Who got hit worst in Ireland?

The authors of a new paper, "Crisis, Response and Distributional Impact: The Case of Ireland", are right when they say that "There is strong interest in many countries in assessing the distributional impact of austerity measures". Many people suspect that the impact may be regressive: in Greece, for example, efforts to raise tax have fallen on the ordinary guy who is visible to the PAYE system, and not on the wealthy guy, who isn't. The Irish example in particular is interesting, as Ireland has been the Eurozone economy most prepared to go down the austerity route.

Here's the income distribution pre- and post-GFC. Overall real per capita incomes dropped by 7.8% over the 2008-12 period: within that, the bottom decile fared worst (-18.4%) and the top decile was next worst off (-11.4%).

What caused this pattern of those at opposite ends of the income distribution bearing most of the brunt of the fall in incomes?

At the top end, the strongly progressive nature of the various austerity policies, as shown below.

The graph shows the percentage impact of all the various measures.on disposable income by decile. Austerity policies were heavily targetted towards the better off. There is a little bump in the progressivity, where deciles 2 and 3 got treated a bit less roughly than decile 1, the explanation being that old age pensioners are clustered in deciles 2 and 3, and the old age pension was one of the few social transfers that was not cut during this period.

At the bottom end, as the authors summarise it, "Tax, welfare and public sector pay changes over the 2008 to 2012 period gave rise to lower than average losses for the bottom decile", as we can see in the graph above. "Thus, the larger than average losses observed overall are not due to these policy changes; instead, the main driving factors are the direct effects of the recession itself".

Irrespective of whether you subscribe to austerity as the right plan for a country in Ireland's circumstances, at least there is the cold comfort that, when it came to the forcible whip-around to contribute to the state's coffers, Ireland's clampdown was heavily focussed on the richer half of the income distribution.

Last weekend's Applied Economics workshop at the University of Auckland

Earlier this year I got an invite from the MADE (Making A Difference with Economics) group at the University of Auckland, asking would I be a speaker at their second annual Applied Economics workshop. I said yes, and told them I'd like to talk about applying economics to issues of competition and competition policy. Two other invitees said yes, too: Kieran Murray, who co-heads the Sapere Research Group, came along to talk about the practicalities of economic consultancy, and Calum Gunn, chief adviser (regulation) at the Commerce Commission, came to speak about his hand-on experience of regulating electricity distributors.

So we all fronted up last Saturday for what was an impressive day from several perspectives.

First was learning about MADE itself, which was set up in 2010 by Associate Professor Rhema Vaithianathan. You can read the full background on why she set up MADE but in short "The idea behind MADE was to get young people to start learning how to be change agents for economic ideas", and "The potential for economics is immense. It has not reached its potential. Almost every medical researcher I have met thinks their research will ultimately relieve pain and suffering. Yet economics offers so much more in its ability for relieving human suffering. The 40-year difference in life expectancy between Japan and Burkina Faso is economics not medical science".

Second was meeting an interesting and very diverse bunch of students. Much more diverse these days than when I first studied economics: 36 out of the 40 in my first year economics intake in Trinity College Dublin in 1969 were male, a higher proportion even than in such bastions of male dominance as the engineering school. The workshop attendees were a very bright and very enthusiastic group, too: all of them were Stage 3 undergraduates or above, so the questions for the speakers were on the button, and there was high quality discussion throughout the day. And the whole day had been put together very professionally by a working committee of the students themselves.

MADE is a really worthwhile programme. Students can sometimes struggle to connect economics to the 'real world', and initiatives like this one show them how economics actually works to address practical problems as well as (hopefully) transferring some practical expertise and perspectives.

If you're asked to come along and present at one of these workshops, do - you'll enjoy it, all three of us had a great day - and if you feel like volunteering to support the programme at other times, give it a go. I see, for example, that they had Girol Karacaoglu, chief economist at the Treasury, along to speak to them last year. If you're applying economics in your career, you'll find a very receptive audience. Here's the link again if you'd like to help out.

How microeconomic reform helps the young find jobs

There's quite a bit of revisionism going on at the moment. In potted format the logic is that deregulation of finance helped, led towards, or even caused, the GFC, hence deregulation in general (or liberalisation, structural reform, microeconomic reform, 'economic rationalism', Rogernomics, call it what you will) is a bad thing, too. Given that microeconomic reform always had its sceptics or outright opponents even pre-GFC, people making this argument have got the wind in their sails. There's some risk that this is becoming the latest conventional wisdom.

I think this line of argument is deeply wrong, and jeopardises many well-deserved successes for microeconomic reform.

Putting finance to one side for a moment, the reality is that in many markets deregulation has produced more flexible, efficient and equitable outcomes than previously, and it is becoming increasingly clear that the economies that took the liberalisation route is the 1980s and 1990s are making a better fist of coping with the post-GFC world than the ones that didn't.

Here's one particularly good, though socially tragic, example of what I mean.

In an earlier post about how the OECD has come up with a very good way of presenting data on unemployment rates in the OECD area, I mentioned in passing the unusually high rate of youth unemployment in France (with its fossilised labour market policies) and how it compared badly with the US's 'sack at will' regime, and in another I noted how France's largely unreformed labour market compared badly with Germany's, which has had a dose of microeconomic reform (adding to the efficiency of a market that was already doing pretty well).

Now four researchers - two French, two German - have just published a discussion paper, "Youth Unemployment in Old Europe: The Polar Cases of France and Germany" (available here) which shows, first, the poor youth unemployment and inactivity outcomes for France and the much better ones for Germany, and second, goes on to analyse why the two large Eurozone economies have behaved so differently.

The relatively poor French outcomes came despite France being hit relatively lightly by the GFC: as this graph from the paper shows, the immediate post-GFC hit to French GDP was significantly less than the hit to Germany's (though Germany subsequently has recovered faster and more strongly).

Here's the NEET (not in employment, education or training) rate for 20-24 year olds for the same group of countries: the French rate has generally been high, and in the past few years has been rising, while Germany's has fallen substantially.

Why these patterns? It's down to the microeconomics of labour market institutions and policies.
Germany has a respected, effective apprenticeship system that efficiently matches employers' needs and education provided. In France, apprenticeships are somewhat sneered at (I'm  paraphrasing here, but that's the gist) and the link with business isn't there: "in particular [French] SMEs are reluctant to hire apprentices"(p12).

A national minimum wage in France shuts out many low-skill young workers: "A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be" (p13). Germany has more flexible, locally negotiated minimum wage rates, with the predictable result that "The vast majority of skilled younger workers still have good prospects of entering open-ended contracts in Germany" (p13).

The French labour market is also highly segmented, with an 'insider' group (my description) of "employees in permanent contracts, protected by many rules, often leading to contentious litigation, and not effectively protecting employees while at the same time resulting in very uncertain outcomes for employers" (pp14-15), and everybody else on, at best, short-term contracts. Germany's no paragon, either, but it doesn't have anything like the rigidity of the French system, which again hits the young and inexperienced particularly hard.

