Tougher than that

Michael Reddell Fiscal policy

Thomas Coughlan has a column in the Herald this morning, under the heading “Nicola Willis is just the right amount of Tory”. To this centre-right voter it isn’t obvious Willis is (or sees herself) as any type of Tory, but what Coughlan seems to be suggesting is she is just right if the aim is to hold office, and never mind the large structural fiscal deficit the government inherited from Labour.

It isn’t an uninteresting column, and this post is just about one snippet where I don’t think the author is quite right. Here it is

The simple maths looks about right: $3.5 billion is 25 per cent higher than $2.8 billion and the CPI has increased by about 25 per cent since Budget 2018 (depends a little on your precise reference point). But that isn’t the right way to look at things: it misunderstands how the operating allowances work. And it doesn’t come even close to meaning that Willis is splashing the cash just like Grant Robertson was doing in his first Budget.

There are two things Coughlan seems to have overlooked. First, a big part of what the operating allowances cover is cost pressures on existing government spending programmes. Some increases, eg to welfare benefit rates, are done automatically by statute, and so don’t count against the operating allowance. But most other things do – new programmes of course, but also many of the spending implications of population growth (very rapid at present) and general inflation.

One way of looking at this is to compare the two operating allowances (2018 and 2023) with the total government (core Crown) operating expenses in the year just ending at the time of each Budget.

Grant Robertson gave himself an operating allowance of $2.8 billion in 2018 against an estimated final level of operating spending then for the year to June 2018 of $81.7 billion (3.5 per cent of that spending). Willis by contrast talks of an operating allowance of (probably just under) $3.5 billion against estimated (at HYEFU) spending in the year to June 2024 of $140.3 billion (or 2.5 per cent of that total). National was very vocal about the increases in spending under Robertson, but they went into the campaign not promising to get rid of many programmes (and needing most of their spending savings to finance promised tax cuts). The programmes still cost, inflation is still a thing, and the population keeps growing.

But this year’s story is even tighter than that simple comparison might suggest. Inflation is not something under control of the Minister of Finance – we have the autonomous Reserve Bank for that – and so from any one year’s Budget perspective inflation (as forecast by Treasury) is just one of those things the Minister of Finance is stuck with. In the early 2010s, one thing that made Bill English’s zero operating allowances less extreme than they might have seemed was that inflation was very very (and surprisingly) low. In the 2018 Budget – Robertson’s first – Treasury forecast CPI inflation for the year to June 2019 at a mere 1.5 per cent. By contrast, at least in the HYEFU the Treasury forecast for inflation in the year to June 2025 was 2.5 per cent (and in the BPS last week that forecast was still 2.2 per cent). Willis faces more cost pressures just from inflation than Robertson did in his first year, and that chews up not inconsiderable amounts of the operating allowance.

So it seems quite unlikely that the room she has given herself (all nominal) will do anything close to justifying Coughlan’s claim that this Budget will be “one of the more generous right wing Governments in New Zealand history”. Core Crown expenses as a share of GDP will almost certainly be dropping.

I’m no fan of this government’s fiscal policy – and the apparent indifference to the deficit, and the spooky scare stories about not being Ruth Richardson or Tony Abbott (both mentioned in the article) – but on the numbers the minister has given herself and the general inflation pressure Treasury is forecasting it hardly looks like being all that generous, even by National Party standards (one could make a case for not in effect being that much different than Steven Joyce’s Budget in 2017). That is neither surprising nor inappropriate coming off the back of six years of very large increases in government spending. And after all in 2018 (fairly or not) Robertson and Ardern were banging on about making up for “9 years of underfunding”, a very different narrative to Willis’s now. But the big difference from Steven Joyce in 2017 is that he was running surpluses, and Luxon/Willis apparently are content to keep running deficits.

But….there is the nagging question of what specifically are ministers deciding they don’t want to spend money on that Labour was spending it on (over and above the savings they are now exacting from departments, but on which the promised tax cuts have first claim). We don’t know. Do they?

Not very bothered by deficits

Michael Reddell Fiscal policy

I was away last week so have been rather late in getting to the Budget Policy Statement and associated material released last Wednesday. It does not make for pleasant reading, at least if one cares at all about governments not borrowing to pay for the groceries.

Once upon a time – still not that long ago – New Zealand had a fairly enviable fiscal record. This chart, comparing New Zealand and the median advanced country, draws from data published in the IMF’s last World Economic Outlook

We used to have smaller deficits or larger surpluses than the typical other advanced countries (consistent with that our net public debt as a share of GDP was materially lower than the median advanced country). But no longer.

Using data from the same WEO (which, incidentally, was published before our election in October), on the IMF’s estimates we had one of the very largest structural fiscal deficits of any of the advanced countries.

Structural deficits – by definition – do not go away of their own accord as the cyclical position of the economy improves. They are removed only by conscious and deliberate choices by governments, and – by the same token – if they are left to linger that is a conscious and deliberate choice by a government.

There wasn’t even a hint of this starting position in any of the material released last week (although they did mention an international comparison of the increase in net debt over the Covid period). And consistent with that, there is very little about eliminating the structural deficit or getting back to operating balance/surplus. In her BPS the Minister outlines several priorities for the coming Budget, but none of them involves any priority or emphasis on getting the structural deficit down. The current government inherited the deficit, but if they choose to continue to run structural deficits – which aren’t about the cyclical state of the economy – the responsibility is on them, quite as much as it was on their predecessors when they chose to continue to run structural deficits once the heavy Covid spending was behind them. If it was pretty irresponsible then, it isn’t much better now.

Consistent with this overall approach, the Prime Minister has this morning released an “action plan” for the next three months, a period which includes the Budget. There is not even a vague suggestion in that list that closing the deficit is any sort of priority for the government.

Under the previous government the forecast date for a return to surplus kept getting pushed back. And this government now seems to be engaged in the same game – the fiscal version of the old line from St Augustine (“grant me chastity and continence but not yet”) – and whatever numbers finally emerge in the Budget projections should probably be accorded no more weight than when the Treasury produced (eventual) surplus forecasts under Labour. It might be nice to be back to surplus by whatever the next published horizon is but….don’t hold us to it. Much more important to keep funding the baubles that both Labour and National competed to offer last year.

Much of the Minister of Finance’s rhetoric in recent months has seem designed to convey a sense that structural deficits are things that just happen and that ministers can affect only at the margin. That wasn’t so under Labour – when Grant Robertson chose to run substantial structural deficits – and it is no more so under the current government. It is simply a policy choice, and a bad one, especially when there is no particular besetting crisis. She talks about the difficulty on the projections of getting back to surplus by a particular date, but the issue isn’t projections – especially when the economy operates fairly close to capacity – but choices, political choices. It might be particularly challenging for a government to take the budget from substantial deficit to balance in its first year, but over a two or three year horizon it really is pure choice. If we still run structural deficits by, say, 2025/26 that is purely a policy choice by the current government, for which responsibility will rest wholly on them.

The Minister appears to attempt to cover herself from this sort of critique using this line, which I saw twice in the documents she released: “International evidence is that reducing deficits is best done over the course of several years by focusing on structural reforms to expenditure and revenue settings”.

Which might sound good but (a) there are no footnotes or references to support this claim of “international evidence”, and (b) there isn’t anything much specific about these “structural reforms” (at present the focus of fiscal policy seems to be on finding enough spending savings to fund tax cuts and other giveaways, rather than on a actually reducing the deficit). I’m rather sceptical of the claim. It might have a little merit in an economy in a deep recession with monetary policy constrained by the effective lower bound on nominal interest rates, but…..that very much isn’t the world New Zealand fiscal authorities now face. Instead, the line just feels like an unsupported excuse for a few more years of deficits (“they had them so why shouldn’t we?”).

The Minister has also been making quite a play of a story that it has all gotten so much harder than she had envisaged because the economy has been deteriorating. At present, that seems a dramatically overblown story, designed to distract more than to enlighten.

Much is made of the revisions downwards late last year in the level of real GDP (and thus the level of labour productivity). But that is mostly distraction, because before those numbers came out Treasury and IRD already knew how much tax revenue the economy had been generating, all they didn’t know was the latest macroeconomic estimates of the size of GDP itself. That matters for, eg, nice charts of tax/GDP ratios but not very obviously for making sense of the fiscal situation and its challenges.

Some weeks ago I showed this graph on Twitter, showing the Reserve Bank’s latest nominal GDP forecasts against those the Bank produced in August last year (ie the last projections before the election).

The Reserve Bank reckoned in February that if anything nominal GDP would be a little higher than they’d thought just prior to the election. And while nominal GDP tends not to be a big point of focus for the RB in putting together its forecasts, the Secretary to the Treasury (or her senior delegate) does actually sit on the MPC.

