A million dollars doesn't go very far...

The latest REINZ house price data are out, and to nobody's surprise they showed a hot market, with the national median price up 8.6% over the past year, and the Auckland median price up 12.2% to a new record level ($825,000). The median price on the North Shore (Auckland's most expensive region) is now $1,062,500.

Some of this is our own doing, especially the slow and inadequate response of housing supply, and some of it is down to cyclical issues like strong net immigration (which includes more Kiwis coming home, more not leaving in the first place, and more foreigners wanting to come here). But as I've argued before, we need to remember that there are broader global issues in play, too.

Those million dollar homes on the North Shore, for example, are nothing unusual in Australia. As it happens another lot of house price data came out this week, compiled by CoreLogic, and it showed how many suburbs across Australia are over the million dollar mark (Aussie dollars, at that). The latest answer? 613. And as the CoreLogic graph below shows, the number of million dollar suburbs has been rising strongly over the past three years.

Anything with a view of Sydney Harbour in particular is now stratospherically expensive. Here (again from CoreLogic) are the average prices in Australia's top 10 most expensive suburbs.

It's not much different where I grew up, in south County Dublin. Here's a typical four bedroom house from the area (full details here), close to where my sisters and I went to our secondary schools. The asking price in today's Dublin market will set you back €1,075,000, or some $1,660,000.

None of this is coincidence: the common factor is global monetary policy, which has been set on ultra-easy in the US, the UK, Japan and the Eurozone, and which has fed through to Australian and Kiwi mortgage rates, as the graph below shows. It starts back at the end of 2004 because that's where the RBNZ's data series on fixed rate mortgages (Excel file) starts.

You can see at a glance that our long-term interest rates are very closely linked to world rates (and if you'd like more formal research on the closeness of the link, have a read of an analytical note from the RBNZ, 'What in the world moves New Zealand bond yields?'). Our fixed rate mortgages are consequently set for us: they're smoother than the overseas rates, and there's quite a lengthy lag - it's about a year, eyeballing the graph - but they're dealt to us by the world croupier. We don't have a lot of say*.

And sometimes, like now, that can be a problem. We can end up with rates that don't suit our local objectives, just as the Irish did in the 2000s when they had low Eurozone interest rates dealt to them at a time when the Irish economy was already booming. And for us, it's going to get worse again, because of that lag between overseas rates and ours. There's a fair whack of the recent sharp fall in overseas rates that has yet to feed through to lower local mortgage rates and which has the potential to wind up our housing market a few notches more.

So when we're thinking about the local explosion in house prices, especially in Auckland, we absolutely do need to free up and accelerate supply, and do all the things that are under our control. But it's unlikely that house prices are going to go all the way back to their usual relationship to family incomes until global monetary policy also moves away from its current abnormal setting.

*The economics of it is that you can have any two off a menu of your own interest rate, your own exchange rate, and your preferred capital inflow/outflow. You might want to pick the interest rate plus one of the others, but you might not like the implications for the third.

Lies, damned lies, and Irish statistics

In March, Ireland's statistical agency, the Central Statistics Office (CSO), estimated that Ireland's GDP had grown in real terms in 2015 by 7.8%.

Yesterday the CSO came out with a revised estimate. It now says that Ireland's GDP in 2015 grew by - wait for it - 26.3%.

This is both absurd, and yet technically correct. Absurd, because as the Irish Times commentary headline put it, 'Crazy growth figures bear scant relationship to reality'. Yet technically correct, because the CSO says it follows the methodology of the "European version of the current UN mandated international standards for national accounts statistics, the System of National Accounts (SNA) 2008". And there's nothing wrong with doing that: our own Statistics NZ uses the same UN approach (details here if you're ever looking for them).

What's actually happened is that, for assorted tax reasons, over a short period of time in 2015, a number of international companies shifted the domicile of patents they own, or aircraft they lease, or their own corporate domicile, to Ireland. And, apparently, if you apply the standard national accounts methodology to those transactions, you get 26.3% GDP growth. I say "apparently" because the logic of some of the accounting escapes me, but let's take it at face value that the Irish statisticians cranked the right handles and out came the "right" UN-consistent answer.

There is now, as you can imagine, a big barney going on in Ireland about the reliability of the GDP statistics and how can people tell how the economy is actually behaving, but I was struck by two other thoughts.

One was the complete absence of any helpful explanation from the CSO. Here is the complete text of their statistical release.

Is there any attempt to reconcile their earlier 7.8% stab at it with the new 23.6%? No. Is there anything helpful at all about what actually drove the new results? No. Nothing. Zip. Nada.

Or in Irish, neamhní, faic, dada, rud ar bith*.

The relevance to us in New Zealand is that there's been a bit of a debate, here and overseas, about how far statistical agencies ought to go in providing analysis or commentary on the statistics they produce. Statistics New Zealand, I'm pleased to say, is down the right end of this debate, and goes some way to help users understand what's going on.  As an example, the commentary on the latest GDP release, for the March quarter, told us that "The anticipated El Niño weather pattern was not as severe as expected. The normal seasonal fall in milk production was less pronounced than usual, resulting in seasonally adjusted volumes of milk produced increasing slightly", which is helpful when you're trying to make sense of the agricultural production component of GDP.