It doesn't help that the French network of local placement offices is nigh on useless (much like large swathes of the rest of the French bureaucracy), though to be fair there probably isn't a lot they could achieve, even if they got their act together, when faced with all the other institutional rigidities of the French labour market. And finally the demographics don't help, either, with modest increases in the size of French youth cohorts in coming years (Germany doesn't have the same issue).

The bottom line is that "The situation in France is very alarming and the future prospects of French youths are increasingly dire. This is a socially explosive situation and politicians must act now to avert a lost generation" (p21). The authors are unambiguous about the reason for this social tragedy: "The roots of the problem are located in the structural design of national labor markets and education systems. Hence, Europe’s youth unemployment disease has to be cured with structural reforms" (p25, their emphasis), and they've got a bunch of reform proposals lined up (see the Table, p22), recognising that you can't readily 'cut and paste' things that have taken decades to embed, like the German apprenticeship system, from one country to another.

There are over 5.5 million young people unemployed in the European Union. For them, liberalisation and deregulation isn't the problem: it's the answer.

Revealed preference

Despite TV2's programming schedule, which is strong evidence the other way, I'm generally inclined to believe that people aren't stupid, and I'm correspondingly inclined to believe that there are fewer markets than you might think where consumers are, supposedly, unable to spot or judge quality differences.

I'm not saying that there aren't any markets where people can't be sure in advance of the quality or features of the good or service that they are contemplating buying, and I'm not saying that we shouldn't use appropriate mechanisms (such as occupational licensing, or information disclosure regulation) in those cases to help deal with what could be a potential issue of market 'failure'. Of course there are, and of course we should.

But the more I observe how people actually behave when buying supposedly 'hard to tell what you're getting' stuff like medical care or an education, the more I'm leaning towards the view that people can make quite a good practical fist of judging quality, that 'market failure' on this score is less significant than you might think, and that there is a stronger case for letting markets do their job and a weaker case for non-market mechanisms.

Earlier I posted about the latest heavy duty research on US charter schools. Consider this quote from the Executive Summary (p8): "Charter school students now comprise more than four percent of the total public school population in the United States, a proportion that continues to grow every year. There are estimated to be over 6,000 charter schools serving about 2.3 million students in the current 2012-2013 school year. This represents an 80 percent increase in the number of students enrolled in charter schools since CREDO released its first report on charter school performance in 2009, Multiple Choice: Charter School Performance in 16 States".

What this says to me is that very large numbers of parents and students in the US (and the equally large numbers of families in Sweden and the UK who have been queueing to get into new private schools there, too) are capable of spotting differences in educational quality - indeed, capable of spotting quite small differences in quality (at least in the US), and acting on them. To think otherwise is to argue that 2.3 million American students and their families are systematically deluded, and on a matter that is of high priority to them.

I very much doubt that, not least because Word Gets Round. People can generally judge whether they or their neighbours have had a good outcome, and they adjust their behaviour accordingly. As one big study of offering more choice in the UK health system unsurprisingly found, when given a menu of hospitals to choose from, "A patient with a bad experience of their local hospital was much more likely to choose a non-local provider compared with someone who had a positive experience at their local hospital" (p65 of the report). People also use workably effective rules of thumb as guides: as the same report noted (p93), patients rated facilities on three big criteria, "cleanliness, quality of care and the standard of facilities", with cleanliness apparently being not only valued for its own sake but also being used by patients as a rough and ready way of steering themselves away from hospitals with high infection rates from the likes of "superbugs".

And people share their experiences, good and bad. I've swapped notes with others about our eye cataract operations, like (I'd guess) every other parent in New Zealand I've discussed the local schools and local teachers with other parents, and I'm a member of the support organisation for people who've been through through the barrel of laughs that is an acoustic neuroma. Do we have useful ideas to share about what worked or didn't? You betcha.

It is of course true that what many professional services provide is multifaceted, and not easily reducible to a single criterion of better or worse. And it is easy to take the next step and say that only the professional gatekeepers can make a good job of telling good from bad, and that consumers don't (or will never) have the information or analytical nous they need to be able to make socially effective decisions, and that markets can't therefore be the way to allocate things.

But that can be a step too far. The marketplace of consumer revealed preference may often need a bit of supplementary regulatory or supervisory assistance to work well: fair enough. But personally I'm becoming more impressed by the growing evidence that in many markets people are adequately capable of sorting the good from the bad.

Did Keynes really say, "When the facts change...."?

Economists are good at making assumptions, and one of the assumptions I've always made is that John Maynard Keynes was the source for what is usually quoted as "When the facts change, I change my mind. What do you do, sir?"

It certainly sounded like something he would have said, and the ad hominem counter-punch at the end, in particular, seemed pretty Keynesian to me.

Turns out though that I'm very probably wrong. Thus far, there's no evidence he said it. The best article I've found on it is on the Quote Investigator website ('Dedicated to Tracing Quotations'). By coincidence, the latest quote investigated on the site (as of today) is also about economics, "Teach a Parrot to Say ‘Supply and Demand’ and You Have an Economist".

This article "Keynes: He Didn’t Say Half of What He Said. Or Did He?" from the Wall Street Journal also doubts that Keynes ever said it, and to boot argues that he didn't say "The market can remain irrational longer than you can remain solvent", either (and has put up a modest prize, US$10 per quote, to anyone who can prove he did).

"When the facts change, I change my mind. What do you do?"

The relevance of the title will become apparent, but first some context.

I've been researching a book, which has largely been on the benefits that increased competition and greater operation of market forces can bring to sectors such as health and education, which tend to use largely non-market methods to commission and distribute their services.

Along the way I've been looking at the literature on new private schools competing with the traditional public system schools - Sweden is often credited with giving this initiative its start, and it has been spreading elsewhere, notably in the UK ('academies') and the US ('charter schools'). And it's reached here, too, with the proposed launch of our version of the idea ('partnership schools').

So I've had to wade into the politicised jungle of quantitative research on how these schools have been performing.

With that as background, here's the news.

For a long time one of the key pieces of evidence on US charter schools was a 2009 study from the Center for Research on Education Outcomes at Stanford University, a body with the snappy acronym, CREDO. It was a big piece of work - the authors called it "the first time a sufficiently large body of student‐level data has been compiled to create findings that could be considered "national" in scope" (here and later, I'm quoting from the 2009 report's Executive Summary). It covered the learning gains in English and maths of 70% of the total student body then in charter schools, and compared them with demographically matched comparator students ('virtual twins') in the public school system.

One of the headline CREDO results was seized on by opponents and critics of charter schools: overall, 17% of charter schools were better than the public schools, 46% were much the same, but 37% were worse. The differences in actual outcomes were not large, but they were statistically significant. It was a widely quoted result and the study received broad coverage in educational circles everywhere: our own PPTA, for example, had a link on their website directly to it.

