The most important bit

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

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

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

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

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

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

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

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

Getting real

We don't have an adequate grasp on the real-time state of the economy. We need much more close-to-real-time data.

That's it. The rest of this post is a riff on the same theme.

As covid wreaks its damage, it would be good to know, now, what that damage is: what's the initial hit to GDP? Where are the worst impacts? How are the knock-on ripple effects going? Among many other things, it would inform how hard fiscal policy needs to fight back. As it is, we - and many other countries - are at the "Oops, did I say $10 billion? I meant $40 billion" stage of Finance Ministers' groping for what the fiscal response needs to be.

Crises apart, we should always have had better high frequency cyclical data than we've actually had. As Michael Reddell said recently in the 'Measuring the slump' post on his Croaking Cassandra blog, "We and Australia are the only two OECD countries without a monthly CPI, our GDP estimates (quarterly only, as with most countries) come out only with a very long lag, we don’t have a monthly industrial production series, and we still don’t have an income-based measure of GDP". These deficiencies have been known for a long time - I can remember discussions over the years at Stats' Advisory Committee on Economic Statistics (since disbanded) - but the debate never got as far as prising open Treasury's chequebook.

Michael had several constructive ideas on how to improve things, including having Stats publish the monthly results from its rolling quarterly Household Labour Force survey, and having Stats also "look at hosting some sort of dashboard pulling together, and making openly available, all manner of formal and informal economic indicators. There have to be lots".

The good news is that at least two parties (though not Stats, yet) have had a go at dashboards.

First out of the blocks was Sense Partners: you can access their latest six-variable dashboard here. It's good, isn't it? I especially liked the electricity generation graph (below). You'd think that it must be reasonably close to the fall in GDP, and is suggesting something like a drop of close to 20% in output since late March (though there may be seasonal stuff going on, too).

They were closely followed by Treasury, who've just put out theirs (media release here, access to the pdf dashboard here). Personally I felt the Sense set gave me more of a real-time feel, though Treasury's information was interesting in its own right, especially the traffic data and the data on uptake of the job subsidy scheme (below).

The next thing that would be really useful would be some composite indicator of all these glimpses of the overall underlying reality. As it happens economists have a nifty way of devising one: it's called 'principal components', and works by assembling a lot of data, hopefully all related (positively or negatively) to some underlying common influence, and then analysing it econometrically to see if you can identify a common background factor.

Treasury's dashboard helpfully included some international data, and one of the series shown was, indeed, one of those composite indicators, for the US. It looks like this.

If you want to follow the series yourself it's here at the Fed of New York site, and there is a (short) write-up of how it all works here. The devisers of the index have calibrated it so that percentage changes in the index can be (give or take) read as percentage changes in GDP, or as they put it, "a reading of 2 percent in a given week means that if the week’s conditions persisted for an entire quarter, we would expect, on average, 2 percent [GDP] growth relative to a year previous". So we know that if early-April conditions persisted for the whole of the June quarter, US GDP would be some 9% lower.

Can we be sure that the weekly economic index does in fact track US GDP pretty well? Yes, we can, as you can see below (this is from Chapter 1, 'US economic activity during the early weeks of the SARS-Cov-2 outbreak', in Issue 6 of the Centre for Economic Policy Research's covid economics series, well worth following).

Two things to finish with.

One, obvs, wouldn't it be nice if someone did the same number crunching on New Zealand data and gave us close to a real-time reading on where GDP has got to? And yes, I'm happy to be part of the effort if anyone feels the urge to get it done.

Two, the wider point about the limited range of our current official cyclical data, and the speed with which what we have gets published, needs to be addressed. You can't go to a competition or regulation conference these days without people blathering on about how 'big data' enables market power, or threatens privacy, but you don't see anything like the same focus on how the torrents of big data could be used to generate near-real-time cyclical gauges.

It's fine to have the business as usual, industrial strength, quality-assured things like the quarterly national accounts. But as Grant Robertson and the lads at Treasury - and the rest of us - are finding out, there's a big role for the cheap and cheerful but timely and informative indicators, too. We've shelled out some $9 billion on wage support: in the greater scheme of things a couple of mill to zero in on where we actually are would be money very, very well spent.

Lessons for later

There will be lots of economic policy lessons from covid-19. One of them, I hope, will be about the coordination of fiscal and monetary policy.

Before the virus, there were many people saying that monetary policy had already been loosened so much that it left central banks too little room for further support if the proverbial encountered the wind redistribution device. And they were right.

Have a look at this simple and I'd say uncontroversial macroeconomic policy schema. There are four states of the world, too high/low inflation crossed with too high/low unemployment. Some folks might prefer an 'output gap' to 'unemployment' but same diff.

What's 'too high' or 'too low' inflation? Judgement call, but there's enough of a consensus these days around 'materially above/below 2%' as a good enough rule of thumb. And 'too high' or 'too low' unemployment? Unemployment is unwelcome at any substantial level, but for these purposes let's call it 'materially above/below the level that would get inflation accelerating' (the 'NAIRU' in the trade). Nobody has a very tight grasp on that level, but (according to Figure 5.3 down the back of the RBNZ's most recent Monetary Policy Statement in February), it's somewhere in the 4% to 4.75% area. So let's say 'clearly above 4.75%/clearly below 4.0%'.

In principle, in two states of the world (the green boxes) fiscal and monetary policy ought to have been pulling together. In the top right quadrant, anything the RBNZ did to boost inflation would likely do the real economy some good, and ditto for fiscal policy helping to increase inflationary pressures.

Did any of that happen? No. In practice the official cash rate got all the way down to 1.0% before fiscal policy belatedly came to the party by way of the $12 billion infrastructure spending plan in the December 11 Half-Year Economic and Fiscal Update. Here's the stance of fiscal policy, from that HYEFU.

During the whole of the 2012 through to 2017 period fiscal policy was actually contractionary - not expansionary, as it should have been, since unemployment was too high through all that period as this chart from the RBNZ shows (again from February's Statement).

I've painted things rather black and white, and there are some nuances being left out. One is that I can see some of what contractionary policy was trying to achieve which, in part, was to restock the ammo after the splurge on anti-GFC and post-earthquake support. And another is that whether the OCR was 5% or 3% or 1% at the onset of the covid-19 out breakout has become somewhat moot, since monetary policy would have seen the OCR cut to its present 0.25% and unconventional monetary tactics deployed either way. And I'm conscious that we're far from the worst in the world at this: the eurozone, for example, pushed monetary policy even further than we did (into negative interest rate territory and into tactics like quantitative easing) and were even more feeble on the fiscal front.

All that said, there has to be a better way. Pushing one setting of policy to Full Steam Ahead and leaving the other on Mild Astern makes no sense in periods when they should be coordinated (like most of the past decade). When we get out of this, we need No 1 The Terrace and No 2 The Terrace to get their act together.