We don't want Stats to veer off the reservation into opinion or editorial, but we most certainly do want them, at a minimum, to keep up the level of explanation they currently provide. As for the CSO, it badly needs to develop some customer focus and join the 21st century**.

The other thought I had was the silliness of some media and financial market reactions to small changes in GDP from what they had expected. As the Irish example has inadvertently reminded us, GDP is an estimate, a more or less rough stab at the aggregate level of economic activity. It comes with various kinds of measurement and survey error, and has complex and debatable inbuilt assumptions, and not just the Irish ones around intellectual property and official domicile. The measurement of the output of the financial sector, for example, is a contentious issue.

Our latest official stab at GDP growth for the full year to March is 2.4% (or 2.8% just comparing March '16 with March '15). The reality is that "low to mid 2's" is probably just as good a description.

*Pronounced navnee, fack, dodduh, rud er bih, though the 'd's are more like the 'th' in the English 'the'. I particularly like faic, as in "the statistics make faic-all sense".

** (Update July 14) This is too harsh. While I'm still of the view that the statistical release was inadequate, the CSO did supplement it with a separate press release (see comments below). Yesterday the CSO also announced that, while it will continue to estimate GDP/GNP according to the international rules (as it is obliged to), it is also convening a new consultative group to look at "how best to provide insight and understanding of all aspects of the Irish economy", including "whether new presentations of existing information would improve understanding". That's a good move. In that context I hope they have a look at moving on from bare bones presentation of the data.

29th is not good enough - neither is 27th

I'd no sooner posted a piece on our relatively poor infrastructure than I discovered that Ireland's National Competitiveness Council had come out with its latest annual assessment (pdf) of Ireland's competitiveness.

It picked up on exactly the same point: as it happens, Ireland scores almost exactly the same as us (a global 27th for them, a global 29th for us) on the perceived quality of infrastructure. Here's how the Irish showed the picture from their perspective: they happened to include us in their graph.

It's interesting to see that the rating of Ireland's infrastructure has improved, for a mixture of good and unfortunate reasons: "Perceptions about the quality of Ireland’s infrastructure have improved since 2010, reflecting both the impact of a decade or more of investment, and the reduced capacity constraints as a result of the economic downturn" (all quotes are from p17 of the report). Ours is also better than five years ago, but only slightly. Despite the Irish improvement, "Ireland, however, still lags behind the OECD average and scores significantly less than leading performers", and the same is true for us.

The Irish policy conclusion, which I think applies with equal force to us, was

As the economy continues to improve, further investment growth is forecast for 2015. However,projected public investment levels are insufficient to address the emerging infrastructural needs of a growing economy and population, particularly as a significant proportion of public funds will be absorbed in maintaining the existing stock, leaving less funding available for new investment. While recognising the importance of maintaining sustainable public finances, further additional targeted investment is urgently required to address constraints which could undermine the economy’s growth prospects, dampening productivity growth, increasing costs, and weakening Ireland’s attractiveness as an investment location (for both foreign and indigenous investors). To achieve the improvements required, prioritisation will be required such that over the medium term, investment is directed to those areas of the economy which can have the greatest impact upon competitiveness. It is critically important to put in place the appropriate policy and regulatory frameworks to facilitate this targeted approach.

Speaking of those "appropriate policy and regulatory frameworks", I discovered from Joel Mokyr's history of the Industrial Revolution, The Enlightened Economy, that the Birmingham Canal was authorised by Act of Parliament in 1768 and completed in 1772. I looked it up here: it was some 22.5 miles (36 kilometres) long, and took only 13 months from the first public meeting to regulatory approval. The first 10 miles were built in only 18 months, and the whole thing from approval to completion took four and a half years.

I seriously doubt we could match that today.

A cautionary tale

I've just finished reading The Fall of the Celtic Tiger (Oxford University Press, hardback 2013, paperback 2014), a fine book cowritten by my old classmate at Trinity College Dublin, Donal Donovan, and our former monetary economics lecturer, Antoin Murphy. Well worth reading from many perspectives: the story of how the best performing economy in Europe became a financial basket case is gripping, and it's got many lessons for countries elsewhere, including for us.

One is the importance of keeping a very close eye on the structural fiscal balance - the true shape of the government's books, shorn of cyclical influences. The Irish government of the first half of the 2000s spent up large on the back of a cyclical and unsustainable boom in revenue, a lot of it emanating one way or another from the massively overheated Irish property sector. In reality, its spending (and the future commitments it also entered into) left it hugely exposed, financially, when its revenues plunged.

At the time, as the book explains, watching the structural balance wasn't much in vogue, and it didn't help that when the first estimates were eventually made of the true Irish position, they didn't correctly pick up the sheer awfulness of the fiscal books. These days we're more on the ball - though the media attention at Budget time is still disproportionately on the government's headline fiscal numbers and not enough on what's really happening under the bonnet - and I was pleased to see that Treasury continues to beaver away at improved ways of calculating where we really are.

