Morning roundup

The morning's worthies:

• NZ alcohol policy basically gives a veto over licensing to the Medical Officer of Health and to the Police. Sucks when you get a prohibitionist in charge of either. And why are so many NZ prohibitionists named Palmer anyway?
• Josh Gans on copyright status of AI-created works. 
• Grimes set up an AI trained on her own work. It tweets. Grimes notes, "The degree to which this bot has mastered my internal monologue is terrifying to me"
• Michael Reddell on RBNZ forecasting. I think it's a damned shame we didn't get NGDP markets for NZ; Simon Bridges murdering iPredict may have cost us considerably. Thanks again Simon. 
• A reminder that it was Don Lavoie who coined the term "knowledge problem" for Hayek's fundamental insight, not Hayek himself. Even if you think you're familiar with the term, please read this. 
• Immigration NZ continues to be an absolute mess. It's only partially the bureaucracy's fault. They'll have had whipsawing policy directives from the Ministers. First it's clamp down and don't process visas because Labour hates immigrants. Then the inevitable bad consequences from blocking migration, so they get told to stick every employer into the high-trust accredited employer visa programme to speed up processing - which pushes actually trustworthy employers into the same queue with a bunch that really really aren't. And the inevitable consequence of that. Absolute mess. Herald, Stuff. The Stuff piece is particularly good. 
• RBNZ figures that migration might now be reducing inflationary pressure rather than adding to it - easing labour supply bottlenecks.
• In today's edition of "China is actually a more stable and reliable trade partner than the US," Trump promises 10% across-the-board tariffs if elected. Shouldn't US foreign policy aim at encouraging deeper trade links with the US and reduced reliance on China?
• Action on Smoking and Health is getting fed up with BS coming from Health Coalition Aotearoa.

Morning roundup

Another closing of the browser tabs, including a couple from Auckland University's Prof Robert MacCulloch, who's caught a few things I'd missed.

• MacCulloch catches a piece from John McDermott, former RBNZ Chief Economist, criticising the Bank's recklessness. Adrian Orr likes to paint his critics as being some kind of right-wing extremists. Bit harder to do that with McDermott. But it's also worth noting that some of the decline at RBNZ happened under McDermott's watch. That's when research capabilities started being pushed out. 
• MacCulloch finds Shamubeel Eaqub's critique of ACT Party leader David Seymour's economics more than a little thin. Bottom line: it's off to paint Seymour's positions as 'illiterate' and 'lies' when plenty of economists agree with Seymour on that excessively loose fiscal policy can contribute to inflation when we're up against supply constraints. Perhaps some of is definitional? I'm generally happy to say that inflation is always and everywhere a monetary phenomenon, but if government is running giant deficits while facing a positive output gap, it's going to be pushing up prices by doing so. FWIW, here's Waikato's Prof Frank Scrimgeour also noting pointing to the consequences of the continued inappropriate fiscal push. 
• Under pressure over testing, Director General of Health Bloomfield told press "To improve our horizon scanning and considering new tests, we have established an innovation team... reviewing other countries' experiences with the use of testing technologies." There was no such team. What's the way of phrasing things in NZ that avoids defamation... the guy seems to have a habit of saying things that wind up having been entirely wrong, and that any reasonable person in his position should have known to have been falsehoods. 
  
• Things that are overdetermined are overdetermined. Queensland District Council refusing to provide a consent for Peter Thiel to build a lodge on his land: the normal Resource Management stupidity? Council just doesn't like the guy? Both?
• 2022 vs 2008
• Barriers to prescribing medicinal cannabis. 

Afternoon roundup

The afternoon's worthies

• Covid tests considered reliable enough to let you board a flight to New Zealand aren't considered reliable enough to be allowed to be imported into the country. We truly are run by Vogons. 


