The Kiwi dollar is our currency and nobody else's problem

Oliver Hartwich in The Herald:

A small economy like New Zealand should be cautious. Being small has some obvious advantages, not least that smaller countries can be nimbler in changing circumstances. But that tiny size also limits the ability to get away with bad policy.

To illustrate this point, consider the United States. As the world's largest economy, it has a greater ability to retreat from the rest of the world. To be clear, even a very large country like US must exploit its comparative trading advantages. But because the US' market is huge, it could withdraw from international trade and still keep the impacts on its consumers and businesses moderate.

The same is true for monetary and fiscal policy. The US is not just the largest economy on the planet. It also has (at least for the time being) the luxury of being able to print the world's de facto reserve currency. Or, as John Connally, the Treasury Secretary of the Nixon Administration, once said, "The dollar is our currency, but your problem." As a result, the US can run massive fiscal deficits and money printing programmes without much restraint.

As a small country, New Zealand simply does not have the ability to withdraw into its shell like the US can. Reducing New Zealand's participation in global trade would be a catastrophic outcome of this crisis. For a start, too many products are not made in New Zealand. Cars, specialist machinery and pharmaceuticals are all imported. For lack of scale, import substitution would be a disastrous choice.

Given New Zealand's small size, the percentage of its economy traded internationally has been relatively low for some time. As a percentage of GDP, imports and exports are just over 50 per cent, a remarkably low number by comparison with other small economies like Denmark (103 per cent), Switzerland (119 per cent) or Ireland (208 per cent). New Zealand is trade-dependent but not nearly trading as much as expected or hoped.

The same is true for monetary and fiscal policy. The NZ dollar may be the world's 10th most traded currency, but that ranking overestimates our dollar's importance. It is only involved in about 1 per cent of global trades and is not regarded as a reserve currency. To paraphrase Connally, the Kiwi dollar is our currency and nobody else's problem.

New Zealand cannot debase or inflate its currency as much as other countries. It is dependent on other countries having faith in the stability of the NZ dollar, so any political moves to undermine it are potentially dangerous. If New Zealand or its dollar disappeared tomorrow, the world would barely notice.

The general picture for New Zealand is becoming clear: this country is too small to be a must-have in anyone's portfolio. Against this background, the political direction of travel in the Covid-19 crisis is worrying.

Since March, New Zealand First ministers have announced a wish to reduce New Zealand's trade engagement. Shane Jones openly toyed with a tariff on log exports and is now rushing through legislation to redirect forestry towards national manufacturing. Winston Peters has talked about onshoring manufacturing even when goods are more expensive to produce in New Zealand.

The Government is also making it harder for international investors to come to New Zealand. Minister David Parker is pushing through changes to the overseas investment rules requiring Government approval for buying 25 per cent of Kiwi businesses, regardless of the dollar value.

None of these initiatives will improve New Zealand's international trading position. Combined with the inevitable decline in the country's export revenue from the shuttering of tourism and export education, serious problems are emerging for both New Zealand's current account and net international investment position.

On top of this is the slow merging of fiscal and monetary policy. The Reserve Bank has signalled it would monetise government debt if it is asked and it has already started a large quantitative easing programme, which Governor Adrian Orr has indicated could be expanded if needed.

The pandemic requires our firms to be able to be nimble. They have to be able to adjust, retrench, find what new opportunities they can, and rebuild in ways that fit the current environment. New microeconomic rigidities that the government might throw in, including trade and capital restrictions, just make all of that harder.  

The coming Covid-crisis

Oliver Hartwich, at Newsroom ($), on the consequences of Covid-19 for the Eurozone. This stuff really is Oliver's beat. 

To start with a disclaimer, I am not a medical expert. I have no degree in epidemiology, nor can I claim any expertise in public health management.

In these difficult times, it is perhaps useful to lay one’s qualifications on the table. There is too much misinformation about the medical aspects of the virus out there. Worse than that, when even the experts contradict each other, what chance would laypeople have to understand what is happening?

That said, there is one aspect of the crisis which relates to my expertise as a commentator on Europe. And that aspect, frankly, scares the hell out of me: It is what the virus does to Italy – and by proxy to the eurozone.