I was also struck by how quickly the Irish fiscal situation deteriorated when the balloon finally burst, and there's a lesson there too. Here is what the level of Irish government debt looked like before things went to hell in a handbasket (based on the data in Table 6.1 of The Fall of the Celtic Tiger).

That looks good, doesn't it? Despite the big spendup, revenues were so large that the government could scatter cash to the four winds and still have enough left over to work government debt down to what looks like a conservative level of just under 25% of GDP. You'd think that debt at that level was low enough to be able to cope with anything the domestic or global economy might throw at you, wouldn't you?

But it wasn't.

So when our Fiscal Strategy Report says,

The Government has five fiscal priorities:

...

2 Reducing net government debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18

...

...

5 Using any further fiscal headroom – including from positive revenue surprises – to get debt down to 20 per cent of GDP sooner than 2020 

I say, right on.

And finally there is the whole issue of overheated property markets: as you read the book, you find yourself asking, are we on the same slippery slope to a property bust as the Irish were?

On balance I'm inclined to think not. We do have some of the same characteristics as the Irish did: a surge in property demand from growth in incomes, strong net immigration, and a monetary policy imported from elsewhere that doesn't suit our circumstances (in Ireland's case it was the common eurozone monetary policy, in ours the Fed's which has, for example, helped drive our fixed rate mortgage rates to low levels). But we don't have others, notably the reckless lending of the Irish banks in general and their huge lending to property development companies in particular.

But sorting out what's happening in real time is as hard here as it was in Ireland. You can easily miscategorise things: what looks to you like a 'genuine' increase in housing demand meeting a near-fixed short-term supply curve could as easily be the early to mid stages of a speculative bubble. And often enough there may be elements of both stories happening at the same time.

Which is why I thought this chart was so interesting. It's by Ronan Lyons, an assistant professor at Trinity, and it appeared a few days ago in this article on the Irish economy blog. It's his estimate of the strength of the different factors that were driving the Irish housing boom/bubble.

As you can see, different things mattered at different times. As the boom started (1995-2001), you had decent sized contributions from a variety of sources - people's incomes (blue), demographics (green), bank lending (red), and those too-low eurozone interest rates (yellow) all played a part. The bubble period of 2001-2007, however, was driven overwhelmingly by loose lending.

Wouldn't it be useful to see the same analysis done here?

More house lending controls to come?

As we all know, the Reserve Bank is in a difficult spot.

It can't easily raise rates. It probably doesn't want to anyway, since (as I've argued before), overall monetary policy conditions are already too tight. But even if it did, the Kiwi dollar would appreciate, or at the very least not fall to the levels the RBNZ would like: "The upward pressure on the TWI reflects several influences but primarily investors have been attracted by the broad strength of the economy and our higher interest rates", as the Governor's speech last week said (it's here as a web page and here as a pdf), and wider interest differentials in NZ's favour would clearly make the fight on the NZ$ front more difficult (as is already the case with the A$/NZ$ cross rate after the Aussies' cut in interest rates).

It can't easily lower rates. There's an argument that the low oil price has lowered any inflation risks, and another (which I'm partial to) that, in hindsight, it overtightened with its latest OCR increases, but cutting rates in the middle of a boom would still be rather odd. "New Zealand is the only country among the advanced economies that has had a positive output gap in the past two years, our unemployment rate is low and falling, net inward migration and labour force participation is at record levels, and business and consumer confidence surveys remain strong", as the Governor said, plus it would make the housing market even more exuberant - "we have already seen some effective easing of credit conditions with declines in fixed-rate mortgages, at a time when we have financial stability concerns about accelerating house prices in Auckland".

So by default it's stuck with leaving interest rates where they are, which means that its financial stability headache over Auckland house prices doesn't go away, or even gets progressively worse - floating mortgage rates stay where they are (or even drop a bit if the banks' marketing wars heat up a bit more), while fixed rates fall as long maturity bond yields remain very low overseas (essentially we're lumbered with importing world bond yields, plus a credit/risk premium).

All of which leads you to think that there may be another round of "macro-prudential" regulation around the corner. We've got the existing regulation - only 10% of new bank lending on houses can have a loan to value ratio (LVR) higher than 80%, or put another way, 90% of new lending must have at least a 20% deposit - but while it's had some impact, it doesn't look as if it's been enough to rein in the Auckland market in particular. Prices in an already expensive market are up another 13% in the year to last December (on the latest REINZ data),

Yes, there's more going on than just easy credit. As the Governor said, Auckland prices reflect a melange of "rising household incomes, falling interest rates on fixed-rate mortgages, strong migration inflows and continued market tightness". But there's still a financial stability issue. When these factors ease, or reverse (eg when housing supply finally come on strong), banks risk being left with big loans on lower priced assets. So you'd reckon the RBNZ must be looking in the cupboard for another macro-prudential stick.