• Glad to hear that Michael Reddell is feeling better. On 7 March he posted that his household had caught Covid but all was well. On 29 March he posted that he'd been unable to maintain concentration for any sustained period: "Reading one 8 page memo bright and early yesterday morning completely did me in for the day." 28 April, he notes things are improving. I'm very glad that things are improving.  


• Parliament is scrambling to put some kind of enforcement regime around its stupid road user charge holiday. I feel bad for NZTA here. I expect they were blindsided on this one, that they told government that all of this was stupid, and they're stuck having to administer it. But I'll have to wait for the OIA results to find out. 


• David Dodge, former Bank of Canada Governor, argues for very large and rapid interest rate hikes. Stimulatory monetary policy in an overheated economy is a bad idea. Meanwhile, Adrian Orr assures us RBNZ has everything in hand and thinks his interest rate increases thus far are courageous. I miss the old Tui Billboard "Yeah, Right" campaigns.


• Darian Woods sings about GDP on this Planet Money episode. Very suitable for NCEA classroom use. Darian was in the same superstar cohort with James Graham (now teaching at Sydney) and Nick Sander (Bank of Canada). Good times. Here's an old RNZ piece on his album with Lucy Botting. 


• Russians supporting the current thing


• The Auditor General's worried about Covid spend. Treasury hasn't seemed really able to keep on top of this spend. And Treasury noted that it only likes the government's new debt ceiling if there's a focus on value-for-money in spending. So we have a new public finance regime that requires more vigilance from Treasury, an not a lot of reason to believe that Treasury is up to the bigger task. 
• Next time we're out near Dunedin, we'll definitely be checking this out for the kids: a 12 year old down there is running her own business, doing horse riding experiences for other kids. 


• A private backer was ready to sponsor Moana Pasifika - but the NZ government prefers to crowd out private investment. 


• Divorce rates are down, but largely on the back of marriage now largely being only chosen by those with strong preferences around being married. 51% of babies born in 2021 had married parents. Yikes.


• The convoluted ownership structures for the proposed amalgamated water entities might not even achieve balance sheet separation.  


• Hard to tell if this is the normal RMA stupidity, or bureaucrats sticking it to Peter Thiel just because. Either way it ain't great. 


• Monetary policy in pandemics. "If the activist policy was appropriate, by year end 2022, inflation will be on the way back down to 2 percent with an unemployment rate remaining near 4 percent. If the nonactivist policy would have been better, inflation would remain near double digits and would recede only with a recession."

Afternoon roundup

The closing of the browser tabs:

• Lots of covid cases among police manning the Wellington protest suggests there'll be plenty of cases at the protest. Great to see that ESR is testing wastewater from the protest. Not sure why we haven't results yet though. 
• Dileepa Fonseca makes a case for councils to shift the ratings base to land-value alone, rather than land plus capital. I agree!
• If NIMBYs are going to complain about every single conceivable way of generating electricity anyway, here's a potential option. Nuclear that can load-follow. 
• Michael Reddell gets an OIA response from the RBNZ. Adrian Orr told the Finance and Expenditure Committee that the Bank had done its own modelling of climate risks to financial stability. So Reddell asked for it. And of course the Bank hadn't really done any. I hadn't known that Bank independence extended to (arguably) actively misleading Parliament.
• The protestors have been dumping waste from chemical toilets straight into the stormwater drains, which flush directly to the harbour. 
• NZ's average residential house price is now 8.8 times average household income. 
• Jenée Tibshraeny reports that RBNZ is sticking with its "No experts please. This is the Monetary Policy Committee" position. Barking mad. 

Migrant acceptance

Arthur Grimes' latest column at Newsroom covers migration and wellbeing. 

The happiest countries in the world tend to be quite affluent but also tend to have strong social support programmes. In 2018, the ten happiest countries according to the Gallup Poll were (in order): Finland, Norway, Denmark, Iceland, Switzerland, Netherlands, Canada, New Zealand, Sweden and Australia. Thus New Zealand, at 8th, is (despite our grumbles) a great place to live.

