Lies, Damned Lies and Statistics
The debate about the current state of the New Zealand economy is less useful than it should be because of two increasingly dominant aspects of the way in which we address these issues.
First, is the perennial proclivity of our media to consult – almost exclusively – bank economists, as though they are able, from their positions as paid mouthpieces for the banking interest, to tell us all we need to know about the wider economy.
Second, is the growing practice of asserting – when the statistics fail to tell a story that suits our policymakers – that the statistics should not be believed.
We have seen both of these elements at work in the current discussion about employment. We are solemnly assured that the fall in the number of people both in work and seeking work cannot be taken seriously because it is an article of faith that the economy is actually doing rather well.
We have seen the syndrome at work, too, in the continuing discussion about the overvalued dollar and its malign impact on jobs, investment, output, productivity and the trade balance.
There are good reasons to believe that the dollar, we are told, is not really overvalued. This is an oft-told story. One of the most pernicious of such assertions is the fatuous “Big Mac index” published by The Economist; this populist version of a purchasing power parity index purports to measure the degree of under or over-valuation by comparing the local-currency cost of buying a Big Mac in various countries.
But the price paid for a hamburger in the domestic economy tells us very little about price competitiveness in the internationally traded goods sector. Successful exporters almost always have – as a consequence of, among other factors, the economies of scale available in manufacturing for export – a quite different cost and price structure from that of domestic production for local consumption.
When Japan, for example, was growing fast in the 1960s and 1970s, and exploiting worldwide markets for manufactured goods like cars and television sets, the inflation rate in their export industries was low by world standards, so that they could go on exploiting a price advantage, even while their domestic inflation rate across the whole economy was actually higher than average.
We are also told that there is no need to worry because our dollar is not overvalued against the currencies of all our trading partners. It is certainly true that the trade-weighted index has some deficiencies, and that against the Aussie dollar (which is also overvalued in world terms), our current parity is quite advantageous – thank heavens, because otherwise we would now be “drowning not waving.”
But, as Steven Joyce says, our exchange rate establishes values against all currencies; and what matters – in terms of whether it is overvalued or not – is the impact it has on our overall balance of trade. A correctly aligned exchange rate should allow us to balance our trade, by “clearing the market” in conditions where we are also achieving a sustainable rate of growth and the full utilisation of our resources, including labour.
It is no comfort, in other words, to be told that we are not handicapped by overvaluation in respect of one or two of our trading partners when the corollary is that the total trading picture is one of considerable disadvantage.
Nor is it much comfort to be told that the major impact of overvaluation is on our ability to compete against imports, rather than on our ability to export. The international market for manufactured goods embraces both exports and that part of our domestic market that is open to imports. So weak is our export effort (as a consequence, at least in part, of overvaluation) that it is the competition from imports in the domestic market that matters much more to us. The manifest and growing vulnerability of domestic producers to that competition is just as much a consequence of overvaluation, and even more damaging to our prospects, than is our disappointing export performance.
We should also beware of historical comparisons designed to show that the dollar is, in some respects at any rate, no higher in value than in earlier times, particularly when those earlier times are themselves very recent and when our history of consistent overvaluation extends back for decades.
Rather than juggle with the indices in an attempt to distract attention from the hard reality of overvaluation, it would be much more helpful to look at the characteristics typically exhibited by uncompetitive economies – in other words, those with overvalued currencies.
Such economies have slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets – including national assets – into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.
Sound familiar? Forget arcane debates about small fragments of the picture; if we want to judge whether or not our currency is overvalued, these are the consequences that provide the conclusive evidence.
Bryan Gould
10 February 2013
Getting the Dollar Down
That dwindling band who continue to deny that our economy is being hurt by an overvalued currency will usually – in the face of the indisputable evidence – take refuge as a last resort in the assertion that “there is nothing much we can do anyway – we just have to live with it.”
Nothing is further from the truth. We have an overvalued dollar – which continues to destroy jobs, weaken our industry, worsen our balance of trade, and increase our indebtedness – because that is what our policymakers choose.
The usual assertion that there is nothing that can be done usually focuses on – and then dismisses – the possibility of intervening in the foreign exchange markets, as though this is the only option. But intervention is the least effective measure that could be taken; it is quite true the Reserve Bank, and its (comparatively) puny resources, would be quite unable to offset the huge flows of hot money that determine the value of our dollar. Intervention is merely a straw man that can be conveniently knocked down so as to distract attention from more effective options.
