Archive | Economy

The budget (for what it’s worth)

Government budgets used to be about micro-managing things like tax hikes increasing the prices of cigarettes & beer & petrol. They’re still about micro-managing, with some subtle touches.

One of those subtleties is that the spends are announced as totals but the sums coming from the Government coffers are trickled out. The new trick is the 4-year spread, through 2 election campaigns.

Yesterday’s election-year budget was very much about reducing the opportunities for the Opposition to campaign, and the Government’s done this with social welfare handouts & investments.

It’s a slow awakening for a government which has been reactive through its 3 terms, and it’s a questionable one.

Many of the measures announced yesterday & through preceding months increase dependency on the state, and not just for poorer citizens. Business, innovators, exporters – everybody has a potential handout to stretch their fingers out for. Ironically, socialism creep from a supposedly capitalism-supporting government.

If you think about why dependency is increased, you’ll find 2 reasons. One is that management of basics like housing construction and the control of economic inputs like migration has been abysmal, hurting those at the bottom of the pile but also causing widespread damage for everyone trying to go about their business.

The answer is to pay handouts, when for a government of this one’s ideology it should be about creating the basis for a thriving private sector, which would reduce the need for handouts.

The other reason is that support for private enterprises has been structured as handouts, instead of being in the form of facilitation. There’s a small but essential difference, partly due to the control factor but, more importantly, due to the inability to understand how to lift an economy.

One potential beneficiary has fared less well, and that’s Auckland. The Government didn’t trumpet too loudly that it’s finally paid the entry fee to Auckland’s city rail link project, but it did state once more that roads are the way ahead.

Every Aucklander knows that alternatives are imperative before the region is consumed by total gridlock, but roads are where the big infrastructure money has been directed.

In summary:

It’s a budget which displays largesse, which will be lapped up by a nation of beneficiaries.

It’s a budget aimed at winning an election through the offer of small individual gains, not at demonstrating what it could have been used for: demonstrating prowess at advancing the nation economically.

Links:
Treasury, Budget 2017
Labour on budget
Greens on budget
NZ First: Budget a ploy to hide crises

Attribution: Budget documents, my comment.

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Reserve Bank releases capital adequacy issues paper

The Reserve Bank published an issues paper today on regulation of banks’ capital adequacy.

It’s seeking feedback by Friday 9 June and will follow up with detailed consultation documents on policy proposals & options for each of 3 components later this year, with a view to concluding the review by the first quarter of 2018.

Deputy governor Grant Spencer foreshadowed the broad-ranging capital review in March, in a speech in which he compared the average housing risk weights of large banks in 6 countries.

New Zealand was clearly the most heavily weighted towards housing at 28.3%, followed by Australia at 23.5% (and its bank overseers also tightening the reins), then a long way back to Denmark 13.9%, the UK 11.7%, Canada 7.2%, Sweden 6.8%.

The Reserve Bank aims to identify the most appropriate capital adequacy framework, taking into account experience with the current framework & international developments.

The review will focus on the 3 key components of the current framework:

  • The definition of eligible capital instruments
  • The measurement of risk, and
  • The minimum capital ratios & buffers.

Paper sets out 2 sides

In its issues paper summary, the bank said it recognised the need to balance the benefits of higher capital against the costs, but set out 2 sides to the argument: “It is expected that a higher level of capital would reduce the probability & severity of bank failures and would smooth out credit cycles.

“But banks typically argue that capital is a costly source of funding and that if they had to seek more of it they would need to pass on costs to customers, leading to reduced investment & growth.

“There has been debate about the extent to which these costs reduce national welfare. In one view the capital levels of banks are inefficiently low because of implicit government guarantees of creditors or other incentives. Raising the minimum capital requirement restores efficiency by reversing the implicit subsidy to bank shareholders, and in this way improves overall welfare.

“A growing number of academics, most notably Anat Admati from Stanford University & Martin Hellwig from the Max Planck Institute for Research on Collective Goods (as well as some regulators) have argued that the costs to society as a whole of higher capital are very low and that capital requirements should be much higher than they are now.

“These authors are associated with the ‘big equity’ view and are distinguished by the extent to which they see significant increases in capital as being possible without net negative economic impacts.

“Empirical studies have attempted to quantify the costs & benefits of increasing capital requirements, and to determine the optimal capital ratio which has the greatest net benefit. In the more mainstream studies the Reserve Bank has considered so far, a typical optimal ratio is about 14%, but estimates do vary widely (the range is roughly 5-17%). The Reserve Bank will continue to review & assess these studies, but also welcomes the views of submitters on this issue.”

The bank said that, at this early stage of the review, it hadn’t formed a view on the final calibration of capital requirements, but said it was likely to take into account the studies it had seen, as well as empirical evidence.

Links:
Review of the capital adequacy framework for registered banks
Grant Spencer’s March speech

Attribution: Bank release.

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Joyce lifts infrastructure intentions and talks new operating mechanisms

New finance minister Steven Joyce (pictured early in his career as a sod-turner) looks to have increased the annual allocation to capital infrastructure spending from $900 million to $4 billion for the 2016-17 financial year, with the promise of upping the budget for the following 3 years by $4.3 billion.

Mr Joyce took over finance from Bill English in December, in the reshuffle following Mr English’s appointment as prime minister. The country goes to a general election on 23 September

Under the more conservative English programme, the allocation to capital infrastructure over the next 4 years was $900 million/year. Mr Joyce said yesterday the focus would be on the infrastructure that supports growth, and those annual allocations would rise to $2 million in the 2017-18 financial year and $2.5 billion in each of the following 2 years.

Both the Property Council & Infrastructure NZ focused on the $11 billion figure Mr Joyce waved in front of them, which included the $3.6 billion already budgeted.

Property Council chief executive Connal Townsend said a lot of the country’s infrastructure was at the end of its useful life and he expected asset replacement would feature prominently in the Budget: “Government’s announcement is a recognition that houses & commercial properties do not exist in isolation but need to be supported by infrastructure such as roads, schools & hospitals….

