Towards an engaging Governor

There won’t be a post here on Monday, but yesterday something caught my eye in the email inbox (and I’m not very much of a rugby fan).

This was the advisory from the Reserve Bank

Text of a speech by Head of Communications and Board Secretary, Mike Hannah, entitled “Engaging with our stakeholders to promote understanding, accountability and dialogue” will be published on the Reserve Bank website at 8:30am on Tuesday 27 June

It reminded me of an earlier piece by Hannah a couple of years ago.  It was a Bulletin  article published in May 2015 under the title Being an engaging central bank.  It didn’t seem to attract much attention at the time, although I wrote about it.  Hannah used the article as, among other things, a platform to highlight how active its engagement was and how transparent it was.  I highlighted then some of the many areas in which the Reserve Bank is well off the pace in respect of transparency, particularly around monetary policy.

When Hannah wrote his previous article things must have seemed to be going quite well for the Bank, at around the half-way mark of the Governor’s five year term.   The article presented and drew on a survey of external stakeholders about the Bank’s external engagement, that had been done in the second half of 2014.    The OCR increases were then well underway, and they and most of the people they regarded as domestic stakeholders still probably thought the Bank was doing the right thing.  The Bank used the article to talk up a more active programme of public speaking.   And just a couple of months previously Central Banking magazine had named the Reserve Bank of New Zealand as central bank of the year, citing various things to their credit including having been “the first advanced economy central bank to raise interest rates in the current cycle”.   (Oops)   Graeme Wheeler must have been feeling rather pleased.  According to the survey, most “stakeholders” were also reasonably happy with the Reserve Bank’s communication.

It will be interesting to see what Hannah has to say on Tuesday.  But it is a little surprising that he is doing such an on-the-record speech when the Governor has less than three months to run on his term.  It can’t, one would think, be outlining a new approach  – surely anything of that sort would be a matter for the new permanent Governor next year?   So we can only assume it will be an explanation and defence of the current approach.  If so, given the embattled state of the Bank it is a bit of a surprise that they leave it to a relatively junior member of the senior management group to make the case rather than, say, Hannah’s boss Deputy Governor Geoff Bascand, or indeed the Governor himself.

However they choose to engage, speeches clearly seem to have gone out of fashion again.  The Governor gave five on-the-record speeches in 2013, and seven in 2014.  Things seemed to be going well then.    But in 2015 and 2016 he gave only three on-the-record speeches each year, and in the first half of this year (ending next week) he will have given only one speech.    The pattern is pretty similar for his Deputy Chief Executive, Grant Spencer who is being appointed (questionably legally) Acting Governor for six months after Wheeler leaves.  He has also given only a single speech this year.

What is a relevant comparative benchmark?   Well, Phil Lowe, Governor of the Reserve Bank of Australia will have given six on-the-record speeches in the first half of this year.  His deputy, Guy Debelle, who is particularly active on international foreign exchange regulatory matters, will have given eleven speeches in the first half of this year.    The Reserve Bank of Australia, it will be recalled, covers a lot less ground than our central bank, not being responsible for the supervisions of banks, non-bank deposit-takers or insurance companies.    For most of the RBA senior management speeches, there is also a webcast or audio/video material, something our Reserve Bank doesn’t do.

Here are the numbers for the Governor of each of the other Anglo country central banks, and those of two other small inflation targeters.  Of those central banks, only the Bank of England has at least as wide a range of responsibilities as our central bank,

Governor speeches, first half 2017
UK 8
Ireland 8
Norway 7
USA 5
Canada 4
Sweden 2

What is striking in some of these central banks is the number, and range, of the speeches done by other senior managers.   Our central bank – smaller than most of course – will have done four on-the-record speeches in total in the first half of this year.

However the Reserve Bank engages, it isn’t through media interviews either.  The Governor now seems to give a soft interview to the Herald the day after a Monetary Policy Statement, but that seems to be it.  In almost five years he has given not a single searching interview to any media outlet.  Perhaps that is not so unusual internationally, but the Governor here wields personally an unusually large amount of power, and the Bank has been rather active (interest rates up and down, and more and more regulatory interventions) in the last few years.  Doing citizens the courtesy of a sustained interview once in a while –  an interview that is more than advertorial – would seem the least a Governor could do.  The Governor is said to be uncomfortable with the media.  In a role such as his that should really be disqualifying.

Of course, we now know that the Governor doesn’t much like criticism either.  In fact, one of the ways he engages (was that to promote “understanding”, “accountability” or “dialogue”?) is to send his senior managers out to try to whip critics into submission.  And when that doesn’t work, he sends threatening letters to the chief executive of a bank he regulates, calling for the critic concerned to be censored, to end the risk of upset to the Governor.  Perhaps Hannah will be able to offer some statistics on the frequency of “engagements” of this sort?   Perhaps he could offer some thoughts on the legitimacy of such engagements (after all, the Governor hasn’t been willing to front up in public)?  And on the effectiveness of them?  Does he judge that they have enhanced the Bank’s standing, and public/stakeholder confidence in the institution?

We also know another way the Reserve Bank was engaging, but is no longer.  Under Hannah’s stewardship the Reserve Bank was for years running lock-ups for journalists and analysts just prior to the release of MPSs and FSRs.  Unfortunately, they took that engagement so far that the procedures they used were so lax that people in the lock-ups could simply email highly confidential market sensitive stuff back to their offices (or indeed to anyone else).   That came to a crunching end when, somewhat by accident, I became aware that something of the sort seemed to have actually happened: MediaWorks staff in the lockup had been emailing things back to their office (who knows how many times before?) and on this occasion someone in their office passed the early information on to me (I was to be a guest on their show later that day).    In response, the Governor’s idea of engagement was to (a) largely whitewash MediaWorks, while (b) attacking me as irresponsible, even though I was the person who had brought to their attention what turned out to be both an actual leak and a serious weakness in their procedures.  Perhaps there will be some reflections on that sort of engagement?   Probably not though.

We’ll see what Hannah has to say on Tuesday. But in many respects it doesn’t much matter now.  The embattled Wheeler will be gone in three months, and Spencer  – probably not really the problem –  will be gone in nine.   The challenge for the new permanent Governor –  and something the Board and the Minister should be looking for in identifying potential appointees –  is to move towards much greater openness and effective open engagement.   There are so many fronts on which reform is overdue that it could make a post in itself.

