Keep up the stimulus

Last week I was making the point that one of the key things to look for in the Pre-Election Economic and Fiscal Update or PREFU was whether fiscal policy was going to be supportive or contractionary over the next wee while, and to what extent, and whether the proposed fiscal stance matched up with the likely state of the economy. 

You might have thought that Ministers of Finance need no special advice on aligning fiscal policy with the cyclical needs of the economy. Surely (you might have thought) they let it rip when times are bad, and wind it back when times are good: obvs, to use the technical macroeconomic term.

And if so you'd be in for an unpleasant surprise, at least if you were a citizen of the US or the EU. Overnight we had this presentation from the OECD on their latest economic outlook. It included this graph, where the blue bars are the same measure of the stance of fiscal policy I used in looking at least week's PREFU, except that the OECD shows bars above the line as fiscal tightening and bars below as loosening (our Treasury does the opposite, it's arbitrary, either works). The yellow triangles are a measure of how poorly each regional economy is faring. The grey shaded area is the GFC.

In both the US and the EU you'll see the local fiscal response was bang on: decent sized fiscal stimulus. And in both regions you'll see that it was taken away much too soon. There are all sorts of reasons why the GFC was a doozy, but premature fiscal braking was one of the larger moving parts. Inevitably politics played a large part, including a Republican Congress wanting to unwind anything President Obama initiated.

The OECD says, rightly, that eventually everybody's fiscal house will have to be put back in order, and done the right way, but as of today "Undertaking fiscal consolidation measures now would be premature". I suspect in our case the eventual retrenchment won't be able to get started  before 2023.

The other big messages are that the world economic outlook, on the OECD's latest base scenario, is a bit better than it was when the OECD took its last stab at a guess back in June ...

... but before rushing out into the street to celebrate, bear in  mind that the range of uncertainty around the base scenario is still very wide, as it is here at home.

Finally, the OECD points out (on p10 of the Outlook) that

With long-term interest rates close to zero in many advanced economies, the social rate of return on public investment is likely to exceed the financing costs for many projects. Investment is particularly needed in areas that have large positive externalities for the rest of the economy and where under-investment might otherwise occur due to market failures, including in health care, education, and digital and environmental infrastructure.

Here in Auckland the Bridge has been out, aggravating the already inadequate transport infrastructure, the water supply is iffy, and housing land remains stratospherically expensive: I passed a sub-division the other day, admittedly with largish sections in a nice rural area, where section prices are "from $985,000". When are we going to start fixing it, if not now?

The most important bit

Every year we get Treasury's economic and fiscal updates - the latest, the Pre-Election Economic and Fiscal Update or PREFU on Wednesday - and every year the analysts and the pundits get stuck into the size and pattern of government spending and taxation, the size and trend of the fiscal surplus or deficit, and the size and trend of government debt. All worthy topics, to be sure. 

Yet every year one of the most important aspects of the update struggles to get a proper look in. It should be right up there with the politicised argy-bargy over whose plan for debt is better than whose. This year it's arguably the single most important aspect of the update.

It's whether fiscal policy is boosting or braking the economy. That's important anytime, but doubly important now: once because of fighting the impact of covid, obvs, but also because the other big policy tool for managing the economic cycle, monetary policy, has mostly shot its bolt, so perforce most of the the heavy stabilisation lifting from here will need to be done by Grant Robertson rather than by Adrian Orr.

Here's what the expected impact of fiscal policy is looking like. All these kinds of fiscal impact calculations are by guess and by God, but they're all we have and despite their inherent measurement challenges they're probably in the right general area. I've included the likely impact as shown in the PREFU and the shape that had been expected back in the May Budget.