“Under-investment in infrastructure creates significant deadweight losses for the wider economy. Property Council is pleased that Government recognises this. Infrastructure spending must be seen for what it really is. It is an investment in our cities and a productive input into the wider production process, rather than a mere cost.”

Infrastructure NZ chief executive Stephen Selwood said: “This is a massive increase and the largest capital investment commitment by any government since the 1970s. But it must be said that New Zealand’s growth challenge is the highest it has ever been, and meeting population demands requires the services for a city larger than Nelson to be added every year.

“Added to the growth challenge is New Zealand’s historic under-investment in infrastructure. The reality is that it would not be difficult to spend $11 billion in 2017 alone.”

Mr Joyce said: “We are growing faster than we have for a long time and adding more jobs all over the country. That’s a great thing but, to keep growing, it’s important we keep investing in the infrastructure that enables that growth.”

“We are investing hugely in new schools, hospitals, housing, roads & railways. This investment will extend that run-rate significantly, and include new investment in the justice & defence sectors as well.”

Mr Joyce said the budgeted new capital investment would be added to the investment made through baselines & the National Land Transport Fund, so the total budgeted for infrastructure over the next 4 years would be about $23 billion.

He said the Government wanted to extend that further, with greater use of public-private partnerships and joint ventures between central & local government & private investors.

“As a country we are now growing a bit like South-east Queensland or Sydney, when in the past we were used to growing in fits & starts. That’s great because we used to send our kids to South-east Queensland & Sydney to work, and now they come back here. We just need to invest in the infrastructure required to maintain that growth. Budget 2017 will show we are committed to doing just that.”

Mr Joyce will give details of the initial increase in the May Budget.

Attribution: Ministerial release.

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Leading banker takes Australian politicians to task on governance, finance, infrastructure, urban prospects

Australian politicians’ ears must have been burning when bank chief Ken Henry addressed the country’s Committee for Economic Development in Canberra on Thursday, because he wasted no words in portraying the destruction – instead of construction – of a sound future they continued to guarantee.

The Unconventional economist on MacroBusiness, Leith van Onselen, wrote: “Dr Henry pulled no punches in admonishing the Government’s negligence in managing Australia’s mass immigration programme.”

Mr van Onselen also raised questions arising from Australian Productivity Commission reports, including An ageing Australia: Preparing for the future.

But migration & age were just 2 of the questions raised by Dr Henry, who chairs the National Australia Bank. He talked about the notion that endless growth was a practical proposition for Sydney & Melbourne, how every proposal for major infrastructure was drowned in political wrangling and – in the sector he knows best – how every tax reform proposal of the last decade had failed.

Below are some excerpts from his speech:

Business at odds with community

“According to our research, Australian businesses see our strong rate of population growth as a positive. …. In the broader community, there is considerably less support for a larger population. People are concerned about the impact of a growing population on traffic congestion, urban amenity, environmental sustainability & housing affordability. And they worry about our ability to sustain Australian norms of social & economic inclusion. These concerns are understandable.

“Australia’s business leaders have to accept responsibility for ensuring that strong population growth, and the investment opportunities that go with it, lift economic & social opportunity for all, without damaging the quality of the environment we pass to future generations. That means that we have to take an interest in traffic congestion, housing affordability, urban amenity & environmental amenity, including climate change mitigation & adaptation….

“If we want better access to skilled domestic workers, then we are going to have to offer those workers the prospect of better lives. If we want modern & efficient infrastructure, then we are going to have to take an interest in the design of our cities; we are going to have to take an interest in regional development; and we are going to have to take an interest in the planning of new urban centres.

“If we want less red tape & less regulation, then we are going to have to demonstrate that regulation is not necessary….

“Meanwhile, our politicians have dug themselves into deep trenches from which they fire insults designed merely to cause political embarrassment. Populism supplies the munitions. And the whole spectacle is broadcast live via multimedia, 24/7. The country that Australians want cannot even be imagined from these trenches….

“Almost every major infrastructure project announced in every Australian jurisdiction in the past 10 years has been the subject of political wrangling. In the most recent federal election campaign, no project anywhere in the nation – not one – had the shared support of the Coalition, Labor & the Greens.

“Every government proposal of the last 10 years to reform the tax system has failed.

“And the long-term fiscal, economic growth & environmental challenges identified in 4 intergenerational reports over the past 15 years?  The opportunities identified in the White paper on Australia in the Asian century? Simply ignored.

“The reform narrative of an earlier period has been buried by the language of fear & anger. It doesn’t seek to explain; rather, it seeks to confuse & frighten.

“Meanwhile, the platform burns.”

Growing Sydney & Melbourne

Dr Henry also spoke about the Australian budget & tax system, a strongly growing but aging population, climate change & energy security, and making the most of the Asian century.

“How will we fund the biggest infrastructure build in our history? And what about infrastructure planning?” he asked, before questioning the sense in adding 7 million people to the populations of Sydney & Melbourne:

“On the basis of official projections of Australia’s population growth, our governments could be calling tenders for the design of a brand new city for 2 million people every 5 years; or a brand new city the size of Sydney or Melbourne every decade; or a brand new city the size of Newcastle or Canberra every year. Every year.

“But that’s not what they are doing. Instead, they have decided that another 3 million people will be tacked onto Sydney and another 4 million onto Melbourne over the next 40 years.

“Already, both cities stand out in global assessments of housing affordability & traffic congestion.

“And even if we do manage to stuff an additional 7 million people into those cities, what are we going to do with the other 9 million who will be added to the Australian population in that same period of time? Have you ever heard a political leader addressing that question? Do you think anybody has a clue?

“At the very least, we are going to have to find radical new approaches for infrastructure planning, funding & construction. And that includes energy infrastructure, critical to our economic performance and our quality of life.

“The biggest challenge confronting the energy sector is that climate change policy in Australia is a shambles. At least 14 years ago, our political leaders were told that there was an urgent need to address the crisis in business confidence, in the energy & energy-intensive manufacturing sectors, due to the absence of credible long-term policies to address carbon abatement. It is quite extraordinary, but nevertheless true, that things are very much worse today.”