What about real GDP? Well, as we know, there were some downward revisions to the historical data, so in this chart we will focus on forecast real GDP growth, using as the base date the March quarter of last year (the latest actual data the RB had when it did its last pre-election projections)

Those are pretty tiny differences. And, after all, the Reserve Bank had been telling everyone – including the then Opposition – that the economy was going through a tough patch as part of getting inflation back down.

Among the material released last week was a four page Treasury note on the economic and tax outlook. It contains some preliminary high level forecasts, but can’t be directly lined up against the Reserve Bank numbers because there is no quarterly track for nominal GDP (the best proxy for the tax base). It appears from Treasury’s annual forecasts that they are running with a lower nominal GDP track than the Reserve Bank has (perhaps by around 2 per cent), although it isn’t clear quite why (and although the documents note a revision downwards in inflation forecasts, the Treasury inflation forecasts for the first year or so still seem higher than those of the Reserve Bank).

In terms of spinning a story around the deficit this is perhaps the paragraph the Minister will have been most keen to have readers pay attention to.

You are meant to take away from this that it is going to be so much harder than the current government had thought last year when they were in Opposition, to get back to balance by 2026/27 (recall, a date already pushed out under Labour). But there are a few crucial words in that excerpt: “all else equal”.

And they aren’t (of course). When the size of the nominal economy is smaller than previously expected – but still operating at around capacity (and the Treasury preliminary forecasts have unemployment by 2025/26 and beyond around their estimate of the NAIRU) – it isn’t just revenue projections that need to change. So will many spending obligations – both statutory things like indexed benefits (remember, Treasury has revised down its inflation forecasts since late last year) but also expected wage inflation (in the private sector but also in the public sector). Economies with a dreadful productivity growth record – and the productivity assumptions in these forecasts seem likely to be very weak indeed – tend not to support large wage increases. Of course, there are other items in government spending where there are no semi-automatic savings, but the weak productivity story doesn’t seem to be just a New Zealand phenomenon at present. (More generally, of course, all medium-term economic forecasts – RB, Treasury, IMF, or whoever – are subject to huge margins of error, and not worth a lot more than the paper they are printed on.

Being in surplus two to three years hence (or not) is purely a political policy choice. Not to be is a bad choice. (Of course, in the meantime some really bad event could hit – earthquakes, deep global recessions or whatever – but since no one can or does pick the timing of those we can worry about them when and if they hit. At the moment, planning proceeds on the basis of an economy developing fairly routinely (if underwhelmingly).

I’m old enough to remember when a National government and Minister of Finance first got New Zealand back to operating surplus in the mid 1990s. I’ve told stories about what seemed to have been bipartisan commitment to get back to surplus fairly promptly when occasional nasty shocks happened (although in truth it was really tested only once). It is disheartening now to see little sign that National (and their coalition government) is any more bothered about deficits – borrowing to pay for the groceries – than their Labour predecessors were. (The new debt target enunciated in the BPS is no more encouraging, with the new government seemingly willing to settle for higher levels of (net) debt than New Zealand has averaged over the last 25 years, with no evidence of strong potential productivity growth that might compellingly justify such debt.)

UPDATE: Incidentally, I saw in the weekend papers (page 3 of Saturday’s Post) one academic economist defending the government’s fiscal approach as classic supply-side economics. I don’t find that claim at all persuasive. There are certainly elements in the fiscal grab-bag that might fit that bill (one could think of restoring interest deductibility to rental property owners, on the same basis as any other business in New Zealand). In the abstract, lower income tax rates might, were it not for the fact the starting position is one of a deficit. Savings from cuts to spending can be used to cut the deficit or for tax cuts, but tax cuts today with a structural deficit – all else equal – just mean either further cuts to spending or higher taxes in the future. And some of National’s policies are distinctly retrograde even with a supply-side focus in mind – one could think, for example, of the policy both they and Labour campaigned on, the elimination of depreciation for tax purposes in respect of commercial buildings (office, factories, warehouses). Simply a freshly distortionary revenue grab. And meanwhile we run one of the highest company tax rates in the OECD with not even a suggestion the government is interested in addressing that.

A government agency planning more nice-to-haves

Michael Reddell Reserve Bank, Statistics

Almost all government agencies are in cost-cutting mode at present, under instructions from the incoming government. All sorts of things they, or the previous government, thought were nice to have and some things perhaps they thought were really rather useful indeed seem to be going by the wayside.

But at the Reserve Bank they are planning a new nice-to-have.

The Bank has a consultation process open at present on a proposal to “invest in” (that is public sector for “spend”) a new survey of business people, asking about their specific numerical expectations for a subset of macroeconomic variables. What is striking, in this climate of general public sector austerity, is the utter absence of any analysis of what gaps this survey is designed to fill and how material they might be for monetary policymakers. That was one thing in the era of bloat and lavish increases in public spending – in which the Bank fully participated over the last few years – but it really shouldn’t be acceptable at present.

On the substance, I’m sceptical of asking specific numerical questions to a wide range of businesses about specific macroeconomic variables (up, down, or the same questions just might be useful) and of whether there are really information gaps at all. I put in a fairly short submission, as follows:

Submission to the Reserve Bank on proposed Business Expectations Survey

Michael Reddell

23 March 2024

This is my personal submission in response to the Reserve Bank’s consultation document on the proposed Business Expectations Survey.  I have been a long-term user of business and household surveys, was involved in various refinement to the existing (and now) expert survey of expectations the Bank runs, and was a user of such material for several decades as a senior monetary policy adviser in the (former) OCR Advisory Group.   I am now also a monetary policymaker in another country, so am very much attuned to the perspectives and interests of policymakers.

There appears to be no prior background document referred to, so I am working on the assumption that the current document is all the information/analysis that the Bank is choosing to provide.

On that basis, it is quite astonishing that there is no analysis of the case for (or against) a survey of the sort the Reserve Bank proposes to spend additional public money on.   As you will be well aware, there is a plethora of surveys in existence (which wasn’t the case several decades ago), including the monthly ANZBO, the monthly BNZ PMI and PSI, the quarterly QSBO, and of course the Bank’s own survey of (now) expert expectations –  to name just the more-prominent of the business surveys.   The Bank used to be a large funder of the QSBO, and I assume that that is still the case  (and I used to, and would still, champion the case for some slight extensions to the QSBO, notably around wages).

The survey you propose is of a subset of macroeconomic variables.  You will no doubt be aware that the existing Survey of Expectations began with a much larger range of respondents, including business and union people, and was eventually slimmed down towards its current form in part as it was realised that many of the business respondents had no particular reason to have formed specific expectations for many macroeconomic variables, or even in some case to be aware of the specific measures being asked about.   I am aware, of course, that your current proposal is for a more-limited subset of questions, and in the case of near-term inflation it is a fairly commonly asked question even of households.  But do you really believe that many business respondents are likely to have well-developed thoughts on what the inflation rate might be in 10 years’ time (or even that they have risen or need to have even implicit views given that very few nominal contracts exist)?  Similarly, how many of your respondents will be familiar with the details of the specific wage series you ask about, or will recognise a difference between annual GDP growth and annual average GDP growth (let alone know the numbers).  

It is much more common for surveys of the wider business community to use tendency questions and focus reporting on net balance results.  Absent any compelling analysis or evidence from abroad, I’d have thought that was likely to be a much better way to go, if you really believe there is value to the MPC in yet another business survey (typical targeted respondents seem much more likely to have some sense as to whether growth or wage inflation might speed up or slow down over the period ahead than to have meaningful numerical expectations.  In respect of labour market slack existing questions in other survey (“difficulty of finding labour”) seem to cover the ground these sorts of respondents could typically generally offer (few will, by contrast, have particular to care what the specific HLFS definition of unemployment is).

But, more generally, where is the evidence of gaps in the (survey) data that the MPC needs to make good monetary policy?   This is posed as a serious question.  I’m not aware of such gaps, but perhaps you are and could have elaborated on this point for submitters.  Material monetary policy mistakes have (and no doubt will again, in the nature of imperfect individuals and institutions) be made, but is there really any evidence that it is (a subset of) business expectations of macroeconomic variables that is lacking, or which led the MPC astray in the last few year?  I’d be surprised, but am certainly open to evidence.

It was perhaps surprising that there was no indication in the consultation document of the cost of (a) developing and (b) administering the proposed survey, which makes it even more difficult to assess whether it is plausible that there will be net benefit for taxpayers (as ultimate funders of the Bank).

