In brief, the research looks at the quantity of a variety of services (energy, transport, communications, professional services) used by the different Spanish manufacturing sectors. And then it uses some OECD data on the degree to which regulation of these sectors in Spain became more market-friendly between 1991 and 2008 to do a 'with and 'without' comparison - they compare what Spanish manufacturing exports would have been if the degree of regulation had stayed at its (user unfriendly) levels of 1991, with what actually happened in a progressively more liberalised economy.

For some reason which eludes me, the authors didn't put the most startling result of all in the summary paper, so here it is.

The positive impact of deregulation and liberalisation of the Spanish services sector on manufacturing exports is enormous. As the authors put it on p16 of their research, "The figure shows that the effects of lower service regulation on downstream manufacturing exports were sizeable: from the smallest gains recorded in electrical and optical equipment (13.4%) and transport equipment (27.7%) to the largest gains recorded in chemicals (64.2%), food products (69.4%) and other non-metallic mineral products (82.9%)...the industries that benefited the most of [they mean 'from'] lower service regulation were typically more dependent on service inputs".

The big result, in sum, is that deregulation does what it says on the tin - it allows the economy to become far more competitive.

There's also another lesson. That OECD data the Spanish researchers used includes us, so we can see how we're faring in terms of production-friendly regulation and infrastructure networks compared to other places. And the story is that while we're reasonably good by world standards at a lot of this, we've stopped improving in some areas, while others are still reforming. We're losing competitiveness.

The OECD uses a scale that goes from 0 (terrific) to 6 (awful). In terms of our regulation of professional services, the data shows that we started in a reasonably good place in 1998 (1.90, compared to Spain's 3.48) and by 2013 we'd improved to 1.10, which means we kept a big lead over Spain, which had also improved, but only to 2.06.

On network regulation, however, we've dozed off. The way we organise our infrastructure is stalled (2.49 in 1998, 2.46 in 2013), whereas in Spain their score has improved from 3.80 to 1.59, or in other words they started off well behind us, and are now ahead of us. And even if you don't give a toss about Spain, you might be more concerned with how the Aussies are doing. They went from 2.24 in 1998 (already better than us) to 1.50 in 2013 (way better). The same is true of the US and the UK.
Other countries, in sum, now benefit from infrastructure networks - electricity, gas, telecoms, post, airlines, railways, roads - that have increasingly lower barriers to entry, less government ownership, less vertical integration, and more competition-friendly market structures.

We've left a lot unfinished. And it's going to cost us unless we fix it.

Thursday, 21 August 2014

A big rise in immigration - excellent

Stats came out today with the latest immigration numbers for the year ended July, and they showed that the country gained 41,044 people over the past year, a near record level (the record is the net inflow of 42,500 in the year to May 2003).

Like a lot of these numbers, the net result is the difference between two surprisingly high numbers: total arrivals were 102,396 and total departures were 61,352. As I said the other day, behind 'net result' numbers there is often a very large degree of churn, with large inflows and flows that are sometimes many, many times larger than the net outcome. So it's not the case that 41,044 people upped sticks and came here: rather, 163,748 people were coming and going between New Zealand and the rest of the world, and rather more of them arrived than left.

The reason the net figure has risen to a near record, by the way, is that both arrivals picked up and departures eased off, so our net gain rose from the 10,600 of the July '13 year.

No doubt the xenophobes and other crazies won't be happy, but I think this is excellent news.

Personally, I like the non-economic social benefits that immigration tends to bring, but even if you put those to one side, the economics of immigration says, we win. The latest economic research on the impact of immigration shows that it tends to be good for the receiving country. You can read all about it in this post on Paul Walker's excellent Anti-Dismal blog or you can read the authors' own summary here, at the always interesting Vox site. In sum, "In two-thirds of the 20 countries analysed, both high-skilled and low-skilled natives would benefit from a small increase in immigration from current levels".

And even if you think, well that's just one research paper, the reality is that a large majority of economists look on immigration as benefiting the host country. Here are the answers to a survey question that the Centre for Macroeconomics sent out earlier this month to a panel of UK economists (you can read the full thing here).

As the authors summarise it, "there is overwhelming support for the view that migration will increase the average income of current UK inhabitants".  There was also overwhelming support, by the way, for the idea that the UK was making a complete hash of its immigration policy and processes, but that's another story.