  • Dr Henry was Secretary of Australia’s Treasury Department from 2001-11, and was appointed a director of the National Australia Bank in November 2011 and chair in December 2015. From June 2011-November 2012, he was special advisor to the prime minister with responsibility for leading the development of the white paper on Australia in the Asian century. He’s a former member of the board of the Reserve Bank of Australia, the Board of Taxation, the Council of Financial Regulators, the Council of Infrastructure Australia and chaired both the Howard government’s tax taskforce in 1997-98 and the Rudd government’s review of the tax system in 2008-09, and he’s governor of the organisation he was addressing above, CEDA.

Links:
23 February 2017: NAB chair Ken Henry’s full speech at CEDA
Unconventional economist on MacroBusiness, 24 February 2017: Australia can’t build its way out of population ponzi
Unconventional economist, 24 February 2017: Bigger cities are engines for inequality
Australian Productivity Commission, November 2013: An ageing Australia: Preparing for the future
Committee for Economic Development of Australia

Attribution: NAB, CEDA, MacroBusiness.

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Institute says Wheeler exit opportune for Reserve Bank policy review

Property Institute chief executive Ashley Church called today for Finance Minister Steven Joyce to renegotiate the Government’s target agreements with the Reserve Bank because of bank governor Graeme Wheeler’s convenient retirement 3 days after the election in September.

Mr Wheeler said he wouldn’t seek a second 5-year term. Deputy governor Graeme Spencer, who’s also retiring, will hang in as acting governor for 6 months after Mr Wheeler leaves.

Mr Church has been a strong critic of Reserve Bank policy for 2 years, and said Mr Wheeler’s resignation gave the Government a timely opportunity to review that policy & its effect on the housing market. He said many of the bank’s decisions had damaged the market and had slowed construction of new homes to a rate well short of catching up with demand.

“While the Government, the Auckland Council & the private sector have all been focused on addressing the supply issue in Auckland, the Reserve Bank has been unashamedly at odds with the market in its attempt to artificially cool demand. Sadly, it’s failed, and has only served to make the problems in Auckland even worse.”

Mr Church said he would like to see the Government add a ‘housing market supply’ clause to its contract with the Reserve Bank, which would require the bank to consider the effect its policies would have on overall supply: “If such a policy had been in place 2 years ago, the disastrous LVR (loan:value ratio) restrictions would have been much more carefully considered – and there would be no talk of debt:income limits on lending.”

Mr Church said he would also like to see the Government move to immediately modify existing Reserve Bank policy, particularly the LVR restrictions on first-homebuyers: “The decision to put LVR restrictions on first-homebuyers has been directly responsible for stopping thousands of Kiwis from buying a first home – and the longer they stay in place the worse the situation gets. We don’t have the luxury of waiting till September till those restrictions go – they need to be removed right now.”

Related story: On the move, February 2017, Wheeler sticks to one term at Reserve Bank, Spencer to fill in post-election

Attribution: Institute release.

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Treasury positive about government investment & asset monitoring

A lofty ambition worth aiming for, and an acknowledgment that more, and better, can be done: Prime Minister Bill English wrote, while he was still finance minister, that progress on monitoring the Government’s investments & assets was encouraging, but added: “The job is not done.”

Then, in Treasury’s investment management annual report, out today, he wrote: “More action & innovation is needed to continue to improve in important areas such as benefits & asset management. I expect active stewardship from the [Government] corporate centre, so that the investment system delivers the best value for New Zealanders, not just today but for decades to come.”

Budget & public services deputy secretary Struan Little says in the report the Government is investing in 508 significant projects with a combined whole-of-life cost of $87 billion (up 9 projects & $13 billion from the starting point a year ago): “These investments are being delivered by 53 agencies, across 11 sectors, and 38% of them are being worked on collaboratively. In addition, the Government uses fixed assets worth $93 billion to provide public services and enable social & economic development.”

Immigration warning

One early warning in the report: Immigration will continue to rise. The report says: “Immigration is a critical enabler of New Zealand’s economic growth, and New Zealand has one of the highest per capita inflows of migrants in the OECD. Migrants create jobs and build diverse communities – they bring skills & talents that help make local firms more productive & globally competitive.

“New Zealand competes internationally for skilled migrants, students & visitors. Immigration NZ is a global operation that facilitates travel while managing immigration-related risk.

“Immigration volumes have increased by 51% since 2011-12, and are expected to rise further, which means growing demand for Immigration NZ’s services as visa applications increase.”

The report notes:

  • One in 4 of all workers in New Zealand are migrants; in Auckland the figure is 44%
  • 3 million visitors arrived in New Zealand in the June year 2016, the highest ever annual total
  • International visitors spent more than $10.3 billion in the last financial year
  • More than 105,000 student visas were approved in 2015-16
  • International education is worth $3.1 billion to the economy each year and supports 30,000 jobs
  • Business investor migrants have invested over $4.8 billion since 2009.

Immigration NZ said over 100,000 online applications had already been received on its transformed visa processing service.

The report says 55% of the portfolio by number of projects, and 48% by whole-of-life cost, is being delivered to benefit specific areas – referred to in this report as ‘regional investment’.

40% of regional investment ($16.8 billion by whole-of-life cost) continues to be targeted at the Auckland region, and $12 billion of that is in transport, including the new western ring route, a 48km alternative route around the isthmus to improve network resilience & travel time reliability. Its total expected cost of $2 billion makes it the biggest project ever undertaken by the NZ Transport Agency.

Agencies use a 3-point scale for their performance reports, while the corporate centre & gateway reviews use a 5-point scale to assess projects. Treasury says it’s considering how to better get consistency in assessing project performance.

Data on performance showed the portfolio continued to perform well based on agencies’ self-assessment. 69% of the portfolio was assessed as green, compared to 58% last year.

Link:
Treasury investment performance report to November 2016

Earlier stories:
27 July 2016: First ratings out on government agencies’ management
1 December 2015: Major project transparency brings Christchurch consternation

Attribution: Treasury report & release.