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When the euro crisis struck in the wake of the Global Financial Crisis, Italy was one of the hardest hit countries in Europe. Indeed, it never properly recovered from that crisis. Per capita (and in constant prices), GDP is still lower than it was in 2011. Industrial output collapsed at that time and never returned to its previous levels.

On top of the problems in Italy’s real economy, there has long been a banking crisis. It is a banking crisis that has been simmering under the surface, mainly because the European Central Bank kept it there.

For the past decade, the ECB introduced a range of programmes with the more-or-less explicit aim of stabilising the Italian banking system. Banks were enabled to access cheap, fresh money from the ECB so they could purchase Italian government bonds and pocket the interest rate difference. That way, the ECB kept both the Italian banks and the Italian government afloat. Only every now and then were these policies not enough and Italian banks had to be bailed out like Banca Monte dei Paschi or Banca Popolare di Bari.

The Italian government certainly benefited from the implicit ECB support. It is one of the most indebted governments in the world. Thanks to the ECB’s help, 10-year government bonds currently trade around 1 percent and thus much lower than a decade ago when they peaked at more than 7 percent. Even so, Italy’s debt-to-GDP ratio kept going up and has hovered around 135 percent since 2015.

Politically, it has been a turbulent time for Italy as well. After the wasted Berlusconi years, the EU interfered directly with Italian politics during the GFC and even installed a new Prime Minister by exercising pressure. Ever since, the Italian political system has been characterised by the rise of populism, both from the left and the right. Only very recently, after the exit of the Lega party from government, did the country see a return to a more moderate and conventional form of government.

So, Italy has long been a troubled place on many fronts. Even that is an understatement. We haven’t even mentioned Italy’s demography. Or migration. Or corruption.

But all that was before the coronavirus hit. And the situation now is worse. Much worse.

Despite Italy’s many, many problems, the country could always rely on its inherent appeal. There is only one David – and he stands in the Galleria dell’Accademia in Florence. There is only one Venice in the world. There is no equivalent of Rome anywhere else.

No wonder that tourism had become one of Italy’s most important industries. It was practically the only industry still growing and accounted for about one seventh of Italian GDP. Just for comparison, agriculture accounts for not even half that in New Zealand.

Tourism collapses; Italy's public finances collapse; its debt ratio jumps; the zombie firms fall over along with the banks to whom they owe money.

To say it clearly, Italy is too big to fail – in ordinary times. But it is definitely too big to be bailed out – in extraordinary times.

If Italy fails – and there is a temptation to write ‘When’ instead of ‘If’ – it will be a catastrophe not just for Italy. It will be the end of the Euro as Europe’s currency. It will be the return of the euro crisis on steroids.

I have been covering the euro crisis for a decade now for various publications. But I have never seen a situation as dramatic as Italy’s today. The only reason why you may not have read about the new coronavirus-induced Italian euro crisis just yet is that there are so many other coronavirus-induced crises around.

As for my Italian friends, I am afraid I have to finish with a quote from your national poet, Dante Alighieri: Lasciate ogni speranza voi ch′entrate. (Abandon hope, all ye who enter). This will not end well.

Morning roundup

The week's closing of the browser tabs brings some fun:

• Supermarkets find consumers nicking the shopping carts when they no longer can get plastic bags. Carrying bags around everywhere just in case you might realise you need to do some shopping might work for some people (and hooray for them!) but not for everyone. I wonder if anybody is tracking how many of the reusable bags are winding up in the tips because nobody needs the dozens of bags that easily accumulate - they're of little use as bin liners.


• Oliver Hartwich says it's time for a little game theory on Brexit


• SmokeFree Action UK's poster encouraging pregnant women to vape instead of smoke sends the right message. Nice. 


• In similar line, I liked this chart in the Annual Review of Public Health earlier this year. I continue to wonder why we aren't looking at a risk-proportionate excise regime where less harmful tobacco products would carry far lower excise than smoked tobacco. 
  