On a couple of specific items in your document:

  • It was rather surprising to see several references to “respondent burden”, including to justify leaving out very small businesses from the possible sample base.   It is a highly relevant consideration when the state uses the coercive powers SNZ in particular has to insist on private firms and citizens completing surveys, but as you note this proposed survey will be quite as voluntary as any of the other business surveys, and it isn’t obvious that –  to the extent you are likely to get any useful data from this survey – businesses with 5 employees will have anything less to offer than those with (say) 15, again bearing in mind that it is macroeconomic variables you are asking about.  Moreover, since you propose to revolve the panel, no one potential respondent would be asked for response all that often or for that long.    More generally, I note the very low response rate you expect (“10-20%”) and given the severe selection bias that probably introduces one is again left wondering about the strength of the case for the survey at all.
  • I’m also unpersuaded by the (very sketchy) case made for the exclusion of primary industry firms.  It might be common to exclude such firms, but (as you recognise) this is an economy in which the primary sector is of some considerable importance, and (again) these are macroeconomic questions you are proposing to ask, and it isn’t obvious why primary industry respondents would be any less equipped to answer such questions than other firms their size. I note that you say that primary industry firms are not generally price-setters, but it is a galaxy of macro questions you are proposing to ask, not ones about price-setting intentions (and primary sector firms employ, borrow, fx hedge (or not), and so on).

Finally, and while I recognise that the Reserve Bank’s current funding agreement does not run out until next year, in the current climate in which government agencies pretty much across the board are being expected to exercise considerable spending restraint, often cutting established functions and activities, it seems extraordinary (but consistent with a longstanding culture of Reserve Bank exceptionalism –  and yes, I used to share and even champion it) for the Bank to be proposing a new ongoing spending commitment on what is, at best, a nice-to-have, supported by no serious underlying analysis of the need for this new survey, or even of the Bank’s ability to continue to fund it (against other priority claims) if and when the Minister of Finance finally catches up with the Bank and adjusts its authorised spending levels.

Goodbye to the Productivity Commission

Michael Reddell Productivity Commission

The Productivity Commission closes its doors on Thursday and goes out of existence.

There have been a couple of recent articles on the demise of the Productivity Commission, and the chair (Ganesh Nana) has even put out his own statement (not exactly compelling) on productivity, and policy options for improving New Zealand’s dismal performance.

There has been a degree of unreality about some of the recent comments. Getting rid of the Commission was an ACT policy (and one I support) but when David Seymour was quoted as saying it wasn’t about left-wing economist Ganesh Nana personally we can take that with a pinch of salt. It wasn’t possible for an incoming government to remove the existing commissioners, all of whom were either fairly vocally left-wing, not at all actually focused on or expert in productivity, or in a couple of cases both. Had the previous government (a) appointed latterly people with more-evident expertise and interest in productivity, and b) been assigning inquiry topics more specifically focused on productivity it seems unlikely National would have been as ready to go along with simply abolishing the Commission. And when Nana himself is quoted as claiming he and the Commission were “blindsided” by the decision to close them down then (if he is being straight) you have to wonder about the political nous of the commissioners. But perhaps they had just hoped to limp on until the Budget?

I was an enthusiast early on for the idea of the creation of a Productivity Commission in New Zealand. It was one of the recommendations of the 2025 Taskforce report in 2009 and was also a bit cheap gift to the ACT party, then supporting National in government. Supporters tended to look across the Tasman at the contribution the Australian Productivity Commission had made to enriching policy research and analysis there.

But I was also fairly sceptical from early on as to just how long the new New Zealand Productivity Commission would last. That wasn’t because I expected them to do bad work or even fail to contribute to the New Zealand debate (and our aggregate productivity performance was dire and longstanding). it was more the track record: the Monetary and Economic Council had come and gone, as had the Planning Council. Both had at times produced useful papers, but that hadn’t saved them. It wasn’t clear what was likely to be different about the Productivity Commission over the medium term, whether what saw them off was getting offside with the government of the day, fiscal stringency, lack of critical mass or whatever. There wasn’t, after all, any sign of a passionate embrace by either main political party of the cause of markedly lifting New Zealand’s productivity growth.

The Commission did produce some useful papers. Of the inquiries they were assigned by ministers, perhaps the work on housing was most useful, helping to build a wider recognition in New Zealand that supply and land-use issues really matter. And when, as in the earlier years, they had a bigger research budget, that team under Paul Conway produced some useful and interesting papers (and Conway’s narrative of the productivity failures was itself useful). More recently – and I think the change pre-dates Nana – the value of the output has been less evident. Neither chair has been a productivity guru, but Murray Sherwin (the first chair) was an experienced and effective bureaucratic operator and not I think seen as a partisan figure.

In more recent years – I think even pre-Nana, although that shift brought the case into sharper focus – I’ve become more sceptical of the place of the Productivity Commission at all in the specific New Zealand situation. First, it isn’t obvious political parties really care about productivity anyway – beyond an occasional talking point in opposition or in the first few weeks of government. But even if they did, it isn’t obvious that a small Commission just up the street from The Treasury was going to consistently have a lot to offer. I’ve highlighted before the contrast with the Australian Productivity Commission: which (in a much bigger, and richer, country) has the size to allow the creation of critical mass and concentrated expertise at the staff level. And much of the staff is in Melbourne rather than Canberra, which represents a different sort of career option for public sector economists for whom Canberra just isn’t that appealing as a place to live. And we don’t have the sort of generally-respected senior productivity-guru for whom the Commission might nevertheless have been a useful longer-term platform for helpful contributions.

And it isn’t as if other government agencies are overflowing with economic talent. Treasury likes to tout its role as the government’s “premier economic adviser”, but while they clearly have a say on most things, I doubt anyone looks at that agency now and thinks of it as a powerhouse of economic analysis and advice (whether at the very top or further down the organisation). So if wanted to beef up the quality of medium-term economic analysis and economic policy advice, I’d come to the conclusion that I would look to focus scarce resources on fixing The Treasury, and building one really capable economic policy agency. There are counter-arguments of course: Treasury has lots of day to day stuff to do, and as a line ministry is (appropriately) more subject to ministerial influence, and to agency incentives to manage what is said on one thing to keep influence with ministers on other things. But, as we saw with the Productivity Commission, being an independent Crown entity might have left the Commission free to say what it liked, but ministers managed that by (a) choosing sympathetic commissioners, and (b) assigning inquiry topics that would not prove troubling or awkward. So I’m just not convinced that we were better with two bodies and would have preferred to focus on rebuilding Treasury. But, of course, there has been no sign yet the government actually cares about that either (if they did they would probably not be renewing the Secretary’s contract in the next few weeks, her term expiring in September).

Of course, Nana did little to help. Readers may recall the OIA releases a couple of years ago, written up in the Herald and here about the disruptive influence (for little/no apparent benefit) Nana’s arrival was.

We are told by the government that the resources freed up by closing the Productivity Commission are to be used to create a new Ministry for Regulation. Thus far, three months into the government’s term nothing much has been seen or heard of the new ministry (it doesn’t yet seem to have any substantive existence and there has been no sign of the appointment of (or even an advertisement for) a chief executive. I guess the financial resources perhaps don’t come free until 1 March, but….the clock is ticking and before we know it it will be election year again.

There is much about regulation that could be done much better, but I’m sceptical about the proposed ministry. Since it might well prove a casualty the next time the left takes office, few people are likely to see working there as a longer-term career move. If so, a lot is going to depend on the calibre – some mix of intellectual guru and effective bureaucratic operator ideally – of the person appointed as chief executive of what will be a small agency. Really able people will seek to work for someone who commands a lot of respect, and who is likely to be seen as effective and relevant. Otherwise, the risk is that the place is filled up with a few dozen of the many public servants and consultants being displaced by the government’s current cuts and eager for a job, any job, in a tougher public sector job market. Time will tell I guess, but time is passing.

Finally, on a personal note, I have been reflecting on the future of this blog. I have recently been appointed to the board of Papua New Guinea’s central bank, the Bank of Papua New Guinea. I worked there on secondment from our Reserve Bank decades ago, and the PNG central banking law requires that at least one board member has international experience of central banking and does not live in PNG. I’m looking forward to the opportunities and challenges.

There aren’t direct conflicts with this blog (I was appointed in the knowledge that I write it, and no one has suggested I stop). I don’t, and won’t, write about Papua New Guinea. On the other hand, many of the central banking issues I’ve written about here – mostly in an RBNZ context – are relevant for any central bank. I don’t want views I espouse here in a New Zealand (or international) context to be used to bash BPNG. Also, while I don’t expect to have any links to the Reserve Bank, BPNG (as one of the various South Pacific central banks) does. And the BPNG role is going to chew up a fair chunk of my time.

I have considered stopping writing altogether about central banking but at this point I don’t think I will. But I may be a bit more choosey about my topics, and readers should bear in mind that in what I write on central banking I am a bit less of an unconstrained outsider than I have been. Whatever direction the blog takes, between holidays and other commitments there probably won’t be much here on any topic until at least after Easter.