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Fed deputy mulls over interest rates & tools for better regulation

US Federal Reserve vice-chairman Stanley Fischer made one of the more valuable contributions to the US & international economic debates a week ago – not answers, but questions with a direction to follow.

His 3 topics were monetary policy, financial stability and the zero lower bound (referred to as the ZLB, where nominal interest rates have fallen as far as they can go – and no, 0% isn’t necessarily the stopping point).

At the centre – and the key point from a New Zealand perspective – is the question: Where to for interest rates? Further into his speech, Dr Fischer examined the potential for negative interest rates, commented that the Fed’s cash-buying policy had reduced the level of the term premium embedded in long-term interest rates, and ventured into the possibility of a cashless society.

A permanently low rate?

Dr Fischer’s first question was whether we are moving toward a permanently lower long-run equilibrium real interest rate; second, what steps can be taken to mitigate the constraints imposed by the ZLB on the short-term interest rate; and third, whether & how central banks should incorporate financial stability considerations in the conduct of monetary policy.

“The equilibrium real interest rate – more conveniently known as r* – is the level of the short-term real rate that is consistent with full utilisation of resources. It is often measured as the hypothetical real rate that would prevail in the long run once all of the shocks affecting the economy die down. In terms of the Federal Reserve’s approach to monetary policy, it is the real interest rate at which the economy would settle at full employment and with inflation at 2% – provided the economy is not at the ZLB.

“Recent interest in estimates of r* has been strengthened by the secular stagnation hypothesis, forcefully put forward by Larry Summers in a number of papers, in which the value of r* plays a central role. Research that was motivated in part by attempts that began some time ago to specify the constant term in standard versions of the Taylor rule has shown a declining trend in estimates of r*. That finding has become more firmly established since the start of the Great Recession and the global financial crisis.

“A variety of models & statistical approaches suggest that the current level of short-run r* may be close to zero. Moreover, the level of short-run r* seems likely to rise only gradually to a longer-run level that is still quite low by historical standards. For example, the median long-run real federal funds rate reported in the Federal Reserve’s summary of economic projections prepared in connection with the December 2015 meeting of the Federal open market committee has been revised down about half a percentage point over the past 3 years to a level of 1-0.5%. A decline in the value of r* seems consistent with the decline in the level of longer-term real rates observed in the US & other countries.

“What determines r*? Fundamentally, the balance of saving & investment demands does so. A very clear systematic exposition of the theory of r* is presented in a 2015 paper from the Council of Economic Advisers. Several trends have been cited as possible factors contributing to a decline in the long-run equilibrium real rate. One a priori likely factor is persistent weakness in aggregate demand. Among the many reasons for that, as Larry Summers has noted, is that the amount of physical capital that the revolutionary IT firms with high stock market valuations have needed is remarkably small. The slowdown of productivity growth, which has been a prominent & deeply concerning feature of the past 4 years, is another factor reducing r*. Others have pointed to demographic trends resulting in there being a larger share of the population in age cohorts with high saving rates. Some have also pointed to high saving rates in many emerging market countries, coupled with a lack of suitable domestic investment opportunities in those countries, as putting downward pressure on rates in advanced economies – the global savings glut hypothesis advanced by Ben Bernanke & others at the Fed about a decade ago.

“Whatever the cause, other things being equal, a lower level of the long-run equilibrium real rate suggests that the frequency & duration of future episodes in which monetary policy is constrained by the ZLB will be higher than in the past. Prior to the crisis, some research suggested that such episodes were likely to be relatively infrequent & generally short lived. The past several years certainly require us to reconsider that basic assumption.

“Moreover, the experience of the past several years in the US & many other countries has taught us that conducting monetary policy effectively at the ZLB is challenging, to say the least. And while unconventional policy tools such as forward guidance & asset purchases have been extremely helpful, there are many uncertainties associated with the use of such tools.

“I would note in passing that one possible concern about our unconventional policies has eased recently, as the Federal Reserve’s normalisation tools proved effective in raising the federal funds rate following our December meeting. Of course, issues may yet arise during normalisation that could call for adjustments to our tools, and we stand ready to do that.

“The answer to the question ‘Will r* remain at today’s low levels permanently?’ is that we do not know. Many of the factors that determine r*, particularly productivity growth, are extremely difficult to forecast. At present, it looks likely that r* will remain low for the policy-relevant future, but there have in the past been both long swings & short-term changes in what can be thought of as equilibrium real rates. Eventually, history will give the answer.

“But it is critical to emphasise that history’s answer will depend also on future policies, monetary & other, notably including fiscal policy.”

What steps can be taken to mitigate the constraints associated with the ZLB?
“Against that backdrop, a second key question for central banks is: ‘What steps, if any, can be taken to mitigate the constraints associated with the ZLB?’

Raising the inflation target: “One step that has been proposed by many is the possibility of raising the target rate of inflation from 2% to some higher level. One concern I have raised in the past about such proposals is that high levels of inflation may also be associated with higher inflation variability. The welfare costs of high & variable inflation could be substantial. For example, more variable inflation would make long-run planning more difficult for households & businesses. And higher & more variable inflation would likely also lead to higher levels of indexation in the economy over time that, in turn, would make it more difficult for central banks to achieve their inflation goals.

Negative interest rates: “Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation. Our colleagues in Europe are busy rewriting economics textbooks on this topic as we speak – and also helping us to remember earlier discussions of negative interest rates by Keynes, Irving Fisher, Hicks & Gesell.

“To provide further monetary accommodation amid weak inflation prospects, the European Central Bank lowered its deposit rate into negative territory in June 2014 and twice cut it further, most recently to -0.3% in December. The Riksbank has lowered its key repurchase agreement, or repo, rate to a similar level, while the central banks of Denmark &d Switzerland have cut their key policy rates more deeply, to -0.75%, in large part to offset considerable appreciation pressures on their currencies.

“In each of these countries, short-term money market rates declined along with policy rates. Moreover, while it is hard to distinguish the effects of the rate cuts from those of concurrent asset purchase expansions, the easing appears to have been transmitted to assets of longer maturity & greater risk. Bond yields & bank lending rates declined and, in the euro area, the volume of lending to corporations & households picked up notably. In addition, the rate cuts into negative territory have acted as expected through the exchange rate channel.

