Gordon Campbell on why the Reserve Bank cut interest rates

All hail Graeme Wheeler. Because at some point this year, the government appears to have contracted out all the major decisions to do with running New Zealand to the un-elected Governor of the Reserve Bank. A housing crisis in Auckland? The government was still in denial that a crisis existed, until the Reserve Bank chose to crack down on speculators. Dairy prices in virtual freefall? The extent of farm debt a big concern? The tradeable sector in chronic deflationary mode? The currency over-valued? The economic stimulus and jobs related to the Christchurch rebuild beginning to wind down? For his part, Finance Minister Bill English continues to perform his earnest possum in the headlights routine about all of those issues… but at least the Reserve Bank has intervened. It cut interest rates yesterday by 25 percentage points (to 3.25%) in an effort to keep the economy ticking over in the meantime.

What this suggests is that the government’s “Look Ma, no hands” style of economic management has run its course. For the past six years, the Key government has enjoyed a run of luck – sky-high global commodity prices, benevolent terms of trade, strong demand from China (and until recently from Australia) plus domestic stimulus from the Christchurch rebuild…It could also borrow overseas at incredibly cheap rates, and sell state assets here at home to cover social and infrastructural spending requirements.
In case you think I’m being harsh, the recent OECD report envisaged much the same trendline, only they chose to put it more nicely.

For example:

New Zealand is enjoying a strong, broad-based economic expansion. Economic growth has been around 3% over the past three years (except when a drought temporarily depressed growth in 2013). This expansion has been driven mainly by a large increase in the terms of trade, the post-2011 earthquake reconstruction in Canterbury, and construction activity in Auckland.

But uh oh, the OECD went on, some or all of these positives are in the process of becoming negatives:

The increase in the terms of trade was mainly attributable to earlier price rises for dairy products, the nation’s largest export (representing one-quarter of goods and services exports). However, dairy prices have fallen by nearly one-half since the peak in February 2014. This decline has been only partly offset by oil price declines.

The growth effect of the Canterbury rebuild is expected to wane by 2016. Infrastructure and residential construction activity are growing strongly in Auckland in response to rapid population increases and past shortages and are likely to continue to do so for the next few years. Net immigration has increased to record rates of around 1.1% of the total population per year, easing labour-market tensions but exacerbating housing shortages in Auckland.

By repetition, we’ve become somewhat dulled to these forbidding realities. Yet one has to ask: where is the long term planning for economic development? The substantive responses (a) to child poverty (b) to the shortage of affordable housing (c) to the rising national superannuation costs (d) to a declining health system amid an ageing population, and (e) to the threat and costs involved with climate change? All issues too hard, and politically risky for this government to tackle. Better to throw 20 bucks or so at the poor in the Budget and hope they’ll go away. Again, the OECD report (p.24) genteely noted that the recent burst of economic growth is waning before labour conditions and wage growth have been restored to pre-GFC levels:

Following a soft patch in 2011-12, robust employment growth resumed, and the unemployment rate has fallen from 7 to 5¾ per cent recently, although this is still about 2 percentage points higher than the pre-recession trough. The share of long-term unemployment (27 weeks or more) has not yet fallen from the post-recession range of 25-30%, which is far higher than the lows reached in the mid-2000s. Nominal wage growth remains subdued, with annual increases in the Labour Cost Index (LCI) of private-sector wages running at less than 3% (below 2% after adjusting for productivity growth), slightly below the average since the global financial crisis…..

Moreover, the OECD pointed out, our economic settings continue to face serious unmet social needs:

Another challenge is to lift the economic and social prospects of New Zealanders who have been persistently on low incomes and face material deprivation and multiple barriers to economic and social participation. The ranks of this group grew sharply between the mid-1980s and mid-1990s but have declined somewhat since then. The link between parents’ socio-economic status and a child’s educational and health outcomes is relatively close on some measures. A higher proportion of Māori and Pasifika live in chronic poverty, underperform in employment and education, are over-represented in prison and as victims of crime, and have poorer health and access to care.

Finally, the OECD painted a rather gloomy picture of what lies ahead:

…..New Zealand faces potentially large macro-economic shocks, as a commodity-exporting small open economy, and long-term pension and health-care spending pressures. Planned increases in public savings will also help to mitigate upward pressure on interest and exchange rates and reduce risks associated with New Zealand’s elevated level of external liabilities…..However, care needs to be taken to ensure that consolidation does not impede efforts to improve the well-being of the most vulnerable members of society. The current government aims to do so primarily by using existing resources more effectively and efficiently.

That will not be enough. So why not raise more revenue by raising taxes, urges the OECD, or think about creating new taxes. “Nevertheless, some tax bases could be used to raise revenues: examples are environmental, land and capital gains taxes.” Partly to meet existing social need, but also because harder times are a-coming soon:

Economic growth is projected to decline from an annualised rate of over 4% in the second half of 2014 to 3% in 2016 as the boost from the Canterbury rebuild wanes, the drag from lower terms of trade takes effect and immigration comes down. With slowing growth in incomes and wealth and net immigration easing from its very high recent rates, private consumption should decelerate significantly.

But hey, major corporates will still probably do OK, since labour will be cheap and disposable, and interest rates will remain low:

Growth in business investment, on the other hand, should remain high as firms seek to ease capacity constraints in a context of solid profitability and a low cost of capital.

Interestingly, very little of the coverage of the OECD report has even mentioned the worrying macro-picture the OECD paints of a New Zealand facing rising problems and declining prospects. Similarly, most of the coverage of the Reserve Bank’s cut in interest rates yesterday has focussed upon the potential short term impact on the Auckland housing market – and not on why the Reserve Bank feels impelled to stimulate activity, amid a decelerating economy that is losing momentum by the day.

This where an entirely independent central bank is politically useful. The Reserve Bank can create a sense that something is being done – about housing bubbles and an economic recovery that’s already in decline before it delivers much in the way of wage rises or job security - while keeping accountability at arm’s length. The only political risk is that some point, the electorate might begin to ask – why, exactly, do we pay Bill English and Stephen Joyce so handsomely to talk so much, when they actually do so little that’s making a positive difference to our lives?

South Korea, not all K-Pop

It is tempting to look at South Korean pop music only through the narrow lens of K-Pop, and to embrace the bubblegum charm and weirdness that the K-Pop girl groups continue to bring to the party. Before and besides K-Pop though, the presence of US troops in South Korea helped to stimulate some pretty interesting pop psychedelia / blues hybrids during the 1960s and 1970s….and the artist to start with is the guitarist, songwriter and band leader Shin Joong Hyun, who has a slew of interesting tracks on Youtube, including a great 14 minute version of Iron Butterfly’s classic “In-A-Gadda-Da-Vida…”.

In the early 1970s though, Shin also made a number of mainstream pop records with female singers, and both the tracks I’ve chosen from this period are fascinating. The soulful “I Don’t Like” features Lee Jung Hwa on vocals, while “The Sun” uses a deceptively simple folky framework to project a determinedly utopian, dreamily intense mood and message. Kevin Barnes from the band Of Montreal used to rave about “ The Sun” and featured it for a while on his Facebook page.

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