First of all fiscal policy is strongly expansionary over the next two years, as it should be. And the shape is looking more realistic and more appropriate in the PREFU than it looked back in May at Budget time. I wasn't sure that the government machine was capable of delivering that big a boost in 2019-20 in that short a time (unless it was very heavily weighted to get-it-into-people's-bank-accounts-quickly initiatives like wage subsidies). And it's become apparent that fiscal support will need to be kept going for longer than previously thought, so healthy fiscal stimulus in both 2019-20 and 2020-21 rather than one big hit in 2019-20 is looking a better plan.

The odd thing, though, is the planned and quite large (3.7% of GDP) contractionary impact from fiscal policy in 2021-22. Sure, at some point a Minister of Finance has to tack back on the other course, either (in the short term) because the economy is now strong enough not to need further fiscal stimulus or (in the longer term) because deficits and debt will need some repair work. But 2021-22 is not that point. On Treasury's forecasts the unemployment rate will still be 7.6% in June 2022, still unacceptably high and in no way the appropriate time to slam on the fiscal brakes. 

Another way of getting to the same point is to look at the 'output gap', which is how far the economy is below full employment of its resources. Here's the PREFU estimate (which I backed out of the data supporting Figure 1.6 in the PREFU). An economy still substantially (4.0%) below full potential in mid June 2022 is an economy that is not ready for fiscal retrenchment.

What I drew from the PREFU is that fiscal policy is at the moment appropriately supportive, but also that - barring a miraculously early development and deployment of a covid vaccine - there is a degree of unreality about how quickly the current levels of stimulus can safely be withdrawn.

An excellent resource

Interested in staying up with Australia's criminalisation of cartels, and New Zealand's impending move to do the same? Then head over to the MLex site and download your free copy of  'Collusion Damage: Australia’s struggle to secure its first criminal cartel convictions — and make jail time a deterrent at last '.

It's an excellent resource. As the report says, "Since the first individual criminal cartel charges were laid early in 2018, MLex has been present at every material court hearing in Canberra, Melbourne and Sydney", and the expertise shows. The report is on top of all the cases currently live. My take, not theirs, but after reading this report, and also going by the coverage of the case in the Australian Financial Review, I do wonder from a variety of perspectives if the ACCC is going to succeed with its alleged cartel case against the underwriter banks left with unsold ANZ Bank shares. 

There's a chapter in the report about New Zealand's impending regime, where I agree with MLex that "It’s true that the Commerce Commission will still have the full suite of civil offenses at its disposal and will be under no obligation to unleash a criminal prosecution for trivial matters. Yet ensuring that well-meaning, small businesses -  those that aren’t large enough to have in-house counsel or even to employ a law firm to review their decisions - don’t get caught up with criminal offenses designed to ensnare larger, possibly global players, will remain a challenge for the agency".

In writing up the CLPINZ session on cartel criminalisation I'd also wondered about potential overkill, and had assumed we in New Zealand would end up with some arrangement similar to that between the ACCC and the Commonwealth Director of Public Prosecutions, which hopefully would set some seriousness threshold before unleashing the criminal process. But I learn from the MLex report that "Unlike the ACCC, the Commerce Commission will be able to take its investigations to court directly, without handing the file over to public prosecutors; however, it will be required to ascertain how its planned prosecution measures up with the Solicitor General’s Prosecution Guidelines, which demand “evidential sufficiency” and proof that the prosecution is in the public interest". As the Guidelines say, "The predominant consideration is the seriousness of the offence", and hopefully a conservative approach will be the way to go, rather than feeling the collar of commercial naïfs.

Speaking of resources, I came across the MLex report on its useful Twitter feed. If you're interested in competition tweets, head over to my own Twitter posts and help yourself to my Twitter 'Competition' list (currently 73 members). And if New Zealand economics is your thing, then the 'NZ economics' list (52 members) should be of interest. If there are local competition or economics folks I've missed, let me know and I'll add them.

It's not every day ...

