Wednesday, 26 May 2021

The Bank and the markets are on the same page

First thing you notice about today's Monetary Policy Statement?

Well, maybe the second thing, after the wholly expected news that the official cash rate or OCR will be staying where it is for quite a while yet, as (for example) all 13 folks surveyed on the Finder OCR preview page had anticipated.

The possibility of an OCR cut is now remote. The February Statement had said, "The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed". The April Review had said, "The Committee agreed that it was prepared to lower the OCR if required". And in this one? Any cut to the OCR has been taken out the back and quietly buried. Which makes complete sense: the futures market has already moved on and has been signalling no further cuts for a while now.

We're back to the good old days when the Bank published a projection for the OCR, rather than the notional "unconstrained OCR" construct it had been running with in recent Statements. And here it is.

As the Bank says (p17), "This projection is conditional, in that it communicates the policy path required to meet our monetary policy objectives subject to the economic outlook and the assumed impacts of other monetary policy tools", and it is not "forward guidance", or the Bank's formally tipping its hand about likely future moves, and if the outlook changes the projected OCR path will, too. But all that said, it's the best take we've currently got on what the Bank is likely to do next. It also agrees with what the markets were expecting, which was an OCR hike of 0.25% around the middle of next year and another one by the end of 2022..

On the Really Big Question that is bothering central banks right now - are current signs of inflationary pressure a signal of permanently higher inflation down the track, or will they go away as (eg) Covid effects wither away? - the Bank has come down largely on the temporary side: 

"The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium term inflation were mitigated by ongoing global spare capacity and well anchored inflation expectations" (p3), and

"we expect the broader impact on consumer price inflation to be moderate and temporary. Our projection assumes that goods supply-chain bottlenecks begin to ease in late 2021, and dissipate gradually over 2022. There are already tentative signs that the strong global demand for goods is abating, as easing of public health restrictions abroad is lifting demand for services such as eating out and travel. In addition, we expect labour shortages will lessen as border restrictions ease and more workers are able to come into New Zealand" (p28)

though if the Bank's wrong it will have to do something about it, or as it put it (p19), "there is some risk that the change in prices is more persistent and leads to ongoing inflationary pressure. Consistent with the [Monetary Policy] Remit, the MPC [Monetary Policy Committee] would be expected to respond to ongoing inflationary pressure if it were perceived as being inconsistent with the inflation target".

One bit of good news in the Statement is that while we are not in completely calm waters yet, some of the extreme risks around the economic outlook have dissipated: "Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment" (p2). 

On Covid, the Bank is operating on the basis that "New Zealand is assumed to remain at Alert Level 1 or a lower level of restrictions over the projection ... Border restrictions are expected to begin to ease more broadly from the beginning of 2022. The majority of New Zealand’s adult population is assumed to be fully vaccinated by the end of 2021" (p34).

Thursday, 20 May 2021

Cyclical course-setting? Pretty good

Does the Budget set a sustainable course? Is it appropriately boosting or braking the economy? Short answer to both: yes.

Here's the 'true' or 'underlying' state of the Government's finances (from pp34-35 of today's Budget Economic and Fiscal Update) which uses the methodology I talked about the other day. The solid blue line shows the headline deficit, and the green line shows the underlying position when the headline figure is adjusted for the state of the economy. The thing to keep a watch on is the track of the underlying cyclically-adjusted balance, and from a sustainability point of view it is tracking as it should. It's gradually moving back towards balance, which is a good thing to do over the longer haul, but not disruptively quickly, which is the right thing to do in the still-unsettled short term.

The government is running ongoing deficits (cyclical and structural), so over the forecast period it is supportive all the way (it's adding more to the economy than it's taking out). But it's also useful to look at whether it's becoming more supportive, or less. That's estimated by the 'fiscal impulse', the change in the underlying cyclically-adjusted position from one year to the next (shown below).

This looks pretty reasonable, too. There was an appropriately huge increase in fiscal support in the June '20 year, to the tune of just over 6% of GDP. The degree of support is being eased back a bit in the current June '21 year, and that makes sense, as the Covid downturn wasn't as bad or as long as expected, and the rebound has been faster and stronger than first thought. 