As it happens, there's a brand new model for them to have a look at, and that's the Irish Central Bank's. The Irish had one of the biggest housing market busts of all time - the national house price halved, almost exactly, between the peak in September '07 and the trough in March '13 - and, to put it very mildly, are not keen to see a repeat. With Irish house prices up 16.2% over the year to last December, they've just stepped in with a package that combines LVR ratio limits and loan to income ratios. You can read the whole thing in the Bank's FAQ here: the gist is a 3.5 times income limit for all new loans except loans to buy rental properties, a 20% LVR ratio limit for most mortgages, a 10% first time buyers' LVR limit up to €220,000 (about NZ$340,000), and a 30% LVR limit for rental property loans. There's room for the banks to do some business outside these limits (20% can be outside the income limit, 15% outside the LVR limits).

Interestingly, one of the questions in the FAQ reads, "Has the Central Bank considered that these measures may be discriminatory against people looking to buy in Dublin and the surrounding areas?" The Irish Central Bank preferred to downplay that aspect - it says, yes, but only a bit - but that's exactly the sort of selective impact we'd like to see happening in Auckland.

"We will be talking more about the housing market over the next few months", the Governor said last week. I wonder if they'll be talking with an Irish accent?

Let's take in more talent from overseas - and quickly

The latest net migration figures got a fair amount of media airtime, and even though a fair slab of it was on the invidious "aren't we doing better than Australia" track, the numbers were still pretty impressive - we had the biggest ever annual level of net immigration in the October '14 year (+47,700), beating the previous records set in the August '14 year (+43,500) and the May '03 year (+42,500). Net immigration is running at over four times its annual average over the past 20 years (+11,700). If you're interested in the details, the big pdf release from Stats is here and the actual data here.

It's interesting to see how sensitive these migration flows are to economic conditions at both ends of the migration journey: a lot of the media commentary, for example, picked up on the big impact on trans-Tasman flows of the strong New Zealand business cycle, compared with the currently sub-par Aussie one. But the same mechanism also works on migrant flows from other places, and it's left me wondering whether we're missing a good opportunity to attract European talent in particular.

We know, for example, that employment conditions in France are pretty grim, particularly for younger people, mostly down to the weak French economy, but aggravated by an inflexible labour market. So it's not surprising to see that the number of French people coming here on work visas has been rising strongly, from 1,187 in the October '12 year to 2,642 in the October '14 year. Unemployment isn't anywhere near as bad in Germany, but again the local slow economy is encouraging more Germans to look for jobs here, and the numbers coming on work visas have risen from 1,703 to 2,723 over the past two years.

But these opportunities to get talented people to come here from overseas don't last forever: the flows are very sensitive to relative changes in the business cycle at both origin and destination. Ireland's the classic example: business conditions were dire in Ireland until this year, when there has been a reasonably robust recovery. And the link to the net work migration flows from Ireland has been immediate: we had 1,298 Irish people coming here on work visas in the October '12 year, and 1,378 in the October '13 year, but it's already started to ebb, with a drop to 1,032 in the October '14 year.

I'd say we have a short but highly promising opportunity to get more skilled people to come here from the recessionary Eurozone. Jobs fairs in Australia are all well and good: but what about also doing a one-off liberal offer of work visas around Europe?

And by liberal, I mean one that doesn't pay too much mind to MBIE's 'Long Term Skill Shortage List', the thing that prioritises the kinds of skills we're normally looking for, partly because the list looks to me rather odd in places - I can believe we're short of engineers of all kinds, a fair array of medical specialists, and anything to do with ICT, but social workers? chefs? education lecturers? statisticians? external auditors? quantity surveyors? - and partly because we can't actually achieve that degree of precision in knowing what we'll need or in linking credentials to innovation or entrepreneurship. For all we know the next big app could be written by a self-taught enthusiast who left school with no qualification.

So I'd be inclined to hoover up as many of Europe's skilled and talented people as we can, while we can, and I'd relax the current immigration criteria to do it. Paper Marseilles and Düsseldorf with easy to complete work visa forms, and see what happens.

It can only be good for us. And if you're not too sure that immigration is good for a country, then read this opinion piece from the Brookings Institution, "Even Piecemeal Immigration Reform Could Boost the U.S. Economy", which says

High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around — they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries

A bit of piecemeal immigration liberalisation would work for us, too.

The picture of health

This chart, from the OECD's latest Health At a Glance publication, is going the rounds of the social media, and it's a bit of a reality check, in a good way. If you'd thought that we were all going to hell in a handbasket because of binge drinking, bad driving, obesity and all the rest of it, think again.

The graph shows people's self-reported state of health, and we're very near the global top. Even if you take off a positive bias for the way the question was asked in some countries (our score is 5-8% higher than it would be if measured the same as in most countries), we're still well up there.

How people feel about their health is one reasonably important outcome, but if we go away from perception and look at some of the hard numbers, we stack up pretty well, too. Here's life expectancy.

The wealthier OECD countries are all pretty much of a muchness, really, but again we're in a pretty good place. Interestingly, as the next graph shows, we have much less of a gap in life expectancy between the well-off and the poor than exists in most countries. No idea why this should be, but there you go - another pretty good outcome.