“Negative policy rates have generally not been associated with the problems that likely were anticipated. Adverse effects on money market functioning have been limited. Cash holdings have not risen significantly in these countries, in part because of non-negligible costs of insuring, storing & transporting physical cash. These favourable outcomes may be partly because significant shares of deposits at central banks in these countries are not subject to negative rates. It is unclear how low policy rates can go before cash holdings rise or other problems intensify, but the European experience has certainly shown that zero is not the effective lower bound in those countries.

“Could negative interest rates be a policy response that the Federal Reserve could choose to employ in a future crisis? One possible concern with a strategy of this sort in the US is the potential for destabilising effects in money markets. For example, various observers have noted that negative rates could lead to scenarios in which money funds ‘break the buck’ or simply shut down, either of which could generate strains in money markets. Another concern is whether the complex & interconnected infrastructure supporting securities transactions in the US financial system could readily adapt to a world of negative interest rates. For example, similar to the types of issues addressed ahead of the year 2000, there could well be automated systems that simply are not coded properly at present to process transactions based on instruments with negative rates. All of these are, of course, transitional problems, but they might be sufficient to make a move to negative rates difficult to implement on short notice.

Raising the equilibrium real rate: “An even more ambitious approach to ease the constraints posed by the zero lower bound would be to take steps aimed at raising the equilibrium real rate. For example, expansionary fiscal policy would boost the equilibrium real rate. In particular, the need for more modern infrastructure in many parts of the American economy is hard to miss. And we should not forget that additional effective investment in education also adds to the nation’s capital.

“As another example, numerous studies of the effects of the Federal Reserve’s asset purchases suggest that these operations have reduced the level of the term premium embedded in long-term interest rates. If aggregate demand depends primarily on the level of long-term interest rates, it might be possible, in principle, to maintain a level of long-term rates consistent with full employment & stable prices by lowering term premiums while at the same time raising the level of short-term rates by a compensating amount. This result could be accomplished, for example, if the Treasury took steps to shorten the average maturity of Treasury debt outstanding or, alternatively, if the Federal Reserve maintained large holdings of long-term assets.

Eliminating the ZLB associated with physical currency: “While the European experience suggests that interest rates can be pushed somewhat below zero, the existence of physical currency likely still limits how deeply interest rates can be pushed into negative territory. That observation has led some to ask whether it would it be possible for the financial system to operate effectively without physical currency provided by the central bank. This is a theoretical question that has fascinated economists for decades and, with advances in technology, could possibly have practical implications as well. Indeed, the Scandinavian countries have embraced the development of new payments technologies that seem to be reducing the need for physical currency for transactions in those countries. Nonetheless, a transition to a cashless economy in the US seems very far off; indeed, US currency outstanding has been increasing relative to nominal gross domestic product over recent decades, driven importantly by foreign demands for US bank notes. “Moreover, to eliminate the ZLB associated with physical currency by going cashless, countries would need to transition to an economy that did not require widespread use of physical currency, and central banks in those countries would need to cease issuing physical currency on demand (for example, in response to demands spurred by negative rates on so-called inside money). For all of these reasons, as a practical matter at least for the US, it seems highly unlikely that the constraints associated with the ZLB could be meaningfully addressed by steps to encourage a transition to a cashless economy.

“None of these options for dealing with the difficulties of the ZLB suggest that it will be easy either to raise the equilibrium real rate or to mitigate the constraints associated with the ZLB. But when the real rate is close to zero, even small effects can make a noticeable difference. And, of course, such issues are clearly worthy of additional research.

How should central banks incorporate financial stability considerations in the conduct of monetary policy?

“The challenges associated with the ZLB and the potential risks resulting from an environment of extremely low rates for a prolonged period of time bring me to the third question: How should central banks incorporate financial stability considerations in the conduct of monetary policy? Or, put another way, can we conduct monetary policy in a way that reduces the likelihood of financial instability?

“The first response of policymakers to the question of whether monetary policy – defined as the short-term policy interest rate – should be used to support financial stability is to say that macro-prudential tools, rather than adjustments in short-term interest rates, should be the first line of defence.

“Macro-prudential tools are primarily regulatory or supervisory in nature and target specific activities, markets & financial institutions. In the US, we now have some experience with such tools. The interagency guidance on leveraged lending issued in 2013 and the annual co-ordinated stress tests (the Dodd-Frank Act stress test, or DFAST, mandated by the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010; and the comprehensive capital analysis & review, or CCAR), focused on the capital adequacy of the largest banking firms, are 2 examples implemented for a few years now and for which data are available for an assessment of their effectiveness.

“An important new element of the post-crisis capital regime is the counter-cyclical capital buffer (CCyB), which the Federal Reserve put out for comment on 21 December 2015. The CCyB is designed to be activated when there is an elevated risk of above-normal losses in the future and released when the risk of above-normal losses recedes. The higher levels of capital would increase the resilience of the largest banks because they would be better positioned to absorb the losses.

“Despite the tools that the Fed can use to support financial stability, including the Fed’s authority to impose margin requirements on secured financing transactions, the Fed has fewer macro-prudential tools at its command than some other central banks, particularly with respect to real estate. Regulators in many countries facing or anticipating problems with rising real estate prices often turn to controls over loan:value or debt:income ratios. Such measures are potentially important, as the real estate sector is the most common source of the beginnings of financial instability. In the US, responding to such problems with these tools would require inter-agency co-ordination, which could make their use cumbersome at critical moments.

“It is important to acknowledge that there remain cases in which macro-prudential tools are either not available or have not been sufficiently tested in the US, or they may be in conflict with other objectives such as widespread access to credit. The effective lack of such tools has 2 important consequences. First, it requires placing greater weight on the ability of financial institutions and the financial system as a whole to withstand financial shocks without the authorities having to use macro-prudential instruments – that is to say, on structural reforms to the financial system. Second, in such instances, one could consider using monetary policy – the short-term policy interest rate – to lean against the wind of financial stability risks.