• Alex Tabarrok points to Matt Levine's proposal to free people to invest in things the SEC thinks are dumb investments. Basically, you sign a form agreeing that it's a dumb investment, an SEC employee slaps you hard across the face, then you're allowed to invest. Less rigamarole than the 'accredited investor' regime. 


• The economics of apologies. The best form of apology compensates the harmed party. 


• Trackless trams. Neat. Allows for far more flexibility, and is much cheaper than putting in rails. 


• MBIE notes the advantages of flexible workplaces with coming technological change. It'll all be ruined if we get fair pay agreements specifying terms and conditions across entire industries and occupations, but nice to think about. 

Volkswagon

Oliver Hartwich sums things up nicely over at Business Spectator.

In a way, Volkswagen’s crime was a very Germanic response to a business problem: It rendered regulatory standards useless by sophisticated engineering. Or, to say it with the famous Audi slogan, it tried to gain Vorsprung durch Technik (‘Advancement through technology’).
...

This is a corporate PR catastrophe of the first order, easily dwarfing previous disasters like the Deepwater Horizon explosion, the sinking of the Exxon Valdez or Merck’s recalls of its Vioxx drug. It calls into question not just one company, but a whole industry in one of the world’s leading business nations.

It is a common misconception to believe Germany is a place for ‘whiter than white’ business practices. That is, of course, how Germany likes to see itself and how it likes to advertise itself to the world. Self-righteousness is a virtue invented in Germany. Just look at the ways the Germans have tried to teach other nations lessons on fiscal policy, energy policy and now refugee policy.

The problem is that there is a gulf between this self-image and the reality of German life. The Germans are probably not worse than everybody else. But they certainly aren’t better, either.

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Volkswagen itself has had its own experiences with, well, suboptimal business practices. The German system of co-determination in which employees play a role in a company’s management had led the Volkswagen leadership to bribing its own employees’ representatives. They received cash, were taken on luxurious locations and invited to lavish sex parties. The scandal resulted in high-profile convictions, including a prison sentence for the head of the employees’ council.

If this had happened with Great Wall or another Chinese car company, imagine the demagoguery and the calls for bans on Chinese car imports.

I note as well that not all organisations headed by Germans reward staff with lavish sex parties.

Morning roundup

Today's roundup of assorted worthies, from the Great Closing of the Browser Tabs. The past week's been rather busy, and rather a few things deserving of their own posts didn't quite get there.

• Raf Manji is doing great stuff at Christchurch Council. He'd previously tweeted in support of per-unit water pricing in Christchurch using a refundable quota allocation system: you get x units for free, with additional units costing some amount, and Council buying back any unused quota allocation at that same price. It's a great way of framing things. I also appreciate his support for getting rid of the property tax exemption for religious land. The Press's online poll had 73% support for that churches pay Council rates. 


• The Press misses the point in their story on pay rates for EQC loss adjusters. Much of this is buying an option to pull these guys in full time in case of emergency. 


• The University of Canterbury is betting on sports partnerships as a way of getting students. I'm pretty pessimistic that that will work, but it could be part of a longer game. I used to think it a great advantage of Kiwi academia that there were no campus sports entanglements. And then, with the earthquakes, I also saw no real facility for ongoing engagement with alumni to get their support. If this then led to stronger campus sports franchises, and from there to greater alumni support - it seems worth a punt.


• Should EQC only serve as reinsurer? I generally agree with Farrar here. But does anything stop the major insurers from contracting for that kind of arrangement with EQC currently? In that world, they could then advertise that it's their loss adjusters, and not EQC's, that would handle all claims. I'd be willing to pay a strong premium for any insurance plan that meant I never, ever, ever, EVER had to deal with EQC in the case of another earthquake. It seems... surprising... that Brownlee's office would find the EQC model to be generally sound. There are good reasons for having EQC. But I do hope that the review document they produce honestly lists the very substantial problems encountered in Christchurch and why they think only minor changes are necessary to avoid a repeat.


• Franks and Beans. Franks and Beans.