From an economist's perspective, it's interesting to see that we've got better health (measured by life expectancy) than you'd expect for a country of our income level, and better health than you'd expect for the amount we spend on healthcare, as the next two graphs show. In both cases you want to be north of the fitted black line, and we are. And it's interesting to see that some of the stylised facts we all 'know' about global healthcare are, indeed, true, notably the hopelessly inefficient level of the health spend in the US.

I know, I know, we could be even healthier again, and if we did a better job of managing the booze, the weight, the fags, the exercise, the diet and the heavy foot on the accelerator, we'd all be even better off. But at the same time we ought to take on board that as far as comparisons with countries like us are concerned, we're already making a pretty good fist of health outcomes.

That "heavy foot on the accelerator" isn't a random comment, by the way. I'm recently back from Ireland, where I couldn't help noticing how much more polite and orderly the driving is than here in NZ. And it shows in these OECD stats, too: neither country is a smash palace along Brazilian or eastern European lines (and America doesn't show to advantage, either), but Ireland's death rate on the roads is clearly lower than ours. Which is something you could think about next time you cut me off on the motorway.

Are we asleep?

On Wednesday I was passing through Dublin Airport on my way back to New Zealand, when I saw poster ads promising people up to 150,000 euros as a reward, if they've been responsible for introducing a new foreign company as a direct investor in Ireland. You can see how the scheme works here.

It's a clever idea, and it comes on top of an already impressive track record in attracting foreign direct investment (FDI) into Ireland. The agency involved, IDA Ireland, is widely regarded as one of the best of its kind: as one example, in the 'Achievements' bit of its website, it says that "2013 was a record year for FDI in Ireland as IDA client employment reached its highest ever level at 166,184. FDI alone created 25,000 jobs in 2012 and 2013".

And it is quality investment. As a recent report from an IBM unit says:

For most countries it is not just the number of jobs created that is of interest, but also the type of investment projects and their value to the economy. Comparing countries on what
projects are attracted, and not just the number of jobs, is therefore an increasingly important metric for gauging inward investment performance. To this end, IBM-Plant Location International has developed an FDI value indicator that assigns a value to each investment project, depending on the sector and the type of business activity. This value indicator assesses the added value and knowledge intensity of the jobs created by the investment project. Using this measure, Ireland continues to be the top performer in the world, resulting from the country’s success in attracting research and development (R&D) activities in life sciences and ICT coupled with high-value investment in financial services. 

It's left me wondering whether we are doing anything at all in New Zealand to attract inward FDI, let alone anything comparably slick or substantial or successful. Quite the contrary: I can recall people arguing against the desirability of FDI in the first place (repatriated profits would supposedly weaken the balance of payments) and some crassly populist criticism of the cost of wining and dining potential investors.

While Ireland's got some unique advantages - it's a low tax, business friendly, English speaking base within the EU -  we have our own selling points. But when's the last time you saw any recent government making a serious attempt to capitalise on them? And why aren't we getting our share of the FDI that's creating those high value added and knowledge intensive jobs?

Could it happen here...

I was fossicking on The Irish Economy site, mostly to follow-up on the news that Ireland plans to come off the IMF/EU life-support machine next month, and I came across a post by Trinity professor Philip Lane, 'Public-Private Wage Gaps: EU Evidence'. This in turn took me to the source paper, a European Commission Economics Paper, 'The gap between public and private wages: new evidence for the EU', which is summarised here and available in full as a pdf here.

Here's the key finding.

Start with the bottom line. Reading left to right, the first column, 'Total difference', is the percentage difference between wage rates in the public sector and the private sector across the whole European Union. On average wage rates are 10.5% higher in the public sector (or were, anyway, on these 2010 numbers). The second column is how much of this premium can be explained by a vector of the usual suspects - education levels, age, occupation, level in the managerial hierarchy and what have you. As it happens, 6.9% of the EU-wide public sector premium of 10.5% can be explained by these compositional effects. And that leaves the third column, the 'unexplained' part of the premium, which I'm going to interpret as the extra wages you get merely for being in the public sector.

I've highlighted Ireland in yellow. Enough has been said already about the fiscal indiscipline of Irish administrations during the Celtic Tiger days, so I won't belabour it, but I will just observe that the Irish were the most profligate in the entire EU for overpaying public sector staff (by 21.2%), edging out Cyprus (20.9%) and Luxembourg (20.4%). It's noticeable, too, that all the PIIGS showed the same pattern of showering largesse on the public sector - Portugal (PT, 11.9% premium), Ireland (IE, 21.2%, as we saw), Italy (IT, 10.5%), Greece (GR, 8.2%) and Spain (ES, 15.1%).

You might conclude that the fix is wage cuts (as the Irish have since done) or at least a prolonged wage pause in the public sector until the premium is eroded by increases in the private sector. As the authors note, though, it's not that straightforward. There are systematic patterns to the overpayments: as they say (p28), "although a positive wage gap is found for public sector workers, this is mainly
concentrated on lower-skilled workers, typically occupying lower job positions", which in turn means that "fiscal consolidation measures aiming at reducing the public wage bill may find difficult trade-offs between the efficiency and equity goals".

