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Trade policy released

Posted by Maryan Street on October 28th, 2011

I released our Trade policy this evening, as promised. Trade is a bipartisan issue because both National and Labour recognise that we are too small and our electoral cycle is too short to risk our exporters’ efforts and foreign direct investment in our industries, by potentially pulling the policy rug out from under them every three years. So we both promote New Zealand’s trading interests overseas equally.

So it will come as no surprise that we wish to build on the international market access we have gained in recent years, particularly in Asia after the successful FTA with China, signed by Phil Goff.

Labour will support the Trans Pacific Partnership negotiations as they proceed but Pharmac remains a bottom line for us. It works for the public good of New Zealanders and should not be compromised, despite pressure from large multinational pharmaceutical companies.

We need more openness and better engagement of civil society in our trade relationships, and so we will establish a Trade Advisory Commission to give contestable advice to the Minister about trade relationships. This Commission would comprise union, business, exporter, academic and NGO interests.

Where we differ from the National Party however in the Trade area is in the fundamentals of monetary policy which underpins the environment in which our struggling exporters work. We will alter monetary policy by introducing a Capital Gains Tax which will moderate interest rates, which will in turn take pressure off the exchange rate. We will broaden the Reserve Bank’s objectives to include employment and the health of the export sector amongst other things in its brief. We will put an exporter on the Board of the Reserve Bank to represent their interests.

And more besides……to see the whole policy, go here.

Filed under: economy, international, monetary policy, trade
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Budget FAQs #5: Growth Hockey Stick

Posted by David Cunliffe on May 19th, 2011

The New Zealand economy has failed to fire under National.  As a result successive rosy Treasury forecasts have been revised downwards.  The starkest example is between last year’s May Budget and December Half Year Update.  

  2010 GDP Track Revision

Implications: The  growth upturn “hockey stick” just keeps getting pushed out into the future.  The so-called GST tax switch had no discernable positive impact on growth.  And the same rosy forecasts will be embedded in today’s Budget.  On this track record Budget 2011 growth  projections will not be worth the paper they are written on.

When the 2009 growth projections are added the picture gets even more interesting.  As this graph shows the actual GDP growth track has been so bad that it is back down to the proections made by Treasury during the darkest days of the 2008/9 global financial crisis.  

   2009-2010 GDP Track

In other words, despite the international crisis having passed 18 months ago and NZ receiving record prices for our agricultrual commodities, our economy has performed so badly that it is back down to the track Treasury predicted during the darkest days of the crisis.   Quite simply, whatever the Govt has been doing is not working. 

In a future post we will decompose the relative impact on debt of this under-performance and otehr factors like earthquakes.

There is no coherent plan from National on how to manage debt reduction alongside needed investments in economic and export development, closing the savings gap, repairing the damage to middle New Zealand, and giving all Kiwis hope and confidence for the future.

Labour has an integrated economic strategy that will achive that withi a fully costed programme that will reduce net debt over a 10 year economic cycle.  You can see the direction we are heading in set out in a recent speech I gave to Business NZ  here.

For the wonks among you, here is the underlying data – all the Government’s own numbers.

  GDP per capita, 95/96 dollars    
 

Actual

Half Year Update 2009

Budget 2010

Half Year Update 2010

30/12/2008

7,805

      

30/03/2009

7,700

      

30/06/2009

7,683

7,683

    

30/09/2009

7,677

7,694

    

30/12/2009

7,716

7,721

7,716

  

30/03/2010

7,741

7,741

7,758

  

30/06/2010

7,734

7,768

7,802

7,734

30/09/2010

7,701

7,795

7,909

7,747

30/12/2010

7,694

7,830

7,883

7,799

30/03/2011

  

7,873

7,928

7,859

30/06/2011

  

7,916

7,973

7,904

30/09/2011

  

7,967

8,026

7,948

30/12/2011

  

8,027

8,088

8,010

30/03/2012

  

8,055

8,118

8,039

30/06/2012

  

8,091

8,156

8,085

 Sources: Budget relevant documents and Statistics NZ series

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Filed under: Budget, Cost of Living, Global financial crisis, Inflation, Investment, Tax, business, debt, economic, economy, finance, jobs, monetary policy
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Bank of England boss criticises banks.

Posted by Trevor Mallard on March 7th, 2011

Merv King the Governor of the Bank of England is a pretty extreme example of what I consider a crude monetarist. But in this interview with The Telegraph he points the finger at bankers. With good reason.

