• 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