That is not to say that the occasional selling of New Zealand dollars (as the Reserve Bank has done recently) would not be helpful in inducing a little doubt in the minds of speculators who are usually confident of a guaranteed interest rate premium and probably a capital gain as well, while the Governor’s unequivocal description of the dollar as “overvalued” was also a useful signal; but there are much more effective measures that can and should be taken.
The first and most obvious step is to change the policies that inevitably force up the dollar’s value. We persist in paying an interest rate premium to overseas lenders to persuade them to lend us money; and the more we do that, we more we push up the dollar and weaken our economy, and – as a consequence – the more we have to borrow and therefore to offer high interest rates to persuade them to go on lending to us.
We insist on creating this vicious circle, despite all the obvious downsides, because we assert that controlling inflation – not sustainable growth, not competitiveness, and not full employment – is the only goal of policy, and that raising interest rates is the only way of doing it. If we identified wider goals of policy, and stopped using interest rates and the exchange rate for literally counter-productive purposes (when we should be focusing directly on the actual causes of inflation, such as unrestrained bank lending for non-productive purposes), we could avoid repeatedly shooting ourselves in the foot.
Other countries are rapidly learning these lessons; even the Governor-in-waiting of the Bank of England has signalled that he is ready to abandon inflation as the sole focus of policy. Sadly, so committed are our leaders to an increasingly discredited orthodoxy that they will not even contemplate any change. And our government has compounded this stubbornness by opposing policies that would help recovery from recession – and bring the exchange rate down at the same time.
By identifying the reduction in its own deficit as the principal goal of policy, the government has signalled that its priority is the financial rather than the real economy in which most people live and work. This concern for the short-term value of financial assets ensures that foreign lenders will go on buying dollars, secure in the knowledge that nothing will be done to jeopardise “confidence” amongst financial institutions and that the dollar will go on rising.
Other countries, by contrast, now know better. They know that the only way to escape recession is to get the economy moving again by improving competitiveness. They have increasingly turned to quantitative easing (or printing money) – as in the US and the US – or, even more interestingly and much more effectively, to fiscal stimulus – as in the case of Shinzo Abe’s new Japanese government. The effect of these measures is not only to encourage growth and recovery, and – interestingly – to get government deficits down, but also to devalue the currency; in the case of Japan, that goal is quite overt.
These measures show that not only that these countries understand the importance of improving competitiveness by bringing down the value of their currencies but at the same time how easy it is to do so – just check out what has happened and is happening to the US dollar, the pound and the yen.
We remain stubbornly in that dwindling group of countries whose priority is maintaining the value of the currency and who are willing to sacrifice everything, including recovery from recession, to that end. While others reduce the value of their currencies, we say we know better and continue to push up the value of our dollar.
We have an overvalued dollar, in other words, because we choose to. When bankers, stockbrokers and other holders of financial assets assure us, in other words, that we “just have to live with it”, they are just putting their own sectional interest ahead of the rest of the economy.
Bryan Gould
2 February 2013
This article was published in the NZ Herald on 6 February.
Why Are Houses So Expensive?
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for young couples who were buying their first home. It was one of the more satisfying parts of my work.
At that time, a deposit of just L50 ($100) would purchase, for a total price of L850 ($1700), what was called a deferred licence on a quarter-acre section. It was then possible to borrow the total cost of building a new house through a 100% mortgage either with the State Advances Corporation at 3% interest or with a non profit-making building society with which the young couple had been saving and of which they were members and co-owners.
These arrangements promoted what was then virtually the highest rate of home ownership in the developed world. Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. It is hard to know why that was possible 50 years ago but is said to be beyond our reach today.
The damage done by the shortage of affordable housing today does not need emphasis. Young families with children are growing up in conditions that threaten their health, handicap their education prospects and destroy their life chances. The benefits to those who already own their homes of the rapid, unearned and untaxed growth in the value of their housing equity, by contrast, represent a huge transfer of wealth from the poor to the well-off. We cannot be surprised that New Zealand today is disfigured by growing inequality.
The contrast between 1960 and today in terms of housing affordability is the result of a fundamental shift in policy. In 1960, decent housing for all was seen as a social responsibility to be discharged by the community through its government or through cooperative arrangements. Today, confidence is reposed in the market to achieve this same outcome.
The evidence as to which is the better approach is surely conclusive; the market has – in this respect at least – failed. But, says the government, that is not the fault of the “free market” (which ideology asserts is infallible), but rather the consequence of “rigidities” which stop the market from operating as it should.