So many other central banks are now so much further ahead of our central bank in this area (as well as others).  In most of them the whole institution has rather less power in the whole institution than is here concentrated in a single individual.  It is a shame, as the Reserve Bank could once reasonably have been said to be in the forefront of openness, transparency and honest engagement.  Now it is quite a laggard in this and other areas, with pre-existing institutional weaknesses reinforced by the problems of a thin-skinned insular and embattled Governor.  An engaging Governor would be a huge step forward towards a more engaging, open and accountable and central bank.  Whoever is Minister of Finance when the appointment is made should insist on it.

 

Leadership and accountability

I’d been going to write just a short post on the contrast, that I’ve been trying to make sense of over the past week, between the very public calls for the head of the Director-General of the Ministry of Health, and the near complete silence around the conduct of the Governor of the Reserve Bank.   Perhaps there are just more votes in health than in the Reserve Bank?

Chai Chuah seems to lead a not entirely well functioning ministry –  in time presumably the SSC PIF report will reveal more –  but he has little or no direct control over anything beyond his own agency.  And the latest calls for his head –  or at very least for severe reprimand –  appear to relate to errors in putting together the Budget.  The mistakes were made by people down the organisation, and while chief executives have to take responsibility for everything in their agency, it doesn’t look as though the direct mistakes were made by Chuah himself.   And even the mistake affected expected flows of money between various government agencies (the various DHBs), with little or no apparent consequences for the public.   But the Minister was openly embarrassed by the mistake.  And there has been plenty of public and media comment, and even comment from politicians –  so much so that the State Services Commissioner has (rather unconvincingly) sought to suggest public service chief executives shouldn’t be openly criticised by the Opposition.

Contrast that situation with Graeme Wheeler, Governor of the Reserve Bank.  He is an extremely powerful indepedent public servant, who makes policy himself and regulates financial institutions, with relatively few checks and balances.   Upset by comments on his policies by the BNZ’s economist, he engaged in a sustained campaign to “silence” (materially alter the tone and/or content of) a leading critic.  It wasn’t a matter of a single upset phone call, but a sustained campaign over weeks (at least) involving not just the Governor, but each of his three other most senior managers, a meeting with the BNZ chief executive, and finally (that we know of) a letter to the BNZ chief executive, urging that Stephen Toplis be censored.   The Governor, recall, is a key regulator of the BNZ’s business.

And what was the response?   Pretty muted to say the very least.  Lots of people were pretty appalled by the behaviour, but hardly anyone was willing to say so openly.  As Reuters put it in a story

To write such a letter was an unusual move for the head of an independent central bank in an advanced economy, particularly one that directly regulates banks.
The fact the letter did not cause more controversy indicated the central bank’s power, analysts said.

Whether it is really the central bank’s power that was the issue I’m not sure.  For some no doubt it was (some people directly associated with banks made that point to me).   But for many others, with no current involvement in banks, it must have been something else. Perhaps it was partly because Wheeler is leaving shortly anyway?  Perhaps an ingrained willingness to turn a blind eye to egregious conduct when it involves establishment institutions?  The sort of practical indifference that, in turn, enabled the Minister of Finance to get away with abdicating his responsibilities (for the Governor and the Bank) and breezily dismissing the issue as nothing whatever to do with him.   A silence that risks leaving the impression that such conduct –  active attempts by senior public officials to silence a prominent (and annoying) critic –  is acceptable is modern New Zealand.

Then again, look at the example set by our current head of government.

I’m not party political at all.  If any readers think they can work out who I’ll vote for they are doing better than me.  But I’m probably the sort of pro-market conservative that might in times past have been most naturally comfortable supporting National.  And I’ve always had some regard for Bill English.  He was Minister of Finance when I spent some time at The Treasury and if he wasn’t willing to be very ambitious about doing stuff, at least he seemed to recognise – and care about – many of the underlying issues.    And in this very secular age, there was also something reassuring about a conservative practising Catholic as Prime Minister.   He seemed to be a person of decency and integrity, the sort of person any Cabinet would be fortunate to have.

Which is probably why what has emerged this week is so profoundly troubling.

I don’t care greatly about Todd Barclay himself.  What bothers me is Bill English, long-serving Minister of Finance, now Prime Minister, about to seek election to a full term as Prime Minister in his own right.   They are roles in which we should be looking for leadership with integrity.  What is on display this week doesn’t look remotely like that  –  not much leadership, not much integrity.

I’m sure plenty of politicians in the past have had guilty secrets – things that were either never widely known, or never able to be reported.       Had they become known, perhaps some other political reputations would have been severely damaged.    But we are dealing with this specific episode, which has become public, and this specific election.  In the process, the standards of the man who seeks to keep leading our country seem to be laid bare pretty starkly.  Not, I hope, the standards he would sign up to in the abstract, but the way that, under pressure, he actually chose to operate.

From his comments this week it is clear that:

  • Bill English knew not just that a financial settlement had been made in the dispute that had arisen over the employment relationship between Todd Barclay and his former staffer, but that (a) part of the settlement had been funded from the National Party leaders’ fund (not a problem in itself). and (b) that the payment had been larger than usual because of the “privacy issues”
  • Bill English knew that Todd Barclay had taped some of (her end of) his employee’s phone calls (as he noted in his statement to the Police that Barclay had told him so)
  • Bill English knew there was a Police investigation into a complaint around the taping (approached by the Police, he made a statement to them),
  • Bill English knew that  –  as was public knowledge – that Todd Barclay had refused to cooperate with the Police investigation.
  • Bill English knew that when an OIA release was made on these matters, his statement to the Police (with the report of Barclay acknowledging the taping), was deliberately and consciously withheld.

If it didn’t initially occur to him, when Barclay first mentioned the matter, that taping someone else’s phone calls could be a criminal offence, the possibility must have been clear by the time he was making his statement to the Police a couple of months later.

Bill English wasn’t Prime Minister when all this was going on, but he was both Deputy Prime Minister and the former electorate MP for Clutha-Southland.  He knew all those involved in a way that, presumably, John Key didn’t.  And can anyone really doubt that, in a matter with these specifics, if Bill English had insisted to John Key on a higher standard being adopted, it would have been done?