Beneath the calm surface

The Productivity Commission's been working on 'Technological change and the future of work'. Last month it came out with the second report, 'Employment, labour markets and income', in what will be a five-part series (press release here, whole thing here). The big headline takeaway was that it might be well worth looking at systems like Denmark's 'flexicurity', where people's incomes are supported through employment volatility. The idea is that the labour market needs to be able to be flexible, and jobs will come and go, but people's incomes will be cushioned against the volatility through, for example, an employment insurance scheme. All very sensible.

Along the way Chapter 4 looks at the case for 'active' labour market policies, things like retraining to help people find new jobs. The Commission is somewhere between agnostic and outright sceptical about their value: "There is a large gap between good intent and robust evaluation of the effectiveness of labour-market programmes. Few programmes are subject to robust evaluation.  Of labour-market programmes, ALMPs ['active' ones] have received more evaluation effort. The results of those evaluations are not encouraging (p78) ... Overall, the Commission cannot say whether New Zealand’s labour-market programmes are effective or not" (p80).

The Commission may have missed the latest bit of evidence, which I wrote about in 'Let's get more active', and which was more upbeat about their potential. It found that two kinds of programme appeared to be effective (wage subsidies and helping people to go out on their own as self-employed), vocational training wasn't too bad an option, but brokering services (helping match job seekers and recruiters) were a waste of space. So if I were the Commission I think I'd be taking a modestly more constructive view of the potential to make the labour market work better, particularly as it's a vital economic issue.

For one thing, governments in many countries (though not Denmark, obvs) have been failing to live up to the social compact underpinning an open, flexible, market-based economy. The core bargain is that the national gains from openness will create enough income for the winners to be able to compensate the inevitable losers and still come out ahead. But the redistribution to the losers hasn't been happening, and the resulting resentment in the world's Rust Belts is feeding tear-up-the-old-rules populists everywhere.

For another, virtually nobody outside the economics trade (and not always inside it, either) realises just how vast the flows in and out of the labour market actually are. We learn from Stats, for example, that total employment went up by 16,000 in the June quarter, and by 6,000 in the September quarter. That doesn't look like a lot of movement.

But what is actually happening is that huge numbers of people change jobs, get fired, and get hired each quarter. The 6,000 in the September quarter is the small net effect of enormous gross flows in, out, and between.

In recent years, roughly 155,000 new jobs are created each quarter, which has happily been ahead of the 145,000 or so jobs that have gone bung in the quarter. The 10,000 or so increase in employment in each quarter is the outcome of very large gross flows indeed. The data, by the way, come from Stats' Linked Employer-Employee Dataset ('LEED'), which you can play with yourself for free on NZ.Stat. I've done rolling four-quarter averages to take out the pronounced seasonality.

And the big levels of job creation and job destruction are only part of the wider ferment in the labour market. People are moving around from one job to the next in very large numbers. A bit over 350,000 people each quarter change seats.

Are we out on a market-turmoil limb here? Not at all. In the States, for example, the increase in jobs in any given month is around 200,000: in December it was 266,000, which was thought of as quite a large increase at this late stage of the long U.S. expansion. But that is absolutely tiny compared to the gross flows. According to the U.S. JOLTS data, which show us the underlying gross flows, in the month of October alone (the latest to hand), 3.5 million people voluntarily quit their job in the month. Another 1.75 million were laid off or fired. Employers hired 5.75 million people. In one - one - month.

Bottom line. There are two reasons we ought to be helping people a lot more to cope. One is that moral compact: for both efficiency and equity reasons, we need to have a dynamic but not painful labour market. And the other - acknowledging that a fair amount of it is entirely voluntary, with people quitting (especially in good times) to do better for themselves in a new job - there's far more turnover in the labour market than you likely thought. Flexicurity, and 'active' labour market programmes, aren't just for the unlucky few in the meat processing factories: they're for all of us.

Are we ready?

The Budget came and went while I was overseas, and I've been catching up with the news and the coverage.

It's not surprising that a lot of the media and analyst attention was focused on the 'wellbeing' perspective: it's getting attention overseas, too, as in this thoughtful piece in the Financial Times ($?). It's equally unsurprising, though, that virtually nobody (as usual) has asked the simple Keynesian question, is the Budget expansionary or contractionary? Do its direct effects on government spending and taxation boost or brake the economy?

Here, buried (as usual) on page 15 of the 'Additional info', is Treasury's best guess at the answer. The 'fiscal impulse' is the effect of policy changes on aggregate demand, allowing for anything cyclical that might also be affecting tax revenues and government spending. A positive impulse is expansionary, and you can see that fiscal policy has been giving a decent 1%-of-GDP-ish boost to the economy in the June year just finishing. It's not doing a lot either way in the next couple of years, and then if policies stay as they are, it starts to modestly brake the economy over 2021-2 and 2022-3.

The last time we saw these calculations was at last December's 'Half Year Economic and Fiscal Update', or HYEFU, when they looked like this (I wrote about them here).

From a fiscal policy cycle-management point of view, the new profile makes a good deal more sense than the old one. In the old one, there was a stonking 2%-of-GDP fiscal boost in the 2018-19 year, when the economy didn't need it, nor was there any obvious reason why the brakes should have gone on immediately afterwards. The new pattern is rather more sensible: there's less of a pro-cyclical boost in this June year, and the brakes aren't getting applied in the coming June year.

It would be nice to think that this was a deliberate adjustment of fiscal policy to make it more attuned with the cycle, but it looks more happenstance than design. While there is a bit of extra spending in 2019-20 that helps draws the sting of the previously planned braking, otherwise it seems to be down to timing differences: spending didn't happen to the original timetable. Or as the official explanation puts it

The 2018/19 impulse is now estimated to be 1.1% of GDP compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending previously expected to take place in 2018/19 is now expected in 2019/20. Changes in the timing of spending and higher allowances announced at Budget 2019 see a broadly neutral impulse in 2019/20 compared with a -0.9% of GDP impulse forecast at the Half Year Update.

That's all understandable: we're all human, things always don't go like clockwork, and the incoming Coalition government didn't exactly have a fully worked-out policy programme when it first took the reins, so some slippage isn't a huge surprise.

But if you get biggish changes in the stance of fiscal policy happening by administrative accident rather than for proactive cycle-management reasons,  it does make you wonder how effective fiscal policy can be in dealing with cyclical ups and downs. You might well want to slow things down, for example, only to find the economy gets an unwanted boost from spending programmes kicking in late, or conversely find that planned fiscal boosts get undermined by slower than expected spending.