Often migrants come from poorer, and less happy countries. The process of moving to happy countries (e.g. in Northern Europe, Canada and Australasia) leads to a significant boost in their welfare.

Indeed the top ten ranking countries for average happiness of migrants (i.e. of the foreign born) is almost the same as for overall happiness: Finland, Denmark, Norway, Iceland, New Zealand, Australia, Canada, Sweden, Switzerland, Mexico (Netherlands slips fractionally to 11th). Note that New Zealand rises to 5th in the ranking of happiness of migrants.

An important factor for explaining migrant wellbeing in their new country is the local attitudes of the domestic population towards migrants. The report finds that countries which are highly accepting towards migrants tend to have both greater migrant happiness and greater happiness for the domestically-born population.

This aspect is one in which New Zealand scores particularly highly. According to the Gallup Poll data, Iceland and New Zealand are neck-in-neck at the top of the most accepting countries for migrants. Intriguingly, acceptance of migrants is not strongly related to country incomes: the next five places after New Zealand in the acceptance stakes are Rwanda, Canada, Sierra Leone, Mali and Australia. (People in Eastern European countries are particularly unaccepting of migrants. Of the eleven countries who are, on average, least accepting towards migrants, ten are in Eastern Europe; the other is Israel).

He links through to the underlying data, from the 2018 World Happiness report. That report constructed a migrant acceptance index:

In reaction to the migrant crisis that swept Europe in 2015 and the backlash against migrants that accompanied it, Gallup developed a Migrant Acceptance Index (MAI) designed to gauge people’s personal acceptance of migrants not just in Europe, but throughout the rest of the world.

Gallup’s Migrant Acceptance Index is based on three questions that ask respondents about migrants in increasing level of proximity to them. Respondents are asked whether the following situations are “good things” or “bad things”: immigrants living in their country, an immigrant becoming their neighbor and immigrants marrying into their families.

“A good thing” response is worth three points in the index calculation, a volunteered response of “it depends” or “don’t know” is worth one point, and “a bad thing” is worth zero points. We considered volunteered responses such as “it depends” because in some countries, who these migrants are may factor more heavily into whether they are accepted. The index is a sum of the points across the three questions, with a maximum possible score of 9.0 (all three are good things) and a minimum possible score of zero (all three are bad things). The higher the score, the more accepting the population is of migrants. 

Polled Kiwis gave the second highest average score in the world: 8.25, just 0.01 points below Iceland's 8.26. The survey questions were asked in 2016 and 2017.

Michael Reddell's post earlier this week on immigration suggested that policy allowing reasonably liberal immigration represents an 'elite' ideology.

It may.

But if it does, it's an elite ideology that appears very broadly shared - at least in the Gallup data.

Hard to short housing

Mike Reddell points to Phil Twyford's speech on housing and wonders why, if folks with money on the line take him seriously, house prices haven't started dropping yet: The housing supply agenda looks good, but if it were credible, house prices would already be dropping.

It's a good question. My answer to it: it's darned hard to short housing.

Think about other markets covered by the NZX or futures markets. People there are betting all the time on whether prices will go up or down. If you think prices will rise relative to current price expectations, buy now or buy futures. If you think they'll drop, sell futures or buy options to sell in the future. There are lots of ways for people to trade in future prices, regardless of which way they think things will go.

Suppose you wanted to bet on Twyford's being right and you only own your own home. You might sell your house, rent another house, and hope to buy a house at a much reduced price in a few years time. But you'd have to live in a rental for a few years, and current broken housing markets have meant that the rental market sucks. It's an expensive option. If you think the price of soy beans will drop in a couple years, you can make a few clicks and have some options in your portfolio. You don't have to go without food for a couple years.

And everyone who thinks Twyford is wrong - well, it's easy to put a bet on house prices increasing. Maintain your current property portfolio or expand it.