What might a high standard of integrity have involved in this case?

I’d have thought it was as simple as this.

Once it became clear that there was a Police investigation into these matters, English (and Key) should have insisted that Barclay co-operate with the Police inquiry –  first made that insistence known privately, and then (if that failed) publicly.  There was no legal obligation on Barclay to cooperate with Police, but this is about politics and acceptable standards in public life.    Insisting on co-operation with Police isn’t an asssement of guilt, or innocence, just the sort of minimum acceptable standard we should expect in those holding high public office (in this case under the National Party banner) –  especially when you as leader or deputy know stuff (per the English statement) that, at least on the surface, looks questionable.

And if Barclay had refused?   Suspension from Caucus would presumably have been an option, followed by expulsion from Caucus if necessary.   Richard Prebble did that as leader of ACT when the Donna Awatere case arose.

English –  and Key and the National Party Board –  could also have made clear that if Barclay refused to cooperate that under no circumstances would he be a National Party candidate at the 2017 election.

And Mr English could have released his Police statement.

No doubt, well before any of this happened, Barclay would have quietly bowed to the inevitable and either resigned or cooperated with the Police investigation.    But he isn’t the issue here; the conduct of the National Party leadership (and that of Bill English in particular) is.

Might it have been uncomfortable for English and the National Party?  Quite possibly –  and over something that they had had no effective control initially.  But doing the right thing often is uncomfortable.   But it is also why we all drum into our kids that “you’d get in less trouble if you’d fronted up straight away”.    Dealt with effectively 15 months ago (a) this would largely be forgotten by now, and (b) as much of any memory would have been about the willingness of the Prime Minister and Deputy Prime Minister to act decisively to uphold standards.

Instead, none of this was done, and presumably the hope was that none of it would ever come out.  As late as Tuesday morning –  after the Newsroom story came out –  the Prime Minister was still trying to claim he didn’t know much about what had gone on.

It is pretty shameful conduct from the Prime Minister.  And pretty feeble leadership even now.  There is no sign of contrition.  There has been no apology.  Even now, Barclay is still not indicating that he will be cooperating with the Police, still not apologising.  And yet he still sits in the National caucus.    Meanwhile, media seem to find it impossible to get the President of the National Party to face the media on the issue –  even though if the Prime Minister told him otherwise he’d surely be available almost instantly.  (In fact, I heard one National Party MP on Morning Report this morning bemoaning how unfortunate it was that “internal party stuff” had become public.  It suggests they still don’t get it.  Police investigations into possible criminal conduct aren’t just “internal party stuff”. )

Where was the leadership with integrity last year?  Where is it today?

Perhaps the spin is right that the public don’t care.  Time will tell.  But I reckon we should expect, and demand, better from those who hold, or seek, high office.  In a sense, we are fortunate that so much detail emerged on this episode –  that, for example, the Police got Mr English’s text with the comment about taping.  The standards  apparent in the stuff we do see is our best predictor for how our leaders handle other difficult stuff.  On the evidence of how Bill English (and John Key) have handled this episode, from the beginning to today,  those standards look pretty deeply disquieting.

As readers will know, I have written here more than once about a tendency that has crept into this government as the years have gone, and the problems of underperformance have become more apparent, to just make stuff up.  Perhaps it is the pretence that the economy is doing wonderfully, better than most of our peers (when in fact productivity growth is non-existent, the tradables sector is in relative decline, and the unemployment rate still disconcertingly high etc), or the proposition that New Zealand came through the 2008/09 recession better than most, or the laughable (and worse) attempt to pass off extraordinarily high house prices as a “quality problem” or mark of success, it has become all too pervasive.    Frustrating as that sort of thing is, at least anyone who looks for themselves can see that it is largely made-up lines.

The lack of leadership, and attempts to keep things from the public, apparent over the Barclay affair seems to me an order of magnitude more serious.   But perhaps one sort of spin eventually corrodes in other areas the standards these people would surely once have set for themselves, and allows them to lose sight of just how unacceptable the continued failure of leadership now on display really is.  Flourishing free and open democracies need better than that.

 

A few scattered thoughts prompted by the OCR

Once again, I largely agree with the Governor’s bottom line –  OCR unchanged, and no great sense of urgency about future changes in either direction.   And I have quite a few other things on my plate over the next few days.  So here are just a few scattered thoughts prompted by the OCR statement this morning.

At a fairly trivial level, I was a bit surprised, on two counts, to see this line “Recent changes announced in Budget 2017 should support the outlook for growth.”   First, aren’t the bulk of the Budget announcement changes conditional on the current government being re-elected?   That is hardly in the nature of a sure thing I’d have thought.   And second, the comment could be read as something of an endorsement for the government’s spending plans, which doesn’t really seem appropriate for an independent apolitical Reserve Bank.  Why do I say that?  Because the observation isn’t just that increased government spending will provide a boost to demand in the near-term, but that it will increase the “outlook for growth” –  generally regarded as “a good thing”.  Perhaps I’m being a little picky, but it would be surprising if the sorts of initiatives announced in the Budget do anything to lift potential growth.

I wonder too if the Reserve Bank ever gets uncomfortable with the implications of this line “Monetary policy will remain accommodative for a considerable period”?  On their reckoning, presumably, monetary policy has been “accommodative” for probably eight and half, getting on for nine, years, now.   And they expect it to remain “accommodative” for a considerable period ahead.  In total, on their reckoning, at least a decade.     And yet throughout the whole of that period unemployment has been or is projected to be above the NAIRU.   And inflation (core) has been persistently low.  It isn’t even as if that can be ascribed to a series of positive supply shocks –  in fact, productivity growth (not something the RB has any real influence over) has been shockingly bad in recent years.    So where, specifically, is the evidence of the “accommodation”?  Interest rates are certainly low, but that is potentially a quite different thing.    There is an old line about the evidence of leadership being the existence of people actually following.  Perhaps the evidence of monetary “accommodation” should be some sustained resurgence in inflation and pressure on the economy’s available labour?  We still haven’t seen it.