With monetary policy creeping ever closer to its practical limits, especially after the latest interest rate cuts in Australia and New Zealand, fiscal policy is necessarily going to have to do more of the heavy lifting to manage the business cycle in the next downturn, which may not be too far away if the Trump administration continues in brinkmanship mode.

As it stands, however, fiscal policy is vulnerable to large ebbs and flows that can dwarf any attempt at fiscal cycle control. We need to be able to do something more effective when - not if - the next downturn turns up. Ideally, 'shovel ready' infrastructure spending programmes that could be rolled out quickly would do the trick, but while they're not impossible to organise they're not a doddle either. An alternative would be quicker-to-work defibrillator fixes like "put $500 in every beneficiary's bank account", which we've shown we can organise (recall the recent winter heating top-ups to national super, for example).

I'd like to think there's someone in Treasury primed and ready to pull the Emergency Fiscal Boost lever. Am I wrong?

A little light on a mystery

There's been something quite odd happening for quite a while. Employers are saying they are having a lot of difficulty finding staff, as this graph from the latest Monetary Policy Statement shows.

But at the same time there are large numbers of people telling the Household Labour Force Survey (HLFS) that they are currently part-timers but are available, and want, to work more hours. So how can we have employers tearing their hair out that they can't get people, and yet a whole bunch of people are saying "Pick me! Pick me!"?

Quite apart from being a mystery that it would be nice to unpick, it's also a reasonably important macroeconomic issue. If there really is a reserve army of people ready to take up jobs, or at the very least more hours in their current jobs, then the labour market mightn't really be as strong as it looks. Big wage increases wouldn't look terribly likely either if there are lots of people standing ready to take jobs at the current prevailing rates of pay. Conversely, if this reserve army isn't really there, then maybe employers' concerns are the thing to watch as an indicator of likely pay increases down the track, as employers bid against each other for the limited staff availability.

The regular HLFS tables don't shed a lot on these 'underemployed' people. We know from Table 12 of the HLFS that they are disproportionately women: of the 117,000 (seasonally adjusted) who were recorded as 'underemployed' in June, two-thirds (78,000) were female, compared to the roughly 50:50 male:female split of employment. And we know from Table 13 that of the 112,800 underemployed (not seasonally adjusted this time) in June, some 48,000 of them are not 'actively seeking' work.

That might suggest that they're not, actually, awfully interested in taking on full-time jobs, and maybe the employers' view is more descriptive of reality. But I'm not sure about that. I don't think it's the right thing to do, in these days of online job ads, to say that someone is not actively seeking work if all they've done is read the ads. But that's how Stats views things: you have to do more than scan Seek (or wherever) to be counted as 'actively seeking'. Not how I see today's world, but there we go.

Other than those little nuggets, though,we know nothing from the headline HLFS about these underemployed folk. So I asked Stats if they could break out the underemployed by industry or by occupation. And the ever-helpful people at Stats came up with the goods. Here are the answers. Stats would like me to say "Source: Statistics New Zealand, customised report and licensed by Statistics NZ for re-use under the Creative Commons Attribution 3.0 New Zealand licence", so there it is.

I'd love to say, Aha! Solved it! But the data, interesting and useful though they are, don't crack the puzzle.

You'd wonder, for example, when the housebuilding industry is desperate for anyone who can carry a hod, how 21,400 labourers say they can't get as many hours as they'd like.  That kinda points in the "yes, there's slack available" direction.

On the other hand the highish number of underemployed represented by retail trade and accommodation points another way. No matter how strongly business picks up at the motel, the motelier is very likely not going to add another full-time person: more likely, it'll be another person to do the 8.00am to 2.00pm shift to clean up the 10 extra units being occupied. The economy can pick up all it wants and won't make a blind bit of difference to motel cleaner-uppers (or peak-time sales assistants) who'd like longer hours.

And then you start asking yourself, why don't the motel and shop people move to other lines of business where there might well be a full week's work on offer? Is it because they have low level skills that aren't in demand? Unlikely, since demand for unskilled and low skilled staff is actually stronger than it is for skilled or highly skilled, as MBIE's latest online vacancies survey shows. Plus you look at the 7,400 managers (who you'd think have transferable generic skills) and the 17,000 professionals (a fair proportion ditto, you'd guess), and wonder why they don't move.

Still at least as many questions as answers, I'm afraid, but at least we've now got more data to be ignorant about.

You're welcome.

Here's a revolutionary idea

There's an ongoing barney on social and mainstream media about what the latest poor numbers for business confidence might or might not mean, and, in that unappealing Kiwi way, who's to blame. The truth is, we're all reduced to guessing what goes through the minds of the people who fill out the survey forms and bung them back to the ANZ and the NZIER.

My conjecture - an upmarket way of saying 'sort-of-informed guess' - is that it's actually a mix of several things. There's probably an element of party politics in it, though as I said the other day, it looked to me as if the business community had got past the toys-out-of-cots stage. There's probably an element (beyond partisan) where they've looked at government policies and think they're bad news (irrespective of who introduced them). There's certainly concern about pressures on profitability, where there's pretty obvious evidence of costs pressures that aren't easy to pass on to consumers.

But do I really know? Does anyone?

So here's my revolutionary idea. Why don't ANZ or the NZIER ask, what's bugging you?

And here's the template. It's from NAB's latest quarterly survey of Australian businesses.

That's not hard, is it? You could ask the same questions here, word for word, and you'd be left with as clear an answer as the Aussie survey shows.

Just before I let go of this business confidence thing, could I say to all those talking up and talking down the 'confidence' figures, confidence readings are kinda interesting in their own right, but you're both paying them far too much importance. The links between 'confidence' and actual business outcomes aren't always that strong.

But don't extrapolate from that and say, business surveys are airy fairy indicators of nothing in particular. It is - and you can't say this terribly often in economics - beyond reasonable question that some of the measures in these surveys, particularly the ones related to firms' own prospects, have very strong links to reality. You might think a simple 'getting better/getting worse' question isn't going to get you very far. But it often will, which is why even official statistical agencies run them. 

Here, just to belabour the point, are the latest results from the French statisticians.

And to belabour it into the ground, here is the link between Aussie GDP and the 'Performance of services index' compiled by the Australian Industry Group, which is again based on the balance of better/worse answers.

And, finally, here at home here's how a combo of some of the business and consumer measures in the ANZ business surveys track against our GDP (it's a graph in the latest one). It's a pretty good relationship. It helps too that it is timely, and a leading indicator of what's down the track (the graph shows a five month lead between changes in the indicator and subsequent changes in GDP).

So for all those knocking business surveys because it suits them tactically - give over. These are useful, cheap, timely and while not every bit of them is always telling you useful stuff, in parts and in combo they give reliable readings on where we are and where we're going. If the evolution of the economy, good or bad, is giving you political conniptions, don't shoot the messengers.