You could make a case that the forecast increase in fiscal support in the June '22 year isn't necessary from a cyclical point of view: we're looking at a period of expected GDP growth of 2.9% (current '20-'21 year), 3.2% ('21-'22), and 4.4% ('22-'23) which doesn't add up to the strongest case for revving up the degree of fiscal stimulus. 

On the other hand, the unemployment rate at June '22 is expected to be 5.0%, and there is an argument (explicitly made by the Aussie Treasurer Josh Frydenberg in his Budget earlier this month) that you should keep the fiscal pedal to the metal until the unemployment rate has a 4 at the front. So no biggie either way, and at least the years beyond '21-'22 show an appropriate ongoing unwinding of the Covid-era fiscal stance.

In terms of setting the best fiscal course, on the left lay the lure of buying everything in the toyshop, on the right an "I'm more fiscally responsible than you" austerely fast return to surplus. This Budget has steered pretty well through those extremes.

Wednesday, 19 May 2021

Small issue, little interest, move along

Last week I turned up (by video) at the Economic Development, Science and Innovation Select Committee to have my say about the Commerce Amendment Bill: supporting reform of s36 (abuse of market power), suggesting that the Commerce Commission should be able to issue quick-fix provisional authorisations like the ACCC can, and arguing against the information sharing powers being proposed for the Commerce Commission.

Very few people seem to care about the information sharing issue. There were 29 submission on the bill but on my count only 5 of them raised the information sharing powers. 

They were the Commission (for); Edward Willis of the University of Auckland Law School ("tentative support, subject to some reservations"); Malcolm Harbrow (Twitter's Idiot/Savant and No Right Turn blogger), who wanted to make sure the new provisions weren't used to subvert application of the Official Information Act (good idea); and Russell McVeagh and me (both opposed). Russell McVeagh in their executive summary say "Such expansion of powers will disincentivise businesses from voluntarily providing information to the Commission to the detriment of the current levels of efficiency in the discharge of the Commission's significant number of functions", and I agree, though I also have wider issues, as I said in my submission.

So: not many people care. And maybe it really is no biggie. At the Committee hearing the Commission sang quite a good "we're all public sector entities trying to work together" song, and I can imagine that hitting the spot. And to be fair it has guidelines (the relevant bits are pp33-4) which set a reasonably high threshold for sharing information. 

The guidelines say that "Other than as provided for in the specific situations discussed below we do not share evidence with other New Zealand or overseas law enforcement or government departments or entities". The specific situations are: joint investigations; Fair Trading Act sharing with the FMA and Takeovers Panel (allowed for in that Act); where there might be serious fraud (allowed for under the SFO's Act); where there might be serious criminal offending (sharing with the likes of the police); where there might be a serious threat to public health or public safety (whatever agency is relevant); and assisting overseas regulators the Commission has a cooperation agreement with (allowed under various Acts including the Commerce Act).

That's all sensible and desirable, and if the Commission carries on along those lines, and you'd expect it to, all good. But the problem is that the proposed legislation doesn't replicate those high standards. It just says (proposed s99AA) that 

(1) The Commission may provide to a public service agency, a statutory entity, or the Reserve Bank of New Zealand any information, or a copy of any document, that the Commission—

(a) holds in relation to the performance or exercise of the Commission’s functions, powers, or duties under this Act or any other legislation; and

(b) considers may assist the public service agency, statutory entity, or Reserve Bank in the performance or exercise of its functions, powers, or duties under this Act or any other legislation

That opens a very large door: "Any information ... that ... may assist" a public sector entity is a far looser criterion than the serious criminal offending, or serious threat to public safety, that the Commission under its present guidelines would need to see before it was prepared to share. 