Once were a trading nation

Michael Reddell New Zealand economic performance, Trade

I’ve used here before the snippet from older books that in the decades before the Second World War it was generally accepted that New Zealand had the highest value of foreign trade per capita of any country.  Estimates of historical GDP per capita suggest we also had among the very highest levels of real GDP per capita.

That was then. Yesterday I noticed this tweet from a Herald journalist. I presume the chart was taken from The Treasury’s Briefing to the Incoming Minister.

2021 wasn’t a great year for comparisons, since our border had been largely closed, directly affecting exports and imports of tourism services, but perhaps it was the most recent complete data Treasury had back in October.

This is the New Zealand story in isolation, for as far back as the quarterly national accounts data go.

You might discount the peak in 2000 (coincided with a shortlived trough in the exchange rate), but however you look at the chart, external trade as a share of GDP hasn’t been growing for 30 years. In the last decade it has been shrinking. Ministers and trade lobbyists, touting their preferential trade agreements, would prefer you didn’t notice these actual outcomes.

How does New Zealand’s experience compare to that of the other OECD countries (large and small)? The OECD database is complete from 1995, so here is the change in the average share of exports and imports from then to 2022.

Most OECD countries have seen quite a big increase in foreign trade shares over that period. Some of that will have been a rise in trade in intermediates. One could look at the OECD data on trade in value-added, but there is a multi-year lag in the availability of that data..

Can you spot New Zealand? That’s us over on the very far right of the chart, one of just a handful of countries to have had no growth in foreign trade as a share of GDP over those decades (as it happens - and I’m not here arguing causation – each of that handful of countries have been long-term OECD productivity underperformers).

What about the level of trade as a share of GDP (which is what that Treasury chart is showing). Here is the 2022 data for all the OECD countries (in case you are worried that pandemic effects are still distorting the picture the 2019 chart is very little different).

There are two regularities when looking at the extent of cross-country trade, neither very surprising:

  • all else equal, big populous countries tend to do less foreign trade (share of GDP) than smaller ones, and
  • all else equal, remote countries tend to do less foreign trade (share of GDP) than ones close to lots of other (advanced) countries.

Most OECD countries aren’t large (22 of 38 have populations of 12 million or less) and most of them are close to other centres of advanced economic activity.

What of New Zealand?   We have the 5th lowest foreign trade share of any OECD countries.  Of the four lower than us, three are large countries and the fourth (Australia) has a population five times our size.   Every single other small country has trade shares higher than New Zealand’s.  In all but Israel’s case, materially higher, and Israel is another example of a country fairly geographically remote (surrounded by plenty of other countries but not wealthy advanced economies, and wealthy advanced economies tend to trade a lot with other countries like them).

And if you inclined to read this and note it as just one of those things, here is how New Zealand stood in 1995.

trade 1995

Not great…..and still smaller than all the small OECD countries other than Greece…..but a substantially different picture than the 2022 one, and one that does not flatter New Zealand.

(And yes, for many purposes it does make sense to discount the numbers for Ireland and Luxembourg, but doing so won’t really change the underwhelming picture of New Zealand’s place among OECD countries.)

The Conway speech

Michael Reddell inflation, Monetary policy

I’ve been rather tied up with other stuff for the last few weeks (including here) which is why I’ve not previously gotten round to writing about the first piece of monetary policy communications from our Reserve Bank this year.  That was the “speech” by the Bank’s chief economist (and MPC) member Paul Conway given to anyone and no one in particular over the internet last Tuesday. It had been a couple of months since anything had been heard from any MPC members, in what are not exactly settled or uninteresting times, and it is still several weeks until we get the first formal monetary policy review and MPS this year. We really should be able to expect better……but then if it were that sort of central bank, lots of things about the last few years would have been done differently, including the Bank might not have lost the taxpayer the mindbogglingly large amount of $11bn or so (with not the least sign of any contrition or of anyone having been held accountable).

Conway’s fairly short piece was a puzzling document.  What was the pressing need that called for a speech on ‘the importance of quality research and data”? And what made it sufficiently pressing that they couldn’t even wait to find a real live function/audience to address? And if there is no particular function/occasion that needed a speech, but rather just something the Bank had chosen to do, wouldn’t you have expected (I certainly would) to have found some substance. The bit (the bulk) of the speech under that headline title was in fact much more notable for what wasn’t there. Is any serious observer going to dispute the likely value of quality research and data? And especially not against the backdrop of the actual New Zealand situation: poor (if very slowly improving) data and very limited volumes of macroeconomic and financial research (with the Reserve Bank’s own output in the last half dozen years notably diminished).

You couldn’t help but think that the “speech” was really just an excuse for putting out a page and a half of comment on recent economic data. I’m all in favour of individual MPC members putting their individual views and their analysis into the public domain (one of the few ways we see the quality of the analysis and thinking of these statutory officeholders). Perhaps all the more so when it had been two months since we’d heard anything, but then one was left wondering why they felt the need to wrap an entire speech around those brief comments rather than (say) just stick out a press release with the recent data comments.

But if the process was a bit puzzling, my main interest was the substantive content of the short address.

I’m going to take the material in reverse order. At the back of the speech there is a page a half of text on “a policy-relevant research agenda” and “the importance of quality data”.  On the first of those headings, the speech is simply devoid of content. One might have hoped they would be releasing some new research or touting how policy-relevant research papers had shaped their thinking and understanding over one of the most turbulent periods for monetary policy in decades. Or even just foreshadowed a couple of specific papers that were almost ready for release. Instead there was nothing of substance at all, just a stylised graphic highlighting areas they were interested in, a list looking pretty much like any monetary policy research agenda in recent decades for almost any advanced country central bank.

What of data? Better data would be great. At a macroeconomic level, New Zealand is one of only two OECD countries with only a quarterly CPI, something Conway glides over in welcoming the recent additions to the partial monthly prices data. We also don’t have monthly unemployment data, a pretty basic measure of excess capacity/slack, and all our main macroeconomic data comes out later, with longer lags, than most of our OECD peers. It really isn’t a satisfactory situation, when so much rides on reading the economy well. But what Conway offers is mostly honeyed words about “a consultation process” with SNZ “to better understand data needs and priorities”. If one wanted to look on the bright site I guess one could note that they are “exploring collecting much more detailed data from banks to support economic analysis and research” and “we are also developing new sources of higher-frequency data to incorporate into the MPC’s assessment process”, which sounds fine directionally, but so far doesn’t seem to have amounted to much.

Right up front, in the introduction to his speech, Conway claims that “the economy is now significantly different to how it was before COVID-19”. His claims appears to be that this is so for both the world economy and for New Zealand. Again, it is a lead-in to what is, at best, a once-over-lightly treatment: one page of text and two charts, and simply isn’t very persuasive at all (especially as regards the functioning of the economy as it affects monetary policy).

Inflation went up, to very uncomfortably high levels, and then is coming back down again. But what about how the economy works is materially different now than it was five years ago? Conway really offers no hints at all. Instead he notes that government deficits have been large and government debt has increased (as he notes, by more as a percentage of GDP in New Zealand than in the typical OECD country) but what, if any, implications are there for monetary policy? It isn’t obvious and Conway offers no suggestions.

Then when we get the common line about globalisation changing, with supply chain resilience and geopolitics more in focus. It is a common line, and this might have been an opportunity to illustrate the point with specific reference to New Zealand macroeconomic and inflation dynamics. But no…. I’m still a little sceptical that there is much to the story (of macroeconomic significance) and took that line too from a recent Martin Wolf piece in the FT. Perhaps there is a story that matters to the Bank, but Conway made no effort to get beyond the cliches.

We also heard - what we all know - that traffic through the Suez and Panama canals is down at present (the former for geopolitical reasons, the latter for climatic), but nothing at all about what it might, or might not, mean for cyclical or inflation dynamics. The Suez Canal, for example, was shut completely and for several years a few decades ago. In what way did it matter and to whom?

And then we got Conway’s take that “the pandemic has sped up the digital transformation”, which was he thought a good thing. I can’t claim to have read all the papers on the subject, but my impression had been that there just wasn’t much there (in terms, eg, of improved productivity). And if in some places more people are working from home (less a thing here it seems than in some US big cities) in what material way would it matter for a central bank?

Perhaps there were substantive points to be made. Perhaps there were things New Zealand (eg RBNZ) research might have shed light on. But….nothing.

Most of whatever interest the speech commanded was inevitably going to be on Conway’s short comments on recent data.  When the MPC hasn’t spoken for two months, and was then last heard talking up the possibility of a further OCR increase, it was going to be lot of few drops of rain falling on travellers crossing a parched desert. It wasn’t as if that November MPS statement itself had been overly persuasive (this was the Bank that was talking of further OCR increases even as it forecasts showed inflation collapsing over the next few quarters).