“The use of monetary policy to address financial stability concerns raises 2 distinct but closely related sets of questions. The first is whether adjustments in the policy rate can indeed enhance financial stability by reducing either the odds of a financial crisis or the severity of such a crisis once it is under way – and, if so, through which channels.

“Provided that the first question is answered in the affirmative, the second question is how leaning against the wind interacts with the traditional objectives of monetary policy – namely, the employment & inflation mandates in the US. This trade-off could be small or even nonexistent when both traditional macro objectives & financial stability objectives call for the same policy action – for example, when the credit cycle is approaching its peak, output is above potential and inflation pressures appear to be building. In contrast, when different objectives call for different policy actions – for example, when some financial assets appear overvalued but economic growth remains tepid and inflation is subdued – policymakers may find this trade-off much more difficult to assess and will search for macro-prudential tools. Perhaps unsurprisingly, recent contributions in the literature that quantify this trade-off point to a range of recommendations, with some reporting an optimal monetary policy that leans against the wind and some suggesting otherwise.

“I would like to conclude on this issue by saying that the issue is a bit more complicated than suggested so far – for, given that financial variables are a critical part of the transmission mechanism of monetary policy, when policymakers say the economy is overheating, they may well be considering the behaviour of asset prices as a critical part of that phenomenon and part of the reason to tighten monetary policy. Thus, I believe that the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macro-economic, and that if asset prices across the economy – that is, taking all financial markets into account – are thought to be excessively high, raising the interest rate may be the appropriate step. Further discussion of this issue will probably bear considerable similarity to the analysis of how to deal with asset bubbles that took place in the US in the decade starting about 2 decades ago.

Conclusion

“In closing, let me concede that it is easier to pose these questions than it is to answer them definitively. The issues are both deep & interesting. Along with other monetary policy issues, particularly the role of the lender of last resort in a world of significant uncertainty, they deserve the attention the profession in both academic & governmental institutions is, will be and should be giving them.”

Dr Fischer was addressing the American Economic Association in San Francisco on 3 January. His first degree was a BSc in economics from the London School of Economics in 1965. Now 72, he’s had an impressive & wide-ranging career, including 8 years as governor of the Bank of Israel before his Fed appointment in 2014, several senior roles at Citigroup, 7 years at the International Monetary Fund, and professorships & fellowships at the University of Chicago & Massachusetts Institute of Technology.

Link: Full address
CV

Attribution: Fed speechnotes.

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Commission proposes radical change to help the most disadvantaged

The Productivity Commission posted a 4-corner chart in its latest research paper, More effective social services, out yesterday, showing how those at the bottom of the economic pile can’t help themselves up: “Complex needs but can’t navigate the system to co-ordinate services”.

In a section called A new deal for the most disadvantaged New Zealanders, the commission said the Government should create a new model to target these people with integrated services.

The Government agreed, though the 2 ministers who commented were talking less radical change.

Finance Minister Bill English & State Services Minister Paula Bennett said in a joint release: “The Government agrees with the commission’s analysis of the weakness in our current social delivery systems. These issues are why the Government has an ongoing programme of social services reform which focuses on better understanding customers with complex needs and changing public services & accountability to improve their lives.

“The introduction of national standards in schools, health targets, the investment approach in welfare, better public service results and more recently the social housing reform programme are all focused on getting better results from largescale social spending.

“We asked the commission to undertake this review because we expect the public sector to continually do better in supporting the most vulnerable in our society. It is clear that further, ongoing change is needed. These aren’t easy issues to deal with, so the Government will be carefully considering the commission’s recommendations. But this report provides a useful road map to drive further improvement.”

The commission said in the shortest version of its report: “A relatively small proportion of people fall into group D (the most at-risk group), but they experience consistently poor results across health, education, welfare dependency & crime. This can create a cycle of disadvantage that persists across generations. This is unsatisfactory for all of us – those in need, those tasked with helping & New Zealand society generally. We have the opportunity to do better.

“For these people & their families, just making the current system work better is not enough. They need an adaptive, client-centred approach to service design. They need ‘navigators’ who can engage with them & their family, understand their situation and support them to access the services they need.

“Yet the current funding & delivery of services through administrative silos makes this difficult. Navigator services work better if they, and agencies that commission services, have responsibility for improving outcomes for a defined population. Service decisions & a dedicated budget should be close to the clients and reflect their needs. Better information on navigator & provider performance, and clients’ needs & outcomes, will be required to guide funding & service decisions.

“The Government should assess & implement an appropriate model with the features required for successful integrated services targeted at the most disadvantaged. Whanau Ora is an important, but incomplete, step towards such a model. Our report outlines 2 candidate models with the required features – a Better Lives agency and district health & social boards. Implementing a new model will require a major shift in thinking & structures. It is both achievable & realistic, but putting it into practice will take time & persistence.”

Link: Productivity Commission reports, More effective social services

Attribution: Commission report & ministerial release.

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Prime minister reminds NZ why he sought the job: to turn round an underperformer

Prime Minister John Key revealed some pre-Budget goodies in an economic appraisal for a Business NZ audience in Wellington yesterday. More importantly, it was his strongest & clearest enunciation of economic direction for a long time.

Finance Minister Bill English will deliver the Budget on Thursday 21 May.

Mr Key said the economy was strong & growing: “We’re currently doing well compared to other developed economies. However, a few years of good economic growth is not enough – there is still much more to do. Budget 2015 will set out the next steps in the National-led Government’s economic programme.”

He said one way of achieving sustainable long-term growth was through innovation. Another was through investing in the education of our young people, and he announced the Government would provide $244 million over the next 4 years for 7 new schools for 4000 extra students, expansions at 4 other schools, 241 more classrooms at existing schools throughout the country.

That, to me, is less about investing in education, more about catering for population growth in a way that hasn’t been achieved in the housing market.

Mr Key said the Government would invest another $80 million over 4 years to encourage more private sector research & development. Including $566 million already committed to private sector research & development grants over 4 years, he said the Government had boosted science funding by 70% since 2008 to $1.5 billion this year.

