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.
Thursday, 4 July 2013
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?
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?
Wednesday, 3 July 2013
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.
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.
Tuesday, 2 July 2013
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.
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.
Monday, 1 July 2013
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.
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.
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.
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.
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