Doom and gloom? Yes and no

As any number of recent headlines will tell you, there's a bunfight going on about a slump in business confidence and a rise in unemployment. There's the usual partisan point-scoring going on about the size of it, who caused it, and what comes next.

What's really happening?

Let's deal to the unemployment rate first, up from 4.4% in March to 4.5% in June. Should anyone be worried about that?

No, for at least three reasons. One, the statistic comes from a survey, which has sampling error. If I've read Infoshare right, and I've been known to get it wrong, the sampling error for the unemployment rate is 0.3%, which means there's a 95% chance the true unemployment rate is between 4.2% and 4.8%. A 0.1% rise may not even have happened. And second, even if it did, the economy is not an automaton, and you expect to find "noise", random fluctuations even in the middle of a longer-term trend. And third, and most important, the unemployment rate rose for a rather comforting reason: the participation rate went up.

The logic is that the participation rate goes up in good times. People aren't stupid, and can judge what's happening in the jobs market. Discouraged people lurk outside the labour force when they reckon there are few jobs to chase. They delurk when they think it's all on. Sure, there'll be the odd person who's forced by bad stuff - the mortgage getting out of hand, a redundancy in the family - to go hunting for a job, but overwhelmingly the evidence is that the participation rate going up is a signal of the labour market running in job seekers' favour.

Put that together with the all-time record employment rates for women and Maori and a strengthening in wage increases, and the marginal rise in the unemployment rate is neither here nor there. If you get a press release from a pollie banging on about it, mentally subtract a little from your previous estimate of their credibility. Negative numbers are allowed.

The business confidence slump is not so easily dismissed.

For a start, it's beyond any question of sampling error or random wiggles. It's large, and evident over several readings. There's a lot of focus on the ANZ Bank's latest and particularly glum survey, but it goes back further than that. The NZIER's June Quarterly Survey of Business Opinion showed more unhappy campers, too. It's true that you should focus on the 'activity' measures in these surveys rather than the 'confidence' ones, but the activity numbers are also in rapid retreat.

As the latest ANZ survey said, "Firms’ perceptions of their own prospects are a better gauge of economic outcomes, but the news wasn’t upbeat here either: it dropped 5 points to a net 4% expecting an improvement. This is the lowest reading since May 2009 and well below the long-term average of +27". There have also been growth slowdowns captured in the latest BNZ / BusinessNZ surveys of manufacturing and services.

Here's one graph that I think helps explain what's going on. On the trusted principle that in a market economy an analyst should follow the money, here's what businesses have been telling the ANZ survey what they think the outlook is for their profitability.

There's clearly (to my eye) a political component. The sharp drop in expected profitability after we got the new Coalition government might have been rational - "this lot aren't business friendly" - but likely also had some sort of political protest mixed in. But businesses appeared to have got over themselves by March or April of this year - only for expected profitability to drop to even lower levels than immediately after the election. So my guess it's no longer a "should have been National" two fingers, but a signal of something more real.

A good deal of it, I suspect, is pressures on wages and other costs (notably energy) which haven't been able to be passed on. As many others have commented, the rise in the minimum wage, from already high levels by international standards as a percentage of average earnings, and with more to come, is putting sectors like retailing under intense pressure. Retailing has large numbers of minimum wage workers, and bricks and mortar shops have little or no ability to pass the costs on when e-commerce is already stealing their lunch. I was walking around Newmarket today for the first time in a while, and while the area was generally busy, I was startled to see how many retail vacancies there are.

Nor are many businesses enthused about the cost - real or imagined - of having to go back thirty years and sign up again for collective agreements. And I suspect they, like everyone else, are wondering about the sort of generalised wage pressures that look like leaking from the public sector. Any public sector union worth its salt has sized up this government as an easy mark. And they're right: the chance of a Coalition Finance Minister actually getting to the finishing line forecast in this year's Budget is half of five eighths. As I said at the time, "The likelihood of the New Zealand political process actually leaving $7.3 billion unspent on the table is extremely low".

I'm not even there myself. With the infrastructure - where it exists at all - creaking all around us, I'd be using that money, too, especially as we've got not only cash in the government cheque account but also the opportunity to borrow at once-in-a-generation low interest rates and make a substantial and lasting difference.

Inaction on that front may be part of business malaise too, especially when contrasted with the readiness to spend on lower quality ideas (think boondoggle regional lollyscrambles). I was somewhat dismayed, reading MBIE's latest national construction pipeline report (summary here, full thing here) that "Infrastructure is forecast to remain relatively unchanged, increasing marginally to $7.3b in 2023" (p1 of the summary) and that (p4) " Infrastructure activity is lower than previously forecast". And although the summary also notes (p4) that " Pacifecon’s research data suggests that there is a high value of infrastructure construction scheduled to be initiated over the next six years", it always seems to be light rail tomorrow but traffic jams today.

The previous government, by the way, was just as bad as getting the facilities built that would enable all of us to get on with our lives more productively. The longer it goes on, the more likely we're going to hit capacity and productivity constraints that stop the economy growing at the rates we'd like. Whatever else may or may not be needed to be done (or undone) by the current government to move us forward from where we are now, a larger and earlier infrastructure spend has to be part of the answer.

Bottom line, some of the beat-up over the slowdown (actual or imminent) in the economy is exaggerated. But some of it is realistic, especially if you put some weight, as you've got to in this late stage of the post GFC global recovery, on the external environment hitting a bump. Recent surveys of global fund managers, for example, show that they are worried about the impact of trade wars on world economic activity, and with a buffoon pressing the protectionist policy buttons, they're right to be biting their nails. So the ANZ's take looks realistic: "with businesses in a funk, it’s fair to say that the road ahead is looking less assured, and risks of a stall have increased".

Unemployment doesn't strike evenly...

Yesterday's labour force data for the March quarter came out much as expected: forecasters had been expecting a 0.6% increase in employment, and they got it, and they also got their predicted 4.4% unemployment rate, down from 4.5% in the December '17 quarter.

Even if there were no immediate dramas in the data, it's still worth picking out one aspect - a reminder of how unemployment rates vary by ethnicity.

The European and Asian rates are very much lower than those for Maori and Pacific people, and if you knew nothing else about New Zealand than what this graph showed you, you'd diagnose that we have some serious social issues to grapple with, and you'd rightly be looking very hard at our education and training systems and our active (or inactive) labour market policies.

But another interesting aspect is the very different cyclical behaviour of the ethnic unemployment rates. When bad times strike, groups that find it harder even in good times to find a job are disproportionately affected. That's the pessimistic read: the optimistic read is that a prolonged period of decent GDP growth will bring even the higher ethnic unemployment rates down.

