Kiwisaver tool will mostly effect worker’s back pockets

Labour’s proposed Kiwisaver monetary tool has injected something worthwhile into the economic discussion arena. It’s only a ‘proposal’ with more work to be done so it’s far from set in concrete.

5.4 Further tools are desirable to assist the Reserve Bank. Therefore, Labour will ask the Reserve Bank and Treasury to assess in detail the new tool discussed in this section, and to report to the Government on how it could best be implemented.

https://www.labour.org.nz/sites/default/files/issues/eu-mp-policy.pdf

That makes it more of a discussion document subject to revision and firming up, which is a good approach, but leaves a number of unanswered questions at the moment.

Dominion Post puts forward some of these questions in Editorial: Kiwisaver policy a game-changer?

This last hope is Labour’s most tenuous – that the policy will help exporters by bringing down the dollar. Lower interest rates theoretically turn off overseas speculators, but many factors push and pull at the price of the dollar, and it’s not clear this policy would decisively shift it.

There are other questions, too. What about low-wage workers, who don’t have mortgages and can’t afford unpredictable shifts in income? Labour is considering exceptions for them, but that poses its own problems.

What about the wisdom of constantly mucking around with people’s retirement savings? Isn’t that an odd message to send, that they are subject to the whims of the economic cycle?

And will such adjustments be as effective as interest rate hikes in cooling the housing sector, the most inflationary part of the economy?

So Labour has some more explaining to do. But the questions should not puncture the idea – some might be unanswerable until the policy is tried.

If Labour go ahead with this we will have increased Kiwisaver contributions that will be ‘compulsory’ (but Labour says there could be low income earner exemptions).

Will we get anything else? There has been doubts voiced about whether it would have much if any influence on the exchange rate. NZ Herald in Labour’s KiwiSaver ‘bun fight:

Westpac chief economist Dominick Stephens said: “It can’t hurt but it may not do much. Compulsory KiwiSaver should increase national savings and reduce interest rates but only a little bit.”

Bank of New Zealand head of research Stephen Toplis said: “There is no question that to reduce the current account deficit we have to increase the national (not just household) savings rate. The problem is how do you do that. I’m not entirely convinced that compulsion does it, or that having the ability to move the contribution rate over the economic cycle would be particularly effective.

When it is introduced it may be years before economic conditions allow it to be implemented. If it is used cautiously the effects may be very difficult to detect.

We may end up with little more than a shift to increased and compulsory Kiwisaver contributions. This is all wage earners will notice anyway, and it’s probably what they will judge the policy on – less choice and less money for them unless they have a mortgage.

 

 

Politics and reality on the manufacturing inquiry

Excellent commentary on the opposition’s manufacturing inquiry, but not from the Mike Smith at The Standard in his post – Minister Tin-Ears – he’s an employee in David Shearer’s office so unsurprisingly is attacking National and promoting standard Labour lines:

New Zealand’s remaining world-class manufacturers are sick of being told by politicians that they need to work harder when they have been doing that for years, but face a huge headwind from an over-valued dollar.

We can only hope that National’s lack of action or ideas does not do too much more damage to the productive economy before then.

Trying to dutifully reinforce the idea that National runs a ‘do nothing’ government. But this ignores the reality – the exchange rate is mainly governed by international financial influences and there is little we can do about it in New Zealand.

Nick Tuffley (chief economist at ASB) has just spoken about it on Firstline.

The challenge with monetary policy is there is very little the Reserve Bank can do.

I don’t think there’s a free lunch.

We need to fix the UK, fix Europe, fix the US, and then we might have a lower currency.

By far the best at The Standard came from down the thread in a comment by ‘Tiresias’, who spells out the reality

There ain’t nutt’n no Government can do about the exchange rate, unless it’s prepared to sacrifice almost everything else on that altar.

And even if the Government could do something about the exchange rate it would have to think very carefully before doing it. Government debt isn’t frighteningly high. Private debt in New Zealand is. Most of it is via the banks and therefore funded from overseas in the almighty dollar.

Bring the NZ dollar down by 10% (at least, as you’d have to in order to make a difference) and you’ve increased NZ’s overseas debt by 10% overnight and that would have Standard & Poors, Moodies et al running flags up flag-poles left, right and centre.

So why is the opposition having a parliamentary inquiry on this? It’s hard to see it as anything but political grandstanding.

Full comment by Tiresias:

“I am optimistic that the Enquiry will produce some action no later than 2014.” – Mike Smith

I fear I’m not. Much as I loath this present Government I have to say that if there was a magic wand that could be waved to help exporters and manufacturers, Key et al would be waving it furiously. After all the MDs and CEOs and Directors of these businesses are National’s through and through, and I’m sure they’ve been demanding something for their money from the Government privately at parties and golf-courses and business breakfasts since before the last election.

