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