The Maori/Pacific rates, which got as high as 14-15% in the aftermath of the GFC, are down to 8-9% - still too high, but a hell of a sight better than they were. And the gap with European/Asian rates will keep on narrowing as long as GDP keeps trucking along at a decent rate. Exactly the same happens in countries overseas: I gave a US example a while back ('Rising tides lift all boats').

The policy lesson from this is worth repeating. There are people who have concerns about the impact or value of ongoing economic growth: environmental damage, for example, would be high on many people's lists. The lesson is, don't imagine that restraining growth will be socially costless: as the data here and overseas clearly show, the people that will be hit worst are those on the outer. Find smart ways to contain or prevent the concerns that worry you, but otherwise push GDP along as fast as you can: it's the ticket to a better livelihood for the people you likely worry most about.

Give the guy a break

Graeme Wheeler, the Reserve Bank governor, and the Reserve Bank more generally, have been copping quite a bit of criticism.

Shamubeel Eaqub's recent piece for Stuff, 'What makes a good Reserve Bank governor?', for example, noted that Wheeler and his predecessor Alan Bollard "are introverts – in an intensely public role", that hence or otherwise "The RBNZ's communication has diminished in quality over time. It is at a low ebb now", that there are central bank leaders overseas (he chooses Mark Carney at the Bank of England and Raghuram Rajan, formerly head of the Reserve Bank of India) who are doing a better job, and that the Bank and its people "are scarcely able to explain low inflation without leaning on failed models". He feels that when the next governor is picked in 2017, it should be from "a long list of strong candidates who possess the right skills for the job".

And it is not hard to find other critics. Hamish Rutherford, also in Stuff, had a piece, 'The Reserve Bank's job is not to keep people guessing', again focusing on communication, and concluding that Wheeler shouldn't be optimistic about getting the nod for a second term next year. And there are plenty of other mainstream and social media pieces along similar lines.

So let me put a few items on the positive side of the ledger. I've had a few goes at this in the recent past - 'Hold the rotten tomatoes', based on the Reserve Bank of Australia's recent experience, and 'Where are we? Where are we?' based on the RBNZ's - but as they self-evidently haven't made much of an impact on people's perceptions, let me try again.

First, it is indeed true (as Shamubeel says) that the RBNZ's forecasts of inflation and interest rates have been been too high, and for quite a while, and that the Bank hasn't been able to get low inflation back up to the middle of its target range.

But neither has any other developed economy's central bank. None of these gung-ho communicators - not Mark Carney, nor Janet Yellen, nor Yellen's predecessor Ben Bernanke, nor Mario Draghi at the European Central Bank, nor Haruhiko Kuroda at the Bank of Japan - has managed to get inflation up to their target levels, either. And other forecasters have similarly been systematically wrong: the Wall Street Journal, for example, does a monthly poll of a large panel of US forecasters, and they've been wrong for yonks as well. The consensus from the latest (June) poll, for example, thinks that the 10 year Treasury bond yield will be 2.2%: a year ago, the same panel of forecasters had picked 3.3%. That's a big miss by macroeconomic forecasting standards, and this in the most intensively analysed economy in the world.

So it should be obvious that the same thing happening in New Zealand can't be laid wholly or even mostly at Graeme Wheeler's door. And the reason comes down to those "failed models" that Shamubeel mentioned.

Between the end of World War Two and the mid to late 1970s, economists used to have a good working handle on how western economies worked. But it broke down when confronted with the stagflation of the Seventies, and was replaced by another workable model that lasted from the early 1980s through to the GFC and which brought us the 'Great Moderation' of that period - ongoing growth with low inflation. Now that model in turn has broken down, and the economics community globally is trying to build a new one, which is likely (among other things) to incorporate a greater role for credit and the financial sector, for globalisation, and for technological change.

But the economists are not there yet. No-one's got the new economy of 2016 sussed. And again it's obvious that Graham Wheeler isn't the cause of this ignorance, and that he's not alone in being blindsided by the structural changes of the past few decades. At least the Reserve Bank, as its Assistant Governor John McDermott said in a speech yesterday, is doing its bit to understand the new environment - "The Bank has shifted its resources in recent years towards more fully understanding this low inflation environment, and this is a strategic priority in the Bank’s 2016 Statement of Intent. The Bank has completed a range of research topics that have shed some light on the drivers of low inflation" - though to be honest I don't expect the big puzzles to be cracked here in New Zealand.

I'm not even convinced by the prevailing "poor communicators" argument.

For one thing, their communication does not seem to have done much damage to the Reserve Bank's credibility in the marketplace. I've looked up the inflation forecasts from the big four banks, and they have a shared degree of reasonable confidence that the Reserve Bank will have got inflation back around 2% next year. While ASB is least confident - they do "expect inflation to gradually return to the 2% mid-point", but they think not till 2018-19 - the other banks are on board with the RBNZ getting there or thereabouts next year. For inflation in 2017, the ANZ is picking 1.7%, the BNZ 2.4% and Westpac 2.1%.

There's little evidence from inflation expectations that the rest of the community has lost the faith, either. The RBNZ compiles an 'inflation expectations curve', which shows expected inflation at various time horizons, compiled from a range of different surveys. Here's the latest one, from the June Monetary Policy Statement. It leans towards ASB's view of the world, with a relatively slow 2-2½ timetable for inflation getting back to mid-target, but it gets there. And longer-term expectations are well anchored at close to 2%. There's not a lot of evidence there that the RBNZ is leaving people confused about the inflation outlook.

One of the communications gripes critics have, apparently, is that earlier this year the Bank said it wasn't likely to cut interest rates, but then unexpectedly did. The obvious answer to that is what Keynes is reputed to have said (but may not have): "Well when events change, I change my mind. What do you do?". Forward guidance - the (welcome) practice of central banks saying what they are likely to do, given what they know today - is just that: guidance. It's not graven in stone, and can't be.

As for communications style, I'd say that I don't know Graeme Wheeler's well at all: we might nod to each other if we passed on The Terrace, but that's about it. All I can observe is how he goes at the Monetary Policy Statements. He comes across as a bit more diffident than Don Brash or Alan Bollard (or my old mate Rod Carr, who got to make one monetary policy decision as acting governor), but perfectly competent. And for what it's worth I've quite liked the way he's taken a somewhat collegial approach to answering the media's questions, bringing in the likes of John McDermott or Grant Spencer.

As for being an 'introvert', again I don't know him well enough to be sure, but I strongly suspect that you don't get to be governor of any central bank by being a blushing violet. And I'm also left scratching my head over Shamubeel's description of Alan Bollard being one, too: this would be the shy and retiring Alan Bollard who's been head of the NZIER, head of the Commerce Commission, head of the Treasury, novelist, artist, and currently chief cat-herder at APEC? Think what he might have achieved if only he'd been an extrovert.

