Chart of the day, ‘Rock star status’ edition

Via Stuff:

While parts of the rest of the world are still wallowing in recession, New Zealand in recent months has had a significant number of economic bright spots that could see the country reach “rock star status” within the next four years.

That was the view of ANZ bank chief economist Cameron Bagrie speaking at a post Budget luncheon briefing in Christchurch yesterday.

Here’s a graph sourced with historical figures from statistics (in blue) alongside Treasury’s budget projections (in red), showing our net international investment position, ie our assets as a nation minus our liabilities. (That temporary reduction in borrowing over the last two years is the influx of payments after the Christchurch earthquake.)

Where are New Zealanders borrowing that additional $10 billion a year in perpetuity from? Why, we’re borrowing it from foreign banks just like the one Cameron Bagrie works for, which is, presumably, why he thinks we’re a rock star. If you convert our net international position into a % of our GDP we look even worse. Spain is less indebted than us by this metric and Portugal, Ireland and Greece only slightly more doomed.

Whenever opposition finance spokesmen talk about ‘re-balancing the economy’ they’re really talking about reversing that grim, downwards march into eventual fiscal oblivion and an IMF bail-out. They never get to do that when they’re in power though, because re-balancing towards real wealth creation and the tradables and export sector involves re-balancing away from the finance sector, real estate speculators and other rent-seeking agents, who are too politically powerful to allow such a thing to happen. So we get to stay a ‘rock star’ like Greece and Ireland, ie the kind of rock star that drowns in a bathtub.

‘de facto nationalisation’ and why the new power policy is a Big Deal

DPF gets it:

I don’t think people realise the precedent that will be created if you allow a Government to nationalise the entire power generating industry, on the grounds that they are not competitive enough and charge too much.

First let’s address this question of whether the Greens-Labour proposal is a form of ‘nationalisation’, a term that’s been thrown out by National’s comms team and repeated by uncritical journalists.

A lot of left-wing critics of the Mixed Ownership Model have argued that it’s ‘looting’, or ‘theft’ of ‘the people’s assets’, and the problem with that is that National are selling shares in the power companies. The people are getting something back, probably several billion dollars. Likewise, nationalisation is when ownership of assets are transferred to the state, cf Air New Zealand, TranzRail etc. In this case it makes no sense to argue that the state is transferring ownership of the power companies, when it will still already have majority ownership of most of those power companies anyway. Regulation is not nationalisation, not even heavy-handed regulation. If you are, say, an arms company there is extensive government oversight into who you can sell your products to: does that mean that this industry is ‘nationalised’? Are tobacco companies ‘nationalised’? Bah.

But DPF is correct when he says that this is a significant development in New Zealand politics. Prior to the mid-1980s there was a general political consensus that the New Zealand economy should be dominated by state-owned industries, trade-unions and centralised bureaucracies over-seeing any private industry. This system was horribly flawed and in 1984 the Lange-Douglas government broke with the consensus, and for the last thirty years the pendulum has swung a long, long way the other way, far further than almost any other developed country in the entire world, and there’s been a broad consensus between Labour and National that our economy should be dominated by unregulated oligopolies.

Now one of the main political parties has broken with that. This is a Big Deal, and is blowing the minds of people like DPF, Fran O’Sullivan and, most amusingly, Colin Espiner.

The level of disconnect around this debate has been pretty funny, with various Ministers putting out press releases about the loss of share value in various energy companies, apparently oblivious to the fact that most of the country despise the  power companies and see them as loathsome profiteers, and now DPF is warning that Labour and the Greens might introduce legislation to prevent price-gouging by the supermarket duopoly, an idea that is anathema to adherents of the cult of unregulated oligopolies, but probably sounds pretty good to about 90% of the population that have had to live with the spectacular failures of that ideology for the last three decades.

Hideous graph of the day, yes it’s about electricity edition

Sorry. Especially if you’re trying to look at this on your mobile phone. Anyway, this shows change in household electricity prices adjusted for inflation across the OECD since 1990. New Zealand is the red one, and we have had some of the largest increases. Other relevant or interesting countries also colored. Look what happened to lucky little Slovakia (purple) when they privitised their electricity market in the late 1990s.

Kicking the tires out from under them

You can critique the Labour-Greens power-policy on a number of levels. Where do they pluck their estimates of 5000 jobs and $450 million dollar boost to ‘the economy’ from? What happens if our power companies respond to reduced windfall profits by sacking all their staff and scrapping expenditure on the maintenance of their assets?