Ed Willis is his excellent submission (more judicious than my own coathanger tackle) said, and I'm with him, that 

it would usually be expected that processes for the protection of relevant interests and the promotion of transparency would be incorporated into the statutory drafting itself rather than being left to the Commission to work out in practice. That said, the real issue here is one of appropriate balancing. The Committee may wish to question the Commerce Commission directly about the anticipated procedures it will employ to ensure any information sharing under the new provisions is appropriate and fit-for-purpose. Only if the Committee is satisfied with the Commission’s response should it recommend that the Bill be enacted in its current form (p5)

Tuesday, 18 May 2021

A practice run

We've got the Budget coming up on Thursday, so as a limbering up exercise let's have a look at how to figure out whether the Budget will be braking or boosting the economy. 

You'd think that would be one of the top things the media would cover, but in practice they don't, or not well. Far more attention goes on "the" deficit or "the" surplus, on the debt profile and fiscal sustainability over the longer haul, and on specific initiatives. They're all fine, and worth the attention, but they don't tell you whether the Budget will be helping the economy when it needs help, or tapping the brakes when it's threatening to get boisterous - the 'stabilisation' role for fiscal policy, as they say.

So as a practice run at figuring out what cyclical impact Budgets have, here's a graph of what happened in the Aussie Budget that their Treasurer Josh Frydenberg presented last week (taken from their big Budget document, Budget Paper No. 1: Budget Strategy and Outlook).

Start with the solid black line. That's the historic and forecast path of "the" deficit or "the" surplus, the headline figure commentators tend to obsess on. Indeed in both Australia and New Zealand it's become almost a macho indicator of "I can run the Treasury better than that other lot", and any Treasurer that can't point to an actual or forecast surplus must be doing it wrong. Infantile, but that's the politics of it for you.

Now have a look at the 2018-19 year, which I've helpfully identified with that green arrow.

You'll see that the headline outcome was effectively a balanced Budget, with no material surplus or deficit. But what actually happened was that the headline outcome was flattered by a stronger than usual Aussie economy. You can make a decent stab at calculating how much extra tax revenue (or how much reduced government spending on benefits) was down to the good times, and that's shown in the blue bar. It was about 1% of GDP. Without that temporary windfall, the reported headline balance turned into an underlying cyclically-adjusted deficit of about 1% of GDP (the red bar).

No great dramas either way, other than (a) illustrating the point that a Treasurer's "success" in putting a balanced or surplus Budget in the window may have nothing to do with their responsible fiscal management and rather more to do with the state of the economy and (b) reminding us all to watch what's happening to the cyclically adjusted balance as a better guide to what's really going on with the stance of fiscal policy.

Onwards to 2020-21 (the orange arrow). There's a headline deficit of a bit less than 8% of GDP, flattered a bit by cyclical conditions (including the Aussie Treasury clipping the ticket on record high iron ore prices), so the underlying deficit is actually a bit bigger, at a little over 8% of GDP.

The Aussies have quite helpfully split out the underlying deficit into two bits - how much is down to temporary anti-Covid measures (the teal-coloured bar), and how much is genuinely 'structural' (the red bar) and will still be there when things like their JobKeeper wage subsidy scheme have dropped away.

Them's the concepts. What do they tell us about the cyclical role of Aussie fiscal policy?

First of all, that in the current 2020-21 there will have been a stonking great 7% or so of GDP as anti-Covid fiscal support, on top of some 2% of GDP in the 2019-20 year. This is fiscal policy doing its stabilisation stuff, and then some. I have no problem with that: it's possible that Finance Ministers pretty much everywhere ended up overdoing it a bit, but that's okay. Providing too much counter-cyclical support is a hell of a sight better mistake to make than providing too little. 

It also shows, by the way, that fiscal policy when it puts its mind to it, can be deployed very forcefully and very quickly. That wasn't the accepted wisdom pre-Covid, but is now. 

Next thing you'll notice is that Freydenberg was in no hurry to take the Covid support away: it tails off gradually. That's probably right, too: some sectors dependent on an open border will still be hurting for quite a while yet (the Aussies' assumption in this Budget was their border not opening till mid '22). Frydenberg explicitly chose to put a higher priority on near-term cyclical support over the pace of eventual deficit reduction, and one of the key things I'll be looking for in our Budget was what choice Grant Robertson has made.