There's enough lunacy in the pre-election air already without some immigration myths adding to it, so if you hear some politico ranting and raving, take a deep breath and repeat slowly to yourself: no, immigrants don't take jobs from nationals. And no, they don't drive down local rates of pay.

Tuesday, 19 August 2014

Where are the profits?

You'll have seen the gist of today's Prefu (Pre-Election and Fiscal Update) elsewhere, and the only thing I'd add about the coverage is that it's rather silly for commentators to be drawing fine distinctions between the $375 million fiscal surplus for 2014-15 that Bill English talked about in the Budget in May, and the $297 million he's expecting today.

That's because the surplus is the difference between two enormous numbers, each around the $72-73 billion mark. The teentsiest mismeasurement or timing variation in the big numbers can therefore make the surplus jump all over the place. For example, if tax was 0.1% higher and expenditure 0.1% lower, the surplus would go up by around $145 million. So changes of some $75 million between what Bill expected in May and what he's expecting now are completely inconsequential.

There is something in the Prefu, however, that generally doesn't get reported on, but is genuinely important. And that's the government's expectations for profits (which it needs to make a stab at, in order to figure out likely company tax). It's doubly important, in that we don't have regular updates from Stats on how company profits are travelling - many developed economies have official quarterly data, but we don't - so any info at all is quite handy.

Here's the relevant table from the Prefu (I've added percentage changes to the original). The numbers are millions of nominal dollars.

'Operating surplus' is the profit measure. You can see, for example, the big impact that high commodity prices have had on farm profitability in the March year just ended. And profits in the rest of the economy also did well in the year to last March (+8.3%) and are expected to do decently (+7.0%) in the year to next March, too.

And then they fizzle out. Expected profit growth is pretty minimal in subsequent years. No matter how you come at it, you keep arriving at the conclusion that in 18 months or so we're going to have to find something beyond the Canterbury rebuild and high commodity prices for our next trick.

It also makes me wonder about the valuation of our stock market, which (according to ThomsonReuters estimates) is currently trading on a p/e ratio of 16.1 times earnings - the sort of ratio that you'd associate with a reasonably upbeat view of corporate profit growth. Either the outlook for profits is better than the government thinks, or investors are paying on the high side. Given the way the market has been on a gentle slide in recent weeks (as shown below in the graph of the NZX50 index, from the NZX's website), could be that investors are beginning to have somewhat more realistic expectations.

Finally, the Prefu table gives us some idea of who's benefiting from the good times, at least in the sense of telling us how much of the growing national income is going to employees. In the year just finished in March, farmers and business owners did best. But in the current March year, and over the forecast period out to March '18, there's nothing in it. Compensation of employees keeps pace with growth in the economy as a whole. In election years - well, actually, all the time, come to think of it - there'll always be someone claiming that the other fellow is scooping the pot while you're slaving for your pittance. Not on these figures, he isn't.

Friday, 15 August 2014

A brilliant graph

Here's a brilliant graph, from the Calculated Risk blog, an excellent site run by Bill McBride which mainly covers US macroeconomic developments. The graph came from this post, and I'm using it with Bill's permission.

It's about the US labour market, and even if that's not of great (or indeed any) interest to you, bear with me, because I've put up this graph for a variety of other reasons as well.

The first reason is to make the point, again, that national statistics authorities need to get their act together and think of better ways to present their data. I have no doubt that the good people at America's Bureau of Labor Statistics (BLS) are public-spirited professionals, but they don't know how to present data to save their lives. If you don't believe me, have a look at the BLS's release of the underlying data, which looks as if it was written in 1970 on an IBM Selectric typewriter. There isn't a single graph in the whole thing*.

Yes, I know, there's a school of thought that the official statisticians' job is just the facts, ma'am, but I think it's several decades past its use-by. The sky has not fallen when (for example) our own Statistics NZ puts out data, commentary, and several kinds of graphs (here's this week's full retail sales release, for example).

OK, here's the graph itself.

This is a really neat graphical summary of what's happening in the US labour market. On the one hand you've got voluntary job 'quits' (the light blue bar), and 'layoffs and discharges' (the red bar), which when added together gives you the total number of people who left or lost their jobs. And on the other you've got new 'hires' (the dark blue line). When hires outnumber quits plus layoffs, total employment rises, and conversely when hires fall short, employment falls. And, for completeness, you can new job openings (the yellow line), which is employers' demand for staff.