There is a related literature. During the GFC, there were bans on short-selling. Those bans reduce the efficiency of prices and lead to bubbles that can persist and make crashes more likely.

There's no ban on short-selling housing here. But neither is there any obvious ability to do it. There are no Case-Schiller indices here. Other mechanisms are more complicated. Short companies or funds with lots of exposure to property? Even if house prices drop, the value of a set of properties could rise if more intensive land use is allowed. If there were some company that owned a pile of landbanks on the fringes of Auckland, and it were publicly traded, you could try shorting that one.

Just because I can't see any obvious way of shorting housing doesn't mean there isn't one. But the asymmetry in ease of going long versus short can make prices more persistent.

I put reasonable odds on Twyford's actually being able to get this done. Here's a likely sequence of events in that case.

After new infrastructure financing vehicles come on-stream, new leapfrog developments are announced. The first few advertise all-up prices (including the levy that funds the bond that funded the infrastructure) not far below current prices, but far enough to attract interest.

Existing landbankers see what's happening, recognise Twyford's serious, and rush to get their properties developed and sold before prices fall the rest of the way down to paddock price plus infrastructure cost plus construction cost.

Capacity constraints in construction will be even more binding. That will slow down the price drop unless government is able to progress other parts of the supply agenda that are less advanced, or not even yet on the table. Building material supply regulation. Ability to access foreign construction workers. Ability for foreign developers able to build at scale to work in the New Zealand market given the constraints of the OIA, the foreign buyer ban, building material supply regulation, and ability to bring in their own workers.

And Council risk-aversion in consenting driven by joint-and-several liability remains an issue - though if the government's Urban Development Authorities can not only provide resource consents but also sign off on final building certificates, that might help.

So without complementary policy easing other constraints, the path to new equilibrium prices will not be a fast one.

If you want a handle on why prices haven't dropped yet, it'll be the combination of those other capacity constraints pushing out the date for getting much lower fringe prices and the inability to short.

If Case-Shiller markets in Auckland housing existed, I'd be looking about 4-5 years out - but I'd also want to be talking with some construction folks before doing anything.

Morning roundup

This morning's worthies:

• Michael Reddell in defence of capital charges and higher public sector discount rates. Bottom line: you will have nonsense if public sector entities don't have to account for their costs of capital. 


• Construction and Corruption: the game. Based on Montreal's construction sector. 

  Each player is a Construction boss, responsible for a Construction contract on each turn. If you do not finish your contract, you keep it, and get paid again the turn after.
  
  The incentive is to keep your work unfinished as long as possible. Bosses can send their workers to opposing players’ sites, and finish their work instead. Thus the dynamic of the game is ‘screw your neighbour,’ with the added element that players’ cash totals are secret. Each turn also holds an election for mayor, who can punish their opponents, and reward supporters.

  Relevant to the environment in which SNC-Lavalin grew up.


• Insurance rationing in Wellington. Why is this market not clearing on prices? Are there just fixed costs in contracting for greater reinsurance coverage?


• The perils of woke governance. Kerry McDonald on some of the dangers in the wellbeing approach. 


• Duncan Greive on Ian Taylor and computer science innovation at Otago Uni


• 100 females for every 72 males in Australian universities in 2016.

What's the Key Government ever done for us?

Mike Reddell provides a short list, after the latest Australian leadership spill cited Key as example Australia might follow:

I grabbed a piece of paper from my bedside table and starting trying to jot down on the back of the envelope the “very significant economic reforms” in New Zealand over the last seven years.

It was a short list.  I couldn’t think of any.

Perhaps Turnbull had in mind the tax package of 2010?  Some of it might have been useful, but (a) it was pretty small in the scheme of things and (b), as the Treasury pointed out at the time, the net effect of that package was to raise the average tax rate on business income, not lower it.