Whatever you own view of the data, you can see why Conway might have wanted to be cautious. The Bank had been talking of a further OCR increase while the market was now very focus on when, and how aggressively, rate cuts would start (here and abroad).  Last week’s short comments seem to have been designed basically to try to dampen market enthusiasm, not necessarily because Conway and such of his colleagues who were consulted had a markedly different firm view than the market, but so as not to create a rod for the Bank’s back if, come late February, the Committee as a whole does conclude that there is no OCR cut in prospect any time soon.  The more the market had already moved, the harder it would be for the Bank to drive home its message (without quite nasty snapbacks in market pricing).

What, if any, insights were there in Conway’s comments? Not much.

There seemed to be three points:

  • revisions downwards to the level of GDP over several years past don’t necessarily tell us anything much about the inflation outlook.  And, of course, every serious analyst already recognises this : if those data suggested the underlying productivity picture was a bit worse than had been thought, they don’t tell us much, if anything, about capacity pressures and how they are changing.    We already have the inflation data for those earlier periods when the level of GDP itself was a bit lower than had been thought.
  • We (they) really don’t know what is going on with immigration (either the numbers –  itself a reflection of data weaknesses reintroduced to the system a year or two before Covid – or the net pressures on capacity and inflation).  There was a footnote suggesting NZIER had done some work for the Bank on migration and inflation, which is described as “forthcoming” but no useful insights were offered from that work.
  • Inflation is falling but –  on the measure Conway chose to highlight (annual non-tradable inflation) –  still far too high.   But there was no supporting analysis at all.

Highlighting annual non-tradable inflation –  and suggesting it is a “rough approximation of inflation generated within the New Zealand economy –  was really a bit naughty in a couple of ways.   As other commentators have pointed out, non-tradables inflation is almost always higher than general inflation, and it is general CPI inflation that the MPC is charged with focusing on.  The MPC isn’t given an option of just being indifferent to tradables sector inflation.   And you’d expect central bank analysts and policymakers to be fairly heavily focused on recent quarterly inflation (especially when the OCR only got to the current level last May), rather than lagging annual measures. 

Conway mentions that core inflation measures are falling, but again chooses to illustrate the point using annual data only.   That said, what used to be the Bank’s preferred measure – the sectoral factor model –  is both annual and prone to revisions (up when inflation keeps rising, down when it keeps falling, but was already showing core inflation at 4.5 per cent, down from a peak of 5.7 per cent just a couple of quarters ago.

What about some of the quarterly core measures, probably reflecting the impact of monetary policy early last year?   SNZ provides a breakdown into tradables and non-tradables only at the 10 per cent trim level.  For tradables, the December quarter saw the lowest quarterly inflation rate since mid 2020, for non-tradables the lowest since the start of 2021.  The picture is pretty similar for the weighted median quarterly data.

But perhaps the thing that surprised me most about Conway’s speech –  in its reflection on recent data –  is that there was no sign of any cross-country comparative perspective.  Now, each country’s core inflation outcomes are ultimately the responsibility of its own monetary policy, but when core inflation in a bunch of countries rose pretty much at the same time, and then central bankers raised policy rates at pretty much the same time, and often to somewhat the same extent, you might think there would be value in posing cross-country comparisons, especially when many of those countries have more frequent and more recent data than we do.  The common story seems to have been that (core) inflation has been falling away, a little earlier and easier than had seemed likely to many at (say) the start of last year.  It isn’t obvious that New Zealand was a particular laggard in tightening (weren’t particularly early either) and so one might take some comfort from what is happening in other countries.

The comparison with the US might have been a particularly interesting one to touch on.  The US has, so far, seemed to have experienced a sharp reduction in annualised core inflation with, as yet, little sign of any substantial or sustained economic slowdown.  As Westpac’s Michael Gordon points out in a nice piece this morning, the US has been quite unusual on that score, and the economic data in both New Zealand and Australia have been materially weaker than we observed in the US (and that is especially so when one looks at per capita GDP growth).   Quite why the US outcomes have, to date, been so favourable is a bit of mystery, not often explored by commentators in an international context, but when our economy has been so much weaker it seems that our inflation outlook should generally be positive.  At very least it would be good to see some of this ground traversed in the MPS later in the month.

Before Christmas I wrote a piece here on monetary policy turning points in which I ended by noting that it wasn’t inconceivable that by the end of February an OCR cut might be appropriate here.  Whether the data support such a case may be a bit clearer by Wednesday afternoon (after the quarterly suite of labour market data are out), although I don’t suppose that whatever the data show an early OCR cut is at all likely.

There is an interesting piece in the Financial Times today on “Why central banks are reluctant to declare victory over inflation”.  Setting aside the fact that such language is more George Bush “Mission Accomplished” and never likely to be heard from central bankers –  my old line (with acknowledgements to von Clausewitz) about inflation was “the price of price stability is eternal vigilance” –  it nonetheless touches hardly at all on what must be one of the biggest factors weighing on the minds of central bankers.  Having stuffed up so badly (a description rarely heard, although it should be more openly acknowledged) and delivered us into very high inflation and all the attendant unexpected wealth redistributions etc, central bank reputations took something of a well-deserved hit (a change since 2019 that of course Conway chose not to mention).  They were too slow to reverse the easings of 2020 and the public paid the price.   For them, reputationally, perhaps the worst possible thing now would be to begin easing, cutting policy rates, only to find in a few quarters time that inflation really wasn’t securely settling near target.  There would be considerable public and political unease if they were soon tightening all over again.  By contrast, people are attuned to the idea that squeezing out inflation involves some pain, so why not take the free (to them) option until they are 100 per cent sure inflation really is on course).  

One problem then is that the interests of the individual central bankers –  mostly still holding the offices they did in 2020/21 – aren’t necessarily well-aligned with the wider public interest.  To be 100 per cent sure that inflation was well on course towards the target midpoint also necessarily then means quite a high risk of overshooting (both that inflation ends up going below target midpoint –  as in so much of he pre Covid decade, here and abroad) and that output and employment are unnecessarily sacrificed.    That, in turn, might be less of an issue in the US, where the economy has held up, then (say) here where we’ve already had last year some of the very weakest per capita GDP growth of any OECD country.

Much of the discussion about the possibility of rate cuts this year tends to proceed –  perhaps not consciously but it is the effect –  as if the two choices were to keep rates at current levels or to take them quickly back to neutral (wherever that unobserved variable might be –  our RB thinks somewhere under 3 per cent).  But those aren’t the choices central bankers actually face.  I very much doubt it would be prudent for interest rates to be anywhere near neutral right now, but relative to how things looked when the OCR got to 5.5 per cent first in May 2023, there is a lot more reason now to be confident that the worst is past.  Back then it was purely prospect but now we have some hard evidence, and we know that monetary policy works only with a lag.  More disinflation is, as it needs to be, in the works.  It isn’t impossible than an OCR of 5 or 5.25 per cent would now be better than one of 5.5 per cent.

Of course, none of any of this was in the Conway speech, which really did seem to be just about buying time/space to get the MPC through to the end of February (after its inexcusable three month summer break).

In conclusion….well, this was Conway’s

in conclusion conway

It was really quite remarkable for its avoidance of any responsibility. You’d note know from this that any central bank’s conscious and deliberate choices played any part in inflation being well above target for three years in succession.  When you can’t acknowledge your part in a really bad, costly and disruptive, set of outcomes, it is really hard to be confident that you are really any sort of “learning organisation” or that the much-vaunted (but as yet unseen) research will be for anything other than support rather than illumination.

Central bank monetary policy speeches are rare enough in New Zealand. On the rare occasions MPC members do speak we deserve better than Conway’s effort. The Governor is due to speak next week. HIs speeches to the Waikato Economics Forum have tended to be substance-free zones, but I guess we can always hope.

And I hope the Minister of Finance and her advisers are taking note, and are looking to find and appoint rather better people to fill the two MPC vacancies arising in the next few months.

Conflicts of interest

Michael Reddell Reserve Bank

A while ago I stumbled on the report of Kristy McDonald QC, dated 22 February 2022, which had been commissioned by Hon David Clark, then Minister of Commerce, into aspects of the appointment of the default Kiwisaver providers, and specifically around the handling of conflicts of interest involving the then chief executive of the Financial Markets Authority (FMA) whose brother-in-law was the chief executive of one of the providers. The FMA provided a strictly limited bit of advice to the Minister.

I was less interested in the specifics of the case - which didn’t reflect very well on the FMA or its board/chair, but was (from the report) hardly the worst thing in the world - than in Ms McDonald’s observations on conflicts of interest. This is probably the most useful excerpt from her report (the document mentioned in italics is from the Public Service Commission).