Does it matter?   Perhaps, it could be argued, it is only words.  What matters is actions.    I think it does matter.  The Reserve Bank has twice started what it saw as sustained tightening cycles, only to have to reverse itself quite quickly.   And even though they are no longer champing at the bit to raise the OCR, the mindset still seems to be on the gap between actual and (their estimate of) neutral interest rates.   That increases the likelihood that they will miss, or downplay, downside risks.     In fairness to the Reserve Bank, I suspect it is a problem shared with many of their peers in other advanced country central banks –  there is plenty of talk of a hankering for “normalisation” in the United States – but most are perhaps more subtle and less dogmatic about their phraseology.   In the RBA latest statement, for example, there is no attempt to comment on the gap between the actual cash rate and (estimates of) the neutral cash rate.

And, finally, the Governor repeats his common line that “Longer-term inflation expectations remain well-anchored at around 2 percent”.   Perhaps that is what economists tell survey-takers  (and in a welcome development the Reserve Bank is just about to add such a question to its own survey of expectations).   In fact, we know very little about what (implicit or explicit) assumptions about medium-term future inflation that firms and households are basing their decisions on.   Perhaps, in most cases, they don’t even need to give it much thought –  most interest rates and most wage contracts reprice at least every year or two, and most selling prices can be reset or reviewed at least that frequently.

But we do have one set of indications about what people putting real money on the line might be thinking.    That is the gap between the yield on conventional government bonds and the yield on inflation-indexed government bonds.  That difference isn’t a pure measure of inflation expectations –  there probably are no such things anywhere – and it can be affected by the relative supply of the various instruments, and changing attitudes towards risk.  Try to sell too many indexed bonds, for example, and the yield on them will rise compared to yields on conventional bonds.  That isn’t a change in inflation expectations.   Indexed bonds are often less liquid than conventional bonds.  But then again, for many purposes an indexed bond is a more natural hedge (and thus a more valuable asset) than a conventional bond.   Some of the issues around indexed bonds were covered, long ago, in a Reserve Bank Bulletin article.

There is also a problem that indexed and conventional bonds rarely have the same maturity dates.   Here is the chart of the differences (the “breakevens”) for New Zealand for the last few years.  I’ve used the Reserve Bank’s benchmark 10 year conventional bond yield (the actual bond they are using moves through time), and the indexed bonds maturing in 2025 and 2030.   Throughout the whole period shown, the 2025 bond was closest to 10 years away, but by the end of the period (now) it has only little over eight years to run, and can start to get thrown around by short-term CPI fluctuations (eg oil price changes).

breakevens NZ

There was a big rebound in these “breakevens” (or implied inflation expectations) from the lows in the middle of last year.  But it hasn’t really come to much.  Take the average of last observations from those two series, and the 10 year breakeven –  where people are placing actual money –  is 1.15 per cent.   That is a long way from the 2 per cent target midpoint that the Governor has been required to focus monetary policy on throughout his term.  It has now been at least two years since the breakevens were averaging even as high as 1.5 per cent.

As readers who are closer to markets will no doubt be drumming their fingers and telling themselves, it isn’t just a New Zealand issue.   What about the US and Australia?  Well, here is the same chart for the United States (using the constant-maturity series for both indexed and conventional bonds).

breakevens US

There has been quite a fall off in the last few days, but at least until then the picture looked less disquieting that the New Zealand one does.   If the breakevens weren’t averaging around 2 per cent, perhaps you could say that at around 1.8 per cent they weren’t too far away.  For those defending the Fed’s interest rate increases –  I’m not fully convinced of the case myself –  it might have been some comfort.

And here is a similar chart for Australia, using data from the RBA website (for which the data are only available since the start of 2016).

breakevens aus

Australia’s inflation target is centred on 2.5 per cent annual inflation.  Averaging these two series, implied inflation expectations for the next 10 years are currently only around 1.75 per cent.  The gap in Australia, between the breakeven inflation rate and the midpoint of the target, is almost as large in Australia as in New Zealand.

Perhaps there are compelling market-based reasons why such breakeven inflation rates should be completely discounted, as currently telling us nothing relevant to monetary policy.  But if so, perhaps the respective central banks could explain the reasons why they think there is no meaningful information, rather than (as it seems) simply ignoring the information.  Curiously, twenty years ago –  when Graeme Wheeler was still head of the Treasury’s Debt Management Office – the Reserve Bank was dead-keen on having inflation-indexed bonds, as one read on inflation expectations.  Treasury themselves were never that keen –  they just thought it would be expensive funding.    But at the moment it looks as though markets are telling us that Graeme Wheeler will finish his term as Governor without any widespread investor confidence that things are well-positioned for inflation to average near 2 per cent over the next 10 years.  On the face of it, that should disquiet the Bank, and those charged with holding them to account.

In conclusion, and in passing, one of my repeated themes has been the persistently large gap between New Zealand real interest rates and those in other advanced countries.  When our OCR is 1.75 per cent and the Australian cash rate is 1.5 per cent, it is easy to gloss over that point.  But bear in mind that the Australian inflation target is 0.5 per cent per annum higher than New Zealand’s, so that even at the short end there is still a material real interest rate gap.   And what about the very long-term indexed bond yields?   Both governments have indexed bonds maturing in 2035.  Ours was at 1.94 per cent earlier this week, and Australia’s was yielding 0.91 per cent.  Those are really big differences –  think how much they cumulate to over almost 20 years –  and not supported at all by productivity growth differentials in New Zealand’s favour.     The US yield on a 20 year indexed bond is similar to Australia’s at 0.8 per cent.   The gap is, amomg other things, one marker as to how overvalued our real exchange rate is.   That has been a constant theme of the Governor’s during his term.  The policy things that might make a difference to that outcome are in the government’s hands rather than the Governor’s.  And sadly, they don’t seem very interested.

 

Monetary policy: towards the next recession

Tomorrow Graeme Wheeler will announce his second-to-last OCR decision.  Assuming, as everyone seems to expect, that the Governor largely restates the policy stance he adopted six weeks ago, I expect to agree with him.  Within the huge, and inevitable, bounds of uncertainty, the current OCR seems plausibly consistent with core inflation getting back to around 2 per cent, and there is no strong impetus that should be pushing the Reserve Bank to either raise or lower the OCR any time soon.