From almost seven years of a Key-led government, I managed a few other small useful items for the list of reforms:

• Some modest welfare reforms  (but 10.3 per cent of the working age population – and one in three Maori – is still on working age welfare benefits)
• Partial privatisations (of minority stakes only) in several state-owned companies
• The wind-back of Kiwisaver subsidies (but, on the other hand, policy is now to make Kiwisaver compulsory)
• The establishment of the Productivity Commission
• Some very modest reforms to the Resource Management Act
• Some modest labour market reforms (probationary periods)
• Minor planned changes to the anti-dumping regime.

No doubt there are others, but if anyone can point me to a “very significant economic reform” undertaken in New Zealand since November 2008 I’d be grateful. 

Anything Mike's left out? National's done a bit to reduce the negative effects of the minimum wage on youths. Plus, having inherited a large structural deficit from Labour thanks to Working for Families and zero percent loans, they managed to clear most of that while cutting taxes. Reddell notes that corporate tax rates are high, but the gap between corporate tax rates and the top marginal income tax rate isn't too bad. On other margins, we can credit the government for things it didn't mess up. Uber has entered the NZ market without being legislated or regulated out of existence. The Financial Markets Authority has allowed neat innovative moves in larger scale crowdfunding and in alternative indices like Unlisted. Nobody has yet banned parallel importation of digital product like geounblocking Netflix, and nobody has yet killed parallel importation of physical product through hamfisted application of GST at the border. The government would have been under strong pressure to do harm on most of those margins, and resisted it.

Otherwise, they've done the more typical conservative thing of making things worse more slowly than the other team might have. Civil asset forfeiture has gotten worse. Treasury has gotten worse and seems mostly to care about being politically palatable. The Ministries have gotten worse for generally not having Ministers who insist on robust analysis. RBNZ's taken its eye off targeting the centre of the band.

Here's Reddell's other list:

And the problem with even the list above is the list of measures that could appear on a  “steps backward” list:

• Higher effective corporate tax rates
• The debacle of the earthquake-strengthening legislation
• The continuing debasement of our skills-based immigration system, both in the way it is administered and in formal announced policy.
• New overlays of financial market regulation
• The re-establishment of direct government controls over who banks can and cannot lend to
• The continuation of a regime of “corporate welfare”, including for example the Sky and Tiwai Point deals, and the smell that the Saudi sheep deal gives off
• The degree of central government control of the Christchurch repair project, involving both wasteful projects (some of which may not finally go ahead), and the way central government has artificially boosted land prices and impeded the prompt redevelopment of the central city.
• The continuing apparent decline in the rigour of public sector policy advice, and the use of robust cost-benefit analyses in underpinning policy decisions.
• Increased first home buyer subsidies.
• Undermining housing affordability with mandatory insulation etc requirements for rental properties
• Continuing increases in minimum wages, from very high levels (relative to median wages) at a time when unemployment is quite high, and policy was supposedly oriented to getting people off welfare.
• Heavy investment in the newly state-repurchased loss-making Kiwirail

But, mostly, the story is just about the failure to do anything much. 

It feels like National has convinced itself, and many of its supporters, that it has done the most it can do given the political constraints it faces: that this is the best of all possible worlds.

Perhaps that's the ambition Turnbull has as well. Lowering supporters' expectations does make the job a bit easier.

Ultra Vires?

Michael Reddell, ex-RBNZ economist, has wondered whether the RBNZ's LVR rules really fit within its financial stability mandate. I had a piece in the NBR last month wondering the same thing.

Seems we're not alone.

In a briefing for Secretary to the Treasury Gabriel Makhlouf, officials said they agreed with the Reserve Bank that a pick-up on the Auckland housing market "could potentially pose a threat to financial stability" in the coming years.

"However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ's mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices."

The comments appear to suggest the Reserve Bank is being warned that it may be overstepping its role over financial stability, a claim made in recent months by Michael Reddell, a senior adviser to the bank who was made redundant earlier this year.