I loved everything about this graph - the clear, bright colours, the logic, the value add to the underlying data. But quite apart from its graphical excellence, it also says quite a lot about how economies work.

Often, the overall result in many markets is the net outcome of two very large gross numbers. Behind any small overall movement - employment, business creation - there tends to be a vast boiling undercurrent of gross turnover. It's emphatically not the case that employment falls (for example) because virtually everyone keep their jobs and a very small number lose theirs. The reality is that if employment falls in any given month, it's because there is a very large number of new jobs created, slightly outweighed by an even larger number of jobs lost or given up. It gives you a Schumpeterian shiver up your back.

The gross flows can be immense: as the BLS helpfully points out, "Over the 12 months ending in June 2014, hires totaled 55.7 million and separations totaled 53.3 million, yielding a net employment gain of 2.4 million. These figures include workers who may have been hired and separated more than once during the year". Which also reminds us not to read too much into statistics that are the small number resultant of two much larger numbers: whether it's net new jobs, or the balance of payments deficit, or the savings rate, little errors in any of the big gross numbers can be as large as the net resultant itself.

I'm personally of the view that these high levels of turnover reflect (and accommodate) efficiency and flexibility, and you stand in their way at your peril. There are plenty of people who disagree: they don't like the essentially 'fire at will' nature of the US labour market, and they'd rather that employers didn't have such a free hand. But less flexible, or outright inflexible, labour markets don't help anyone, as the youth unemployment rates across much of Europe demonstrate (they're not just a cyclical austerity story). Policy moral, in my view: mitigate the influence on individuals and communities by all means, equip people to the max with the skills to play the game, and get out of the way. You're doing employees and businesses no favours when you throw sand in the works.

Finally, for those who do have an interest in how the US is travelling, the news in the graph is pretty good. The dark blue line is keeping its head above the combined blue and red bars, so total employment is rising. The 'help wanted' ads have been steadily increasing: they bottomed out in the middle of 2009, and have roughly doubled since. And 'quits' are also increasing, which among other things reflects increased confidence about jobs availability. As you can see, the GFC left a big scar on the level of 'quits', which haven't got back to pre-GFC levels yet, and so far it's hardly a rip-snorter of a recovery: recent monthly net new jobs have been around the 200,000 to 250,000 mark, which aren't enough to make much of a dent in the unemployment rate. But even so, it still all adds up to a picture of sustained if still modest expansion.

*Update September 6 - I may have done the BLS a disservice here, apologies. I've just looked at the August jobs report, and the PDF version does indeed have graphs (though the HTML version doesn't), and a reference to the impact of a strike at a New England business.

Thursday, 14 August 2014

Behind the retail sales numbers

This morning's retail sales statistics made the headlines for the strong overall growth in spending - up 1.2% in real terms during the quarter, and up 3.6% on a year ago. As I've noted before, I think we're just past our peak rate of economic growth for this economic cycle, but even if we're easing off a little, on this showing things are still running along at a pretty robust rate.
Behind the big number there were quite a few interesting patterns. The total volume of retail sales was up 3.6% on a year ago, while the total value of retail sales was up only 3.8%, which implies that prices in the shops went up by only 0.2% over the past year. With people's incomes up anywhere from 1.7% to 2.5% (a guide to the different estimates is here), but prices in the shops broadly stable, their purchasing power has got a sizeable boost.
One possibility, as we get nearer September 20 and the voting booths, is that households might be a bit happier with the state of the economy than some of the numbers would lead you to believe. Yes, the overall cost of living in the year to June was up 1.6%, thanks to electricity, the housing market, and central and local government charges, but on the other hand every time you go into Harvey Norman or Noel Leeming, your money goes further than it did before.
And households have certainly noticed. Prices for electrical and electronic equipment are 6.7% lower than a year ago, and shoppers have responded in a big way: the quantity of electrical stuff bought over the past year is up 13.8% (he said at the keyboard of his new Dell laptop).
Some of this is technological progress as TVs and cameras and phones continue to plummet in price, but the rest is is obviously down to the high Kiwi dollar. Cars have been another big beneficiary (down 1.5% in price on a year ago, which has meant that 8.6% more cars have been driven off the dealers' forecourts), and, I'd guess from those sharp European wine offers I keep getting (and accepting), liquor too (down 2.2% in price, up 5.3% in quantity). The high dollar won't last forever, but while it's there we seem to be taking full advantage of it.
On the downside, some of our domestic sectors keep spitting out price increases. Accommodation, for example: prices up 2.7% over the past year. I can partly understand it - if you're in the accommodation trade, I suspect the rates, the electricity, and the wage bills are your big outgoings, and they've all been rattling along - but I also think it's symptomatic of quite a few of our domestic industries still living in a world where you take out last year's rate card and add 3% to it.