Two thoughts.

One, I suspect the wage premium is only part of the EU overpayment picture, and if the full compensation package of relatively cushy job security, relatively generous pension arrangements, and contractual pay increases based on tenure* rather than performance were included, the comparison would tip even more in favour of the public sector.

And two, of course, you wonder, could it happen here? My first guess is, possibly not. If we're "most like" the UK in our arrangements, then maybe not - the UK shows as paying people marginally less (-1.3%) in the public sector (though that excludes the notoriously good pension deal many UK public sector staff enjoy). And anytime I've been involved in employment decisions in the New Zealand public sector, there have typically been attempts made to do a genuine like-for-like comparability exercise with what the job would pay in the private sector.

Those appointments, though, tended to be at the more senior levels, and on the EU showing, that's not typically where the gravy train is. It's lower down.

So it's still an open question. Anyone know of any evidence?

*As an aside, my father, a lifelong Irish public servant, once tried to prevent one of those payments (an "increment", in Irish civil service jargon) to one of his non-performing staff. It nearly caused a constitutional crisis.

Mind the gap! - New Zealand's experience

Earlier I wrote up a piece from the Bruegel think tank's blog about the fallibilities in the European Union's way of measuring the output gap, and the problems it causes in trying to estimate how much of a country's fiscal deficit might be structural or cyclical.

Bluntly, big problems with estimating the 'normal' state of the Eurozone economies, and what the 'structural' or 'underlying' fiscal balances look like in that 'normal' state, would make you very wary indeed of basing fiscal policy decisions on them.  And I wondered whether these issues tend to crop up elsewhere, and whether this exercise is a sensible goer anywhere.

As it happens, one of Treasury's officials had a close look at these issues in a New Zealand context. It was one of the papers presented at Treasury's 2011 conference New Zealand's Macroeconomic Imbalances – Causes and Remedies Policy Forum. Anne-Marie Brook's paper, Making Fiscal Policy More Stabilising in the Next Upturn: Challenges and Policy Options, was on the general topic of fiscal policy as a tool of macroeconomic stabilisation, and included both a literature review and empirical analysis of how fiscal policy has actually played out in New Zealand.

Here are two graphs that I thought especially interesting (from p14 and p18 of her paper).

The one above charts the fiscal impulse on the vertical axis. The fiscal impulse is the year to year change in the structural (cyclically adjusted) fiscal balance, i.e. how much of the change in the fiscal position is down to fiscal policy decisions as opposed to cyclical (or unusual one-off) factors. It is therefore a measure of whether fiscal policy is more expansionary or contractionary.

The horizontal axis charts the state of the economy - a negative number for the output gap means the economy is running below full potential, relatively weak in other words, and a positive number means it's running hotter.

You can see the logic of the four quadrants - for macroeconomic stabilisation purposes, you want to see the data points turning up in the countercyclical upper right and lower left quadrants, and not in the procyclical other two. On these numbers, in practice you see clear patterns: no instances of tightening in bad times (excellent), quite a few of tightening or loosening when you should have (jolly good), and a bunch of procyclical easings (not good at all), what Anne-Marie summarised (p14) as "a tendency towards asymmetric Keynesianism, in the sense that procyclicality is successfully avoided during downturns, but not so consistently during good times (too many outturns in the bottom right quadrant)".

At face value, this looks moderately encouraging for folks who might be inclined to estimate potential output, the output gap, structural fiscal balances, and the fiscal impulse, and use them for cyclical stabilisation purposes.

Except that Anne-Marie also provided one of the best graphs I've ever seen, which showed the difficulties in trying to do this exercise in real time. Here it is.

The graph shows what Treasury thought the output gap and fiscal impulse were a year before the Budget (green dots), around Budget time (red dots), and, crucially, what the situation actually was, as measured later with the benefit of hindsight. And it transpires that three of those procyclical fiscal stimulations were actually completely unintended: the economy was actually in better nick than Treasury realised at the time.

Not that Treasury ought to be hauled over the coals for it. "The magnitude of such forecast errors is not Treasury specific or New Zealand specific. It is well known that empirical estimates of the output gap are subject to significant and highly persistent revisions for all economies", Anne-Marie concluded (p17), and she recommended among other things that Treasury should therefore "expand the repertoire of indicators so that advice on the fiscal stance is less reliant on any single measure, with particular care taken to augment fiscal impulse measures with complementary measures" (p26).

Our experience would tend to confirm the international experience: estimating output gaps and structural fiscal deficits is iffy at the best of times (though the EU estimates take iffyness to a whole new level), and you wouldn't want to base cyclical fiscal policy solely or heavily on them.
All fair enough. But even if you conclude that the state of the art in cyclically adjusted fiscal deficit analysis isn't up to much heavy real-time or short-term stabilisation usage (or possibly not up to any real-time usage at all), the concepts are good ones. They still tell us important things about the profligacy or otherwise of the government's books over the longer haul.