If anything, one could probably more readily argue for another cut, rather than any increase, just because core inflation has remained so low for so long and it has proved harder to get it back up than most had expected.  The unemployment rate – an indicator that the Labour Party is rightly calling for the Bank to give more weight to – points in the same direction.   In that respect, I disagree with the collective view of the NZIER’s Shadow Board, who have a clear upward bias.  As an aside, it is interesting  to note that the BNZ’s chief economist, Stephen Toplis, shares the upside bias, but is the only one of the panel to put a substantial weight on the possibility that further cuts might prove, as things stand, to be appropriate.   Here is the probability distribution (percentages) of his recommendations.

toplis shadow board

But in this post, I really wanted to focus on some longer-term issues where I think there is rather more serious reason to doubt that the Governor is adequately discharging the responsibilities of his office and reason to worry that, in fact, some of his duties have been neglected.     And these aren’t just issues about economic forecasting, something that no one is very good at, and where anyone who pretends otherwise is a fool.

My concern is the next recession.   No one knows when it will be, but it has been seven or eight years since the last one ended.    People will chip in to point out that there is nothing inevitable about another recession just because a few years have passed since the last one, and no doubt that is true.  Nonetheless, downturns and recessions do happen, and discretionary monetary policy exists mostly to help cope with them.  (And to anyone who wants to argue that Australia hasn’t had a recession for 26 years, the simple response is (a) check out the fluctuations in the unemployment rate, and (b) check out the fluctuations in the RBA’s policy cash rate.)

Perhaps others will want to point out that the Reserve Bank still seems to think that the neutral interest rate is perhaps 200 basis points higher than the current OCR.   Perhaps they are right, and perhaps not.    But even if, in some sense, they are right, it will be no comfort –  and provide no buffer – if the next recession were to occur in the next couple of years (and if you think that unlikely –  as probably I do too –  recall that the track record of forecasting recessions, globally or domestically, is even worse than the usual economists’ dismal record of macro forecasting).

If anything, of course, these issues are even more pressing in most other advanced countries.  The only upside to having, on average over very long periods of time, the highest interest rates in the advanced world is that the practical lower bound on nominal interest rates is a bit further away here.    But it is quite close enough.  In New Zealand recessions, cuts in short-term interest rates of 500 basis points or more haven’t been exceptional.  After the last recession, the OCR has been cut by a total of 650 basis points, and (core) inflation still hasn’t got back to target.   So when you are starting with an OCR of around 1.75 per cent, and the practical lower bound on nominal interest rates is probably around -0.75 per cent, the leeway that is left is much less than one would typically like.      People can put on brave faces and pretend otherwise, or simply try to ignore the issue (the latter seems mostly the New Zealand approach), but burying your head under the pillow doesn’t make the problem go away.

And it is not as if this is some flaky Reddellian issue that no one else in the world cares about.    In Canada, for example, there is formal process for reviewing their inflation target every five years.   At the last review, they left the target unchanged, but only after doing a huge amount of work looking at some of the alternatives.   That work was openly foreshadowed (eg in a speech here ), and a great deal of it was published, and is available here.

Over recent years, two former IMF chief economists –  Ken Rogoff and Olivier Blanchard –  have called for inflation targets to be raised to provide additional scope for discretionary monetary policy in the next downturn. [UPDATE: I had meant to include this link to a recent post from Simon Wren-Lewis, an Oxford professor of macroeconomics, which also touches on the fiscal options.]

In the US context, I linked a couple of weeks ago to a speech by John  Williams, head of the San Francisco Fed, openly exploring whether the Fed should move away from inflation targeting to price-level targeting, again with a view to increasing resilience in the next downturn.    As I observed then

I’m not persuaded by Williams’ case, but what struck me is how open the system is when such a senior figure can openly make such a case.  The markets didn’t melt down. The political system didn’t grind to a halt.  Rather an able senior official made his case, and people individually assessed the argument on its merits.

And then a couple of weeks ago there was an open letter to the Board of Governors of  the Federal Reserve from 22 economists calling for serious consideration to be given to an increase in the inflation target, and specifically that

the Fed should appoint a diverse and representative blue ribbon commission with expertise, integrity, and transparency to evaluate and expeditiously recommend a path forward on these questions.

As they noted, other senior Fed people had openly acknowledged the importance of the issues.

And was the letter  –  mostly from a group of fairly left-leaning economists, but including one former FOMC member, and one former member of the Bank of England’s Monetary Policy Committee –  just ignored?   Time will tell, but Janet Yellen was asked about it at her press conference.  Her response?

Ms Yellen stressed in her news conference last week that there were both costs and benefits to a higher inflation target, but she added that the Fed would be reconsidering the issue in the future. “We very much look forward to seeing research by economists that will help inform our future decisions on this.”

There are pros and cons to making changes, whether simply to raise the inflation target, or to look at options such as levels targets for the price level, nominal GDP, or wages.    Personally, I would prefer that central banks (and finance ministries) focused on options that eased or removed the effective lower bound on nominal interest rates  (issues on which, again, very able people internationally have written).   As I noted in an earlier post on these issues

At the extreme, central bank physical currency could be withdrawn and completely replaced with electronic central bank liabilities, on which (say) negative interest rates could be paid.  But that would take legislation and considerable organisation, and would be an unnecessary over-reaction, while there is still a considerable revealed demand to transact (in the mainstream economy) in cash.  Better options might be to, say, cap the total issuance of Reserve Bank physical currency and allow an auction mechanism to set a variable exchange rate between physical and electronic Reserve Bank liabilities.  Banks themselves could be allowed to issue currency again –  on whatever terms they chose.  Or the Reserve Bank could simply put in place an administered premium price on access to new physical currency (eg a 2 per cent lump sum fee would be likely to introduce considerable additional conventional monetary policy leeway).  Each of these possibilities has potential pitfalls and possible legal issues.

But now is the time to be doing the research and analysis.  Now is the time to be working through the technical obstacles and logistical constraints.  And now is the time to be (a) canvassing the issues in public, and drawing on the perspectives of outside experts as well as public servants, (b) to be making the informed decisions as to whether (reluctantly) inflation targets need to be raised, and (c) to be able to lay out in public a confident articulation of how the authorities envisage that they would handle the next significant recession, given the evident limitations at present.

