Treasury and the Reserve Bank have words

I am not blogging at the moment – and I’m incredibly sorry about that.  I won’t really be back until I can commit to being back properly – which won’t be until I’ve completed a lot of modeling work related to income inequality in New Zealand.  I am not back today to talk about any literature on inequality though – I realise there are a lot of things I can post about here, and I have views, and those views will come in due course.  But not today.

However, there have been a multitude of developments I should post on regarding an issue I angrily stopped writing on nearly two years ago – the area of financial stability.

Firstly, there is Michael Reddell’s blog.  He is a very good New Zealand economist who would be among the top of my reading list if I was still involved in these sorts of issues.  He recently stated:

The Reserve Bank appears to have taken on itself some responsibility for trying to manage house price fluctuations.  However, the Bank’s involvement appears to be based on a misconception of what is going on, and a misapplication of insights from financial crises abroad, notably that in the United States last decade. There is little or no evidence that financial stability in New Zealand is in any way threatened.  The LVR restrictions –  and others the Bank appears to be contemplating – undermine the efficiency of the financial system.

Eric Crampton has also added the important view about how increased direct regulation threatens actual independence.

However, the big move has been Treasury turning around and criticising the Bank with this gem:

However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ’s mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices.

There are three extreme ways to take this:

  1. The Bank’s communication has been unclear, and this is a push to try to improve the way policy is justified and evaluated
  2. The Bank has been implementing unjustifiable policy due to its own misunderstanding of the issues
  3. Treasury is acting in a politically motivated way, and this illustrates the gradual loss of central bank independence.

I would never come down on any of these explanations as an extreme – but they are useful to consider when we think about how recent events will be interpreted and considered.

And my view on the policies involved – it hasn’t changed since prior to the implementation of LVRs, I’d instead note that views may have changed across organisations relative to 2013.

Sidenote:  There was also this well written bulletin piece by the Bank.  It is well written, but I feel that it missed the critique people actually have – namely the dual concerns of “does risk weighting make any sense when we are talking about systemic risk and externalities stemming from the lender of last resort function” and “is the implied equity ratios for banks really high enough, given how low it is relative to other firms due to the belief by banks and depositors that banks will be bailed out”.  In this case, as in the above case, the RBNZ keeps answering questions people aren’t asking, and missing the questions people are justifiably asking.

Sidenote 2:  This is also not at all related to monetary policy and any perceived failure due to the long period of elevated unemployment NZ has had – this is a relevant issue to discuss, but it is separate and involves a discussion about how we view potential output.  Eg here and here.  If the Bank’s decrease in its view of potential in June 2012 was justifiable and the increase in June 2015 was justifiable then their actions were justifiable – you can use that to defend or to attack the Bank, it is simply a framework.

Graph of the Day: How home batteries might benefit houses without solar

I’m pretty excited about the Tesla Powerwall, the home battery that was announced recently. People mostly think about home batteries as being important for solar.  For residential solar,  most of your generation is during the day when you aren’t home, so it gets sold back into the grid and therefore relies on the whatever the buy back rate set by your retailer is.  These rates are lower than the retail price of electricity so the real benefit is if you can store the “free” electricity you generate in a battery and then use it during peak hours instead of paying for electricity, thus avoiding your variable electricity charge of 20-30 c/kwh.

So the economics of solar depend on whether your savings (avoided retail prices + electricity sold back into the grid) justify the cost of installing solar panels and a battery (typically well over 10k, but costs are falling).

But if you don’t have solar, home batteries could have another use: storing cheaper power generated during off-peak and using it during peak when prices are high.  This of course only works if you have variable electricity pricing, which isn’t super common in New Zealand.  But if you are have day/night rates, or are on Flick Electric like me, then you might be able to exploit the difference between peak and off-peak prices and save some money.   See, for example, the below graph of my electricity use and prices from last Tuesday.

power graphI have drawn some lines indicating the “overnight price”, the “morning peak” and the “evening peak”.  Note that I didn’t use a lot of power that evening (we usually do so this is non-representative), but did use a fair amount in the morning, which is unavoidable.  I also ran my dishwasher on delay that night to take advantage of lower prices later in the evening. If I could store power at the “overnight rate” of 10 c/kwh, there are times when I could halve my variable cost of electricity (i.e. those times during peak when I can’t change my behavior).

Whether or not buying a battery to take advantage of variable pricing stacks up financially depends on:

  • how much the battery costs
  • how much it can store
  • how much power you use that you can’t shift  to off-peak (i.e. by setting the dishwasher on delay); and
  • what the price is at those times.

Hopefully someone does proper modelling of it, or maybe Flick will team up with Vector who have a “special” relationship with Tesla.  You could get some pretty complicated/cool software if you integrated this type of logic with Solar. I.e. buying power over night when the forecast is for rain the next day.

Dole bludger army?

I see that some Australian TV show host said that New Zealand has the “dole bludger army” for support in the cricket.  Now something about intimate relationships with sheep or cows, or something about little country syndrome, or something about Lord of the Rings, would have been fine – banter is acceptable.  But his statement doesn’t make any sense, and feeds into a stereotype of New Zealanders in Australia that leads to real discrimination.