Reddell said the Reserve Bank's own stress tests released in late 2014 showed the major trading banks could withstand a 50 per cent house price fall in Auckland and 13 per cent unemployment without breaching capital requirements. Some could even continue to pay dividends in that scenario. Nevertheless the Reserve Bank had imposed lending restrictions requiring larger deposits on the ground that rising prices were a risk to financial stability, something Reddell claims the bank had not laid out an argument for.

"What they haven't done is make a compelling case that there's a threat to financial stability of the New Zealand financial system," Reddell said.

Reddell hit the topic again at last night's LEANZ meeting. He blogs on it here - his full talk is worth reading. Jenny Ruth at The NBR (gated) has more.

Meanwhile, the Finance Minister reminds the Reserve Bank that they're meant to keep inflation between 1 and 3 percent; they've been running a bit low.

Mr English’s criticism of Reserve Bank governor Graeme Wheeler’s conduct of monetary policy is a major departure from the government’s customary respect for the central bank’s independence.

“He’s been out of the zone for years now, below the midpoint for quite some time,” Mr English told the Bloomberg news service late last week.

“He’s meant to be following the Policy Targets Agreement,” Mr English said.
The PTA, an agreement between the finance minister and the central bank’s governor, requires the governor to keep inflation between 1% and 3% and to aim for 2% over the medium term.

“That’s the bit I look at and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not,” Mr English said.

That's pretty blunt.

Central Bank independence means independence to choose the appropriate methods, among those they're legislatively empowered to use, to achieve the inflation outcomes they're contracted to produce and to maintain financial stability.

It does not hurt central bank independence to remind them that there are targets they have to achieve. I don't like it when Finance Ministers and Prime Ministers speculate about the appropriate path for interest rates. But they have to hold the Governor to the targets. I think that failed in 2005/6 when Cullen let Bollard run too hot for too long. But I am a bit surprised that English's comments came after Wheeler started cutting interest rates, rather than a few months ago.

Coasean biosecurity externalities

Michael Reddell beat me to the punch on this one.

The budget's imposed a customs levy on air travellers to cover the costs of biosecurity border enforcement. Michael makes the simple Coasean point:

• A new tax on international travel.  I wonder if the government looked at the possibility of levying these costs on, for example, the apple and kiwifruit industries, for whose benefit most of the biosecurity apparatus seems to exist?  Are those industries really economic?

It's a bit beyond that. Somebody bringing hoof and mouth disease into the country would do rather more harm. But the simple Coasean point is that it takes two to make an externality. Either the agricultural sector will impose an external cost on the tourist sector, or vice versa. It isn't obvious which side of the ledger ought to bear the burden.

The rest of his post on the budget is well worth reading, as is his follow-up. I especially liked this potted history in the latter post:

The previous government in many ways deserves a lot of credit for keeping spending in check for their first six years, but the structural surplus in 2006 peaked at 4.7 per cent of GDP (OECD estimate). Those huge surpluses just set up an electoral auction in the 2005 election campaign.  No political party will ever want to be in the position of allowing their opposition to spend the surplus their way –  those choices, about priorities, are a large part of what politics is about.  And the large surpluses built up in the early 2000s didn’t even do much to ease pressure on monetary policy, because they were run up well before the peak pressures on resources (2005 to 2008).  Quite possibly, overall macroeconomic management in New Zealand over the last 15 years would have been a little better if piecemeal adjustments had been made throughout.  We’d never have got into a position where we had highly stimulatory discretionary fiscal policy in the period (2005-2007) of greatest pressure on resources (and on the exchange rate).  And it would also have avoided a situation where Treasury, applying its best professional judgement, finally determined only just before the great recession of 2008/09 that the revenue increases looked permanent.  A high stakes judgement that turned out to be quite wrong.  Fiscal institutions, and ambitions, need to take more serious account of the severe limits of anyone’s knowledge.  A Fiscal Council, as the New Zealand Initiative and the former director of the IMF’s Fiscal Affairs Department have recently called for, might explore some of these issues.  Or a Macroeconomic Council might?  Then again, our academics and think tanks might lead such debates.