The Prime Minister attributed near parity with the $A and shrinking of the migrant outflow to Australia to just 2600/year, from 36,700 2 years ago, to the New Zealand economy doing well, rather than to the Australian economy having a rare struggle to overcome slashed mining exports.

“Last year, we were among the fastest-growing developed economies in the world. We’re doing well both in absolute terms and also relative to countries we like to compare ourselves with – such as Australia. And the main reason New Zealand is doing well is the positive attitude of New Zealand households & businesses – backed by the Government’s careful & balanced economic programme.”

Mr Key gave his audience a reminder of progress: “When we first came into office in late 2008, New Zealand’s economy had been in recession for nearly a year – well before the global financial crisis. Government spending had climbed 50% in just 5 years. Treasury told us that if we didn’t change course we faced never-ending deficits and net Government debt would exceed 60% of gdp by the early 2020s.

“Some forecasters were talking about our unemployment rate coming close to 10%. Average floating home mortgage rates were nearly 11% and inflation had been above 5%.

“Now, let’s turn the clock forward 6 years. Our economy grew by 3.5% in calendar 2014 – its best performance since September 2007. Annual core government spending is just 14% higher now than when we came into office 6 years ago – including the considerable cost of the Canterbury earthquakes. And although we’ve been holding the purse strings quite tight, we’ve actually improved public services.

“We’re approaching surplus and net core Crown debt will peak at less than 27% of gdp before falling. That’s less than half the 60% of gdp expected by the early 2020s under the previous government’s settings.

“Another 80,000 jobs were created in the past year and the unemployment rate is 5.7%. While it’s still higher than we would like, it is below Australia’s 6.3% and it’s forecast to fall below 5% in the next couple of years. And our labour force participation rate – the proportion of the working age population in work or looking for work – is at a record 69.4%. This is around 5 percentage points higher than in Australia and another sign of confidence among New Zealanders.

“Average floating mortgage rates are now just over 6.5% and average weekly wages rose by 2.5% in the past year, comfortably ahead of inflation of less than 1%.”

Mr Key took his audience back to his reason for seeking the job of prime minister: “A few years of good economic growth are not enough. I sought election as prime minister because I believed we had underperformed as a country for many years. My view was that if we adopted & maintained a consistent programme of sensible economic reform, New Zealand was capable of being one of the world’s best performing economies again.

“What we are seeing now are the first signs of that. We are seeing that if we back our traditionally strong industries and encourage new ones, we can create a confident country that is much better at meeting the aspirations of New Zealanders. We can become a country of opportunity that will encourage many more of our young people to bring up their families here instead of in Australia or further afield. And we can do all of this, despite the twin blows of the global financial crisis & the Canterbury earthquakes.

“I say we are just seeing the first signs of progress because a couple of good years are not enough to change our long-term wellbeing. To really improve future prosperity for our children & grandchildren, we need to continue the reforms that have served us well to date. We need many more years where we grow faster than other developed countries. And we need to remain wary of the risks & challenges in an uncertain & changing world.

Whether it’s falling global commodity prices, a still-fragile Europe, a weaker economic outlook for countries like Australia & China – there is plenty to keep economists awake at nights. Now is definitely not the time for New Zealand to rest on its laurels.

“So this government will remain relentlessly focused on improving the competitiveness of our economy. We will continue to give businesses a platform to invest, grow & create jobs in the knowledge they will be backed by a clear & consistent government policy programme.

“We’ll do that by controlling our spending and taking pressure off interest rates & inflation, by maintaining competitive tax rates and delivering better results from public services, and by continuing with our wide-ranging reforms under the business growth agenda.

“These reforms are all about providing a platform for growth and addressing the choke points of a growing economy. They are about investing many billions of dollars in necessary public infrastructure like roads & broadband, about providing better & more certain planning rules, about expanding access for our exporters in overseas markets, about encouraging investment right across New Zealand, improving the skills of our people and encouraging innovation in our businesses.”

Mr Key said he’d made breaking the cycle of material hardship among families with children a government priority for this term. From 1 April, paid parental leave increased by 2 weeks to 16 weeks, and it will rise by another 2 weeks from 1 April next year. The parental tax credit for lower-income families rose from $150/week to $220/week, and the entitlement increased from 8 weeks to 10 weeks. Also from 1 April, the Government’s new HomeStart scheme took effect, helping about 90,000 buyers into their first home over the next 5 years.

Average ACC levies paid by employers & self-employed people fell to 90c:$100 of liable earnings, down from 95c. From 1 July, children under 13 will have access to free GP visits & free prescriptions. The average ACC levy for a private vehicle will fall by about $130/year.

Attribution: Speechnotes.

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Vote me out of this traffic jam: The Green versus National views

It’s conceivable – though, on the multitude of poll results, improbable – that the Green Party will be part of the new government formed after the 20 September elections, so it’s prudent to pay some attention to the party’s view on the national transport network.

On the other hand, assuming National stays in power, the Green mix will be ignored and the road-dominant programme will continue.

The Greens proposed a big transport programme last week that would swing more money into public transport networks, especially in Auckland, and also into less grand improvements to roading, including highways, around the country.

National’s transport minister, Gerry Brownlee, seized on the Greens’ desire to end big-motorway thinking, saying: “The Green Party owes it to New Zealanders to identify which state highway projects would not proceed under its just-released transport policy. With $11 billion removed from planned state highway projects, it’s hard not to conclude it’s all of them.”

He said 97% of New Zealand’s passenger travel and 91% of freight movement was done on the roads.

And there you have it. One supposes that because the bulk of travel is by road, that’s the way it ought to be. The other supposes that opening up off-road alternatives would ease congestion, enabling better road movement as the alternatives provide cheaper transport.

What you are being given is a political option – the one in charge after 20 September does it their way. What you want is a better system, which may be more of a combination than National is offering both now & for the long-term future, and may be a different mix on closer investigation from that proposed by the Greens.

When Green MP Julie Anne Genter supports a transport proposal it might not just be because she’s green, the idea’s green. It might be because the idea is considered, practical, and would save the country billions of dollars while improving the overall transport network.