Now, the Governor is off on why all this has a moral dimension: “The more I’ve thought about how labour markets work, the more I’ve realised that there are hardly any jobs whose tasks you can describe exactly. Nowadays, most jobs have the property that employees can choose to do them well or badly, so employers need to think about the long-term welfare of the staff not just pay today.” It follows that moral attitude is vital. Industry often understands this well. Nissan in Sunderland asks all its workers for ideas to raise productivity, and, says Mr King, it benefits.

The Governor makes a point of visiting manufacturing and service industries all over the country. Such firms pay far lower rewards than financial services but have “an incredibly successful record. They care deeply about their workforce, about their customers and, above all, are proud of their products”. With the banks, it’s different: “There isn’t that sense of longer-term relationships [hence the demise of the local bank manager]. There’s a different attitude towards customers. Small and medium firms really notice this: they miss the people they know.”

He also thinks that there is “too much weight put on the importance and value of takeovers”. They make short-run profits but “it doesn’t make sense to destroy a company with a reputation”. Since the Big Bang in the late 1980s, Mr King goes on, too many in financial services have thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”. Good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximise profits next week”. But in the past 25 years, banks have increasingly “taken bets with other people’s money”.

That is bad enough, but it gets much worse “if the rules of the game are that they get bailed out if it all goes wrong”. In this weird atmosphere, banks eventually stopped trusting one another. “Financial services don’t like the word ‘casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.”

So what that does that mean for us. Heads the overseas owners of banks win and our balance of payments suffers and tails New Zealand businesses, individuals and the taxpayer cover their losses. And our balance of payments suffer.

Hat tip Lloyd Morrison

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Filed under: Global financial crisis, bank, business, economy, finance, monetary policy
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The Financial Elite have Gambled away our Future

Posted by Lianne Dalziel on January 29th, 2011

Yesterday’s Press Editorial welcomed the PM’s announcement on the beginning of National’s privitisation programme for our country’s assets with the words “John Key was able to demonstrate…the value of his background in the financial industry”.  Excuse me?  Did the Press miss the Global Financial Crisis, where “the over-paid heroes of Wall Street and the City worshipped the gods of globalisation, financialisation and speculation”?   The quote is a teaser for the best of the five books I read over the summer break: “The Gods that Failed: How the Financial Elite Have Gambled Away our Futures” by Larry Elliott and Dan Atkinson.  The first edition of the book was subtitled: “How Blind Faith in Markets Has Cost us our Future”.  The second edition (published in 2009) has an extra chapter, which as one reviewer said could have been titled: We Told You So.  The authors of this book are economics editors, Elliott with the Guardian and Atkinson, the Mail on Sunday.

The metaphor that drives the narrative is inspired by the twelve gods of ancient Greece that lived on Mount Olympus.  Elliott & Atkinson have styled the super-financiers and the international organisations, (central banks, IMF, World Bank, WTO), the “New Olympians” and the twelve gods of the modern Mount Olympus: globalisation, communication, liberalisation, privatisation, competition, financialisation, speculation, recklessness, greed, arrogance, oligarchy & excess. 

“Greek mythology provides plenty of raw material for a book about the failings of modern financial markets.  There is the story of King Midas, who found the ability to turn all he touched into gold a curse. The tendency of markets to veer between the wild optimism of booms and the manic depression busts is akin to the life led by poor Persephone, condemned to live every six months of every year in Hades. But Pandora – a gift from the gods whose beauty belied her baleful influence on the lives of mortals – makes the best metaphor.”

As they said August 9 2007 was the moment the lid came off the modern version of Pandora’s box.  And the rest is history, which is why I believe this book must be read, because unless we learn the lessons of history, we condemn ourselves to repeating it.

This book is well-researched and easy to read.  It contains a chapter called ‘Last Tango on Wall Street” which has a very simple explanation of how the New Olympians (our Prime Minister’s background the Press values so highly) found ways to make money out of nothing – creating securitised financial products like “collateralised debt obligations” out of the subprime market and then hiding the risks behind AAA rated institutions.  The New Olympians made personal fortunes with bonuses they never had to repay when it all turned to custard.  And they were happy to see the taxpayers pick up the tab for their trillion dollar insanity. 

I conclude with this quote: ‘Speculators may do no harm as bubbles on a steady stream of enterprise.  But the position is serious when enterprise becomes the bubble on a whirlpool of speculation’.  That was John Maynard Keynes in 1936.  When will we ever learn?