There was a range of other interesting findings, too, notably the differences in quality across charter schools ("tremendous variation in academic quality among charters is the norm, not the exception. The problem of quality is the most pressing issue that charter schools and their supporters face") and the fact that charters seemed to do better with students from more difficult backgrounds ("two subgroups fare better in charters than in the traditional system: students in poverty and ELL [English Language Learner] students"). As the report said, though, some charter success with sub-groups shouldn't be allowed to dominate the big picture finding: "greater attention should be paid to the large number of students not being well served in charter schools".

For people (like me) who believe that greater competition and better consumer choice are the first-best path to improved outcomes in many areas, this was, frankly, a disappointing though credible result.
CREDO said at the time that a follow-up research project was in the works, but then they went off the air, and over the years and from a distance I'd rather assumed they'd run into funding or other problems.

Fast forward to June 25 this year: CREDO reappeared with the second, even bigger report covering not just the 16 states of 2009 but another 10 states and New York City (looked at on its own for reasons we needn't bother with here), and using the school records of over 1.5 million charter school students.

Charter schools now outperform the traditional public schools (TPSs), mainly on the English side, with no real difference on the maths side. For English, charters are ahead 25% of the time, the same 56% of the time, and behind 19% of the time. For maths, it's technically a  small win for the TPSs though effectively a draw (charters ahead 29% of the time, behind 31% of the time, 40% no difference).

The 2009 result that charters were doing better with some disadvantaged groups came through again. As the 2013 Executive Summary puts it (p23), "Enrollment and persistence in charter schools is especially helpful for some students, particularly students in poverty, black students, and English language learners all of whom post significantly higher learning gains in both reading and math. Hispanic students are on par with their TPS peers in both reading and math. For students with multiple designations (such as being black and in poverty), the impacts of charter schooling are especially positive and noteworthy".

This, by the way, as I've posted before, is exactly what you'd expect from first principles: the people most likely to benefit from greater choice are those with the least opportunities now.

The report argues that one of the reasons for the better performance of charters is holding them to proper accountability and quality standards (8% of the original 2009 sample have closed), a conclusion I endorse, though I can't say I see the same principle of 'perform or get shut down' being invoked to the same degree to deal with the worst of the US public schools.

In any event, while it's hardly a knock-out win for proponents of greater choice and competition in education, it's a clear improvement on where we were four years ago. On the latest data and analysis, charter schools have a slight edge.

Hence the heading for this post: virtually every man and his dog in the educational establishment were keen to wave the first CREDO report around when it was critical of charters.

What are they doing now?

NZAE conference update - some slides from Maurice Obstfeld's speech

I posted earlier a summary of Prof Obstfeld's impressive keynote speech at the NZAE conference on  "Finance at Center Stage: lessons from the Euro Crisis". At the time I mentioned I'd write some of his slides when they became available on the NZAE conference website, so here they are.

The first one that especially piqued my interest was this one about house prices in the Eurozone (with the US included for reference). Bubbles had developed pre-GFC in a wide range of housing markets, and are mostly deflating since, notably in Ireland (green), the US (dashed red), Greece (solid red), and Spain (light purple). On the downside, the unwind poses major problems for banks (who lent on the boom-time valuations of property) and households (negative equity and serviceability issues), but, on the upside, at least the process of setting saner prices and cleaning up the mess is underway.

It's more troubling, however, that some markets rose strongly but haven't dropped from their pre-GFC levels, notably France (bright blue), Finland (brown), and Italy (purple). It may be that the underlying supply/demand characteristics of the French housing markets genuinely explain the ongoing high prices: Paris for example is still a highly desirable city with limited supply. And there may be good reasons for the behaviour of the Finnish market (about which I know nothing). House prices holding up in Italy, however, look harder to explain.

Overall, you're left with the queasy feeling that there is still quite a bit of house price adjustment yet to happen in parts of the Eurozone, and on the policy front some urgency to have Eurozone-wide bank assistance programmes in place before it happens.

The second slide that caught my eye was this one, which shows real interest rates in the PIIGS (Prof Obstfeld prefers to call them by the less offensive GIIPS) compared to Germany. And the lesson here is that one monetary policy did not fit all. In Ireland, in particular, the economy pre-GFC was very strong, prices and wages were rising, and real interest rates were piffling or negative. No wonder the house market ignited.

This is all, of course, with 20:20 hindsight, but even at the time it would have been a good idea to have had some levers to pull to offset an ECB setting of monetary policy that was wildly too loose for parts of the Eurozone (or possibly this is a roundabout way of saying the Eurozone economies never met the criteria for a monetary union in the first place). Either way, the lesson here is something to remember if the idea of a common currency with Australia ever resurfaces.

And the third and final one I'd like to show you is this, which charts the competitiveness of the peripheral GIIPS back to the start of the Euro: a rising graph means worsening competitiveness. If you want to look at the data for yourself, these are the Harmonised Competitiveness Indices that the ECB prepares, they come in three flavours (based on consumer prices, GDP deflators, or unit labour costs), and you can access them here. 

Very notably, competitiveness in Ireland (green) and Spain (red) deteriorated badly in the early 2000s - but only Ireland has been able to do anything effective about it, and without getting into the whole austerity debate, you can see why it has been the poster-child for getting its act together. You can also see where Greece's reputation for failing to deliver on reforms has come from, and what effect its inactivity has been having on its eventual ability to trade its way out of its problems. And while Italy's and Portugal's competitiveness never blew out the way it did in Greece, Ireland and Spain, they haven't been doing much to improve theirs, either. 

Finally you can see how well Germany has been doing, at least in part because it was fortunate to do some labour market reform before the GFC struck. As a result its latest (May) unemployment rate is 5.3%, under half the rate of largely unreconstructed France (10.9%). Prof Obstfeld's graph didn't include France, so I've dug out the data: on the same basis (Q1 1999 = 100 to Q1 2013), French competitiveness on a unit labour cost basis deteriorated by 1.7%, whereas Germany's improved by 18.5%.

From zeroes to heroes: the OECD gets its online presence right

Used to be, the OECD's website was one of the most user-hostile around. Finding anything with the help of its alleged search engine was hopeless.

And now look at it. It's improved so much, that it's actually provided me with one of the best bits of data presentation I've seen in a long time.

I was looking up its summary of its latest Employment Outlook 2013 - which is just as grim as you'd expect - and at the bottom of the page I found a magnificent and interactive way of showing overall unemployment, youth unemployment, long-term unemployment and the age structure of employment.
The gizmo loads the overall OECD data for each variable, and you can then choose whatever countries you like to compare with it. I picked youth unemployment as the variable, and New Zealand as the comparator country. The result looked like this. Answer: we're about par for the course.

Have a play with it. If you didn't know already, some of the numbers (eg for Greece, Ireland, Spain, Portugal) will make you realise just why the austerity protesters are so infuriated.