Me, I'd be careful about taking pot shots. If you are ever in a meeting and you start thinking to yourself, well I'm the smartest person in this room, then you'd better check very carefully that Alan Bollard isn't sitting behind you.

A modest proposal

The Reserve Bank has been taking some stick recently about not getting inflation up to 2% - you have your choice of posts on Michael Reddell's blog, for example - and yesterday Stuff's Vernon Small weighed in with 'Monetary policy is bust, so why are we still banking on it?'

So here's a modest proposal to get us back on track.

First, we cut the Official Cash Rate to 2%, the same level as the Australian policy rate. Nice big demonstration effect right there, with a 0.5% move instead of the usual 0.25%, plus it would be a genuine surprise (the futures market has only one 0.25% cut in the pipeline).

Second, we signal we'll match any future cuts in the Aussie rate (the futures market figures the RBA will cut by 0.25%, some forecasters think there are two cuts on the way).

Third, we do some quantitative easing (QE). The RBNZ buys enough government stock to drive down our current 10-year yield (3.04%) to the level of its Aussie equivalent (2.40%). It would help if Treasury cancelled its scheduled bond tenders and instead placed Treasury bills direct with the RB.

At that point, no sensible investors will pick New Zealand over Australia (the Aussies have a slightly better credit rating, so if the interest rates are the same, you'd pick them). Investors in New Zealand will clear off, and the currency will depreciate. It wouldn't hurt to give it a judicious nudge with some thin-market currency intervention.

If that doesn't get us nearer 2%, well maybe Vernon's right, and nothing ever will, but we'll never know unless we give it a go.

Course, the Auckland housing market will have turned incandescent, but you can't have everything, can you?

More seriously, I can't help feeling that it's theoretically possible, in the current collapsing-commodity, competitive-devaluation, out-QE-the-other-guy world, that there may be no feasible or desirable setting of local monetary policy that is consistent with 2% local inflation.

I've had a go in the past at trying to put this into some kind of formal framework (if you don't mind some simple graphs). My conclusion back then was that, if there was overseas monetary policy loosening (and a great deal more has happened since I wrote in 2013), and the RBNZ wanted looser policy but would prefer if it didn't exacerbate the housing market, then something had to give:

the Bank's got a bit of leeway: it doesn't have to keep inflation strictly at 2%. It's got a band of 1% to 3% to work with (on average aiming at a longer term average of 2%). Where the logic of things leads you to, though, is this: in current markets, the Bank will need to use this leeway, and let inflation undershoot 2% for some time.

It's possible that the sub-2% undershoot that we have indeed experienced isn't such a bad result, in the round. It could be the best we could realistically achieve in current world market conditions - or at least the best we could achieve short of having slavering buyers stampeding from auction to auction to snap up the last house under $3 million.

The dance of the seven veils (economist version)

..and what I mean is, I'm going to show you a series of graphs, but I'm going to take my time baring all.

Here's the first bit.

This shows our actual official cash rate (the OCR, the bold black line) over the last couple of years, compared with the Reserve Bank's projections of where it thought the cash rate would need to go (the various coloured lines, which are forecasts the Bank made at different times). You'll see that recently the OCR has gone down, though the Bank had thought it would need to go up. In our 'gotcha' culture, there have been plenty of people to say the Bank made a 'mistake', but as I've said before, that's probably not the best interpretation. People make the best decisions they can under considerable uncertainty, and every now and then they get blindsided.

Right. here's the next bit.

This is the entire history of the Bank's interest rate projections, since we started on the inflation targetting caper, compared with what actually happened.

I could look at this graph for hours. No, really, I could. It's fascinating.

If you were a blame-seeking muckraker, you could go to town on this. "For over twenty years the Bank has been saying that the OCR will need to go here, or there, and the OCR has gone somewhere else. Heads must roll!" But since we are reasonable people who understand nuance, reality, complexity and uncertainty, let's try some different responses.

My first thought was that it said something about forecasting. Very often, in the financial markets, the default forecast is that something that is going up, will go up a little more, and then drop back (or, if it's going down, will drop a little more, and then rise). You see it all the time in, for example, forecasts of exchange rates. The default tends to be some kind of "reversion to the mean" - people tend to think the current trend could run on a bit more, but will eventually drop back to something more "normal". So my initial reaction was that this looked like a not very sophisticated forecasting scheme.

But in talking to some folks at the Reserve Bank's modelling workshop today, I came to the view that there's something else happening. These aren't really "forecasts" in the normal sense of "what will happen to something": rather, they're actually the RBNZ's view of what OCR will be needed to keep inflation inside the RBNZ's target range. Seen in that light, what the graph arguably shows is that the RBNZ has tended to think that monetary policy is more powerful than it actually is.

For example, over that period from 2004 to 2007, the Bank thought that modest increases in the OCR would have enough oomph to keep things under control: in fact, the OCR had to rise a lot more than that to do the job. Similarly, in the weaker post-GFC period, the Bank thought a brief period of stimulus would be enough to fire things up. In the event, it took a much longer time, and much lower rates than the Bank had expected to wield, to try and work inflation up again. And it hasn't succeeded yet: it thinks it's on track, and that today's low interest rates will be enough to get inflation back to near 2%. But on this showing it's just as likely that monetary policy still isn't as high-powered as you might imagine, and that even lower rates for even longer might be required.

You might think, why has our central bank held this overoptimistic view of the influence of monetary policy? I don't have a good answer to that, but - and here comes the next bit of the striptease - we're in good company. Here are the equivalent forecasts made by the Norwegian and Swedish central banks, in both cases dating from when they also embarked on the great inflation targetting adventure.

Interestingly, they have both tended to err in the same systematic way - they have persistently thought that interest rates would need to be higher than actually proved necessary. Part of it is happenstance: the post-GFC global economy has been a strange place, where central banks might have reasonably expected inflation to have picked up as the global economy has recovered, but it hasn't, for reasons that aren't clear yet. And part of it, in my view, is that when a central bank first sets out to be an inflation targetter, it's absolutely got to establish its credibility early in the piece. And above all, that means not letting inflation go above target. So there's an inevitable tendency to want to set rates at a conservatively high level that takes an inflation-above-target outcome out of play. You can see something much the same playing out in the early days of our own experience.

All of this, by the way, came from an excellent paper albeit with the rather opaque title, "Monetary policy forecast and global indicators", presented by Hilde Bjørnland (BI Business School and Norges Bank) at today's workshop. It's not up on the RBNZ's website yet, but it'll be well worth your while to have a read when it is. I'd also recommend "International inflation dynamics and the New Keynesian Phillips Curve: The role of the global output gap", by the Bank of Thailand's Pym Manopimoke, where she shows that global influences are playing a larger role in individual countries' inflation outcomes, and the rather inscrutably named "Foreign shocks" by Norges Bank's Drago Bergholt, where (if DSGE is your thing) he improves your workhorse DSGE model to allow for a greater influence for international linkages.