The best case we can make for yesterday's budget is that it bought the government time to undertake the more substantial reforms to the benefits system behind the scenes: pushing towards outcome-based contracting, outsourcing service provision, running innovative experiments like Tamaki.

Maybe my expectations have been too high. Under the government's budgetary projections, conditional on continued fiscal discipline, by 2018 government spending as a fraction of GDP will be back to where it was in 2004 under Helen Clark. In 2008, I'd have been very happy for government spending to ever return to 2004 levels. So there's that. Conditional on continued fiscal discipline.

Zealand Free Banking

The more I read Mike Reddell's blog, the more I like it.

Here's Reddell on free banking:

The Reserve Bank of Australia yesterday put out a Research Discussion Paper containing some discussion of the nature, and estimates of the size, of the social costs of counterfeiting of Australian banknotes.

It is good to see a central bank producing research in this area, and opening it to public scrutiny.  But I question the starting point.  I wonder how confident the Reserve Bank of Australia (and perhaps more importantly, the Australian Treasury as advisers to the Treasurer) can be that the statutory monopoly on physical currency  – which is what the anti-counterfeit measures are protecting –  is itself socially beneficial?

Without that statutory monopoly (on notes in section 44 of the RBA Act, and on notes and coins in section 25 of the Reserve Bank of New Zealand Act) banks would have been likely to have gone on issuing their own notes (and perhaps coins).  New Zealand banks issued their own notes until 1934, when the first Reserve Bank of New Zealand Act prohibited them from offering that payments medium, as part of (but not a necessary part of) the establishment of a central bank in New Zealand.

If the monopoly were removed today, it is likely that private issuance would resume, and central bank notes would revert to being issued/used primarily in quite extreme crises, when there was a generalised loss of confidence in liabilities of the banks.   

There is no obvious reason why, in normal times, people would be any more reluctant to hold, say, ANZ banknotes delivered from an ANZ ATM than they would be to hold an ANZ demand deposit (as they were doing just prior to withdrawing the notes through the ATM).  People happily hold notes from the (legally limited) private issuance in Scotland and Northern Ireland.

There's good basis for it too. Larry White worked through the equimarginal conditions showing that banks would be constrained against overissuance.

RBNZ on Housing

I knew that Mike Reddell's now being free to blog on monetary policy and the RBNZ was going to be good.

Here's Reddell's take on the Deputy Governor's statements on housing.

We should expect the Reserve Bank to provide in-depth analysis to back its claims around the housing market.  But in a 19 page speech, only five paragraphs are devoted to the “housing pressures are a threat to stability” section.  And if not everything can elaborated in a speech, we might expect to see links to recent Reserve Bank research in the area – but there are no such links, and not even references to the issue of the Bulletin published only a few weeks ago which cited international research suggesting that housing mortgage loans have rarely played a major role in systemic banking crises. Issues of the Bulletin are generally regarded as speaking for the Bank, so it might be useful for the Bank to clarify just where it stands, and why.  New Zealand might be different, but if so why does the Bank think this is likely?   Perhaps the Bank can point us to countries in which private sector credit growth of around 5 per cent per annum, from starting levels of PSC/GDP that are still materially below the peaks reached 7-8 years ago, have led to serious threats to financial system soundness, or even to wider economic stability.

The Deputy Governor has been consistently reluctant to engage with the proposition that any financial stability risks must have been much greater in 2007 than they are now.  In the years leading up to 2007 we had seen:

• Very rapid nationwide growth in real house prices, on a scale not seen previously in modern New Zealand history
• Very rapid growth in credit and credit-to-GDP, on scales consistent with some of the international indicators that have been taken as suggesting heightened risk of crisis.
• Much lower overall bank capital ratios (actual and required)
• A move (in the adoption of Basle II) towards lower risk weights on housing.
• A long-running period of economic expansion and consistently high levels of optimism
• High levels of real investment in housing
• Rapid growth in commercial property and farm prices, and in the associated stocks of credit.