Though that's only part of the story. Labour market over-regulation  in some countries benefit a privileged 'insider' group, on permanent contracts that are hard to terminate. The impact of austerity (or other economic setbacks) consequently falls on the less privileged, particularly the young, who at best get short-term employment contracts. As the accompanying country report on France points out, for example, in 2011 78% of all hirings and 71% of all firings were of people on short-term contracts.

The somewhat paradoxical outcome is that a country like the US, with effectively a 'fire at will' employment regime, has lower overall and lower youth unemployment than a country like France which supposedly 'protects' employees.

A statistic that deserves more air-time

I've been tracking the New Zealand business cycle for quite a while, and thought I knew most of the statistical and data sources. Somehow or other, one of them slipped under my radar, and it may have slipped under yours, too, as it doesn't look like it gets a lot of media coverage. So with a grateful nod to Stephen Toplis, Head of Research at the BNZ, who put me onto it, a few words about the job vacancies data published by the Dept of Labour (now part of MBIE).

First of all, here's what the latest (June) data are showing, for all vacancies. The commentary from the DoL mostly focuses on the skilled vacancies, and there's logic to that, but in any event here's the overall picture. If you're interested in regional and occupational data, it's all there, too.

The graph shows what you'd expect: solid and ongoing expansion in vacancies, consistent with the strengthening of the overall economy, which on the vacancy series has been underway now since mid 2009. But we haven't reached boom times for job seekers: the series isn't quite back to the strong levels of 2007 (when this series starts). It's also worth remembering that while a rising vacancies series is generally a good thing, as it tends to be linked with positive things happening in the labour market, it can also be picking up some potential problems (eg more employers unable to find the skills they want).

What's the basis of the data? They're the total online job ads listed on the three big employment sites, SEEK, TradeMe and heraldjobs.co.nz. These days, it's a big number - some 20,000 distinct job ads each month, which is another little glimpse of the powerful disintermediation happening on the web.

For economists, and for businesspeople, it's worth knowing that the data also have some predictive power. In the 2009 background paper explaining the data, the DoL drew this graph. It shows the Skilled Vacancies Index leading employment growth. If you shunt the vacancies index one quarter to the right, you get an extremely close link, with a correlation coefficient of 0.95.

There's also a lot of value for both employers and employees in the detailed occupational and regional data. If, as a business, you were wondering whether to pay a bit over the odds to get a vacancy filled, I'd have a quick squizz at what this series is telling you about the state of the market for the skill  you are after, and conversely for employees.

I should have known about this series before, and now that I've finally made its acquaintance, I'd urge other people to make more use of it, too. With all due respect to Stats NZ, we're not blessed with an immense range of monthly economic data in New Zealand, and I understand why - priorities, costs, and sometimes the limited value-add of monthly data, which can contribute more statistical 'noise' than genuine new information.

All that said, anything additional on a monthly basis is a bonus. And as the DoL says, "In some instances it is a robust leading indicator, and has the considerable advantage of being very up-to-date" (the June data were published this morning, July 17). It's also fine work by the DoL to use data that was being prepared by businesses for their own commercial purposes in any event, a trend that is becoming more prevalent at statistical agencies everywhere as they make more use of administrative and commercial data, and for obvious reasons. As the DoL says, "Jobs Online brings together advertised job vacancy information from the major internet job boards, maximising the information value of the data they hold to create new labour market statistics without an increase in respondent burden or compliance costs".

Housing madness

I have every sympathy for central banks trying to figure out whether strong house prices are a sign of monetary policy being too loose, or merely telling us that supply and demand are working out just as you'd expect in a tight market. It's always going to be a hard call. If I were in the RBNZ's shoes, I'd be inclined to think that the supposedly over-exuberant Auckland market is nothing of the kind: it looks to me like a textbook example of higher demand hitting inelastic supply, rather than an artefact of buyers hitting the market with over-generous credit.

If I were in the RBA's shoes, however, I'm not sure I'd come to the same conclusion about the Sydney housing market. What do you make of this? And bear in mind that the forecasters, the futures market, and the business community all think that the RBA's next move will be another interest rate cut. What do you think an inner city bomb site will sell for at even lower interest rates?

The Auckland housing market revisited

On Saturday afternoon, I counted the residential ads in the window of a real estate agent in Mairangi Bay.

There were 44 of them (not counting an ad for a resort, which seemed to me to be more of a business than a residential listing). 38 were already sold. Of the last six, 4 were for undeveloped sections, and 1 was for property on Great Barrier Island. That left just a single ad in the window for the only unsold Auckland residential property they had on their books (an apartment). In short, virtually everything's been sold.

They had a window of rental properties, too. A very ordinary-looking three bedroom home in Browns Bay - which is admittedly a nice neighbourhood with good amenities - will set you back $520 a week. What the real estate agents call an 'executive' home, and what you and I would call the sort of home we're actually looking for, is currently going for over $1,000 a week. There's no two ways about it: when a good quality home is costing you over $50K a year to rent, things have got pretty pricey.

In the spirit of 'economics by walking around', I've drawn several conclusions from this.

One is that everything you hear about the tight Auckland housing market is absolutely correct. If anything, I'd say that it is even tighter than I had imagined.

Another is that I think this is specific to Auckland, and not a symptom of (say) nationally lax or generous lending standards by the banks. If this was happening because all the banks were lending everywhere to anyone who came through their doors, then the estate agents' windows would be equally as full of SOLD signs in Alexandra and Waikanae, and - from admittedly anecdotal accounts of both places recently - they aren't.

And that kind of bothers me: why are the macro-prudential battering rams about to be deployed, if the problem isn't one of nationally excessive credit growth? Especially, as I've posted before, when the statistics on bank lending on houses, or to the household sector more generally, aren't showing any signs of running out of control. I've just re-checked them on the RBNZ website: credit extended to the resident private sector was up 4.3% year on year in May, and lending on housing was up 5.3%. These look to be distinctly unalarming numbers.

And a last thought is that I'm not too bothered by these high housing and rental prices. Of course, they have provoked just the sort of media reaction you'd expect - it's those Asian-Australians-insert-your-target-victim-group-here that are pricing homes out of the reach of battling Kiwi families. But let's go back to Economics 101. Why, in workably competitive markets, do you ever see high prices, and what are they meant to do?

Hmm. Let's see. Demand increases while supply is constant. Tough one. I'd just observe that all the facts are consistent with an immediate rise in demand (the economy doing much better than expected, the Auckland economy humming along, possibly Christchurch refugees) encountering a short-run fixed supply, and high prices are allocating houses to those that value them most. I don't see a national macroeconomic issue here.

I wouldn't underestimate the supply response, either. I've posted before that as I go running around the North Shore, I've noticed a very substantial amount of infill housing development. In recent weeks, it's taken off even more. I wouldn't say that every single large section has been built on, or that every dilapidated 1950s home has been turned into two fancy townhouses, but it's heading that way. This looks like a problem that is part of the way to fixing itself.