What drives the A$?

Exchange rate forecasting, as we all know, is usually a decidedly iffy proposition: the authors of this new Discussion Paper from the Reserve Bank of Australia point to "the well-documented difficulties in empirically explaining movements in exchange rates" and "the imprecise nature of exchange rate modelling, which is well established in the literature".

I'll just pause for a sec (before I get anyone into trouble) to point out that in any Discussion Paper, "Views expressed in this paper are those of the authors and not necessarily those of the Reserve Bank. Use of any results from this paper should clearly attribute the work to the authors and not to the Reserve Bank of Australia".

Right. Carrying on, and despite the well-known difficulties, they've done a pretty good job of modelling the behaviour of the (real) trade-weighted index (TWI) of the Aussie dollar. Here's how their model fits the data: if I'd managed that, I think I'd be retiring to the pub for a beer after a good day's work.

It's an error-correction model, where the TWI tries to move towards an equilibrium level determined in this model mostly by Australia's terms of trade, with a smaller supporting role for a real interest rate differential ("the real policy rate differential between Australia and G3 economies"). And it explains about half of the quarterly changes in the TWI over 1986-2014.

The authors were a bit exercised by those periods where the actual A$ TWI was well away from the modelled band - below, during the GFC, and above, more recently - and they've had a go at seeing whether various ways of modelling the impact of the recent Australian resource investment boom and of unconventional monetary policy overseas would explain those deviations. There were some suggestive hints, but no knock-out discoveries: "Taken as a whole, while the results from these augmented models support the notion that there have been some additional influences on the real exchange rate in recent years, they do not fully account for the behaviour of the exchange rate during the period". The existing model did more or less as well (and more simply) than potential alternatives.

Incidentally, if you're a student, or hence or otherwise would like to get up to speed with where the economics of exchange rates has got to in recent years, there's a very useful bibliography at the end of the paper.

You're probably wondering, is there a Kiwi dollar equivalent? And yes there is, give or take (the Aussie graph shows the modelled A$ TWI versus actual, the Kiwi graph shows an explanation of why the actual rate is away from its long-term average). Here's what it looks like, and I wrote it up in more detail here.

Takeaways? Two main ones. The story that the A$ and NZ$ are 'commodity backed' currencies is oversimplified, but not wrong. And exchange rate forecasting may be problematic, but I'd say not so problematic that you can't get something useful out of it.

Neutral, or too high?

Last week the Reserve Bank came out with the latest of its Analytical Notes - a series I highly recommend. They're pitched at the intelligent citizen, and they also have a 'non-technical summary' at the front, so even if monetary policy or macroeconomics isn't your go-to choice for a light read, you'll find the material both accessible and interesting.

This latest one is more interesting than most - "Estimating New Zealand’s neutral interest rate", by Adam Richardson and Rebecca Williams. Obviously the Bank needs a view on the neutral rate so as to know whether its setting of the cash rate is on the side of policy stimulus or on the side of policy constraint, but it's also interesting for the rest of us, as it's a pointer to whether borrowing costs are relatively low or relatively high.

Intuitively I think we all know what a 'neutral rate' is, but it's harder to pin down an exact definition. The paper says that the neutral rate is "a level of the nominal 90-day bank bill rate that it [the Bank] believes is neither expansionary nor contractionary" and "the interest rate that would prevail once all business cycle shocks have dissipated and inflation is expected to remain at target". The paper doesn't mention where the exchange rate would be at the time, but I suppose we have to assume that the exchange rate is at some middle-of-the-road, purchasing-power-parity sort of level.

The interest rate that would prevail in 'normal', neither boom nor bust conditions, and that would be consistent with inflation steady and the Bank being able to stand pat, is, as the paper says, not directly observable, as things are never going to stand still long enough for you to measure it. So you've got to sneak up on it, and the authors did so from five separate directions. Unsurprisingly the different perspectives give different answers for the neutral 90 day bank bill rate: the range of answers is shown in the graph below. The average is 4.3%, and the Bank's current operating assumption for its policymaking is there or thereabouts, at 4.5%. The Bank's take on the neutral floating mortgage rate, by the way, is 7%, or the neutral 90 day bill rate plus a 2.5% margin.

It's interesting that four of the five approaches have the neutral rate falling. One approach has it bottoming out around the end of the GFC, in 2009-11, but rising quite strongly since, which seems on the implausible side. The ones that have the neutral rate falling, generally have it falling most during and post the GFC period, which seems reasonable: the world seems to be a different place since in a number of respects (including, for example, wage-setting).

But it may not all be down to the GFC: one of the approaches has the neutral rate falling steadily since around the turn of the millennium, and that also makes some sense to me. You'd expect that the Bank would have garnered some increased policy 'credibility' (as the jargon has it) over that period. People would have come to believe more strongly - the odd misstep apart - that the Bank was on top of its inflation-targetting brief. And as they did, the Bank would have been able to exert more effective pressure with less effort, the proverbial 'bigger bang per buck', which is another way of saying that the neutral rate must have gone down.

If anything, I'd say the Bank's operating assumption of 4.5% is a bit on the high side. For one thing, it would be near the top of that target band in the graph, if you discounted the one approach that has the neutral rate rising (and which is responsible for the 4.8% top of the shaded band). And for another, if I put a fund manager's hat on, I'd say that there ought to be a low, and maybe close to zero, long-term after-tax real return to holding cash. At 2% inflation (middle of the target range) and a 28% corporate tax rate, bills at 4.5% would offer a tax paid nominal return of 3.24% and a real after tax return of 1.22%. Or for holding cash (say 20 basis points below bills) an after tax real return of 1.07%. In current circumstances, that looks a return that's on the high side for a liquid risk-free asset.

Policymaking when you don't know where you are

Last week the Reserve Bank published the latest in its Analytical Note series, 'The Reserve Bank’s method of estimating “potential output”' (pdf here). If you're into macroeconomics in general or monetary policy in particular, you probably don't need your hand held about what potential output, and the output gap, are, but in case it's passed you by, the Note explains that

Potential output can be thought of as the level of activity that the economy can sustain without causing inflation to rise or fall, all else equal (for example, assuming no shock, such as big changes in oil prices). By implication, the difference between actual and potential output (the output gap) indicates the extent of excess demand, and therefore the direction and magnitude of this source of inflation pressure

This latest Note, like its predecessors, is a useful resource: I could see undergraduate economics courses using it, and maybe  the more with-it secondary school classes (yes, there are some equations, but they're no biggie). There's also a one-page 'non-technical summary' at the front, so if you're the proverbial intelligent lay person that's for you.