Collaboration? Collusion? Who knows?

On Tuesday I went along to Bell Gully's offices to listen to the Commerce Commission's presentation on its new, improved, Competitor Collaboration Guidelines, which are about how the Commission will implement some proposed changes to the Commerce Act.
The background to these guidelines is that the outgoing government has got a bill in the parliamentary works, the imaginatively named Commerce (Cartels and Other Matters) Amendment Bill. It's obviously now stalled until after the election, but even though it's still only a Bill and not yet the law of the land, you'd think it's highly likely make it onto the statute books even after any change of government, so I think the Commission has been absolutely right in being proactive about it now.
The Bill, as and when passed, will do three things.
It will change the old "price fixing" wording of the Commerce Act, and instead say that price fixing, restricting output, and allocating markets, will all be regarded as "cartel provisions".
It will put the fear of God into hard core cartels, because they will be criminalised, with cartel participants risking jail, though there will be a two year interval (from when the Bill becomes law) before the criminal gun can be fired.
But it will also allow businesses three exemptions where the "cartel provisions are always regarded as a bad thing" writ will not run. Two of them (cartel provisions in the context of joint buying and promotion agreements, and of vertical supply contracts) will be able to be authorised by the Commission, on the usual basis that there's a net benefit (over and above any damage to competition).
The third exemption is likely to be the most interesting one: the Commission will be able to give a clearance (a generally quicker and cheaper process) to cartel provisions that are related to collaborative activity. Basically, if it's genuine collaboration, there are good reasons for it, the dominant purpose isn't to reduce competition, and it doesn't cause the proverbial SLC (a substantial lessening of competition), it will get the nod.
Sounds good. But I felt the presentation feeling a bit of disquiet. I'm somewhat bothered by where we've ended up: I think businesses now have no more certainty than before (and arguably less) about what is or is not kosher when it comes to possibly cooperating with competitors. Before, you knew that a lot of activities were clearly not on: now, some might be.
None of it is down to the Commission, by the way: Mark Berry and David Blacktop did a fine job of explaining the guidelines, and the Commission has taken on board the feedback it got on an earlier version. It's also made a big effort (as it's been doing with its other publications) to write its guidelines in plain English.
But businesses are still somewhat at sea on what's licit or not.
Part of it is down to "the scheme of the Act" (as the lawyers say). When you've got draft legislation that says, we're getting tougher on A and now we'll throw you in the clink if you do it, but we're more relaxed about B, it's now alright and in the country's best economic interests, then there'd better be a clear distinction between the A (collusion) and the B (cooperation), or not much B is going to happen. Legislation can't always do that, and this legislation certainly doesn't.
And it's also partly because the distinction is inherently fuzzy. The best the Commission can say at this point is that the outcome of each clearance application for collaborative ventures is likely to turn on its facts, which is true, but not massively enlightening for companies when they are wondering whether to enter into something collaborative in the first place.
So you can understand why the biggest demand from businesses has been for more worked examples of the sort of collaborative thing that is likely to be okay. There are a couple in the guidelines - companies developing an oil field and jointly selling the oil, software companies developing a product and setting the price they will both sell it for - but not enough to people to get a really strong feel for the area. If there is anything missing or short changed in the guidelines, it's the economics that might lie behind collaborative activity - for example, the consumer and producer benefits of commonly developed standards in network industries (an example I got from the 'Cooperation and Compatibility' chapter of Shapiro and Varian's book, Information Rules). But there isn't a single economics citation in the chapter that deals with collaborative activity, though the law, the cases and even - Gawd help us - the Oxford English Dictionary get a look in.
At Tuesday's meeting one questioner asked about companies jointly tendering for projects - a good question, and one that crops up all the time in business. But it's still a very grey area. I can understand a perfectly valid risk mitigation reason for companies getting together: a company may not want to take on a very large contract if the risk of it going wrong might sink the company, and it might well prefer to go in with a partner so that if everything turns pear shaped later, the company will have shared the risk. But equally if there were four bidding companies before, and they collapse into just two consortia of two companies each, have we now got an SLC?
As for the likes of the meat industry, where there seem to be endemic pressures to go for Fonterra-style or other initiatives that fall somewhere along a cooperative/collaborative/collusive spectrum, are they any the wiser post this new Bill and the guidelines?