I have a lot of sympathy with the argument that even purist inflation-targetting central banks need to be mindful of asset price movements. And I'm also mindful that real-time policymakers will find it hard to differentiate between relative price movements (not an issue for monetary policy) and generalised price pressures. And I'm mindful that central banks have a particular set of risk-management priorities, which above all are focussed on taking the low-probability but high-impact events out of play. They have to be very careful not to make expensive mistakes. All that said, I'm really struggling with the currently accepted notion that the Auckland market has got out of hand because of over-loose monetary policy.

The uphill struggle for free trade

I was very pleased to read that we've signed a free trade deal with Taiwan. I know that bilateral deals aren't as effective as regional or global multilateral deals, but with global WTO talks on the never-never and the Trans Pacific Partnership still over the horizon somewhere, it's worthwhile bagging what we can get, especially with strong performing economies like Taiwan.

It is rather depressing, though, to see how badly the case for free trade still struggles in the marketplace of public opinion. If you google references over the past month to 'Trans Pacific Partnership', for example, you will find that the coverage is dominated by hostility.

The first page of results today included "The Trans-Pacific Partnership is a global corporate coup that makes corporations more powerful than governments and undermines our national sovereignty", "If the TPP is adopted the door will be open wider for human rights and environmental abuse", and "the TPP is a major power grab by large corporations...the intention of the TPP is to enhance and protect the profits of medical and pharmaceutical corporations without considering the harmful effects their policies will have on human health". Maybe there is indeed something wrong with the negotiating process for the TPP or its agenda, but frankly it wouldn't matter for many people. Every free trade initiative faces an uphill struggle in many people's minds.

There was, for example, an article in the latest May Papers & Proceedings issue of the American Economic Review, "Economic Experts versus Average Americans", which compared the views of the American public with those of a panel of expert economists across a variety of policy issues of the day. Asked whether "On average, citizens of the U.S. have been better off with the North American Free Trade Agreement than they would have been otherwise", only 46.2% of the public agreed, and another 15.4% weren't sure; 38.4% thought NAFTA made things worse. Among the economists, on the other hand,  94.6% thought NAFTA was a good idea, and only 5.4% were unsure. Not a single economist thought NAFTA was a bad plan.

The economist result is not surprising: we all get taught early on in our economics courses about the win/win nature of trade. We know that if the Chinese specialise in T-shirts and we specialise in butter and we trade with each other, there will be more aggregate T-shirts and butter produced than either of us could manage on our own, or - and maybe this is a better way to engage people's minds about it - the same amount of T-shirts and butter, but resources freed up to produce something else as well.

We can even put numbers on it: look, for example, at the analysis the Centre for Economic Policy Research in London has recently carried out on the potential benefits of a trade agreement between the EU and the US (press release here, full report here). A big deal could be worth "an extra €545 [NZ$900] in disposable income each year for a family of four in the EU", and beyond the sizeable benefits to the US and the EU it would also increase GDP in the rest of the world by almost €100 billion [NZ$165 billion]. To put that in context, that's around 75% of our nominal GDP.

Some of the public reaction isn't that surprising either: we know how the political economy of the thing tends to play out. The 99.9% of the population who benefit from cheaper imported T-shirts are a widely dispersed group of individually minor beneficiaries, whereas the 0.1% of the population who are threatened domestic T-shirt manufacturers are a highly vocal, highly motivated pressure group.

That said, you can't help feeling that there is more that us economists could do to fight the good fight in the marketplace of ideas for a policy that raises incomes everywhere, and is probably the single biggest escape route from poverty for the poorest countries amongst the poor.

Rising tides lift all boats

I've been thinking about something else Prof John Quiggin said in his keynote address last week to the NZAE annual conference. Along with his other criticisms of microeconomic reform, in passing he had a swipe at how 'trickle down' economics had been discredited, as had the idea that 'rising tides lift all boats'. I suppose the central questions he was thinking about were whether deregulation, liberalisation and the dividends from economic growth benefitted the many or the few: presumably he was saying, the few.

And yet the evidence is that good economic conditions benefit both the better placed and the more marginalised. The graph below shows the unemployment rate in the US for everyone (the red line) and for black people (the blue line). The shaded bits are recessions. It's taken straight from the St Louis Fed's excellent (and free)  FRED database of US and international data.

Quiggin may be right in one sense - things aren't the same for everyone. The black unemployment rate is systematically higher than the national one: as a rough rule of historical thumb, the black unemployment rate is twice the national average. In that sense, I suppose, you could say that 'trickle down' hasn't brought peace and plenty in equal measures to everyone: economic and social outcomes remain a lot better for some groups than others, and for very long periods of time.

But the 'rising tide' argument is harder to dismiss. It's very clear from the graph that when overall economic conditions improve, the unemployment rate falls for everyone. Indeed, if you really want to make a dent in unemployment rates for minorities or the more disadvantaged in society, by far the best way is to make it easy for the economy to grow at a fast rate for a sustained period. The long boom of the Clinton years was the longest peace-time business expansion in America's history, and it led to the lowest rate of black unemployment in a generation (I went back on FRED as far as I could, which was 1972). You can think what you like about Bill Clinton, but the growth that occurred on his watch produced a large gain in minority group welfare.

The same is likely to be true here, too. Currently our unemployment rate for Europeans is 4.7%, for Asians 6.9%, for Maori 15.0%, and for Pacific people 15.2%. The only thing in the short to medium term that will bring all those rates down, and close the gaps between them, is a period of sustained economic growth: the rising tide will do its work.

You could always read the graph the other way - that in recession, the black unemployment rate rises much more than the overall national one (certainly in absolute terms, though in percentage terms they behave similarly). That's true, too. It's another reason, by the way, for countries to think long and hard about the austerity route. Or better still for countries to stick to responsible, sensible macropolicy, so that the austerity route never needs to be taken.

John Quiggin's keynote address

Economists wrestling in the mud with other economists isn't the most appealing of spectator sports, so you might want to pass over this post and come back another day. But if you're still here, I want to talk about yesterday's keynote speech at the NZAE conference, 'Economics after the Global Financial Crisis', by Prof John Quiggin from the University of Queensland.

I've spoken to a lot of attendees at this year's NZAE conference about it. And there were some systematic responses.

First the good news.

A lot of people thought it was worthwhile to have a speaker who would shake the bushes and generate debate, and that's surely how it played out. Prof Quiggin was allotted an hour and a half, spoke for just shy of an hour, and we had over half an hour of questions and challenge before the chair dropped the gavel on what had become a rather acrimonious session.

And it's true that a lot of people saw a lot of merit in many of his points.