 ... you get to listen to a Nobel prize winning economist, so big shout out to the University of Auckland for its Dean's Distinguished Virtual Public Lecture last night by Nobel Laureate Jean Tirole, Professor at the Toulouse School of Economics, and further hat tip to the university's extending the availability of the lecture to the Law and Economics Association of New Zealand (LEANZ, you are a member, aren't you?).

Tirole was talking about "Digital Dystopia", or as the invite put it, "How transparent should our life be to others? Modern societies are struggling with this issue as connected objects, social networks, ratings, artificial intelligence, facial recognition, cheap computer power and various other innovations make it increasingly easy to collect, store and analyse personal data. While this holds the promise of a more civilised society ... citizens and human rights activists fret over the prospect of mass surveillance by powerful players engaging in the collection of bulk data in shrouded secrecy. A dystopian scenario will be used to emphasise the excesses that may result from an unfettered usage of data integration in a digital era".

Truth be told, it wasn't the easiest presentation to follow: not because of Tirole, whose style is affable and conversational, but more because Zoom webinars are not the best medium for presenting equation-rich material, or at least not for those of us below Tirolean levels of mathematical deftness. Most of the invited panel of commentators appeared to have read it beforehand, and that was the sensible thing to do - here's a link.

Even if the details of the maths beat me, I got the message, and it's plausible. Tirole said that, at first, people had assumed that the likes of the internet and other modern social tech would be a good thing - empowering the previously voiceless and all that - and momentarily reminding me of the optimism around the Summer of Love before it petered out into drug overdoses in squalid squats. But he reckons that this upbeat assumption, like the flower children's, is worth revisiting, and that there are real risks of technologies like facial recognition becoming oppressive - and effective - methods of totalitarian control. The poster child in his presentation was China's proposed 'social credit' rating system, which looks to bundle all of a person's activity into a composite measure of whether they are a good citizen in their everyday life and whether they are going with the Communist Party flow, with potentially unpleasant personal consequences if they aren't (for example though restrictions on their access to credit, employment, education or travel).

In the discussion afterwards, there were quite a few questions (including mine) about whether the social credit rating would be as effective as feared. My thinking had been that people would see through the government's rating as a political device - I was reminded of the crack in the Soviet Union that "we pretend to work and they pretend to pay us" - and would actually judge you by (for example) your buyer or seller scores on whatever is the Chinese equivalent of eBay. 

Tirole, as we should have expected, had thought of that, and his answer was that an authority minded to go down the social credit rating route would deal to the private scoring systems to stop them being used in exactly that way. On p4 of the paper he says, "The state must eliminate competition from independent, privately-provided social ratings. Because economic agents are interested in the social reliability of their partners, but not in whether these partners’ tastes fit with the government’s views, private platforms would expunge any information about political views from their ratings. This competition would lead to de facto unbundling, with no-one paying attention to the government’s social score". 

He also said that people couldn't just ignore the ratings when they carried real penalties, and he pointed to an insidious feature of the rating system, 'guilt by association'. You might well want to allow the poorly rated dissident to buy a business class air ticket, but your own rating will suffer if you do. It reminded me that we've been here before: how many people kept buying from Jewish shops in 1934, when the SS were taking notes? Tirole also raised some interesting historical parallels, quoting Aldous Huxley's letter to George Orwell in 1949, where Huxley felt that oppressive governments would find it easier to go for lower cost routes than running gulags. Orwell was right in the shorter-term, but Huxley might be closer today: "the recent developments fit well with his overall vision" (p6).

What should be done? "A key challenge for our digital society will be to come up with principle-based policy frameworks that discipline governments and private platforms in their integration and disclosure of data about individuals" (pp35-6). But as he also says with very considerable understatement, "The exact contours of such disciplined principles are still to be identified", particularly (I'd add) because we also want to keep sight of the very large benefits the new platforms have brought.  Tirole argued for the desirability of keeping divisive issues out of the databases and aiming to "monitor platforms' foray into political coverage unless platform regulation is performed by one or several entirely independent agencies".