Thursday, 7 August 2014

The first casualty of elections, too

You don't expect much sense to be talked about anything during a general election (and politicos wonder why large groups of the electorate clock out of the whole process...). The big economic statistics are as much casualties as everything else.

So in the interest of clearing away some of the smoke that the spin merchants are trying to blow up your (insert body part of choice here), let's just revisit some of the basics of what's happening to pay. Because, while yesterday's labour market statistics were, in general, pretty good, especially the sharply lower unemployment rate, there was quite a bit of partisan argy bargy about what had happened to wages: were they or were they not going up as strongly as you might have expected in a strong labour market? With attendant scuffles over what role, if any, raising the minimum wage had played in it.

As it happens, there's ample scope for the political mischief makers to muddy the waters, because the two main gauges of what's happening to wages are easy to misinterpret, even when there aren't wilful manipulators shouting in your ear.

Here's the relevant bit of Stats' media release.
Annual wage inflation, as measured by the labour cost index (LCI) salary and wage rates (including overtime), increased 1.7 percent compared with annual consumer price inflation of 1.6 percent. Average ordinary time hourly earnings (QES) rose 2.5 percent over the year.
So which is it? Wages only marginally ahead of inflation, or modestly ahead?

The answer is, and I'm sorry if this sounds quintessentially like what an economist might say, it depends on what you're measuring. The two measures that Stats publish - the Labour Cost Index (LCI) and the Quarterly Employment Survey (QES) measure of earnings - do different things.

The LCI looks at the rate of pay for exactly the same job (strictly speaking, we're talking about the "adjusted" LCI here, which is the one used in the Stats press release). If you're a middle manager with exactly the same set of responsibilities you had a year ago, and you're doing it with the same qualifications, the LCI is the measure of the rate for your job. It's a pure "like for like" comparison. On average across the country, on this basis, the pay rate for the same job done by people with the same qualifications is up 1.7% on a year ago.

As a statistic, this has its uses, but it's quite a precise concept, and in particular it doesn't neatly line up with what actually turns up in people's bank accounts from their employer's payroll run, which is probably more what people have in mind when they talk about what's happened to their pay over any given period.

For a start, at the individual level, people get promoted. Or they get a bigger bonus. Or they move to better paying jobs at another place. Or they get more qualifications. Or (on the downside) their employer goes bung and they have to take a job that pays less. Or they jack in the high paying job they've always hated and gone and done what they always wanted to do. Whatever.

There are also all sorts of change happening at the business and industry level, too. "For example" - I'm quoting from p14 of Stats' explanation of the QES here - "average total hourly earnings in the retail trade industry are lower than the national average, and represent about 10 percent of the total paid hours of all industries combined. If the retail trade industry increased total paid hours relative to other industries, the average total hourly earnings for all industries would fall, everything else being held constant, because there is a relative increase in influence from a lower-paying industry". If all the new jobs are McJobs, that probably fits into the measure that most people would have in mind when they're thinking about what's happening to the wages being paid in New Zealand.

So for many purposes - and I'd say for the general citizen's interest in what has happened to pay over time - the QES measure is better going to reflect the messy reality of life. Businesses open and close, opportunities come and go, demand runs hot for some skills while nobody want a bar of others, individual careers thrive or falter. Net net net, after all of this, you get the QES measure of average hourly earnings, which is up 2.5% on a year ago. No, it's not "apples for apples", and if you were a nurse a year ago and a nurse today, the LCI's 1.7% may a closer stab at the true state of affairs. But if you moved to the DHB next door, or got a better paying job in A&E, the QES's 2.5% is likely to be more representative.

As for the impact of the minimum wage - it's there, but it was really small. As Stats calculated,
If the increases that were due to minimum wage had been processed in the LCI as no change, then in the year to the June 2014 quarter:
  • all salary and wage rates (including overtime) would have increased 1.6 percent, instead of 1.7 percent

Tuesday, 5 August 2014

We're past the peak

Treasury's latest Monthly Economic Indicators came out yesterday (assorted links here), and while reading the economic tea leaves isn't always an easy exercise, this time one clear message comes through loud and clear: we've just gone past the point of fastest GDP growth. We're still growing at a good rate, enough to keep the unemployment rate heading in the right direction, but the oomph we got from the dairy boom and the Canterbury rebuild has eased a bit.
Any one of several graphs from the Treasury chart pack serves to show the picture: here's one on firms' expectations for their own activity levels (always a good gauge).