The argument is the same as that used to explain why the market has produced an historically high rate of unemployment. The reason for this, we are told, is that “labour market rigidities” preclude a low enough price of labour to clear the market.
In the case of unemployment, in other words, the fault is said to lie with the trade unions, notwithstanding their “small influence” – described by the Prime Minister as a principal reason (together with a tax gift of $67 million) for Warner Bros deigning to come here to make The Hobbits.
In the case of affordable housing, the villains are supposedly the local authorities. Again, the government – and “free-market” theory – cannot, it seems, be blamed. In both cases, not only does the government deny responsibility but they have conveniently found a scapegoat in those who do not share their political view.
Abandoning the effective planning of land usage, however, so that developers were free to go wherever and do whatever they liked, might stimulate a short burst in property development and building activity, but is unlikely to bring down the cost of housing in the long term. Much more likely would be a surge in the profits made by both property developers and banks – both significant elements in pushing up the cost of housing.
The very term “property development” gives the game away. The development value of land, which is almost entirely produced by the wider community’s success in building new communities and local economies, has been siphoned off into private pockets.
An even more significant factor has been the increasing role of the banks in financing house purchase. With the replacement of mutually owned building societies by profit-making banks, the whole nature of lending for house purchase has changed. The banks make most of their money from lending on mortgage. Its appeal is that it is risk-free lending, with houses providing real and immoveable assets as security. It is in the banks’ interests to go on lending ever more; they thereby apply in effect a huge pair of bellows to the housing market.
The huge increase in the money supply caused by inflated bank lending for non-productive housing, moreover, seriously skews the whole economy. It diverts investment away from productive investment and into housing and creates an asset inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and housing yet more expensive.
It is encouraging to note the first glimmers of recognition of this issue in the Reserve Bank’s contemplation of “macro-prudential” measures to restrain bank lending; but their emphasis is still on the health of the banks’ balance sheets rather than on the distortion of the macro-economy. And, as on so many issues, the government’s loyalties seem to lie with its big business and corporate backers, rather than with families and children in need.
Bryan Gould
29 January 2013
This article was published in the NZ Herald on 31 January
Political Ambition Knows No Bounds
Politics is a funny business, sometimes producing unintended consequences, sometimes revealing human weaknesses that would be better remaining hidden.
A case in point was the unresolved dispute about the leadership of the Maori party. Few could have imagined that the issue could have produced such a bewildering outcome.
The Maori party, like the Greens, had adopted a dual leadership – one assumes as a neat way of avoiding the need to decide between the two candidates who might otherwise have been at each other’s throats. But, as luck and events would have it, the fact that the two leaders were of different genders – and that matter had been decided as a biological (rather than political) fact at a somewhat earlier date – became translated into a “principle” that the dual leadership should comprise one of each sex.
This happy arrangement was disturbed, however, when Tariana Turia – the distaff half of the duo – announced that she would stand down. One possibility immediately presented itself; the other half of the duo, Pita Sharples, might also resign (as he had earlier indicated he would) and bring the dual leadership arrangement to an end, so providing the opportunity for Te Ururoa Flavell to become leader (as the only remaining Maori party MP) in his own right. Te Ururoa Flavell, it will be noted, is a man.
This simple solution was however stymied by Pita Sharples digging in his toes. He announced that he would stay on, and would oppose any leadership bid by Te Ururoa Flavell. Battle (albeit discreetly) was joined.
When it became clear that Flavell was likely to win in any ballot of the membership (which could have been conducted with ease and despatch, since there were by now only 17 members left), what was Pita Sharples to do? Being a Minister mattered enormously to him. He enjoyed the prestige and the perks and was quite understandably unwilling to give them up. He enjoyed the flattery applied liberally to him by the Prime Minister and was able to convince himself (if no one else) that his use of a Ministerial car was essential if Maori interests were to be properly defended.
His problem was that if he was forced to relinquish the leadership of the party, his successor would also have an undeniable claim to take over the Ministerial limousine. The thought of Te Ururoa Flavell stepping into the back seat and instructing the chauffeur as to where to take him was too much to bear.
So Pita Sharples hit upon a brilliant idea. He would remind the party that it had always had two leaders – and that, even if Te Ururoa Flavell took over one of the spots, there would still be one left to accommodate one P. Sharples. But the sharp-eyed reader will already have identified the flaw in the argument; if it was required that the party should have two leaders, it could equally well be argued that it was also necessary that the two leaders should be of different genders.
What was to be done? It was undeniable that Te Ururoa Flavell was a man, leading inexorably to the conclusion that the other leader would have to be a woman. And this, according to most observers at any rate, constituted something of a dilemma for P. (as he had taken to calling himself) Sharples.