There is a heavy emphasis on three things really. First, avoiding actual conflicts of interest. Second, ensuring that outside (“fair minded”) observers can be confident that decisions have not been improperly influenced. And, third, documentation, documentation, documentation (which helps demonstrate, at the time and if necessary later, that actual and apparent conflicts have been recognised and dealt with appropriately).  As McDonald notes in 6.22 you’d think considerations like these should be particularly important in a regulatory agency, especially one - such as the FMA - with regulatory responsibilities in the financial sector. This is from the very top of the front page of the FMA’s website

You’d really have hoped that the Financial Markets Authority would have gone above and beyond in setting and applying standards for its own people, But…..no. You might remember them banging on a few years ago about “culture and conduct” in the private financial sector. I guess those were aspirations for other people.  One hopes that, in the light of the McDonald report, the FMA has now lifted its game in handling such issues in its own organisation. One might hope…..

One of the classes of financial product/entity that the FMA has regulatory responsibility for is superannuation schemes. It has particular responsibility now for a class of so-called “restricted” schemes, closed off to new members and generally in multi-decade run-off.  One of the FMA’s predecessor entities was the office of the Government Actuary which had in times past been required to consent to any changes in superannuation scheme rules. In old-style defined benefit superannuation schemes - a form of deferred remuneration where the effects (contributions/entitlements), even for an individual, stretch over decades – those sorts of protection and oversights, whether embedded in statute law or in the deeds of schemes are vitally important.  Such schemes are typically established as trust structures in which all trustees are required to undertake their duties with the best interests of members in mind. Being a trustee is, or should be, no small thing, not a duty entered upon lightly.

Conflicts of interest can, at times, be a significant issue. In a typical employer-sponsored superannuation scheme some of the trustees will be elected by members and some will be appointed by the employer. These days - in what is mostly regulatory impost (thank you Key government) – schemes are also required to have a Licensed Independent Trustee. (There were hazy warm thoughts at the time that these might be courageous independent thinkers who’d be a force for good, but the model really seems built more to encourage box-ticking – there are lots of boxes to tick – establishment figures earning a bit of pre-retirement income: you aren’t likely to be appointed to such roles if there is any fear you might rock the boat.)

In a scheme that defers for decades employee remuneration there can be material tensions between the interests of the employer and the members.  But much of the time there aren’t such conflicts. The day-to-day responsibility is to ensure that the pensions are calculated correctly and paid reliably, that member queries are dealt with in an appropriate and timely way, that statutory reporting and compliance requirements are met, and that money is collected properly and invested prudently.  I’ve been a trustee of the Reserve Bank scheme for 15 years and those issues go by pretty harmoniously, with any differences of view rarely falling along Bank-appointed vs member-elected trustee lines. And if the rules are clear and discretion strictly limited the room for seriously conflicting interests is minimised.

But the differences come to the fore when there is any consideration of material changes to the rules or the status of the scheme. Things are especially problematic if employer-appointed trustees form a majority. That is why, for example, it is common to require regulator consent to change rules and to include protections such that member consent is required from any members who might be made worse off by a rule change (to which they might still consent if, for example, one adverse rule change was balanced by other changes the member considered was to their benefit).

And here the situation is supposed to be pretty clear. A member-elected trustee is not generally regarded as intrinsically conflicted simply by virtue of being a member (since the entire purpose of the trust is to benefit members, whose interests all trustees are supposed to advance). A member-elected trustee can, of course, be specifically conflicted and should then recuse themselves (as an example, it turned out some years after I left the Bank that my retirement benefits from the pension scheme had been materially miscalculated. I stood aside for any deliberations on that matter). But the situation of employer-appointed trustees is generally regarded as different: often they will be senior managers or Board members of the sponsoring employer and the potential conflicts between the interest of the employing firm and that of the trust (and its beneficiaries) can be all too evident.

There is very little regulator guidance on these issues in New Zealand - perhaps not surprising when the FMA hadn’t really handled its own well - but shortly after I became a trustee I found a lengthy guidance note from the UK Pensions Regulator, which I have since regarded as something of a guidepost (it is still current). It is a different country to be sure, but with broadly similar culture, a large DB pension sector, and much of the case law that gets cited here comes from the UK. In any case, the question here is not what is lawful, but what is proper (substantively and in terms of perceptions and appearances).

You might remember that the whole “culture and conduct” tub-thumping exercise a few years back was done jointly with the Reserve Bank. You’d have thought that the Reserve Bank might be some sort of exemplar of good conduct, and concerned to be seen as such. I guess you might have thought that of the FMA too. More fool us.

For the last decade the trustees of the Reserve Bank pension scheme have been grappling with arguments and evidence around claims that several significant deed amendments done in the white heat of the reform era (late 80s, early 90s) were not lawfully made and are thus invalid. No one really quite knows what the implications would be if these changes were to be held to be invalid, but it would be unlikely to be good for the Reserve Bank (either reputationally or financially). It would, I think, generally be conceded now that the rule changes were, to say the very least, not handled well by former trustees and management (eminent figures such as Sir Spencer Russell, Don Brash, Suzanne Snively, but also able members’ trustees). In fact, Don Brash himself has raised specific concerns with trustees regarding events on his watch - and trustees simply refused to ever meet him.

Three of the six trustees are appointed by the Board of the Reserve Bank from among directors or staff members (a fourth – the LIT – is chosen by other trustees but long ago declared he never wanted to come between member and employer interests). Those Bank-appointed members can be replaced at will for any reason or none. Over the decade they have included a Governor, a Deputy Governor, a deputy chief executive, a couple of Board members, and a long-serving relatively junior staffer.  As we have dealt with the issues over ten years there has never been any sign of these appointees putting member interests first. It is not that nothing has happened - some serious mistakes have been acknowledged and or fixed – but only things that are not awkward or potentially costly for the Bank. It is, of course, impossible to know whether these trustees have actually prioritised Bank interests, but it is impossible to tell apart their actual approach from the sort of approach that would be predicted were Bank interests to be prioritised.  Nothing has ever been done to acknowledge the serious conflicts of interest or to document how those conflicts are being managed or dealt with (and the Bank trustees have consistently refused suggestions of either using an arbitrator or approaching the courts for (definitive) guidance and resolution).

Tomorrow morning in Wellington there is a meeting of the members of the Reserve Bank scheme, called by a group of members (including two former senior Reserve Bank managers) under the provisions of the Financial Markets Conduct Act. The members say that they want to seek explanations for the thinking behind various decisions the trustees have made (usually by majority). Rather than engage, it appears that the intention of the Bank-appointed majority is to stonewall. The current chair – one of Adrian Orr’s many deputies - appears more interested in pursuing me for openly articulating my dissent and criticisms of trustee processes and advice than in engaging with members or getting to grips with the substance of the issues. And - par for the course – never seems to recognise any sort of conflict.

I’ve put as much emphasis on atrociously poor processes (in one part of the decade I was moved to describe what was going on as a “corrupt process”, words today’s trustee wanted excised from the version of minutes provided to members for tomorrow’s meeting). But the process problems go back to the start.

Way back when these issues were first raised with trustees, Geoff Bascand - at the time one of Graeme Wheeler’s deputies, with overall responsibility for Bank HR and finance issues - was the chair of trustees. His quick response to the initial approach - itself in the form of a letter and 30 page document- was to suggest, in writing, to trustees that we simply write back to the member who had raised concerns stated that the issue was closed. He sought to reassure trustees that they needn’t worry because even if anyone took legal action trustees were indemnified by the Reserve Bank. Bascand was later Deputy Governor and Head of Financial Stability at the time of the “culture and conduct” campaign.

Things, and processes, were mostly a bit less blatantly egregious after that, but the conflict of interest issue was simply never addressed, and the process was often Potemkin-village-like (expensive, time-consuming, but pretty much working towards innocuous ends). On all hard decisions the Bank-appointed trustees voted for the interests of the Bank……and all of them were left in office by a Bank management and Board that (fully informed throughout) no doubt appreciated their services….in the best interests of members of course, as the law required.

I have written a retrospective assessment of the experience.

The Indifference of the Powerful RBNZ Superannuation and Provident Fund, Reserve Bank, and the FMA

It is probably of most interest to present and past members of the pension scheme, but it is - to me - a fairly egregious example of simply ignoring serious conflicts of interest.  The scheme is not itself a regulatory body, but it is sponsored and underwritten by one, and the bulk of its trustees serve wholly at the pleasure of the government-appointed board of another of our financial regulatory agency (Orr and Quigley cannot escape responsibility).

As for the Financial Markets Authority, they’ve displayed almost no interest whatever. I imagine it is mostly a matter of being too small, too hard, and too unglamorous but……this entity’s forerunner (the Government Actuary) actually approved some of the more egregious rule changes, so perhaps turning over rocks would be uncomfortable for them, and of course, the FMA and the Reserve Bank work closely together. You might think that something of a conflict, and a dimension that might mean one needed to be seen to go above and beyond to reassure fair-minded observers. But….this is New Zealand and here you’d be dealing with the FMA and the Reserve Bank.