Filed under: Book Reviews, Global financial crisis, Investment, asset sales, business, commerce, democracy, economic, economy, international, monetary policy, national, politics, privatisation
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S&P: National on negative watch (part II)

Posted by David Cunliffe on November 23rd, 2010

Part one of this post showed that S&P placed NZ on negative watch because of the savings gap, the huge (mainly private) net international debt and our under-diversified export profile (and consequent vulnerability).  It all adds up to lenders perceiving potentially greater risks and seeking compensation through higher interest rates.

How did the Government react to the news?  Did it front the issues and explain its “plan”?  Not in your life.

Alex Tarrant at interest.co.nz did a great job of covering John Key’s rather bizarre, meandering post-Cabinet press conference here.  Interest.co.nz’s coverage if the political debate is here.

Mr Key manages to contradict himself three ways in two paragraphs:

“Nothing has changed from our point of view, in fact if anything, our position looks stronger from our point of view (really?)…

We accept that we’ve had to take the earthquake on our balance sheet, accept tax revenues have been a bit weaker this year than we had anticipated…(corporate was 22.4% below 2010 forecasts, gst 15.8% below!)”

So… nothing has changed, we are stronger, but we are weaker.  Classic.   He must have been eyeballing three different journos and guessing they wanted three different answers, so why not try to please all of them at once?

The coup de grace is his attempt to pass it all off as Ireland’s fault.  True, the Irish are in a bit of a bog, but lets assume S & P can tell the difference between the land of the long white cloud and the emerald isle. 

Back in the real world, one thing is for sure, S&P won’t be amused if Messrs Key and English try to talk their way out rather than addressing the fundamental issues: how about trying to grow savings, diversify and lift exports, and reduce private international debt?  Who knows, they could even turn it into a plan?

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Filed under: Investment, Tax, Uncategorized, bank, business, economic, economy, international, monetary policy
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S&P: National on negative watch (part I)

Posted by David Cunliffe on November 23rd, 2010

National’s counter-spin on yesterday’s placement by Standard and Poor’s of New Zealand’s sovereign credit rating on negative watch shows increasing desperation, the latest of a torrent of bad economic news.  I comment in two parts: the announcement and the counter-spin.

First the announcement’s overview:

  • “We perceive New Zealand’s projected widening external imbalances and the country’s weakened fiscal flexibility as increasing risk to the sovereign.
  • New Zealand’s vulnerability to external shocks, stemming from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”

The S&P Report’s rationale makes the drivers even clearer:

  • widening external imbalances
  • weakened fiscal position
  • under-diversified economy
  • high external liabilities
  • a return to high current account deficits averaging 5.9% of GDP over the next three years.
  • and crucially, that “net external liabilities … predominantly reflect dependance by households on foreign capital to fund consumption and property investments”

In other words: New Zealand does not save enough, it has too much private debt, and that debt was used to fund the wrong things (property speculation not real business investment).  New Zealand’s exports are under-diversified and New Zealand will continue structural bleeding on our external accounts after the immediate recession.

The logical repsonse to these problems should be;

  • strong action to close the savings deficit (if possible by building good household saving behaviour)
  • diversify and increase exports (presumably moving beyond a narrow range of bulk commodities)
  • managing the fiscal position to encourage sustainable growth, employment and healthy tax revenues without blowing the fiscal deficit.
  • ensuring monetary policy supports the direction of reform rather than acting against it.

It obviously should NOT include:

  • borrowing more for tax cuts to upper income earners that neither create powerful stimulus nor correct the underlying imbalances
  • reinforcing exisitng bulk commodity exports while reducing investment in innovation and R&D to divesify and add value to the export base
  • cutting back Kiwisaver; cancelling prefunding for the NZ Super Fund; and taking two years to set up a Savings Working Group (and even then proscribing a range of strong policy options)
  • pretending monetary settings are ideal when exporters face extreme currency volatility

Bill English and John Key declared S&P lifting their previous negative outlook as a” verdict’ on Budget 2009.

They should be straight-up enough to accept that S&P has now reversed its verdict.

After 18 months of National Government policies National can have only itself to blame.

In part II of this post we’ll check whther their rhetoric matches this reality.

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Filed under: Budget, IRD, Investment, Tax, bank, business, debt, economic, economy, finance, international, monetary policy
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Unlocking Our Potential

Posted by David Cunliffe on October 4th, 2010

The Canterbury Earthquake, terrible though it was, reminds us of the courage and resilience of New Zealanders in a crisis. 