So why doesn’t the stereotype hold up?  Well for one, Kiwis can’t get the unemployment benefit in Australia – they could pre-2000 but then things changed.  Just check it here.  It is common to see Australian media (and people I run into) complaining both that Kiwi’s are “stealing their jobs” and “stealing their benefits”.  In truth Kiwis are heading over there, without a security net, to work hard to make something of themselves in a larger country – they can’t get the benefits, and the idea of a zero sum set of jobs is just straight incorrect.

Secondly, within both countries there are proportionately fewer people on the dole in New Zealand than in Australia.  New Zealand produces these numbers directly, but I couldn’t find matching Aussie data.  As a result, we can just look at the unemployment rates (given they use matching definitions of what constitutes unemployment):


Sure unemployment went a bit higher recently, due to the deeper recession in NZ – but on average a lower proportion of NZers are unemployed than Aussies are.

And this has occurred with much higher employment rates (% of people over 15 in work) in NZ than in Aussie.


So, out of the population, a larger proportion of NZers are actually working relative to those in Aussie.

So not only was it a stupid, racist, and bigoted call – the data doesn’t even support the TV hosts prejudices.

Note:  The term dole bludger is insulting and degrading in the first place – irrespective of the relative unemployment rate.  Even if NZers could get benefits, and the UR was higher in NZ, this type of attitude towards benefits is pretty dirty.


New Zealand’s sexiest economist 2015: Voting

During the nomination round this year I kept hearing the same questions coming up.  Who am I supposed to nominate?  Why would I nominate someone?  How can I mix the ideas of economics and sexiness?

As this is an economics blog the vast majority of these comments came from economists or people with a strong interest in economics.  Now I’m yet to meet a person who “does” economics at either a professional or amateur level whose focus is on money or status.  Instead the interest in economics, and the corresponding study of economics, has come from an interest in understanding the social world – and a desire to understand if there is some way of making it better.

As a result, motivating nominations was easy, all I had to do was tell people to nominate an economist who has helped them to satisfy this desire to understand the world – specifically New Zealand.  What New Zealand economist has offered you insight into the world, and motivated you to dig deeper into your own understanding of the New Zealand economy and society.  That is where economics meets sexy.

With that in mind the nomination process is over.  Now it is down to you, dear reader, to determine which of these 20 economists most closely satisfies your personal definition of sexy – your choices will decide who wins “New Zealand’s Sexiest Economist 2015” (NZSE15).

Read more

New Zealand’s sexiest economist 2015: Nominations open

It is hard to believe it has already been nearly a year since we have celebrated the work of New Zealand economists with a sexiest economist competition – and nearly two years since the competition kicked off.  However, it has been a year, so we’re doing this all over again.

Last year we introduced a nominations round.  Many people complained that their favourite economist wasn’t in the competition – which I’m guessing is a sign of regret that they didn’t get around to nominating them.

I want everyone to feel that they have had the chance to say “I think this economist does the sexiest economics, and is therefore my sexiest economist“.  As a result, this year I want all of you to take nominations very seriously.  On that note, here are the rules:

  1. The nomination must be for a public facing economist that is involved with New Zealand.  This is defined in more detail here.
  2. You can nominate more than one economist – but I’m still not allowing you to rank economists in the nomination round.
  3. You get an extra 1/4 of a nomination point for the person if you send me an economicsy looking picture of the economist.
  4. You get a FULL extra nomination point for writing a paragraph describing why your economist produces sexy economics.  I am very excited to see what people write.

Nominations will close at 5pm on Thursday the 12th of February (New Zealand time).  Voting will commence at 8am Friday the 13th of February (again, NZT).  This way you will be able to discuss who you are going to vote for with your partner during your Valentines Day dinner on Saturday.

You can nominate people in a number of ways:

Note:  I’m going to reiterate here to keep it classy – the purpose of the competition is to celebrate economists work, not to attack economists.  Let’s objectify the economics not the economists.  I will come down hard on any lewd or insulting comments, with the fire of a thousand economists who are being told that economics isn’t a science – you have been warned.

Why doesn’t NZ need a fiscal rule?

I’ve been pointed to a very useful review of NZ’s fiscal policy that explains how the country manages so well with neither a fiscal rule nor a fiscal council. The NZ government is required by law to maintain ‘prudent levels’ of public debt but, beyond that, it is left to individual governments to decide what that means. Accountability and scrutiny is achieved largely through transparency and “broad social consensus on fiscal responsibility” and, so far, that has largely worked. The weakness identified by the review is that the government pursues time-inconsistent policy and saves too little in booms to offset the expenditure in recessions. The UK, despite a series of fiscal rules, suffers from similar problems.

The review considers whether a numerical fiscal rule might help and makes the point that might weaken the Government’s ‘ownership’ of the debt target, and its preparedness to save revenue windfalls…  It might create incentives for governments to comply with the rule through policies that would weaken other parts of the balance sheet.

In other words, once there is a rule then the game is compliance with the letter, not the spirit, and that can actually weaken fiscal governance. Read more