Why does it matter now?     There are at least two reasons.  The first is that if a higher inflation target is part of the answer, now is the time to do it.  It can’t meaningfully or usefully be done in the middle of the next recession, because by then there will very serious doubts that the authorities can get inflation up to even the current target rate.  And the second reason is because when the next recession is upon us (whenever it is) commentators will very quickly realise the limitations of conventional monetary policy.  We’ve been used to a world in which central banks could act decisively to lean against recessions – not prevent them, but limit the damage that is done, and prompt a rebound.   If people realise that is no longer possible to anything like the usual extent, they will –  entirely rational –  adjust their expectations in light of that knowledge.   Expectations quickly become reality in that sort of climate, deepening (perhaps quite materially) the recession.     It would be almost inexcusable to simply let that happen –  with all the real adverse consequences on individuals and families from unemployment –  when there has been years to prepare against the possibility.

The third consideration is a bureaucratic one.  There will be a new Policy Targets Agreement negotiated before the new Governor takes office next March.  In the normal cycle of our law, that is the time to make any significant changes in the regime.    And now is time to be doing the work on these issues, and canvassing them in public.  There aren’t automatically obvious right answers to these questions, and answering them –  what are the best guidelines to govern macroeconomic management – isn’t just a matter where those inside the bureaucracy are blessed with a monopoly on wisdom.      (It is an  unusual and undesirable feature of our law that the Policy Targets Agreement is formulated before the Governor takes office –  when he or she may have little specific expertise, and little access to staff (or outside) advice –  but that is just one of the many aspects of the Reserve Bank Act that is overdue for reform.)

There are at least two countervailing arguments that I want to address briefly.     The first is one that I take some comfort from myself.    Foreign trade is more important to the New Zealand economy than it is, say, to the United States.    Should our OCR ever have to be cut to the effective lower limit (even if it was then no lower than those of most other advanced countries) it seems highly likely that our exchange rate would fall very substantially.    We’ve seen that in the past when the gap between our interest rates and those abroad has closed (most obviously in 2000).  That would make some material difference in buffering our economy.  Against that, however, it is important to recall that in each past New Zealand recession the exchange rate has also fallen a long way.  We seem to have needed both large interest rate cuts and large falls in the exchange rate.

The second countervailing argument is the potential role of fiscal policy.    But although New Zealand’s government debt position isn’t bad:

  • it is not as good as it was going into the last recession,
  • since then we’ve been reminded repeatedly of the potential fiscal pressures from natural disasters,
  • there is no coordination framework between fiscal and monetary policy and the Reserve Bank (rightly) has no control over the use of fiscal policy,
  • it isn’t clear that in any of the countries that actively used fiscal policy in the last severe recession it was done on a scale that was enough to make a decisive difference,
  • while politicians in other countries were often willing to actively use fiscal policy to boost demand for a year (or perhaps two), the imperatives –  political, economic or market –  for tightening up again seemed to take hold pretty quickly,
  • fiscal policy is simply less well-suited to the cyclical stabilisation role than monetary policy.

But if fiscal policy is to be a big part of New Zealand’s answer to the limitations on monetary policy in the next recession, again the issues need to be openly canvassed and debated now.

These are issues that should be worrying the Reserve Bank, the Treasury, and the Minister of Finance.  But there is not a hint of such concern in any of their publications or public statements.  This isn’t one of those issues –  is a bank on the brink of failure eg –  where secrecy is required.  If anything, it is one that would benefit (perhaps greatly) from open discussion, and a sharing of perspectives, research insights, and other analysis.

Each year the Reserve Bank (for example) is required to publish a Statement of Intent.  In many ways it is a bureaucratic hoop-jumping exercise, but it does require the Governor to set out the Bank’s priorites and areas of focus for the coming three years.  I’ve written here previously about how these issues –  really important medium-term considerations –  have had no mention in past Statements of Intent.   There will be a new SOI out in the next week or so –  they have to publish before 1 July.    Of course, at this stage with only three months left in office, what the Governor thinks of as the priorities for the next three years may not matter much in practice.  But it will be interesting to see if he has given these “next recession” issues any space in this year’s document.   I hope so, but fear not.

It is a shame that he hasn’t used the opportunity of his last year in office, when he could have acted as an honest broker and champion of opening up issues for his successors, to have openly put these issues on the agenda –  in public and for the Bank’s own research.  To do so would have been fully consistent with his responsibilities under the Act.  It would, almost certainly, have been a more appropriate use of his energies than corralling his senior managers into efforts to censor a market economist who disagrees with him in tones the Governor finds uncomfortable.  Leadership is about looking beyond the trivial, restraining your own irritations, and focusing attention on important issues that may be just beyond the horizon (and the immediate concerns of officials and market economists) right now, but are no less important for that.

One would hope that when the Board is interviewing candidates for the next Governor (recall that applications close in a couple of weeks) these are among the sorts of substantive issues they are conscious of.  But you have to wonder how they would do so.  The Board has no role in the formulation of the Policy Targets Agreement, and among its members there is very little expertise in the sorts of issues that need to be grappled with.  As a group that has collectively defended the status quo, it isn’t obvious that it would be in the personal interests of any applicants to seriously challenge in front of the Board whether things are quite right.  That would be a shame.  (And again, it is reason for reforming the Reserve Bank Act –  both to shift the setting of the policy target away from the appointment of a Governor, and to shift responsibility for appointing a Governor more squarely to the Minister of Finance.)

As a marker of just how untransparent the New Zealand system is, the Reserve Bank proved highly obstructive a couple of years ago when I sought papers relating to the 2012 Policy Targets Agreement.   To the credit of Treasury, while I’ve been typing this post I’ve just received a 90 page release of papers relating to the negotiation of the 2012 PTA.  People shouldn’t be having to dig this stuff out years after the event.    Setting the rules, and institutions, for New Zealand macroeconomic management should be one of those areas where government agencies are open and pro-active, before and after decisions are made.