Macroeconomics wasn't prepared for the GFC? Agreed. It doesn't have an answer for what to do next? Not so clear, but not a silly thing to say. The institutional powers in the economics academy reward intellectual rigour over realism or practicability? It's not original, but it's still true. As a linked point, economists had been building theoretically coherent models of the economy (he singled out Dynamic Stochastic General Equilibrium ones, DSGE for short) that were damn all use in the trenches? Sure. Previously accepted theories of finance (like 'the efficient markets hypothesis') exposed as flawed? Financial deregulation and subsequent financial excesses a catastrophe for the world economy? Absolutely. Crises like the GFC affect the more vulnerable in society? No question.

But things got more debatable in other areas. As I give some examples, I'm relying on what I heard on the day, and I don't yet have the formal presentation to hand (come on, NZAE, put the papers on the website!), and I'll be happy to correct any misrepresentation of his views if I've got them wrong*.

I believe he argued that there was no correlation between the countries that had done the most micro-economic reform (the likes of what we call 'Rogernomics'), and those that had best weathered the GFC. This, I believe, is outright wrong. As the most obvious example, the countries that have most liberalised their labour markets have had hugely lower rates of youth unemployment than those who didn't. There was a lovely graph in the recent Economist survey of Germany, for example, which showed that Germany (which with its 'Hartz' reforms in 2005 had made it easier for lower-skilled and part timers to be employed ) has had much lower unemployment than France, for example, which made no comparable change.

He argued that fiscal policy leading up to the GFC was 'missing in action', with a fiscal orthodoxy that was more concerned about medium-term fiscal balance than helping troubled economies in the here and now. Personally I'm not sure that's right: there were many examples of active discretionary fiscal policy pre the crisis, and in any case I'm not sure that the orthodoxy was wrong. Countries like Ireland and Greece would have been better served to have had some medium-term fiscal anchors. As things have played out, the issue has become somewhat more moot as fiscal policy has been deployed more actively,with the US (for example) been running ginormous fiscal deficits, and when even our own fiscally conservative government has let the deficit rip, post-GFC, to support the economy.

He was also no fan of inflation targetting, and argued that all the central banks in developed economies had in practical de facto terms become inflation targetters from the early 1990s. This got some pushback. As one commenter from the floor pointed out, countries like New Zealand, Australia, Canada and Sweden (explicit inflation targetters all) have survived the GFC relatively well, and Japan has just moved to an inflation  targetting regime as part of their efforts to get Japan moving again.

He probably shouldn't have wandered into NZ-specific comments. I didn't mind that he got our original inflation target wrong - anyone can forget details, God knows I have, and sometime not just the details - and he was happy to stand corrected. But in his effort to rubbish Rogernomics and all its little wizards, he tried to make the case that New Zealand's progressive slide in income relative to Australia, and the higher incidence of recession in New Zealand, were down to these mistaken macroeconomic and microeconomic policies. It rather spoils his story that the slide started long before Rogernomics. It even predates Muldoon (not that he helped).

*Post was updated July 10 to reflect Prof Quiggin's feedback

Eurosclerotic price setting

My previous post on Miles Parker's excellent research into how New Zealand firms set their prices mentioned, in passing, how little attention Eurozone firms appeared to pay to competitive conditions in their markets when they set their prices.

I didn't expect to come across such a wonderful example in such short order, but when I signed out from blogging about Miles' research and went trolling through some of the French websites I follow, I found this gem.

It's about how the French post office apparently wants to raise its prices - by 1% more than inflation in 2014 and 2015, and by (wait for it) 3% more than inflation in each of 2106, 2017, and 2018. The article says that, if inflation is 2% a year, this translates into a cumulative price increase of 24%. I make it 22.8%, but same diff.

It's a lovely insight into where many Eurozone businesses' minds are. My business in in free fall (the number of letters carried is expected to fall by 6% a year, similar to what's happening to mail carriers everywhere). So I'm entitled to big price increases to keep my revenue where it used to be.

Yeah, right.

Business decisions in real life

Just a quick heads up at this point, as I can't really do it justice without having the full paper to hand (it's not yet up on the NZAE website), but I was very much impressed by Miles Parker's paper this afternoon at the NZAE conference on 'Price-setting behaviour in New Zealand'.

And just to be correct on the formalities, could I repeat what Miles said, that the paper was his and not necessarily the views of his employer (the RBNZ).

Miles has gone into the micro data at Stats (i.e. data available at the individual respondent's level, though obviously with the safeguards you'd expect from Stats about protecting the anonymity of individuals' data)  and looked at how businesses actually set prices.

It's hugely interesting. As I said, I'll do it proper justice when the full version is available, but even on the basis of the summarised version that was all Miles could pack into his allotted 20 minutes, it was highly informative and suggestive.

Examples: have you ever grizzled that firms pass on cost increases to consumers, but don't seem to pass on cost decreases? On Miles' data, you'd be vindicated. And if you asked yourself why firms can get away with this, one explanation might be that there isn't enough vigorous competition between firms. If competition were vigorous, businesses' windfall gains from lower costs would be competed away as firms used their lower costs to win more market share by offering lower retail prices. So, implicitly, competition can't be that vigorous after all, which (as I've posted earlier) rather dovetails with Roger Procter's speech to the Productivity Symposium. He argued that in New Zealand there don't seem to be the strong competitive forces that would normally see off companies that tried to hang on to cost windfalls or otherwise continue to coast along without serious competitive threat.

There was indirect confirmation of this from another result in Miles' paper. He had an analysis of the main reasons why firms do not change prices. In the US and the UK, as studies he cited have found, the big reason firms do not change prices is what he called "coordination failure", which translated into plainer English means that firms are afraid that if they raise prices, their competitors won't follow, and they'll be left twisting in the wind. As they should.

In New Zealand, though, that ranked only as the number 3 reason for not changing prices. First was the existence of explicit contracts with customers for a fixed price (fair enough), second was the existence of implicit contracts with customers (customers don't have any formal contract, but they expect us not to rake them over, and we respect that - also fair enough). Those constraints tend to figure highly in the pricing decisions of firms overseas, too, but the point is that in the US and the UK, the bigger factor was what competitors would constrain you from doing. That appears to be less relevant here.

Miles also found that companies in the tradables sector (facing import competition, or facing rivals in export markets) were quicker to change price than firms in the non-tradables sector (who don't have the same degree of competition keeping them honest and sharp-pencilled). However you look at these results, you tend to lean towards too many companies being able to get away with a cushy life, at the consumer's expense.

All that said, it's easy in Godzone to be too hard on ourselves, and I know I've done a bit of it here. So for a bit of balance, I should add that the US economy is famously competitive, and not being quite as dog-eats-dog as many American markets doesn't mean you're hopelessly dozy and complacent. And as it happens, we look pretty good by comparison with the sclerotic Eurozone markets, where prices change markedly less often, and competitors' potential reactions are ignored to a greater degree than here.

Who'd have thought?

The NZAE conference - Maurice Obstfeld's excellent keynote speech

This morning's presentation, "Finance at Center Stage: lessons from the Euro Crisis", by Maurice Obstfeld from the University of California, Berkeley, more than maintained the recent track record of the NZ Association of Economists in attracting the global leaders of the profession to address our local conference. And full marks to the Reserve Bank, Treasury, Statistics New Zealand and the University of Auckland Business School in providing the sponsorship that made this happen.

