Compulsory income insurance submissions

Hey all, just a reminder that submissions are currently open on quite a major policy change – the introduction of large scale fully funded income insurance in New Zealand. So if you have thoughts or feelings on the issue, make sure to get a submission in before Tuesday.

In the lead up Simon Chapple has posted a good article on the issue, and I’ve posted up my own article as well. This is a major policy proposal that is being pushed through under de facto urgency without a proper policy design process – and with lots of unintended consequences. As a result, even though we both agree with looking at improving support and transitions for individuals facing hardship – in fact this is an issue we have both focused on in the past – this ain’t it son.

For those who do not want to trudge through text, the thoughts can be boiled down as follows:

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RBNZ’s 50bp hike

The RBNZ increased the OCR by 50 basis points to 1.5% – to someone from three years ago that level might not sound strange, but just take a look at this 10 year government bond rate track. Highest 10 year rate since 2017 and, given when the cash rate is, an indication that higher average rates are expected in the future.

The last time there was a 50bp increase was May 2000. If you want to understand what was going on there take a look at inflation and the exchange rate during that period – a drop in the dollar was stimulating activity while inflation was high and climbing, so the Bank responded.

The exchange rate isn’t doing that now, but the world (and NZ) opening up post-COVID is filling that role – while core inflation is high, and headline inflation is at levels a lot of people have not seen before. In this way, the Bank is tightening – makes sense, and I trust they’ve worked it all though.

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NZ Public Service and Economics

Robert MacCulloch has written an interesting piece on economic advice within the public service in New Zealand (free link), with Eric Crampton noting a lack of trained economists in government as a key concern. Given the recent incoherent experience of rushed policy and advice on fuel taxes this seems like quite a pertinent discussion.

I’m a trained economist. And I’ve been working in government in New Zealand fairly recently, and am now actively employed in the private sector. So do I have juicy gossip?

No, not at all. I do have a perspective however that isn’t just about some arbitrary lack of hiring “well trained economists” – lets have a chat.

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Narrative, communication, and monetary policy

In a recent article on interest.co.nz I chatted about monetary policy in New Zealand. As we’ve noted in the past, measures of price growth are pretty elevated in New Zealand – however, I make the case that RBNZ actions have been relatively appropriate (given uncertainty and the size and nature of the supply/income shock) but that it is their communication that lets the team down.

The comments below the article fundamentally think I’m misguided – and that the Bank has dropped the ball more fully. Blanchard also has an excellent post on the US case which may be also be used to be more critical of the policy operation of the RBNZ.

Although I am constantly misguided and wrong, there are two things I would raise here to defend my own position:

  1. With external shocks there was always going to be an “income loss” – fiscal and monetary policy determine how this is distributed. The Bank can’t make this type of “cost of living” crisis and related loss go away – it can only ensure that the transition back to their clearly communicated inflation target is “least cost”.
  2. Criticising communication is a big critique of the RBNZ – managing inflation expectations is their core job.

There is no point bagging an institution for things that are not their fault – but more transparent and clear communication about monetary policy, instead of every other issue that the Bank seems obsessed with at the moment, is needed. The current lack of communication about narrative/forward looking guidance about how the mandate will be achieved, combined with forecasts that arguably point to a general failure of the mandate, is a problem. If this type of failure doesn’t lead to changes in how monetary policy is communicated in the current environment, or lead to a situation where the responsible people at the RBNZ face consequences for this failure, then inflation expectations are going to become unanchored.

And I would argue that the nature of the comments on my interest.co.nz article indicate that people’s faith in the RBNZ to manage inflation expectations is frayed – and their reaction reinforces the importance of the very communication issue I am pointing to!

If you feel compelled to attack the Bank further or launch into an impassioned defence, then go for it in the comments. I just want good policy communication and evidence-based policy that supports the wellbeing of New Zealanders – something that both the Bank and private sector commentators have a responsibility to up their game on, given the quality of the current discussion of New Zealand’s “cost of living crisis”. (Noting that a number of NZ economists – as shown in the comments of this piece – are trying to clarify what is going on)

Fiscal policy itself matters here, and clearly understanding the trade-offs associated with fiscal policy choices – at a minimum through the necessary monetary policy offset, but also through the distributional implications and consequences on growth and productivity – is another important area for discussion. Let’s leave this for another time though.

Excise taxes and policy incoherence in New Zealand

Ok, I’m coming permanently out of “proper blogging” retirement. Why?

The New Zealand government has decided to cut fuel taxes and RUC due to the “cost of living crisis” in New Zealand – egged on by the opposition and a range of New Zealand thinktanks and “thought leaders”. When a similar spike occurred in 2008 such a suggestion would have been ridiculed for being the ill thought out and incoherent policy it is – now it is the sort of stuff that gets a cross-party consensus and loud repeated cheers from the tens of New Zealand Twitterazzi.

Honestly, what is wrong with policy debate in New Zealand – when did we go from caring about policy outcomes and trade-offs to treating every policy decision as something that must be done urgently as if we are in the middle of an episode of West Wing. I mean, read the analysis in the two front-page articles on Stuff (here and here) – it is all politics and no consideration of trade-offs.

Want to understand why I see things this way – click the tab and read on.

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What is happening with NZ inflation

Walking down the street everyone is abuzz with the recent CPI numbers. 5.9% inflation! Someone’s failed! Economists are wrong for some reason! Freeze prices! Slash things! Destroy capitalists! Suppress workers! Random noises!

I’ve heard it all.

However, it made me realise something. I haven’t looked at the details of the CPI numbers for years. If the situation has changed then my inattention to these numbers may lead to me making silly decisions. Furthermore, other people’s attention to these numbers may make inflation more responsive to the CPI releases – meaning that there is more value in me paying attention.

Given all of this, and given that I wanted to reacquaint myself with the new version of the Stats NZ website, I’ve put together an excessively long video exploring the CPI data at the “product class” level. In it I also have a look at some price stickiness measures, looks at some other inflation numbers, and fail to put particularly nice labels on scatterplots – this can be found here.

If you prefer 4 minute summary videos instead, then I run through the key ideas in 3 graphs here. And if you prefer to get your own hands dirty with the data, rather than listening to me drone one, jump over here to use my R code and access Stats NZ’s data.

Do I reach any exciting policy conclusions, or give a forecast of where we are going in any of this – no. Did I have fun, and feel like I have a better understanding of the type of shock New Zealand is experiencing at the moment – yes.

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