All of which was followed by one of the nastier recessions New Zealand has seen in the post-war period, and a double-dip recession in 2010.  GDP per capita (real and nominal) settled onto a much lower track than had previously been expected – so that many borrowers’ income expectations proved to be quite severely disappointed.   

Nominal house prices did fall during the recession, and by more than the Reserve Bank projected at the time.  And yet with all these factors, the soundness of our systemic institutions was never questioned (even in the midst of a global panic centred on concerns around housing) and the level of impaired housing loans rose only modestly to extremely low levels.

The current climate just does not bear comparison.  If the Reserve Bank disagrees, it would be helpful for them to lay out their arguments and evidence. 

Go read the whole thing. He also hits on whether any tax advantage lies with unleveraged owner-occupiers or those nasty investors.

The relevant RBNZ paper is here.

I wonder whether any old Lyndon Johnson quotes are being circulated over at #2 The Terrace.

Croaking Cassandra

Michael Reddell's blog started so quietly that I didn't notice it until it was pointed out to me last week. But he's now on my feedly Must Read list.

Michael has a wealth of institutional knowledge from a long career advising central banks, working with the IMF, the RBNZ and Treasury. I expect I will find his coming series of posts on immigration to be the most challenging; Michael believes that too high of immigration has been substantially detrimental for New Zealand, where I'm rather pro-immigration. But his is the anti-immigration case worth taking seriously.

Here's a 'best of' round-up of his posts thus far:

• New Zealand's entry into WW1 was preceded, by one day, by the suspension of gold convertibility of New Zealand bank notes. And, until 1934, there was no central bank and only customary practice in which the banks ensured that their own notes remained convertible into sterling.


• Maybe, just maybe, having central government get out of the way in the regions and stop there imposing costly regulatory mandates would help regional economies. 


• A review of Saint-Paul's The Tyranny of Utility and Micklethwait and Wooldridge's The Fourth Revolution.


• New Zealand's economic performance relative to Australia doesn't look so hot in terms of real GDP per hour worked since 2012. 
• And what is perhaps the most terse Executive Summary of a discussion note.


• Reddell's first salvo against immigration. I agree with Reddell that immigration cannot solve underlying economic problems in the vast majority of cases, but with two potential exceptions: if agglomeration is becoming more important and size and distance are now hurting New Zealand more, a bigger country can help to solve that. And migration can potentially help a bit with an ageing domestic population. But it is important that complementary policies be reasonable: we have to be willing to allow more house and apartment building if immigration is strong.


• A caution that we shouldn't be too quick to take all the praise that the Oz press wishes to heap upon New Zealand:

  "Yes, the labour market is a bit easier in New Zealand at present than it is in Australia, although at 5.7% our unemployment rate is not something to be complacent about.  But nothing has happened to even begin to reverse the decades-long widening in the now very large gap between New Zealand and Australian incomes and productivity.  And favourable commentary from the other side of the Tasman will be a false friend if it distracts from the serious economic challenges that our own policymakers should be grappling with.

  I would note, though, that that 5.7% unemployment rate is in the midst of strengthening labour force participation.


• Is the IMF becoming obsolete?


• Further reasonable scepticism about New Zealand's performance relative to Oz - this time on government consumption as fraction of GDP. See Michael's graph below.
  Is it really enough for a rightish National Party coalition government to get government consumption back down to only being a bit more than it was at the start of its term in office, which was preceded by a really substantial expansion in government spending in the third term of Helen Clark's government?

I'm very glad to see Michael blogging. I'll look forward to his future posts.