You can even claim that it amounts to nationalisation of the energy sector and ‘North Korean style economics’, if you don’t actually know what nationalisation is and think that North Korea is a country where publicly listed companies own the electricity infrastructure and pay dividends to private shareholders.

But you can’t fault the politics. The government needs the partial sale of Mighty River Power to succeed. It’s their signature achievement. English needs the cash, and Key has bled so much political capital and invested so much time on this policy that it has to work. And now the shares are finally on sale to New Zealand buyers. It lists on the NZX early next month. They must have felt like they’d finally made it.

But now Labour and the Greens have announced that if they’re elected dividends from these companies will be minimal. How do you quantify that if you’re a risk analyst for an investment fund? No wonder National are furious, and Simon Bridges was close to tears in Parliament yesterday spluttering about the decline in Contact Energy’s share price.

Maybe the market won’t care, and the float will be a success. But if it isn’t, I don’t think the public will be sympathetic when the government blames the opposition. This is an unpopular policy, and government Ministers blame Labour every time they spill their coffee. It’ll also leave English trying to raise money, either through borrowing, spending cuts or tax increases, all of which would kick in in 2014. Election year.

Quote of the day, geekiest quote of any day ever edition

From Matthew Yglesias, excerpted without comment:

Note that Robert’s debts aren’t some kind of countercyclical stabilization policy. This is an agricultural economy governed by a real business cycle. Nor is he going into debt to finance productive investments. He’s not improving Westeros’ infrastructure. He’s not strengthening the Wall. He’s throwing feasts and tourneys. If he doesn’t have the money he needs today, then he’s not going to have the money he needs tomorrow either. That means a fortiori that he’s not going to have the money to pay Tywin back. Making things worse, winter is coming! The Iron Throne needs to be saving during the fall to deal with the huge negative shock to income that’s coming during the winter.

His conclusion:

 In effect, Tywin is attempting to execute a debt-for-equity swap since his debts aren’t actually recoverable. But that simply underscores the extent to which the loans to the Iron Throne are, themselves, worthless as financial assets.

Reinhart-Rogoff in New Zealand

Here’s fun. The big news in the economics blogosphere today is that a pro-austerity paper published in 2010 by two economists called Carmen Reinhart and Kenneth Rogoff, which argues that reducing public debt will increase economic growth, and which has been cited extensively by right-wing economists and politicians as empirical evidence in favor of austerity in the wake of the GFC, seems to be seriously flawed. Those flaws include an error in an excel formula that excludes certain countries from the dataset (including New Zealand). When you include those countries the historical evidence in favor of austerity disappears. There’s plenty more information here.

Turns out this paper has been cited extensively by Treasury in their pro-austerity advice to the National government. So that might be a fun question for an opposition MP to ask the Finance Minister: are the government’s economic policies the result of a bug in an excel spreadsheet, and if not, how does he account for the current state of the New Zealand economy?

Slow hands

David Shearer’s SOTU speech is here. There’s nothing new in terms of policy, but in value terms it promotes contemporary center-left values, a huge contrast from Shearer’s repeated bizarre attempts in 2012 to win over disaffected ACT voters.

His main critique of the National government is that it’s ‘hands off’. DPF rebutted this argument last week, pointing out the many ways in which National is a ‘hands-on’ government, and in an enormous coincidence the Prime Minister made exactly the same points a few hours later.

I agree with whoever wrote DPF’s post and John Key’s speech – it’s not credible to attack the government’s lack of involvement in the economy when they’re spending $400 million dollars on irrigation in Canterbury, $1.5 billion on broadband, how ever many dozens of billions the Roads of National Significance is costing, and so-on, and so-on. This is not a neo-liberal government.

And looking at ACT’s polling, it seems obvious that the political will for a neo-liberal economic model is dead; the debate is now about what kind of welfare state we want to move towards: a traditional model in the democratic socialist tradition, or a corporate welfare model in which benefits and services are directed away from individuals and into the business sector. I guess you could look at contemporary China or 1960s South Korea as exemplars.

I’m not opposed to this second approach – wouldn’t it be great if we were a country with loads of great, high-paying export focused jobs! But most of National’s corporate welfare measures look like white elephants: roads to nowhere that won’t return the cost of the investment, stadium and convention center boondoggles, etc. It seems to be driven by which sectors of the economy are more effective lobbyists rather than any coherent vision.

Set the controls for the heart of the sun

Fran O’Sullivan puzzles over the Prime Minister’s completely bizarre (non)reaction to the rise in unemployment over the September quarter:

For Key to simply shrug his shoulders on this score doesn’t cut it.