Here's Ireland's recent story (data taken from the latest IMF World Economic Outlook database, accessible here if you ever feel like playing with it yourself).

We know, from the Bruegel piece and from other commentators, that the precise numbers may not be right. But they're not so bad that they can't tell us the broad high-level picture. Through the boom years (to 2007 or so) Ireland looked as if it was running a responsible fiscal ship, if you went by the headline numbers that got reported at Budget time. But cyclically adjusted, the government was running a decent sized structural deficit, one that would be exposed if the cyclical revenues dried up. As they did. More recently the graph is again telling us the fundamental truth: Ireland's run a massive fiscal restructuring exercise, which shows up in the hugely improved structural position, even if it's yet to be seen in the cyclically depressed headline balance.

So I still hold out some hope for intelligent use of output gaps and structural/cyclical splits, especially if there are more sanity checks (for example, from business opinion surveys of capacity utilisation rates) around the plausibility of the numbers.

Who got hit worst in Ireland?

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

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

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

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

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

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

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

Yesterday's Budget and the transparency of fiscal policy

We sometimes get tempted to feel that things are done better in other countries - policies are smarter, incomes are higher, they have proper soccer teams - but there's one area in particular where we can credibly say we are among the world's best (maybe the best), and that is the transparency around fiscal policy.

It may not be the most exciting thing in the world to excel at, but let's give three loud cheers for the Fiscal Responsibility Act 1994. Our governments have to produce regular, complete, short- and long-term disclosure, on a conventional General Accepted Accounting Principles (GAAP) basis, of their current and future tax and spending commitments. They have to show the current and projected state of the government's   balance sheet, and they have to disclose all those pesky off-balance-sheet items that governments tend to use when they want to keep expensive future bills or other embarrassments out of the voters' gaze.

We saw it again yesterday, with credible multi-year projections of taxes, spending, and debt, and with full disclosure of off-balance sheet items (in the 'Specific Fiscal Risks' part of the BEFU). We saw some alternative scenarios modelled, and we got the separate forecasts of tax revenue produced by the IRD and Treasury (they weren't much different, as it happened). In many countries, if there were conflicting agency views of the likely tax take, even the mere fact of disagreement would be swept under the carpet, and the numbers themselves would certainly never see the light of day.

The Act, in short, has proved to be an excellent watchdog on what New Zealand governments do and plan to do. Apart from being good practice in itself, it helps to prevent the sort of nonsense that happened (for example) in Ireland before it all turned to custard. In 2006, Ireland was supposedly running a useful surplus (2.9% of GDP), and in 2007 was still marginally in the black. In reality, the underlying position was out of control. Tax revenues were (temporarily) swollen by the government's share of the red-hot property market. Shorn of the government's slice of the property speculation game, the fiscal accounts were massively underwater - by 5.6% of GDP in 2006 and by a stonking great 8.4% of GDP in 2007 (all figures from the IMF's database, with the 'true' position being the IMF's measure of the 'structural' balance).

So it may be on the dull and policy-wonk end of the spectrum, but the Fiscal Responsibility Act has become an indispensably valuable part of good policy governance.

Before getting too holier than thou about the whole thing, though, it's worth adding that we needed it. I've been going to Budgets and Budget analysts' lock-ups (the embargoed pre-Budget access to the Budget  materials) since the mid 1980s, and my abiding memory of the earlier ones is this: what hornswoggling swindle are they trying to pull off this year?

Housing problems - lessons from Ireland (3)

What caused the Irish housing boom and bust crisis, and could it happen here?

The biggest element in the Irish event was a grossly inappropriate monetary policy. After Ireland joined  the Eurozone, it got the monetary policy of the European Central Bank - it got low interest rates, reflecting the slow growth conditions in the major Eurozone economies. Ireland, on the other hand, was 'the Celtic tiger', with strong growth in output, incomes, and prices. The 'one size fits all' Eurozone interest rates were way, way too low for an economy growing at a gangbusters rate.

The other important element was the 'me too' behaviour of both borrowers and lenders. On the borrowers' side, people saw their neighbours making pots of money by taking out mortgages at the low Eurozone interest rates, and buying houses that trebled in value in a decade. The house buying took on a self-fulfilling frenzy. On the lending side, banks, even if they saw a problem lurking down the track, and they may not have, did not want to lose out to their competitors when it came to getting their fair share of this booming mortgage market, so they accommodated the boom as well.

It didn't help that neither borrowers nor lenders were able to sort out, in real time, the speculative excesses from the increases that would have happened perfectly naturally anyway. There was strong net inward migration to Ireland (70,000 people a year at its peak), and strong growth in employment and incomes. House prices would have risen by some amount - perhaps by a substantial amount - in any event. Who, in the midst of very robust economic conditions, is able to figure out that the first 10% of price appreciation is in line with the strong economic fundamentals, but that the next 5% or 10% or 20% isn't?