• Sky City. Again: if the basic deal isn't "You get gambling licences and in exchange the public gets no ongoing cost risk" but rather "You get gambling licences and pay most of the cost of a casino, but the public bears ongoing cost risk", then it's really important that the business case for a convention centre stacks up. Has one even been released? C'mon, National. You're making Labour and the Greens look fiscally competent here. One suggestion: Joyce can have his convention centre IF he finds the money in his own existing budget?


• Australia allows 'granny flats' as a way of increasing housing supply. Shame they remained banned in Christchurch post-quake.


• I'm late to the party on this one, but I disagreed mildly with Oliver Hartwich on Varoufakis's sartorial approach. Oliver found his attire entirely inappropriate. I think that was the point. Here was my reckon on it from last week Wednesday (on the NZ Initiative internal discussion forum):

  Varoufakis needed to convince the Europeans that he's happy to default and just crazy enough to do it, he needed to placate a domestic audience by pissing off the Germans, he needed to stay in the Euro to avoid monetary policy going absolutely nuts, and he needed to achieve massive structural reform.
  
  So the play is this: either default or come so close to it that nobody will lend to Greece any more. Do it in an obviously arrogant and "screw you Germans and Brits" way that gets all the Greeks really happy with him. Then when he cannot borrow (because of it) and cannot inflate (still in Euro), he has to go for structural reform but has an external constraint to blame it on. Since he'd already laid the groundwork by saying "Yeah, I've got no respect for those foreign jerks either", he's then allied with the populist crap there while saying "Hands are tied, have to reform."

  Maybe it was just wishful thinking. But the ECB's fairly rapid blocking of the use of Greek bonds as collateral is consistent with it.

So endeth the closing of the browser tabs.

So where the bloody hell are ya?

Oliver Hartwich's column in the NBR reminded me of the old Australian tourism campaign that highlighted all the beautiful empty places there, then asked "So where the bloody hell are ya?"

Hartwich notes that New Zealand's openness to immigration and wide variety of skilled migrant categories for fast-tracked work visas that lead quickly to residence haven't turned into a flood of new immigrants; he says we gained a net 12 people in the year to January. Hartwich worries that the sales job we do for the tourists isn't the sales job we need to do to make people want to live here. "Clean and Green" is nice to visit. But there are lots of places like that.

New Zealand has far more to offer than its natural beauty. We should let the world know about it.

While the Australian tourism ads hide the ridiculously terrifying spiders, ours don't mention the cost of living. New Zealand is a very expensive place to live. Housing is exceptionally expensive for what you get by international standards. The government now seems committed to breaking the local urban planning nightmares that entrench high land prices. I hope they do a thorough job of it.

I agree with Oliver that the branding needs to change. New Zealand has an absolute advantage in beauty, but there are lots of other countries that have beautiful vistas. Our comparative advantage is our sane policy environment. We are growing insane more slowly than the rest of the world. There are threats to our "Outside of the Asylum" status. But, on the whole, we do well. Nobody here thinks the Prime Minister should have a button that lets him murder people, domestically or abroad, citizen or not, for example. And we don't have police checkpoints where thugs demand to know whether you're a citizen. New Zealand ranks as the most free country in the world. It's worth testing whether a campaign targeting that would work.

I met this morning with Chris Read, who took on my honours project this year to test the sensitivity of international migration to differences in measured freedom. That might be a first cut in seeing whether this kind of campaign could prove effective.

I worry that Americans claiming to love liberty, by revealed preference, might just really enjoy carping about civil liberties whenever their preferred party is in opposition. Few of the Democrats who hated what Bush did to civil liberties seem to mind when it's their guy with the murder-button; few of the Republicans rightly excoriating Obama said much when Bush started this all up. Moving, that's expensive, takes you far from friends and family, depreciates your social capital, and might cause an income drop. And being outraged on Twitter is more fun when the hated other team is in the same country. I'm starting to think that you people actually like US airport security because you get to complain about it when the other team is in office and fantasize about how your team would change things. Prove me wrong.

Oh - The Economist just listed New Zealand as the best place in the world for working women. We somehow managed this while having very free labour markets and minimal obligations placed on employers around maternity leave. Maybe New Zealand's been on the right track by subsidising daycare rather than making it really expensive to hire women of childbearing age. Again, we do well by being Outside of the Asylum.