Obstfeld's presentation isn't up on the NZAE website yet, but when it is, give it a go. There is a lot being learned, the hard way, about the links between macroeconomics and finance, and his speech brings you to the latest thinking on financial sources of macroeconomic instability and possible responses.

The key takeaway, for me, was that the Eurozone authorities face a trilemma akin to Milton Friedman's old formulation (you can have only two off a three-item menu, where the choices are the interest rate you'd like, the exchange rate you'd like, and the balance of payments capital flows you'd like). Any two determine the third, which you're stuck with.

Obstfeld (and others he cited) have cited a similar trilemma, or even quadrillema if there is such a thing, for the Eurozone authorities, where the choices include the likes of monetary policy independence, fiscal policy independence, local financial oversight, and Eurozone financial stability. You can have some of these, and have to live with the necessary implications for the others, but Obstfeld also argued that Europe hasn't even managed to nail down the choices it can influence. It left you with a queasy feeling that the Eurozone could yet lay an even larger egg than the ones already laid by the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

There were some specific points I found especially interesting, and I'll elaborate a little more on them when I can put up Obstfeld's graphs, but here they are for now.

One, the Eurozone (like many other parts of the world in the early to mid 2000s) had large and in some cases clearly unsustainable booms in house prices. Most of these unwound messily afterwards, with two main exceptions thus far - France, and Belgium. It's true that the underlying demand/supply dynamics of the French market, in particular, mean that more of the French house price bubble is due to genuine fundamentals (the ongoing attraction for many people of Paris as a place to live, set against severe constraints on new supply) and less to the musical chairs buying frenzy that occurs when monetary policy is too lax for too long. But you are still left with the uneasy feeling that the French banks' housing-related assets may not scrub up too well as events play out.

Two, and while this isn't new news, Obstfeld documented it well, the PIIGS have had very mixed results at getting their competitiveness (which had deteriorated badly in the years up to the recent Eurozone problems) back into fighting trim. Ireland is the outstanding example of achieving results, through outright cuts in public sector pay and social welfare benefits, for example. The others are showing decidedly mixed outcomes, ranging from ineffective execution to unwillingness to execute in the first place. In passing, I think Obstfeld was a bit kind to pre-crisis Ireland, in that he said that their fiscal stance pre-GFC was respectable, when it wasn't on a cyclically adjusted basis. The headline Irish fiscal numbers had been flattered by the tax take of the 'Celtic Tiger' years: in structural reality, they were a mess.

You're left with the feeling that Eurozone banking and debt issues haven't yet reached the endgame, and Obstfeld argued that you probably won't be able to feel comfortable about an eventually happy outcome until you see some genuine centralised Eurozone institution with the authority to wade into problem banks and with the funds to enable it to take on the role effectively. That's still not on the political horizon: Obstfeld cited a recent column in the FT (I'm pretty sure it's this one) that the sums supposedly available currently (60 billion Euros) are a tiny fraction of the potential capital losses to be met.

Link to the Productivity Symposium material

I said yesterday I'd post a link to the Productivity Symposium papers when they went online, and here it is.

Today's symposium on 'Unpicking New Zealand's Productivity Paradox'

I mentioned yesterday that the Productivity Hub was hosting a day-long symposium on New Zealand's apparently poor productivity performance when compared with Australia or with the OECD as a whole.

It was a highly interesting day, but difficult to summarise let alone synthesise.

Preliminary thought - yesterday I described the 'productivity paradox' as being the strange situation where we had access to the same technologies as everyone else, but didn't seem to be as good at taking them up or using them effectively, and some speakers today also described the 'paradox' that way.

Some folks put it a bit differently, and think the paradox is that we have apparently a world-leading set of institutions and policies - secure rights for investors, ease of starting a business, low tariffs and the like - but don't appear to have the performance payoff we might have expected from doing all these good things. However you define the 'paradox', it's about a lower productivity outcome than you might have imagined we should have enjoyed.

Highlights for me?

I liked the presentation from Alan de Serres from the OECD, who documented that GDP per capita is heavily affected by how much you invest in both physical and human capital, by the amount of business R&D spending you undertake, and by much your economy is integrated into the world economy, this latter point being a particular issue for New Zealand as being on the far end of everything. There was quite a bit of coverage throughout the day on how much of a drawback geographical isolation might or might not be: the internet may well have reduced our effective level of isolation, but there were also arguments that while the cost of accessing overseas relationships may have gone down, the benefits from face-to-face proximity have also risen, so it's not obvious, net, whether distance has become less of a handicap.

Roger Procter from MBIE had a lot of interesting ideas, the two big ones (in my view) being a relatively low level of Schumpeterian competition in New Zealand (allowing a long tail of low productivity firms to survive, when vigorous competition would have seen them knocked off and resources freed up for more productive use) and a strange pattern in recent years of resources moving from high productivity industries to lower productivity industries. That provoked some debate, too: one possibility was that it mightn't be as irrational or backward as it looked at first sight, if (for example) resources are moving into new dairy farm conversions. They may not be especially productive, but they may be highly profitable at current high world prices. I expect we'll be hearing more from MBIE in due course about their estimates of the level of competition in different industries.

Geoff Mason from the UK's National Institute of Economics and Social Research, presented some highly detailed comparisons of sectoral productivity in New Zealand and Australia. For most industries, Australia is well ahead: on average we achieve only 62% of Australia's labour productivity. Geoff's been able to pinpoint how much is down to, broadly speaking,  better ways of doing things in Australia ('multi factor productivity'), which explains 58% of the difference; how much is down to Australians working with more capital equipment than we do (39%); and how much is down to higher skill levels in Australia (very little, as it happens, only 3%).

Helen Anderson reported on the Productivity Partnership's research into construction, which has had one of the worse productivity track records. It was notable for going beyond diagnosis and analysis, to putting up some tentative policy initiative ideas.

And Hayden Glass from Sapere Research Group had a lot of interesting things to say about how information and communication technology (ICT) could be used more effectively to raise productivity. Hayden's main points were that we have been stuck debating issues that have mostly been resolved or on their way to being resolved (access to broadband, take-up rates, pricing and the like) and that we need to concentrate on the big point, which is how to use ICT to improve business processes.

Physical attendees were given a USB stick with the presentations, so they are available in e-copies, but I'm not sure yet how much of all of this has been made available more widely online. If you're interested in following it up yourself in the meantime, you can contact Camilla Lundbak at the Hub secretariat, and if I find a link to the papers I'll post it later.

Micromanagement gone mad

The members of the Manakau Golf Club have, I gather from media reports, in large numbers (more than 80%) approved selling their existing grounds to a housing developer, and will move to a new site near Ardmore Airport. More houses get built, in a market where increased supply is vital, and the golf club gets the money for a new course. Given the size of the majority to accept the plan, club members were clearly convinced they've had a good deal.