We could conceivably see the growth rate pick up again, especially if our export markets perk up a bit (Australia in particular has been on the soft side) or if the Kiwi dollar weakens, which again would help exporters. Or maybe Auckland housebuilding will pick up: as Bernard Hickey argues here, "Auckland's housing consents are still lagging its population growth, let alone catching up with the supply gap created between 2004 and 2012". More likely, though, the peak growth rate is behind us, and if we want to have ongoing decent-sized increases in living standards we're going to have to find something to supplement the dairy trade and fill in for the earthquake rebuild.
Slower growth may have one positive side-effect: it could make the Reserve Bank's job a bit easier. At our recent rate of growth (4% at an annual rate in the March quarter, going by the output measure of GDP, 5.2% going by the expenditure measure) we were rapidly eating into the degree of productive slack in the economy. Once it's all gone and we're into "positive output gap" territory, inflationary pressures start developing. And on Treasury's estimates, shown below, we have indeed used up the slack.

We're either at the "used up the spare capacity" point (according to the 'small macro model' and 'Kalman filter' estimates) or indeed beyond it (the 'HP' and 'MV' filter estimates). Either way you can see why the Reserve Bank has already been tapping the brakes (four 0.25% taps to date).
If you're not too convinced by these rather abstruse measures of how close we are to our productive capacity limit - and why would you be, when you look at the Kalman filter's convincing impression of a drunken driver on an icy road - the business surveys get to the same place, as shown below.

The red line is the one to watch. Capacity as a limiting factor to businesses' growth is right up there, at very close to its high over the past 20 years. Naturally, in these circumstances, you'd expect firms to react by investing more and expanding their capacity, and they are, as the graph below shows.

Whether this investment in new capacity will be enough to defuse domestic inflationary pressures remains to be seen. I'm mildly sceptical at the moment: it's a decent sized lift in investment, certainly, but it's not quite on the scale of previous bursts (mid '90s, mid 2000s). And I haven't liked the look of recent official statistics on stubborn levels of domestic non-tradables inflation, or of business surveys showing more businesses expecting to be able to raise their prices faster than their costs. We'll see how it plays out, but I'm leaning towards the view that we may see the odd bit of unpleasant inflation news down the track.

Monday, 4 August 2014

The payoff from a Free Trade Agreement

Last week the Business Council of Australia released a report, Building Australia's Comparative Advantage, which in turn built on another reportCompete to Prosper: Improving Australia’s global competitiveness, which they had commissioned from McKinsey Australia. I haven't read either of them fully yet, and I'm not too sure whether I buy into the "let's aggregate industries into globally competitive sectors" line taken in both of them, but in any event I also found this:

This is McKinsey's estimate, in Aussie cents per kilogram, of New Zealand's cost advantage over Australia in the international dairy trade. The total advantage in our favour is 55 cents per kg, which looks a sizeable amount in the context of (say) the dairy payout, and the largest part is down to our cost advantage in getting into the Chinese market duty-free as a result of our free trade agreement (FTA) with China.

You can also see the contribution of the FTA in the graph below, also from McKinsey, where after a short post-FTA lag, our dairy exports to China took off. Aussie dairy exports didn't. For completeness, I should add that McKinsey also credit the relative vigour of our dairy industry deregulation ("Australia...deregulated but without anything approaching the intent and ambition across the Tasman", p35), which I agree with, and also admire the creation of Fonterra ("New Zealand created a dairy industry structure that was designed to compete globally", and Australia needs "purposeful market design", p36), which I'm more ambivalent about, but there's no denying a big payoff from our free trade approach.

It's not often that we steal a diplomatic march on our friends across the sea - well done, our trade negotiators - and we may not enjoy it for long: their Business Council is recommending that Australia get a move on with FTAs with China, Hong Kong and Taiwan, and revisit existing ones to make them more agriculture friendly. But while it lasts it's a fine example of how free trade has brought a big benefit to one of our major export industries. And even if Australia levels the playing field, there will still be enduring pay-offs for both of us.

It's also a good riposte to some of those ugly anti-China views that are surfacing in our election campaign.