The latest Transparency International Corruption Perceptions Index is, on past timings, due out any day now. No doubt it will repeat the self-congratulatory self-perceptions that are so standard. No doubt too there are many places more corrupt than New Zealand. But maintaining and preserving standards involves sweating the small stuff….or the not so small when they involve key financial regulatory agencies.

UPDATE: As it happens, the Transparency International results were out less than two hours later, with New Zealand slipping out of the top two places. Seems overdue in multiple ways, sadly.

Avoiding scrutiny

Michael Reddell MPC, Reserve Bank Board

Regular readers will recall that I have, intermittently, been on the trail of the approach taken to the selection (and rejection) of external MPC members when the current crop were first appointed in 2019. I have been pursuing the matter since a highly credible person who was interested in being considered for appointment told me that (a) the Bank’s search company had informed my interlocutor that they would not be considered because they had active research expertise in areas around macroeconomics, and (b) having been somewhat puzzled by this response they had personally checked this understanding with the chair of the Reserve Bank’s Board, Neil Quigley, who had confirmed that was the policy. (The person concerned has never challenged my understanding of those conversations and has reiterated concerns over the years). OIAed documents from the Minister of Finance in mid-2019 confirmed that that approach had also been The Treasury’s understanding at the time (Treasury having responsibility for the ministerial/Cabinet side of the process); indeed that the Minister himself had endorsed/agreed to the ban.

I’m not going to repeat the entire subsequent chain. Everyone believed there had been such a blackball in place (it was even in an OIAed contemporaneous summary of a Board meeting discussion), and that included now-former senior central bankers (eg John McDermott) and the former economic adviser to Grant Robertson. These people may or may not have agreed with the ban, which the Minister himself and the Bank had defended on record in comments to media, but there was no doubt it had been there.

But then last year Quigley told Treasury that there had never been a restriction and Treasury - despite a bit of scepticism from a couple of senior officials – put out an official comment stating that there had never been a ban, and that the particular 2019 document from Treasury to the Minister was all a misunderstanding by another fairly senior Treasury figure (who had - conveniently - now left The Treasury, and whom they appeared never to have checked their new view with). More recently, a former Reserve Bank Board member - who had also been a member of the Board’s selection sub-committee in 2018 – confirmed to the Herald that there had been a ban of the sort generally understood (although his comments suggested Quigley may have conflated in his mind - years on – two quite separate sets of discussions).

The renewed interest last year prompted me to go back and check the OIA response the Reserve Bank itself had provided me in 2019 about the selection process for MPC members.  They had then provided a lot of useful material, but it also became clear that they had chosen to exclude - and not to identify for withholding under specific OIA grounds - all dealings between the Board and management on the one hand and the Board’s search company (Ichor) on the other, even though it was pretty clear that any and all such material had been within the scope of the initial request (“all material relating to the Board’s selection and recommendation of potential MPC members”). This was pretty egregious conduct by the Bank: it is one thing to identify that things have been withheld, and to provide specific grounds, and another to just ignore a whole class of material and never bother mentioning it. 

Anyway, I decided to lodge a new OIA, including explicitly highlighting that the material requesting should already have been covered by the 2019 request. My request (from 7 September) was as follows for:

When the Bank’s response finally came back they explicitly identified 26 documents (all of which should have been covered by the 2019 request), and had explicitly evaluated each of them against the criteria in the Act, concluding that 17 could be released in full, 9 in part (mostly it appeared withholding names on privacy grounds, which - per my request - is just fine), and identifying no documents in scope that would be withheld altogether.

But, nonetheless, they were not going to send me the information, and instead wanted to charge me $786.60, citing “the amount of time required to process your request and the frequency of requests from you over the last three months”.

I was briefly tempted. I have had run-ins with the Reserve Bank over proposed charges previously (some years ago). Almost always in the cases I’m aware of (my own and some other people) their attempts to charge have been, pretty clearly, straight-out obstructionism, when the Bank would really prefer people did not see the documents they had no grounds to withhold.

In this case, the Bank told me it had taken 10 hours to process the request. At just over a day of one person’s time that doesn’t seem particularly unusual – or out of step with requests I and others have previously lodged with them – and there was never an attempt to invoke a common agency line (often used to justify extensions) about needing to search a particularly large or ill-defined body of material (this was a specific request about one search firm on one project in one few-month period, so it must have been very easy to quickly find anything in scope, and it was all several years old). Moreover, they had made no attempt to reach out to narrow down the scope of the request or to suggest ways which might limit the risk of charging - the sort of good faith steps they are required to do, if acting lawfully and in good faith.

Had I made a few requests in the previous few months? Yes, I had, including on matters around MPC appointments, and on the Reserve Bank’s puzzling treatment of fiscal policy issues. They were relevant issues to the scrutiny of a very powerful, but underperforming - and not straight with the public - public agency, whose Board chair had already pretty clearly been shown to have actively misled Treasury and, in turn, the public. (Oh, and one was a request for a specific 2016 document, that was about two pages long and not itself contentious or on matters of policy, for which I gave them the title, the author, the date, and the document number in their document management system - I already had a copy but wanted to be free to use it with another audience.)

I’ve been sitting on the Bank’s response for a couple of months - other stuff demanding my time and attention - not quite sure what to do. I’d be astonished if the Ombudsman did not uphold an appeal against the Bank’s attempt to charge for this request – but that might take two years – especially given that the material should have been included in a response to a request that the Bank had responded to (otherwise) appropriately in 2019, and is on a matter of significant interest to those attempting to monitor and hold the Bank to account (it was after all prompted ultimately by Quigley’s and Treasury’s egregious attempts to rewrite history - and if Quigley really was, after all, telling the truth, these documents should if released support his position: almost certainly they do not).

Just briefly, why do I say that they almost certainly do not? Among other things because in the material the Bank released to me in 2019 there was this email that I’ve included in previous posts on the MPC appointments issue (Mike Hannah then being the Secretary to the Board)

That said, since I have not lodged any OIA requests with the Bank for more than three months now, I am pondering resubmitting my request (it was, after all, them who cited as an excuse for attempting to charge a concentration of requests in a three-month period).

Alternatively, here is the full Bank response

RB OIA response re request for information on Ichor and the 2019 appointment of external MPC members

Anyone else could feel free to submit the request themselves (the exact words are in the document, as is the complete list of documents they had identified and already reviewed, so there will be almost zero marginal cost for them to handle such a request, and no legal basis for attempting to charge.   If anyone else does choose to make the request, I’d be happy to hear/see the response in due course (mhreddell@gmail.com).   

[UPDATE: The Bank’s contact email for OIA requests is rbnz-info@rbnz.govt.nz ]

As it is the clock is now ticking on the terms of two of the MPC members which expire (finally, with no possibility of reappointment) in the next few months.   The documents released last year suggest there is no longer a bar on specialist expertise in external MPC appointments, although the suspicion remains that Orr and Quigley (and the tame underqualified Board) will instead have imposed a bar on anyone who might make life at all awkward for the Governor.   To date, the new Minister of Finance has given no hint of reopening the application or selection process –  despite it all having occurred under the previous government and its appointees – and I guess only time will tell whether she has been willing to go along with such a bar, which might be less visibly egregious, but no better in terms of building a strong and open MPC, the need for which is only made more evident by the deep failures of the current MPC under Orr in the almost five years since the current externals were appointed.

Productivity woes….continued

Michael Reddell New Zealand economic performance, Productivity

In my post on Monday I drew attention (again) to the fact that New Zealand has made no progress at all in reversing the decline in relative economywide productivity (relative to other advanced countries) since what was hoped to be a turning point, with the inauguration of widespread economic reforms after the 1984 election. If anything, the gaps have widened a bit further, and more countries (most former Communist ones) have entered the advanced country grouping, first matching and now overtaking us. Despite being so far behind the OECD leaders there are also clear signs that labour productivity growth has slowed further in the last decade or so.

All that discussion proceeded using simple measures of labour productivity (real GDP per hour worked).  The data are readily available for and are more or less comparable across a fairly wide range of countries, and there is meaningful levels data. Labour productivity is a common measure in such discussions, even though total (or multi) factor productivity (TFP or MFP) is the in-principle preferred measure. It is the bit of growth in output or output per capita that can’t be explained just by the addition of more inputs (labour or capital). Some decades ago the late Robert Solow, recently deceased, observed that in modern economies perhaps 80 per cent of the growth in output per capita had been attributable to TFP.