 If only the same courage and strength could be tapped as part of our normal ‘economic development’, NZ would be able to unlock enormous untapped potential.

 That same courage was evident in many of our forebears: those who voyaged to NZ by waka or ship, and those hacked down the bush to form arable pasture (often on slopes so steep it should not have been touched, but their courage was undeniable).  

 Tapping into that same strength of character to unlock future potential is part of the task that lies before us. 

 Our world is changing.  The old solutions will not work for tomorrows problems.  The old certainties have gone.   The era of guaranteed markets in the UK for our sheep and beef has gone.   The era of free and easy credit has now gone.  

 We are told we face a ‘decade of deleveraging’.  All around us we see growing signs of despair.  

 Just as in the 70’s we were called upon to diversify our markets, in the 80’s to deregulate our economy, and in the 00’s to rebuild our torn social fabric, Labour is now called upon to rise to a new challenge in a new era. Just as Mickey Savage did in the 1930s, we are being called upon to find a better way.

 NZ is currently meandering through the aftermath of the global financial crisis.  We are beset by malaise.  We lack confidence.  We appear unable to define our own future, and even lack awareness of our own potential and character.

 So NZ falls back passively on its proximity to larger Asian growth centres, its traditional bulk agricultural base, and its relationship with its nearest neighbour Australia.

 These are undeniable strategic advantages, but if any are a substitute for owning our own future, they will ultimately undermine our national wellbeing and identity.  

 Our relationship with foreign investment has to change.  As it stands we are becoming more and more deeply indebted to foreigners.  We have been through a phase of selling state assets to cover the interest.  We are now selling our land at the rate of dozens of rugby fields a day.  But still our national debt keeps rising. 

 It was not primarily ‘the government’s’ fault.   Most of this debt is private debt.  Most of it fuelled the private binge on property consumption (it was never really ‘investment’ despite the temporary up-cycle in which much of it happened).

 That we need more foreign investment is undeniable, but it must be channelled into genuinely value-creating and productive activity and not simply transfer the ownership of existing assets to foreigners making our future income deficit worse.   

 A new conversation must begin – one that starts from the proposition that we wish to own and govern our own affairs.

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Filed under: Investment, business, commerce, community, debt, economic, economy, environment, monetary policy, politics, social development
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Kiwibank forces Aussie banks to drop rates

Posted by Trevor Mallard on August 14th, 2010

Radio NZ reporting that Aussie banks are dropping their mortgage interest rates for a second time in a week to try and match Kiwibank. Can’t get link yet.

Doesn’t bode well for economic expectations but makes nonsense of Ralph Norris’ (NAB/BNZ) claim earlier this week that Kiwibank rates were too low.

About time Key gave Kiwibank the small capital boost it needs to move business lending rates down in a similar way.

I’m sick of the one way funnelling of cash west over the ditch.

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Filed under: Cost of Living, business, economy, finance, monetary policy, national, privatisation
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The Naked Economist: Part 2

Posted by David Cunliffe on June 30th, 2010

So what does the end of the Washington Consensus mean for economic policy?

Firstly, borne out of the Great recession, there are no certainties – including whether the recession is yet over or, as increasing numbers of pundits from Krugman and Stiglitz on down are warning, we are in for a further deflationary spiral. 

Assuming no immediate major further meltdowns, we can probably draw some interim conclusions.

First, stable inflation will continue to matter, but should not be the only policy target.  It follows that monetary policy cannot rest on one tool, the OCR.  The number of tools should always exceed the number of targets.  

The OCR is a poor tool to target excess risk taking or asset bubbles.  IMF Chief Economist Blanchard recommends combining monetary and regulatory policy, such as countercyclical liquidity and prudential ratios, and directly targeting problem sectors such as housing. 

If this sounds familiar, no wonder.  The Governor of our own Reserve Bank has been quietly moving towards this in line with the other G20 central banks.   Isn’t it ironic that in New Zealand the only institution really defending the old status quo is the Beehive. 

Second, realistic stable exchange rates are crucial to small, open, trading economies.  This is what our export sector has been saying for years.  Now the IMF recommends central banks use reserve accumulation and sterilised intervention to do just that.  Labour has pledged to investigate reasonable means to help reduce the volatility of the NZ dollar, one of the most outrageously over-traded currencies on the planet.

Third, when investors desert key markets, the case for publicly supplied finance (liquidity provision) can be compelling.  However that implies that there is monetary and/or fiscal headroom available to offset a major recession (not necessarily true of some of the major western economies, worryingly).