 

 

Emissions policy and immigration policy

A month or so ago I ran a couple of posts on New Zealand’s greenhouse gas emissions in international context.  Readers may recall that New Zealand now has the second highest emissions per unit of GDP of any OECD country, having moved up from sixth in 1990.

emissions per GDP

As part of the Paris climate change accord process, New Zealand has made ambitious promises to reduce its total emissions substantially.   This was the wording from the terms of reference for the new Productivity Commission inquiry into how best the economy might adjust given the climate targets

New Zealand has recently formalised its first Nationally Determined Contribution under the Paris Agreement to reduce its emissions by 30 percent below 2005 levels by 2030. The Paris Agreement envisages all countries taking progressively ambitious emissions reduction targets beyond 2030. Countries are invited to formulate and communicate long-term low emission development strategies before 2020. The Government has previously notified a target for a 50 per cent reduction in New Zealand greenhouse gas emissions from 1990 levels by 2050.

At present, total emissions are still above 1990 levels, not a common outcome for OECD countries.

One of the reasons for that is that we have had much faster population growth than most advanced countries.    Indeed, in their recent report on emissions etc, the Ministry for the Environment even listed population growth as first among the various constraints or challenges New Zealand faces.

Some of the challenges New Zealand faces when reducing emissions include:

  • a growing population
  • almost half our emissions are from agriculture where there are fewer economically viable options currently available to reduce emissions
  • an electricity sector that is already 80.8 per cent renewable (meaning that we have fewer ‘easy wins’ available to us compared to other countries who can more easily make significant emissions reductions  by switching to renewable sources of electricity).

As I noted in my earlier post, I was pleasantly surprised to find the population issue listed so prominently.

It is hard to disagree with them  But it does leave one wondering what advice or research/analysis they have done, and provided to Ministers –  including when the target was being adopted –  about the implications of New Zealand’s immigration policy.  Our non-citizen immigration policy pushes up the population by almost 1 per cent per annum (against an, admittedly unrealistic, benchmark of zero inward migration of non-citizens).  Have they analysed the potential costs and benefits from lowering the non-citizen immigration target relative to other possible abatement (or compensation) mechanisms?  Perhaps there is credible modelling that suggests the overall abatement costs to New Zealanders would be lower through other plausible mechanisms.  But given that population increases appear first, and without further commentary, on their lists of “challenges” it would be good to know if they have done the work.

On reflection, I think I will lodge an Official Information Act request to find out.

And so I did, writing thus to the Ministry for the Environment

I was interested to read in the snapshot emissions document released this morning that the Ministry regards increasing population as one of the top challenges New Zealand faces in meeting its emissions reductions target.

Accordingly, I request copies of all advice to the Minister for the Environment or ministers responsible for climate change policy, any and all internal research or analysis documents, and any advice to MBIE or the Mnister of Immigration, on the implications of New Zealand’s immigration policy for (a) the setting of, or (b) the successful pursuit of, or (c) costs of pursuing New Zealand’s emissions reduction target.   Among my interests is in any material on the relative costs of various options for achieving the target, including whether any research and modelling has been done on the costs of cutting the immigration targets relative to other abatement methods/policies.

This request covers all material since the start of 2014.

I deliberately went back to the start of 2014 to encompass both the period leading up to the adoption of New Zealand’s emissions reductions commitments, and the period since then, when presumably officials had to think hard about how policy might assist in minimising the costs to the economy of meeting the target the government had committed us to.

A short time ago, I received a full and comprehensive reply from the Ministry for the Environment, the ministry which has the lead responsibility for official advice on climate change and emissions related issues.

After quoting my request back to me, Roger Lincoln, Director Climate Change, replied

“No documents were found within the scope of your request. For this reason, your request is being refused under the grounds of 18(e) – the document that contains the information requested does not exist or can’t be found.”

I wasn’t really expecting there would be much.  But nothing at all, not a shred, whether before the government entered into these commitments, or subsequently, or even just before they openly listed the growing population first in the list of challenges New Zealand faces in reducing emissions?   That did take me by surprise.   So complete is the absence of material, that it is almost as if they were determined not to consider the issue, or (say) point it out to MBIE, the government’s leading immigration policy advisors.  Whether that was because senior officials internally discouraged them looking at the issue, or whether one or other of their ministers issued such guidance, we don’t know.

But MfE is clearly aware enough of the issue to put it top of their recently-published list of challenges.  And yet has done no research, no analysis, and provided no advice on the interaction between immigration policy and the costs of meeting our climate change commitments.

Not long enough, Stephen Toplis incurred the wrath of a senior public official for suggesting that, in his view, if the Reserve Bank did not adopt a particular line, it could be considered “negligent” –  ie not doing its job properly.   And that was just a conditional statement about something that hadn’t happened yet.      When the Ministry for the Enviroment has done nothing at all on immigration policy and the additional costs it appears to impose to meet the emissions targets –  not even simply pointing out the possible connection to MBIE –  whether in providing advice on formulating commitments, or on how the country might best meet those government commitments – that looks quite a lot like actual negligence, with the potential for real economic costs to New Zealanders.

I do hope that when their Issues Paper for the emissions reduction inquiry emerges, the Productivity Commission will prove to have taken the issue rather more seriously.

The Secretary to the Treasury on productivity

A speech appeared on The Treasury’s website the other day.   It was, we were told, by Gabs Makhlouf, Secretary to the Treasury, and given as the closing address at a Productivity Hub Workshop last Friday.  The Productivity Hub is a grouping of government agencies, hosted at the Productivity Commission

which aims to improve how policy can contribute to the productivity performance of the New Zealand economy and the wellbeing of New Zealanders

It is a laudable aim.  I’ve been to a few of their events, and at times they’ve had some interesting and stimulating speakers.   Whatever the event was that Makhlouf was speaking at, it has a very low profile  –  there is nothing about it on the Hub’s homepage, or anywhere else I can see.  I’ve lodged a request for the papers and presentations.

I’m all in favour of pro-active release of material by government agencies, but I was a little curious why The Treasury chose to make this speech something on-the-record.  Closing addresses usually seek to summarise and draw lessons from what has been heard at the conference/workshop.   But in Makhlouf’s speech there is no reference to any of the papers that had been presented, or any of the material discussed at the workshop.    Perhaps he just wanted to signal that he, Secretary to the Treasury, treats productivity as something important (on checking, I found that Treasury had also published his brief remarks to a couple of previous Productivity Hub events)?