The Note has two graphs which I thought were interesting. The first is a straightforward graph of where the output gap has been, where it is currently, and where the Bank thinks it's headed over the next year or two. The implication would be that the Bank needs to be watchful about potential inflationary pressures down the track, though (a) how it would tighten policy without causing the Kiwi $ to head into the stratosphere isn't obvious and (b) it's possible that inflation, for some reason we don't yet fully appreciate, isn't picking up the way it used to when economies run hot (it's a major policy conundrum in the US at the moment)..

This second one, for me, was highly thought-provoking. It shows what the output gap in early 2012 was estimated to be at the time, and how that estimate later changed as revised GDP data came to hand. Originally, the economy was thought to be running well below capacity; as more complete data came available, it became apparent that the extent of spare capacity was nowhere near as large, and even that the economy might have been running on the hot side, a bit above capacity; and on the latest data we're back to an assessment that it was running slightly on the slow side. As it happens, no harm was done - policy in early 2012 was kept at its supportive post-earthquake level, which turned out to be an okay stance to have taken - but you can see the potential for policy mistakes.

What are some of the other implications?

I'd be more charitable when assessing the performance of central bank Governors. There are plenty of trigger-happy people out there with a Gotcha! mentality: the reality is that monetary policymakers are likely doing their best in an environment of very considerable uncertainty about where are are now, let alone where we are heading next. Ditto Finance Ministers, who face exactly the same issue of assessing where we are in the economic cycle.

The uncertainty also suggests (everything else being equal) that policy is better adjusted gradually rather than in big dollops. Somewhere around the internet in the past few days I saw the analogy of driving in the dark beside a cliff: if you're not sure where you are, it's probably best to drive slowly until you get a better idea. Even if you do become easy game for the Gotcha! brigade, who will be saying you've got "behind the curve".

You'd clearly want to be careful about how much reliance you place on measures like the output gap, and you'd want to be supplementing it with all the other evidence you can garner about how hot or cold the economy seems to be (which is why the RBNZ has all those meetings with companies and organisations in between its policy decisions). It's also why I think business opinion surveys and their ilk are so valuable.

And then there's that problem of the 'true' (or 'least untrue') data only becoming evident years after it's any good for cyclical policymaking (though the data will still be fine for many less time-dependent uses). I'd like to think this will become less of an issue, in particular as we become more adept at using 'administrative' data (things like GST returns, or spending at the supermarket checkouts, that are being collected for non-statistical reasons of their own). That's the way Stats is headed, and they're right: it's likely to be cheaper,  more accurate - and faster.

A brilliant graph

Here's a brilliant graph, from the Calculated Risk blog, an excellent site run by Bill McBride which mainly covers US macroeconomic developments. The graph came from this post, and I'm using it with Bill's permission.

It's about the US labour market, and even if that's not of great (or indeed any) interest to you, bear with me, because I've put up this graph for a variety of other reasons as well.

The first reason is to make the point, again, that national statistics authorities need to get their act together and think of better ways to present their data. I have no doubt that the good people at America's Bureau of Labor Statistics (BLS) are public-spirited professionals, but they don't know how to present data to save their lives. If you don't believe me, have a look at the BLS's release of the underlying data, which looks as if it was written in 1970 on an IBM Selectric typewriter. There isn't a single graph in the whole thing*.

Yes, I know, there's a school of thought that the official statisticians' job is just the facts, ma'am, but I think it's several decades past its use-by. The sky has not fallen when (for example) our own Statistics NZ puts out data, commentary, and several kinds of graphs (here's this week's full retail sales release, for example).

OK, here's the graph itself.

This is a really neat graphical summary of what's happening in the US labour market. On the one hand you've got voluntary job 'quits' (the light blue bar), and 'layoffs and discharges' (the red bar), which when added together gives you the total number of people who left or lost their jobs. And on the other you've got new 'hires' (the dark blue line). When hires outnumber quits plus layoffs, total employment rises, and conversely when hires fall short, employment falls. And, for completeness, you can new job openings (the yellow line), which is employers' demand for staff.

I loved everything about this graph - the clear, bright colours, the logic, the value add to the underlying data. But quite apart from its graphical excellence, it also says quite a lot about how economies work.

Often, the overall result in many markets is the net outcome of two very large gross numbers. Behind any small overall movement - employment, business creation - there tends to be a vast boiling undercurrent of gross turnover. It's emphatically not the case that employment falls (for example) because virtually everyone keep their jobs and a very small number lose theirs. The reality is that if employment falls in any given month, it's because there is a very large number of new jobs created, slightly outweighed by an even larger number of jobs lost or given up. It gives you a Schumpeterian shiver up your back.

The gross flows can be immense: as the BLS helpfully points out, "Over the 12 months ending in June 2014, hires totaled 55.7 million and separations totaled 53.3 million, yielding a net employment gain of 2.4 million. These figures include workers who may have been hired and separated more than once during the year". Which also reminds us not to read too much into statistics that are the small number resultant of two much larger numbers: whether it's net new jobs, or the balance of payments deficit, or the savings rate, little errors in any of the big gross numbers can be as large as the net resultant itself.

I'm personally of the view that these high levels of turnover reflect (and accommodate) efficiency and flexibility, and you stand in their way at your peril. There are plenty of people who disagree: they don't like the essentially 'fire at will' nature of the US labour market, and they'd rather that employers didn't have such a free hand. But less flexible, or outright inflexible, labour markets don't help anyone, as the youth unemployment rates across much of Europe demonstrate (they're not just a cyclical austerity story). Policy moral, in my view: mitigate the influence on individuals and communities by all means, equip people to the max with the skills to play the game, and get out of the way. You're doing employees and businesses no favours when you throw sand in the works.

Finally, for those who do have an interest in how the US is travelling, the news in the graph is pretty good. The dark blue line is keeping its head above the combined blue and red bars, so total employment is rising. The 'help wanted' ads have been steadily increasing: they bottomed out in the middle of 2009, and have roughly doubled since. And 'quits' are also increasing, which among other things reflects increased confidence about jobs availability. As you can see, the GFC left a big scar on the level of 'quits', which haven't got back to pre-GFC levels yet, and so far it's hardly a rip-snorter of a recovery: recent monthly net new jobs have been around the 200,000 to 250,000 mark, which aren't enough to make much of a dent in the unemployment rate. But even so, it still all adds up to a picture of sustained if still modest expansion.

*Update September 6 - I may have done the BLS a disservice here, apologies. I've just looked at the August jobs report, and the PDF version does indeed have graphs (though the HTML version doesn't), and a reference to the impact of a strike at a New England business.