Throughout the fateful night, he wrestled with the dilemma. He reminded himself that Henri IV had once asked, “Is Paris worth a mass?” Was a Ministerial post worth a similarly fundamental sacrifice of something he held dear?
As morning dawned, he had made up his mind. There was, in the end, no real choice. He disappeared from public life for a few weeks – and the rest, as they say, is history. Patricia Sharples was elected with acclaim as the other leader of the Maori Party – and the Ministerial car was safe.
Bryan Gould.
25 January 2013
Manufacturing Matters
New Zealand has always been somewhat unusual in economic terms. With our emphasis on agriculture and primary produce – the characteristic most often of undeveloped economies – we nevertheless succeeded in achieving a high standard of living, to the point where – in the 1950s – we enjoyed one of the highest living standards in the world.
In those days, however, our economy had a certain balance. Small as we were, we were not only efficient primary producers but had developed a manufacturing base that met a reasonable proportion of our needs and a service and retailing sector that was responsive to local control. Able to pay our own way, with an economy that was competitive across the board, we could look the world in the eye.
Since that time, however, the picture has dimmed. As we have been absorbed more and more into a global economy, international competitiveness has mattered more and more, and our small size and remoteness have counted increasingly against us. We were not helped of course by fundamental changes in our trading patterns, such as the UK’s entry into the European Common Market.
In any uncompetitive economy, the less competitive parts struggle and eventually disappear. Ever larger parts of our economy – like manufacturing – have found the going tough, and have the felt the pressure of having to compete with more efficient and lower-cost producers elsewhere. Only the most efficient sectors – in comparative terms – survive. An uncompetitive economy like ours becomes as a consequence more and more dependent on those fewer and fewer sectors that can compete in international terms – and in our case, that means primary produce, and even more specifically, dairy produce.
We have chosen, however, not to recognise the remorseless economic logic that underpins these developments. We have behaved as though – as a total economy and not just in terms of rapidly shrinking proportions of it – we are highly competitive. We have cheerfully entered into free trade arrangements with all and sundry, including the most powerful and efficient economies in the world, apparently confident that we can take them on across the board without suffering damage to our own productive sectors.
Worse, we have quite deliberately set about making the problem more serious. We knowingly pursue policies that – through offering an interest rate premium to anyone who will lend us money – drive up our exchange rate, which immediately makes our lack of competitiveness much worse.
We then avert our gaze from the consequences of these policies. As though a perennial balance of trade deficit, a huge private sector borrowing requirement needed just to keep our heads above water, and the pressing need to sell off more of our assets to foreign owners than any other advanced country are not enough, we still blithely tell ourselves that we are doing well and that our economy is in good shape.
As large parts of our economy cease to exist, our Pollyanna Prime Minister denies that there is a crisis in manufacturing; yet manufacturing jobs, manufacturing output, the balance of trade in manufactures, are undeniably all in a bad way. He does not seem to be aware – and if he is – seems not to care, that manufacturing’s share of our economy has fallen from 26% in 1972 to just 12% by 2009, and will have fallen substantially since. Even those parts of our manufacturing economy that do survive – Fisher and Paykel Appliances, for example – are being sold off to foreign owners.
Does the manufacturing crisis matter? Yes, it does, not just because of the lost output, the loss of jobs, and the increased burden on our balance of payments, but because all evidence shows that successful modern economies build their success on efficient manufacturing.
Manufacturing is the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and offers the quickest return on investment. Almost without exception, economies that have given up on manufacturing have struggled and have discovered that supposed substitutes are either castles built on sand, as in the case of the UK’s financial services industry, or deliver their benefits to only a small part of the economy, as in the case of Australia’s mining industry.
By contrast, the world’s new economic powers – China, India, Japan, Korea – have built their strength on manufacturing, while the strongest of the longer established economies – Germany – continues to do likewise.
We, however, tell ourselves that competitiveness is not something we need worry about. We wave goodbye to manufacturing with nary a care, and expect dairying alone to carry the burden of guaranteeing our prosperity into the future.
But our competitive advantage in dairying is already being eroded as well. We are already treading the familiar path of selling off large chunks of our productive capacity and expertise in dairying to potentially powerful competitors and we have taken the first fateful steps in selling vital income streams from dairying to foreign owners. When dairying has followed manufacturing into decline, what will we do then to pay our way?
Bryan Gould
21 January 2013
This article was published in the NZ Herald on 23 January 2013