Win win all round. Except that the Overseas Investment Office needed to give its approval, since the housing developer (Fletcher Building, as it happens) is, by a small margin, majority foreign owned.

As a policy regime, this is a nonsense, comparable to Helen Clarke's Cabinet deliberating over exactly how many eggs a small artisan producer could sell at the side of the road before coming within the ambit of onerous Elf 'N Safety regulation of wholesale egg producers. Or the Irish Cabinet deliberating over the youngest age pedigree greyhound bitches could be allowed to breed. An observer from Mars might feel that these examples are too bizarre to be true. If only.

What governments need to do, is to butt out of willing buyer, willing seller transactions. There is no market 'failure' - quite the opposite. The market has produced a deal that works for everyone.
The only reason the OIO has been dragged into an involvement, to be brutal about it, is that politicians have been pandering to the voters who think that a Jones or a Murphy can buy a golf course, but a Chang or a Kim or an El Masri needs to go through the hoops.

For a country that (often rightly) prides itself on its egalitarianism and progressive attitudes, this is a disgrace.

Stronger and stronger - but for how long?

Last Thursday's release by the ANZ economists of their Business Outlook survey for June was strong across the board. While the headline results are still influenced by post-earthquake boom-time conditions in construction, the reality is that the rest of the economy is doing fine, too. In May, the ANZ team estimated that, combining their Business Outlook readings with their Consumer Confidence readings, the economy was likely to be growing at a 3.7% rate by the end of this year. On these latest June numbers, that estimate is now for 4.4% growth - faster, the ANZ reckons, than we can actually deliver or keep up.

What the New Zealand economy can actually manage over the longer haul is basically a productivity issue: while you can grow an economy by employing more people and by investing in more capital equipment for them to work with, over the longer term it's your productivity - what extra you can achieve with any given set of resources - that determines your living standards. I'm looking forward to tomorrow's day-long symposium at Te Papa, 'Unpicking New Zealand's productivity paradox', which is assembling a bunch of domestic and international experts to look at New Zealand's current and potential productivity performance.

The 'paradox', by the way, if I've got it right, is that any reasonably developed country can readily access best productivity practice and implement it for themselves, but despite this ready access and the strong and clear incentive to exercise it, we don't seem to have done so, or at any rate not on any scale that has mattered overall. Our levels of productivity seem to stay lower than countries whose practices and technologies we should be able to duplicate.

An extraordinary graph

Here is a truly amazing graph. Yes, I know, 'amazing' is relative and risks sounding over the top, and what might be amazing to an economist mightn't hit the spot for anyone else, but it's still amazing.

It's from a Treasury Working Paper published in February, 'Measuring Savings Rates in New Zealand: An Update'. I missed it at the time, so I should credit Jeff Cope and Steffi Schuster at Stats for pointing me to it.

It shows the estimated household savings rate (savings as a percentage of disposable income), as measured by Statistics New Zealand at various points in time.

So. What do you see?

In 2004, the household savings rate as measured at the time (blue line) indicated massive dissaving: in 2004 the average household was earning $100 after tax and spending about $112. And the conventional explanation, then and now, was that people were spending the wealth they'd accumulated from increases in the value of the family home.

This sounds feckless, and lots of people worried about it this 'home equity withdrawal'. Maybe you worry, too, that people ought to take care about spending today on the basis of uncrystallised capital gains that might not be there tomorrow.

On the other hand, 'wealth effects' on consumption are widely documented. I collect stamps: if in the morning my collection is worth $100K rather than the $30K it might normally fetch, and I'm reasonably sure that I can realise the $100K or thereabouts, I could very safely spend $20K today on the strength of the new valuation. I'm making a realistic reassessment view on my consumption profile based on more than just current income.

In any event, in 2007 (red line), same thing, except now it's more like earn $100, spend $114. And yet again in 2009 (purple line): household dissaving is still very high, and, you'd think, absolutely in synch with everything you've seen before. Earn $100, spend $114.

And then you hit the green line - Stats' best current take on what was happening, based on the best available data to hand today.

It's a complete break from the accepted wisdom. Yes, households still look like they are spending more than they earn, but the scale of it doesn't seem to be quite as bad as previously thought, and far from being a picture of ever-increasing fecklessness (as all the previous estimates had suggested) households, on this latest reading, were actually getting their act together. On the latest data, households are actually breaking even - spending roughly what they earn. It may not be the most thrifty behaviour in the world, but it's stopped being outright profligate.

There are two possible explanations (and they are not incompatible) for what is going on here.

The first is that the original data were inadequate, and that a more complete count of income and spending shows that families weren't engaged on a massive and unsustainable spending binge. The second is that households' behaviour changed, and they stopped being as profligate as before.

If I had to pick between these explanations, I'd give more weight to the first one. When you count things more accurately (e.g  by capturing more of the income of trusts, as Stats has) you find that households were earning more than previously thought, so their spending wasn't quite as large relative to their (newly updated) incomes, meaning that their savings must have been greater.

That said, the second explanation also makes some sense. I'm perfectly prepared to believe that the GFC, and maybe other cyclical influences, also altered people's behaviour, encouraging more precautionary savings.

I have no definitely knock-out way of judging whether better estimation or a change in behaviour is the bigger explanation of the changes in the measured data, and I admit it's a judgemental guess. But my guess, for what it's worth,  is that the original data were well wide of the mark, and that more recently we're getting a better sighting shot on what households have actually been doing. Or in other words, the data revisions are the big story, and any change in behaviour is a contributory but secondary factor.

You're led that way by a point that the Treasury paper makes. Dissaving rates, as apparently measured by the original sets of official stats, must have been substantially overstated. If households were really spending massively more than they earned, then absent more than compensating revaluations on their assets, their net wealth would have gone down. As the paper notes (p20), "the negative saving rates based on the Household Income and Outlay Account imply that households would have completely drawn down their stock of net wealth. However, this is inconsistent with the evidence from both the aggregate sector data on household wealth published by the Reserve Bank, and the micro stock data from SoFIE [Survey of Family Income and Employment]". In other words, dissaving at the rate supposedly estimated would have seen households' assets exhausted. But they weren't. So the original dissaving estimates can't have been right.

A  great deal of newsprint and policy analysis (not to mention actual policy initiatives such as KiwiSaver) were based on a view of household saving and spending behaviour that, with the benefit of better data later on, now looks to have been more mirage than reality. As the authors put it (p15), rather moderately in the circumstances, "These findings underscore the need for the policy debate to be grounded in solid evidence, and to be cognizant of any limitations of the data that underpins that evidence".

None of this necessarily means that we might not have a national savings issue - these revisions affect only what is being measured for households - and our persistent current account deficits suggest we might. But they absolutely do make you reconsider the supposed behaviour of the New Zealand household.