Could it happen here? To some extent, we've got the Irish problem of importing too-easy monetary policy: we've had to match, or at least get within spitting distance of, the zero or near zero short term interest rates of the major OECD economies, to prevent our currency being driven up to even more insane levels. We've certainly got the same household and bank behaviour. And we've got some modest level of genuinely higher demand for housing, from immigration and from net increase of the domestic population, coupled with some degree of constraint on supply responding quickly to the increased demand. Increased demand and constrained supply make for higher prices, and can seed a subsequent expectations-driven bubble.

You can see why the Reserve Bank is worried. And you can also see why it won't be a surprise if the Bank tries to stop the arms dealers supplying the ammunition for this campaign - or in other words, looking to do something about the banks providing easy finance for a housing debacle.

A propos of nothing (1)

I've recently been reading a bunch of fishing books, and it took me back a few years to when my Dad and I used to go to the RDS Library in Dublin. On one occasion we came out and discovered that we had independently chosen the same book, A A Luce's Fishing and Thinking (1959).

Luce - Arthur Aston Luce MC - was a fixture in Trinity College Dublin. As his Wikipedia entry , https://en.wikipedia.org/wiki/A._A._Luce,  notes he holds the record for the longest serving Fellow (1912-77) of the College. The MC is for his Military Cross in the Great War.

When I was an undergraduate in Trinity (1969-73), I was what Trinity calls a 'waiter' - not, as you might think, someone who serves and clears the tables at the communal College meals ('Commons'), but rather someone who is paid to recite the Latin Grace before meals and the Latin Grace afterwards (20 quid a term, from memory, worth having back then). These days, nobody bothers much with Grace, either before or after, though occasionally as a party trick I will do the Grace before ('Oculi omnium in te sperant Domine. Tu das eis escam eorum in tempore opportune. Aperis tu manum tuam et imples omne animal benedictione tua. Miserere nostri, te quaesumus Domine, tuisque donis quae de tuae benignate sumus percepturi, benedicito, per Christum dominum nostrum').

One lunchtime - there are mid-day and evening 'Commons' - Luce was having lunch, and it happened to be his 90th birthday. When I got into the pulpit to recite the Grace after the meal, I decided to change the correct 'Tibi laus, tibi honor, tibi gloria, o beata et gloriosa Trinitas', to 'Tibi, Luce, tibi honor. Tibi gloria', and so on.

I regret to say, virtually nobody noticed, though Declan Kiberd, now a professor at Notre Dame, was one of them, giving me a "very droll, Curtin", as we came out onto the steps of the Dining Hall.
Luce, a distinguished academic, philosopher, historian, author, and war hero, who had survived the Western Front with conspicuous gallantry, was mugged by a lowlife in Dublin in 1977, and died of the injuries.

Housing problems - lessons from Ireland (2)

Some people like graphs, others don't relate to them, so here are some anecdotes to back up the previous post's graph of the Irish house price collapse.

My parents owned a house in a pleasant, middle class suburb of Dublin; my mother lived there until quite recently, when she had to move into care, and some cousins now live there. Four bedrooms, semi-detached, large garden at the back, rather rundown in decor (my ageing mother wasn't up to much house maintenance), but a good, solid, family home in a decent neighbourhood. During the house price madness, all the talk among my mother and her friends was about how much their house would likely fetch. Going by some local prices actually achieved, and the informed guesses of the neighbours - in a property craze, everyone becomes an expert - the house at the peak of the boom would have been worth something like 1.1 million or 1.2 million Euros. At the exchange rate of the time, that was about NZ$2.1-2.2 million.

That in itself gives you some idea of the scale of the madness. Over NZ$2 million for a  middle of the road family home? Even at Auckland's fancy prices, you can still get good family homes for a third of that.

And today? Dublin's housing market is rather moribund, but my spies tell me the family home would be lucky to fetch 400,000 Euros.

Second story: last time I was back in Ireland, a friend said, "Here, come and have a look at this". "This" turned out to one of the infamous "ghost estates" - farmland speculatively  redeveloped as housing during the boom, and in this case (as was typical of the others, too) consisting of tightly packed, high density houses in the middle of nowhere. Like many of the others, this development came on the market after the boom had started to implode. Not a single house sold: the entire development is empty.

Housing problems - lessons from Ireland (1)

Today's OCR review from the RBNZ repeated the Bank's concerns about frothy housing markets in some part of the country. You may well wonder whether the Bank's worries are justified. After all, New Zealand hasn't had the huge booms and busts that have occurred in recent years in residential property markets overseas, and maybe you're of the view that they can't happen here, or that, if they did, it wouldn't be the end of the world.

Just by way of a consciousness-raiser, here's what happened in another small island economy, Ireland.

Irish house prices, 2005-12

The graph, from Ireland's statistics agency the CSO, shows that prices peaked in late 2007 (and an earlier, unofficial, house price series showed that prices had roughly trebled in the decade leading to the peak) - and then halved over the next five years. When a serious house price boom  turns into a serious house price bust, you're not talking the 5% or 10% or 15% price fall that people could arguably live with. Rather, you're staring at something that can potentially be a serious disaster for personal and national finances.