If he was gazumped by the awful statistics, so too were the nation’s economists when official figures confirmed the unemployment rate was the highest it has been since June 1999. “A true shocker,” said Westpac.

Fundamentally you would have to wonder if they have all had their eyes wide shut in recent months while export-orientated companies have cut heaps of jobs in response to more difficult environments overseas.

Key – and the economists who have been caught short by the official statistics – will be hoping the September outturn in the Household Labour Force Survey is a statistical aberration. Westpac has pointed out the survey has a history of throwing up “wild false signals”.

The Reserve Bank was also caught out by the September quarter figures. The central bank has been urged to slash interest rates further in the hope this will depress the value of the NZ dollar, boost export competitiveness and spark firms to hire more workers.

If I understand the new RBNZ Governor Graeme Wheeler – already dubbed ‘Asleep at the Wheeler’ by financial journalists – correctly, he doesn’t need quantitative easing or any other macro-prudential tools because he still has room to cut rates, but he can’t cut rates any further because it would probably lead to increased indebtedness in the household and dairy sectors.

So we have high and rising unemployment, an over-valued currency, very low inflation, our central bank won’t lower rates and it doesn’t want any additional tools to address this situation. The Prime Minister’s reaction is to hope that the statistics are wrong, and keep on doing what he’s doing, which doesn’t seem to be anything. This seems completely insane.

I do wonder if there’s a feedback loop operating here between the Treasury forecasts and the National government. Treasury predict growth, low unemployment and high inflation because there’s a right-wing government in power, and the government reads the forecasts and does nothing, because they don’t need to – prosperity is on the way, Treasury said so!

UPDATE: Matt Nolan has a substantive reply. Short version:

The RBNZ currently believes that, after loitering at a high level for a few more quarters, the unemployment rate will come down sharply.  Furthermore, they believe that current high unemployment IS due to weak demand – so if they could go back in time they would cut rates but RIGHT NOW cutting rates looks inappropriate.

If nothing else, this will be an interesting field trial for central bank independence. Many of the opposition parties would currently direct the RBNZ to act . . . if they could.

Turns out scorn is not a growth multiplier

The latest HLFS survey reveals a very high level of unemployment – higher than during the GFC in 2008. And it also reveals that the number of manufacturing jobs in the New Zealand economy declined again during the last quarter.

I find this slightly surprising. Sure, it seemed like manufacturing was in trouble: just about every week saw announcements of factory closures and job losses, and the opposition parties made a very big deal of this in the media and in the house.

But Economic Development Minister Steven Joyce’s reaction to this talk about a crisis in manufacturing was so dismissive, so withering, so contemptuous that I wondered if the opposition parties had over-reached. This was Joyce’s area, he has his vast new MoBIE Ministry to advise him of real-time conditions in the economy. He must know something the opposition parties didn’t.

Well, he didn’t. The manufacturing sector has lost a net 17,000 jobs this year. The opposition was right, and the Minister, for all his mocking, dripping scorn, was dead wrong.

It’s been a bad two days for the government and its claim to be a credible manager of the economy, which means it’s probably going to be a bad couple of weeks for beneficiaries, or whoever else they decide to get tough on as a smokescreen.

The longer term?

The Herald reports:

Shamubeel Eaqub of the NZ Institute for Economic Research said the latest Barfoot & Thompson figures – which revealed a record average house price of $618,707 – showed most buyers did not think renting was a viable alternative, yet it was better in the longer term.

“Would you buy a loss-making business?” Mr Eaqub asked, pointing out that many house buyers did not factor in the huge losses incurred through paying off a mortgage, maintenance and other expenses.

The NZX had performed on a par with the housing market in the past few years, yet people continued to favour residential property, he said.

Mr Eaqub rents in Wellington and said housing was a particularly bad investment if people examined the amount of money a mortgage and other expenses cost over a lifetime.

Economists don’t like home ownership. It’s an illiquid, non-diversified form of investment that impacts on labour mobility. And in some countries, renting for less than a mortgage and investing the difference makes a lot of sense. Most of my friends in Europe rent properties owned by family trusts, or property management companies who see their rental properties as a long term investment and budget to maintain them in good condition.

But in New Zealand if you’re renting a house, you’re almost certainly renting it off individuals who won’t want to spend any money on maintenance, and will probably sell the house on in a very short time at which point you’ll probably have to move again.

If you’re on a pretty high income you can rent nice apartments or townhouses in the inner-city, sure. But if you have a family and want to live in the suburbs, and you want your home to be insulated, not leak, not have subsidence, have a sense of security because your kids go to the local school, etc, then you have to buy a house.