It is a line that should be taken with several pinches of salt since in practice (a) TFP is an unobservable residual, and b) much of the innovation and new knowledge often thought of as the basis for TFP growth is probably embedded in better human and physical capital and the disaggregation is a challenge (to say the least).  Thriving economies are likely to have better smarter people, better tangible and intangible capital, all used in better smarter ways etc.

But with all these caveats I thought it might still be worth having a fresh look at the OECD’s MFP data for the last few decades. They only have MFP (growth) data for a subset of (24) member countries (mostly the “old OECD”, and including none of the central European countries). For New Zealand, the first MFP growth data is for 1987, and with the annual data available only to 2022 that gives us 36 years of data.

There is a lot of year to year noise in the series, but for illustrative purposes I simply split the data in two, to compare the record for the 18 years to 2004 with the 18 years to 2022. As it happens, the global slowdown in productivity growth in leading economies (US and northern Europe) can be dated to about 2005.

New Zealand averaged annual MFP growth of 0.9 per cent in the first 18 year period, and only 0.2 per cent per annum in the second 18 year period to 2022. It is a pretty dire picture. (All data in this post use arithmetic averages, but using geometric would not make any material difference.)

Now, champions of the reform story might be tempted to look at that simple comparison and say something like “yes, you see. In the wake of the decade of far-reaching reform New Zealand made real and substantial economic progress, but then after the reform energy faded and drift took hold it all faded away to almost nothing.

Unfortunately for that story, here is how New Zealand MFP growth record compares (on the OECD’s particular methodology) for New Zealand and (the median) for the other countries (most of them) for which there is a complete set of data.

We all but matched the average growth performance of those other advanced OECD economies in the earlier period, in the wake of our reform process, but even then didn’t do well enough to begin to close the large levels gaps that had opened up in earlier decades. And then in the more recent period, we’ve done worse again: the comparator group (typically richer and more productive, nearer the productivity frontiers) slowed markedly, but we slowed a bit more still. When you start so far inside productivity frontiers there is no necessary reason why New Zealand could not have made some progress closing the gaps even if the frontier countries themselves ran into difficulties. But no. (Over that second 18 year period when New Zealand averaged 0.2 per cent per annum MFP growth, South Korea - also well inside productivity frontiers on an economywide basis – is estimated to have averaged 2 per cent per annum MFP growth).

It is only one model, and only one set of comparators but there is simply nothing positive in the New Zealand story. There is, and has been, no progress in closing those gaps, and our living standards suffer as a result.

And what of Solow’s 80 per cent? In New Zealand real GDP per capita increased by an average of 1.7 per cent per annum between 1987 and 2004. MFP growth averaged 0.9 per cent over that period. For the period 2005 to 2022 average annual growth in real GDP per capita increased by an average of 1.4 per cent per annum, but over that period MFP growth averaged just 0.2 per cent per annum. (The comparisons are no more flattering if one uses the OECD “contributions to labour productivity growth” table as the basis for comparison.)

Whichever measure of productivity one looks at the New Zealand performance is poor. Champions of reform 40 years ago would, I think, have been astonished if they’d been told how poorly New Zealand would end up doing. I hope they’d be even more alarmed at the indifference to that woeful record that now seems to pervade official and political New Zealand.

[And since I’ve already had one past champion of the reforms objecting to my characterisation in this post and Monday’s post, I’m equally sure that all serious observers now - ie excluding our political leaders and officials - have their own story about what else should (or in some cases shouldn’t) have been done over recent decades. That doesn’t change the fact - on my reading and my memory – that if asked in say 1990 most would have envisaged several decades of catch-up growth as the decline of the previous decades was slowly reversed. It is quite clear from the documentary record that that was the goal, and the intense political disputes of the era were not about that goal.]

40 years on

Michael Reddell New Zealand economic performance

2024 will mark 40 years since the great acceleration of policy reform that began with the election on the 4th Labour government in July that year and ran for the following decade or so. I’m sure there will be lots (and lots) of reflections on the period later this year, most especially from the left where the ongoing political angst seems greatest (yes, it really was a Labour Cabinet that kicked off the process and did many of the lasting reforms, much as some on the left remain very uncomfortable about that).

If one thought about the big economic issues that were around at the time, they could probably be grouped under three broad headings:

  • inflation
  • fiscal deficits and government debt, and
  • productivity

One might add to the list the balance of payments current account, which became no longer a policy problem once capital controls were lifted at the end of 1984 and the exchange rate was floated in early 1985. (Yes, recent deficits have been very large, but as a symptom of other imbalances, rather than a policy issue in its own right.)

Of that list, New Zealand has done fairly well on the first two items. 

We used to have among the worst inflation record among the advanced countries (high and variable), but in recent decades we - like most advanced countries - have done much better. The last three years have been a bad lapse, but if that never should have been allowed to happen, the ultimate test is whether things are got back under control, and we seem now to be on course for that (eventually the lagged infrequent data will emerge). I’m not here going to get into lengthy debates about other countries, but whatever the common shocks once a country floats its exchange rate its (core) inflation outcomes over time are its own choices (see Turkey for any doubters).

We’ve also done pretty well on fiscal policy imbalances. There are plenty of leftists around who think taxes and spending should have been, and should now be, higher, but my focus is imbalances (deficits and debt). Again, the last few years (post Covid spends) have been bad, but under governments led by each main political party, New Zealand has over decades done a reasonably good job of keeping debt low and reining back in deficits when they have first blown out. And our system of fiscal policy transparency is pretty good too (although like almost anything could be improved).

One could throw financial stability into the mix. Almost every country that liberalised in the 80s ran into serious financial sector problems a few years later (neither the private sector lenders and borrowers nor the putative regulators really knew what they were doing, perhaps unsurprisingly after decades of financial repression), but the last 30 years have been pretty good. Lots of finance companies failed 15 years ago, which wasn’t necessarily a bad thing (risk and failure are integral parts of a market economy), but the core of the financial system has been sound and stable. Plenty of countries would have traded that record for their own experience.

The big hole in the story has been around economywide productivity. 40 years ago people were highlighting how far New Zealand’s performance had fallen (official reports from as early as 60 years ago were already drawing attention to growth rates having slipped behind), and the hope/aspiration was to turn that around. This is one of my favourite photos (reproduced in the Herald a decade or more ago, but showing late 80s Minister of Finance David Caygill)

Even though there had been not-insignificant economic reform and liberalisation over the previous few decades, in the early-mid 80s it was easy to highlight the many very obvious inefficiencies in the New Zealand economy (car assembly factories dotted around the country to name but one example). The previous decade in particular had been a very tough time for New Zealand - hardly any productivity growth at all after 1973/74 – probably less because economic policy became particularly bad (one could quite a long list of useful and important reforms, alongside other problems and new distortions - eg Think Big) than because the terms of trade were very weak.

Almost as bad as the worst of the Great Depression, but averaging low for longer. Exogenous adverse shocks to both export and import prices impeded the ability of the economy to generate high average rates of real productivity.

As recently as 1970 (when the OECD real GDP per hour worked data start) and despite decades of inward-looking policies New Zealand’s average productivity still didn’t look too bad. We were below the median OECD country but not by much, just under the G7 median, and more or less than same as the big European countries (UK, Italy, France, Germany). By the time of the 1984 election we’d slipped a long way further.

We were by then around the same as Greece, Ireland, and Israel, and of the G7 well behind all except (still fast-emerging) Japan.

Here is where we are relative to the same group of OECD countries in 2022

We’ve done clearly pulled away from Greece, but that is about the only semi-positive I could find (and yes, the gap to Italy has closed somewhat as well). For what it is worth, on the data to hand so far 2023 looks to have been a year when New Zealand average productivity fell.

Of course, the rate at which we’ve been falling down the league tables has slowed. But then remind yourself what happened to the (merchandise) terms of trade

They have trended upwards since the late 80s (I remember our puzzlement at the RB when the first late 80s lift happened) and especially in the last 20 years. On this measure (which excludes services, to get a long-term consistent series) the terms of trade have averaged higher than at any time in the last century. And yet still average productivity languishes.

There are of course a whole bunch of new OECD members since 1984. A large group of them were then either part of the Soviet Union or communist-bloc countries, even the least bad of which had much more messed up economies than New Zealand’s. This is how we compare now with that group

Middle of that pack to be sure, but probably not for long on the trends of the last couple of decades. South Korea is just about to go past us too.

It really has been a shockingly bad performance by New Zealand, against what would normally have seemed a propitious background - a sharp sustained recovery in the term of trade and a much greater reliance on letting market price signals work.  There isn’t much serious basis for wishing away this failure.

And yet there seems to be little sign that our politicians or their official economic advisers have much interest, or any serious ideas for finally reversing the decades of real economic relative decline.

It is as if the powers that be and those around them have simply become resigned to our diminished fortunes, indifferent to what that failure means for actual material living standards now, and those for our children and grandchildren to come.