The only way you’re going to bring the exchange rate down is to sabotage the economy so it looks as shaky as Spain’s or Italy’s. The Reserve Bank Governor set it out in a speech last October:

“So there are clear limits to what monetary policy and exchange rate intervention can do to lower the New Zealand dollar. In order to achieve a sustained reduction in the New Zealand dollar it would be necessary to alter the overall level and pattern of saving and investment in the economy. In particular, it will be necessary to tackle our addiction of depending on foreign savings to finance our consumption and investment. This dependency means that we have persistently needed interest rates above those in most developed economies to maintain inflation at target levels similar to those being followed elsewhere. Policies that increase domestic savings, including reducing the government’s fiscal deficit, and to reduce the flow of resources into the public sector and other non-tradables sectors, would help to achieve a sustainable reduction in the exchange rate.”

“http://www.rbnz.govt.nz/speeches/5005204.html”

Trouble is, to increase domestic savings you have to increase interest rates which puts up mortgates, both of which dries up High Street consumption which may help exporters but hurts all the rest of New Zealand’s businesses and retailers. Also, New Zealand’s Government fiscal deficit isn’t all that bad compared with the countries in trouble. It’s private sector overseas debt that’s causing the concern in the ratings agencies and the Govt. can’t do much about that except ask businesses to stop borrowing:

union.org.nz/sites/union.org.nz/files/Working%20Through%20the%20Issues%20-%20Debt%20(Revised).pdf

Plus “reducing the Government’s fiscal deficit &tc” is banker-speak for austerity which is just Graeme Wheeler toeing the official line.

Politicians – including Shearer in his State of the Nation speech – dream big dreams of other people coming up with better mouse-traps that are going to take the world by storm. Well, it might happen just as I might win Lotto. (Actually I’ll never win Lotto as I don’t buy a ticket, so make that “just as you might win Lotto”.)

There ain’t nutt’n no Government can do about the exchange rate, unless it’s prepared to sacrifice almost everything else on that altar. And even if the Government could do something about the exchange rate it would have to think very carefully before doing it. Government debt isn’t frighteningly high. Private debt in New Zealand is. (see union.org.nz above). Most of it is via the banks and therefore funded from overseas in the almighty dollar. Bring the NZ dollar down by 10% (at least, as you’d have to in order to make a difference) and you’ve increased NZ’s overseas debt by 10% overnight and that would have Standard & Poors, Moodies et al running flags up flag-poles left, right and centre.

So are you going to subsidise New Zealand’s world-class manufacturers just like you didn’t support New Zealand’s world-class wind-turbine manufacturer Windflow in Christchurch so that it’s had to lay off most of its staff – including world-class engineers and designers – and is now looking to sell its world-leading, New Zealand developed technology to a foreign competitor for a mess of pottage? http://www.nbr.co.nz/article/windflow-dream-fades-shares-plunge-ch-96636

Sorry Mike. All the hot air your inquiry will produce over the next few months might have generated a few kw electricity from a Windflow gen set had there been one available – but for the rest it’s just another charade of politicians forming a committee to look at all the ways you might get other people to reshuffle the deckchairs on the Titanic.

Yes, it is difficult to see the inquiry producing anything but hot air.

The inquiry seems to be a futile exercise that may do little more than give manufacturers false hope and waste their time.

Exchange rate – humping the shark

Much larger economies than ours try and keep their exchange rate at a advantageous level. As pointed out in Quantitative Easing and Swiss Roulette there can be huge costs and risks.

And we don’t have the size or resources to compete.

New Zealand trying to compete in exchange rate manipulation is akin to the minnow humping the shark.

We could print money, but can’t print markets

In a post on interest.co.nz

Bernard Hickey wonders why New Zealand is not printing money and thinks we are being severely disadvantaged by not following the crowd.

The New Zealand dollar seems set to rise towards US$1 if the current trends continue.

He then went on to explain what is happening around the world, including:

  • The US Federal Reserve announced an essentially unlimited plan for money printing on Friday morning.
  • Economists are now expecting the Reserve Bank of Australia will cut its interest rates through 2013.
  • This month the European Central Bank unveiled its own programme of unlimited bond buying.
  • The Bank of Japan, which has been printing and stimulating with 0% interest rates for almost 20 years, is considering fresh money printing to try to drag its yen lower.
  • The Swiss National Bank has been printing francs in unlimited fashion for months to cap a rise in its currency against the euro.
  • The People’s Bank of China is also on the verge of its own fresh stimulus.

In the meantime New Zealand doesn’t even fiddle while the world’s economies burn money like it’s going out of fashion.

Yet we are standing aside from this giant game of musical chairs and scratching our chins, wondering why the world is so unfair. We point to the skies and say there is nothing we can do about this bad economic weather.

Outgoing Reserve Bank Governor Alan Bollard reiterated in his valedictory news conference and parliamentary appearance that there was nothing New Zealand could do about these acts of economic gods.

And our manufacturing sector shows signs of more strain.

All this chin-scratching and finger waving in the air is having very real world consequences. In recent weeks we have seen hundreds of job losses at Tiwai Point, Spring Creek, Huntly, Kawerau and at a fish processing plant in Tauranga. The Reserve Bank’s own Monetary Policy Report noted a slump in manufacturing, particularly the import-competing type in the last year.

I guess we could print more money.

But we can’t print more aluminium, coal or newsprint markets. I put that to Bernard on Twitter (where he was discussing the issue with Fran O’Sullivan).

As yet he hasn’t responded.