It also implies that once recovery is firmly in place stimulus can be eased off in a way that is scially and economically sustainable.  Arguably Cameron’s Tory Budget violates that principle with slash and burn polices that could tip the UK back into recession, and even deflation.

Finally, Blanchard recommends counter-cyclical fiscal policy, augmented where appropriate by automatic fiscal stabilisers such as cyclical investment tax credits or enhanced transfers to low-income households. 

Counter-cyclical fiscal settings are not new to us and were used successfully under the last Labour Government (which reduced net debt to zero alongside full employment).  But automating that process would require careful thought.  One option used in other small open economies like Singapore is a countercyclical savings policy.   

This is all food for thought.  It is high time for our government started thinking.  But increasingly New Zealanders are looking for fresh ideas in the absence of a Beehive that seems capable of new thinking.

In Part 3 I will point to some of the areas, post Budget 2010, where Labour believes a new emphasis is needed.

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Filed under: Budget, economic, economy, finance, international, monetary policy, social democracy
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The Naked Economist: Part 1

Posted by David Cunliffe on June 29th, 2010

There has been a quiet revolution underway in economics in the wake of the global financial crisis.  The “Washington Consensus” is no longer a consensus.  The “Great Moderation” has become a Memphis meltdown.

 As in most revolutions, pressure begins gradually.  Someone then states what is already obvious to all: the “Emperor has no clothes”.  Suddenly, orthodoxy crumbles.  As shown by the recent Toronto G20 summit, in 2010 orthodox economics stands suddenly naked. 

 The foundations have been shaking for a while.  Assumptions of “rationality” have taken a hit from “behavioural economics”.  Stock markets over-react due to fear and greed.  Trickle down trickles up.  Asset bubbles inflate then burst, as in 2008.

For me the “no clothes” moment for macroeconomics happened in February this year.  The Chief Economist of the International Monetary Fund (IMF), Olivier Blanchard, released a ‘position note’ entitled “Rethinking Macroeconomic Policy”. 

Early local media pickup focused on monetary policy, noting Labour’s recently announced withdrawal from the previous monetary consensus.  This has been comprehensively confirmed in two speeches last week by Phil Goff and David Parker.

Blanchard’s critique of “What We Thought We Knew” is, however, much broader than earlier local reaction:

  •  Monetary policy had one target, inflation, and one tool, the policy rate (our ‘official cash rate’ (OCR)).  With low, stable inflation the ‘output gap’ (unemployment) would be small and monetary policy would always do its job: spot the Tui billboard moment.
  • Fiscal policy (government spending and taxing) was secondary at best: hopelessly slow, un-necessary if monetary policy was sound, and subject to nefarious political influence. 
  • Some financial regulation was ok but financial intermediation (leverage, derivatives and stuff) didn’t matter much in terms of managing the broader economy. 

Welcome to the Washington Consensus:  “By the mid-2000s, it was not unreasonable to think that better macroeconomic policy could deliver, and indeed had delivered, higher economic stability.  Then the crisis came”.

Recounting “what we have learned”, Blanchard nails with laser-like clarity six home truths for our uncertain new world.

  •  Stable inflation may be necessary but is not sufficient. Housing bubbles, current account deficits and consumptions binges are serious problems.
  • Low inflation limits the scope of monetary policy in a severe recession.  There may not be room to cut policy interest rates far enough to avoid deflation.
  • Financial intermediation matters.  When financial markets are segmented and arbitrage (interest rate pass-through) breaks down, the OCR no longer works as a policy tool.  Our 2009 Parliamentary Banking Inquiry found just that.
  • Counter-cyclical fiscal policy is an important tool.  Take a bow Michael Cullen, who cut Crown debt by saving surpluses then timed perfectly the recession-fighting 2008 Budget.  That gave NZ a buffer to limit the 2008-09 slump.
  • Regulation is not macro-economically neutral. Weaknesses in US financial regulation amplified a local property crash into a global crisis.  More generally, deregulation is no cure-all (not welcome news in the current Beehive).
  • The “Great Moderation” looked good for so long because it coped with small imbalances and had not faced the full consequences of understated systemic risk, especially around financial leverage and exchange rate exposure.

So what does this all mean for the next generation of policy makers?  The next era should retain the best of the previous consensus, while creatively addressing the challenges that previously lay outside it.    

Part 2 of this post will follow shortly.   Comment is welcome on Blanchard’s critique.

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Filed under: Budget, economic, economy, finance, inequality, monetary policy, politics
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