You can measure how quickly support is being taken away: it's a thing called the 'fiscal impulse', and it is the change from one year to the next in the size of the structural balance. Think of it this way: suppose this year you get $100K in wage subsidies, but next year you only get $50K because the package gets tightened up. You're still being supported, but less so. The fiscal impulse picks up that degree of tightening. For some reason the Aussies don't bother calculating it (search their Budget Paper No.1 for 'impulse' and you get nada), but we do. It's the very first figure I'll be looking for on Thursday.

Even after all the Covid support is gone, Frydenberg has also decided to take his own good time to deal to the non-Covid structural deficit, which will still be running at 1.5% - 2.5% of GDP in the later years of this decade. That's more debatable, but to the extent that an ongoing deficit reflects using once-in-a-lifetime low borrowing costs to provide infrastructure, I can live with that too. Again it'll be interesting to see what choice we make.

Monday, 10 May 2021


Every year the American Economic Association picks the year's best paper from each of its four journals (Applied Economics, Economic Policy, Macroeconomics, Microeconomics): there's a list of the winners for the past decade here if you'd like to catch up with the good stuff. In a nice touch, you can download the full text of each one without being an AEA member. 

So us pro-competition types can feast, for example, on the finding by the 2016 Economic Policy winner ('Death by Market Power: Reform, Competition, and Patient Outcomes in the National Health Service') that increased competition in the UK's National Health Service worked:

Within two years of implementation, the NHS reforms resulted in significant improvements in mortality and reductions in length of stay without changes in total expenditure or increases in expenditure per patient. Our back of the envelope estimates suggest that the immediate net benefit of this policy is around $479 million per year

Fernando Luco, who hails from Texas A&M University, is this year's winner in the Microeconomics category with 'Who Benefits from Information Disclosure? The Case of Retail Gasoline'. This one, though, doesn't have such an unambiguously happy moral.

Our story starts in Chile in 2012, when the government required petrol stations to post their prices on a government website and update them promptly (within 15 minutes) whenever they changed. An everyday tale of empowering customers to find the best deal, you might think.

Except that petrol stations' margins increased by some 9% after the new disclosure policy, and various statistical checks confirmed that it was indeed the disclosure policy, and not some non-policy event happening at the same time, that was behind the petrol stations coining it.

What went on? As the author says (p278)

information disclosure may have both pro- and anti-competitive effects. On the one hand, disclosure may intensify competition if consumers benefit from lower search costs and firms use the website to compete more intensively. On the other hand, if stations can easily monitor their rivals’ actions and consumers do not actively use the disclosed information, disclosure may facilitate coordination

so it could go either way, and the net effect depends on who uses the info smartest.  As it happens, the author had a dataset of smartphone price look-ups, geocoded, so he could see in each local petrol market how actively people were checking out the prices on offer. In aggregate, the petrol stations won - but not everywhere (p302):

price disclosure allowed firms to monitor their rivals’ actions and to increase their payoffs on average. However, when consumers actively engaged in search [which he could tell, from his dataset], the demand-side response to disclosure dominated and competition intensified

The more smartphone-savvy higher income areas came out okay, lower-income areas not so much: "while in the lowest income areas margins increased by around 12 percent, margins decreased by 4 percent in the highest income areas, suggesting that disclosure affected low income areas the most" (p296). 

Bottom line from a competition policy point of view (p303)? 

mechanisms that increase market transparency may increase competition and benefit consumers only if consumers can easily access and use the disclosed information. Otherwise, the supply-side response to disclosure is likely to dominate, and the intensity of competition will decrease. Hence, this paper provides evidence showing that policy makers should consider ease of access to the newly disclosed information to be of major importance

In a New Zealand context, I suspect smartphone use probably doesn't vary as much with income as (I'm guessing) it does in Chile. Even so, the general proposition still applies: a price disclosure Cunning Plan has the potential to be a good pro-competition pro-consumer idea, but only if there's a good deal of effort put into making sure people from every walk of life end up using the thing.