But it’s election time, so those in power feel obliged to mock. From another perspective, that mockery is cementing ignorance in place.

The alliance of alternative thinkers which has begun to lead debate on how people travel – the Congestion Free Network, a collaboration between the TransportBlog, Generation Zero and the Campaign for Better Transport – hasn’t just made an ideological proposal. They’ve said the country should apply the best means to the task, and that adding superhighways to fix congestion isn’t it.

They’ve said improving many other road connections would help, but the primary gains would come from increasing the off-road network. That includes providing off-road corridors for buses, and expanding the rail network in Auckland.

The minister’s response was that 97% of all passenger travel in the country is by road – and therefore road is best, not that that proportion might be better reduced.

Mr Brownlee said major roadworks around Auckland had reduced congestion, and completion of the western ring route would reduce it even more. Recent works, such as taking traffic off the Victoria Park viaduct by building the northbound tunnel, have given temporary respite, but congestion quickly resumed growing.

The Auckland peak traffic periods are longer than they’ve ever been because workers know they can’t make the job without leaving home in the dark, and the return is just as slow because all along the way there are exit bottlenecks.

What the transport network needs is considered – and transparent – evaluation, not ideological slagging.

As for ideology, you would have to wonder why travel needs to be ideologically based at all, but it is. Using the private car to drive to work equates to personal freedom. Providing mass transport that is comfortable & provides amenity (such as WiFi) could be even more personally uplifting, especially if it gets you to your destination more quickly & less harassed.

The Greens’ proposal, announced last Tuesday by party co-leader Russel Norman & Ms Genter, had 7 targets for Auckland to be completed by 2020:

  • Complete the city rail link, cutting train travel times by up to 28 minutes/trip
  • Build a rail extension to Mt Roskill (with further rail extensions to the airport by 2025 and the North Shore planned by 2030)
  • Electrify the rail network from Papakura to Pukekohe
  • Build a new bus lane on State Highway 16 (north-west)
  • Extend the Northern Busway to Albany & Newmarket
  • Establish a new high quality bus service across the upper harbour
  • Extend the Ameti (Auckland-Manukau, eastern) Busway into Ellerslie & Manukau.

The plan includes a $1.3 billion capital investment in the city rail link (60% of the cost) and $825 million into dedicated busways & city bus centre improvements. The party will follow up with plans for Wellington & Christchurch to be announced.

The Greens have taken their policy from the very independently minded participants in the Congestion Free Network, which they’ve proposed as a blueprint laying out an integrated public transport network in Auckland, staged at 5-yearly intervals through to 2030.

The network group said: “The current council’s $34 billion transport wishlist will not reduce congestion – even under its own analysis. However, the $10 billion congestion-free network will provide real choice. It’s better for people and cheaper to build.”

First, they asked: What makes a congestion-free network? The answers:

  1. It has high frequency of 5-10 minutes, no timetable required
  2. Physically separated from congestion, so it’s fast, like electric trains or the Northern Busway
  3. Works as a complete network, so it’s easy to transfer, like the London tube.

They added: “Quality public transport across Auckland will reduce traffic for when you need to use the road and provide relief from high fuel prices. It’s a real vision for a more liveable, low-carbon Auckland.

“Auckland’s current plan is contained in the integrated transport programme. This is both expensive & ineffectual – a road-heavy ‘build everything’ transport scheme that is currently unfunded.

“The Congestion Free Network will not only lead to a higher quality & better functioning city, but is also more affordable than the ineffective integrated transport programme. Investing in the ‘missing’ public transport network before further expansion of the road network will almost certainly turn out to be much cheaper & more efficient for Auckland, as well as being more in sync with the times.

“We think that many of the most expensive roading projects will prove to be unnecessary once Auckland has this powerful additional network in place. Our plan will also greatly improve Auckland’s performance in other harder-to-calculate but vital areas such as air quality, carbon emissions, oil dependency, urban form & public health outcomes.”

The Brownlee perspective

Mr Brownlee professed the Government’s support for public transport, said the Greens’ policy would take the country back decades, but lent on market choice to dictate the way forward. Market choice will not see anybody preferring a leap of faith into uncertainty; the status quo will prevail so long as that’s all that is realistically offered.

The minister said last week: “The National Government supports public transport and has provided $2.4 billion over the past 5 years. With the local government contribution, that is $3.5 billion spent on public transport, including commuter rail investment in Auckland & Wellington.

“The Green Party needs to explain which of the following roading projects it would axe first, or if it’s all of them. The Greens also propose to cut local road spending by over half a billion dollars, putting pressure on our communities and compromising safety.

“Since being elected in 2008, the National Government has been rectifying a 30-year deficit in road transport infrastructure. The Green Party proposal would put us back by decades.

“The National Government has a balanced land transport policy which gives commuters choice in the modes they use to travel and helps businesses to choose the most efficient way of getting their goods to domestic & international markets.”

Genter says let regions decide after proper assessment

Ms Genter said transport was the life-blood of the regions, and charged: “They have been starved under National. Over the next 10 years, we plan to increase regional transport funding by $423 million and we will invest $3 billion on state highways that will hugely improve safety.

“The bulk of National’s transport budget has gone on motorways as it pursues its obsession with roads of national significance, while regional transport needs have been ignored.

“Under the Green Party plan, regions will be able to bid for projects that best serve their transport needs, whether road, rail or a port project. That contrasts with National, which has indulged in naked pork-barrel politics. It announced 14 regional projects in June, paid for by the sale of state assets, which were selected on the basis of National’s political needs rather than any objective assessment of requirements.

“We will not direct the funding for the regions, as National has done. Regions will be able to bid to fund projects and they will go through Treasury for a rational assessment of the transport priorities & proper cost:benefit analysis – something completely lacking with National’s roads of national significance programme.”

Links: Green Party’s transport policy
Draft Government policy statement on land transport 2015/16-2024/25
Congestion Free Network
Transport Blog
Generation Zero
Campaign for Better Transport

Attribution: Party releases, Congestion Free Network website.

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