Whatever the reason, when the Secretary to the Treasury  –  head of the government’s main economic advisory agency –  talks about productivity, it should be worth taking note of.   After all, presumably even now Treasury is in the process of pulling together the analysis and advice that will form the basis for their Briefing to the Incoming Minister (BIM) after the election.     We might hope they will be (a) pointing out to the Minister of Finance that New Zealand’s productivity performance is woeful, and (b) offering a compelling narrative and set of recommendations for what might reverse that performance and enable New Zealand to deliver for its citizens the sort of standard of living they should reasonably expect.     But on the basis of the Secretary’s latest speech, I wouldn’t be holding your breath.

Of course, one can’t expect any sort of fully-developed story in a few pages closing a workshop.  But if there is (a) a sense of urgency, and (b) a well-developed set of policy proposals being worked-up, that should be clear in a speech of this sort. Neither is there.

Makhouf recognises that our productivity performance leaves something to be desired, but how is this for minimising the issue?

We are middle of the OECD pack at best in the amount of income we derive per hour worked, and we have made little or no headway on lifting our productivity performance rankings over the past 15 years.

There are 35 OECD countries now, and only 13 had real GDP per hour worked less than New Zealand’s in 2015 (most recent comprehensive data).   And the only reason we are even near the middle of the OECD pack is because so many poorer countries have been allowed into the OECD.    Every single one of the 11 new members in recent decades was poorer, and less productive than us, when they joined.

When we joined the OECD in 1973, it was a club of 24 countries.  OECD data go back to 1970.  And in 1970, our real GDP per hour worked was similar to that in France and Germany.     These days, they have productivity 60 per cent higher than ours, and of those 24 countries only Portugal, Turkey, and Greece now have lower real GDP per hour worked than we do.   In 1970, Turkey had GDP per hour worked less than half ours, while on the latest estimates it is now almost equal to us.

And while it is certainly true that “we have made little or no headway on lifting our productivity performance rankings over the past 15 years”, the story is much worse than that, as even the OECD highlighted last week.    Here is their chart

OECD productivity

And this is mine, from a post a couple of weeks ago

douglas 3

In 47 years now there has never been a time when New Zealand has succeeded in narrowing the productivity gaps that have opened up between us and other advanced countries.  At best, we’ve gone sideways in some periods.

And if Makhouf understates the severity of the problem, he overstates any signs of progress

Our understanding of New Zealand’s productivity performance is improving, thanks to a wealth of information that has recently been released including as a result of the Productivity Commission’s report Achieving New Zealand’s Productivity Potential, the OECD’s New Zealand Country Study and Going for Growth, and the Treasury’s He Tirohanga Mokopuna.  (That last one is a cracking read, by the way.)

Really?   The Treasury report he refers to was their long-term fiscal report, and I’m genuinely puzzled as to how he thinks that (useful) report advances our understanding of the productivity underperformance.    The Productivity Commission piece, which I wrote about here, was an interesting effort, and did represent a step forward in some areas (including the treatment of immigration policy) but it has hardly galvanised the nation –  or even, as far as I can tell, official Wellington.  As for the OECD’s report, surely Makhlouf was just being diplomatic  –  the OECD chief economist was at the workshop –  rather than seriously suggesting that they have a compelling narrative to explain New Zealand’s underperformance and, thus, a solid model to use in proposing remedies?

Makhlouf goes on

Our challenge now is to keep building the momentum of progress and turning our growing understanding into action that lifts our productivity performance.

But where is the progress at all?   Where, specifically, is the evidence that Treasury –  or other government agencies –  are any closer to credible answers?

Makhlouf set out what might have been an interesting marker

As I mentioned, we have seen little improvement on where we rank among OECD countries for productivity, yet we have been told that we have world-leading settings.
This raises a few questions for me.  ….. Or could it in fact be that New Zealand’s world leading economic and policy settings aren’t so world-leading anymore?

I’m not sure who really thinks of New Zealand policies are being “world-leading” these days.  In some areas, perhaps they are.  In other areas, we score quite badly.  But I’d have thought a fair overall description would probably be ‘no worse than the typical OECD country’.

Sadly, Makhouf doesn’t really do much to develop his tantalising question.

‘World-leading’ is always evolving.  Looking back through history, Rome, China, India and the United Kingdom have all at times been world leading economies, just as the United States is today.  So while some things will continue to hold for productivity and incomes, we need to make sure we are not working towards something that used to be world-leading, but is no longer so.  It’s also likely that what’s world-leading will vary by country so it’s not a recipe that we can simply copy.

Surely all this confuses great power status –  not unrelated to economic strength typically  –  with world-leading (economic) policy settings?   After all, he could have noted that 100 years ago, New Zealand looked pretty world-leading –  not as a “great power” but as one of the very richest and most productive nations on earth.   Nor am I really quite sure how “what’s world-leading will vary by country” makes much sense, unless he is saying –  in which case I agree –  that in thinking about diagnosing New Zealand’s problems and offering remedies to policymakers we need to think hard about the specifics of New Zealand’s situation.  It isn’t clear that the OECD (at least) has really done that.

But it isn’t clear that Treasury is really doing so either.  Because Makhlouf devotes the rest of his remarks to

five factors that the Treasury believes always matter: skills, connections, markets, resources and rules.

Any micro-focused policy agency almost anywhere in world could trot out that list

Of skills

The Treasury believes that opportunities remain to lift skills and resilience in the workforce, and it’s important that those opportunities are pursued.

No doubt, but it doesn’t seem particularly persuasive that gaps here are big part of the 45 year story of underperformance, when the OECD adult skills data suggests New Zealand workers already have among the highest skills of any in the OECD.

Of connections

Connections matter, in particular people-to-people connections.  And as Asia continues to dominate economic activity, perhaps those types of connections – ie, relationships – matter more than ever.  Improving connections can help to improve the flow of people, capital, trade and ideas that contribute to productivity.  Strong people-to-people relationships build confidence and understanding and promote learning.  They help our businesses to identify capabilities that will help them improve their productivity and ultimately compete and succeed in both domestic and global markets.

I suspect this is some sort of code for “keep on having lots of immigration”, but it isn’t terribly specific.    And as a reminder, with rare exceptions, Asia isn’t the home to the richest or most productive economies.  But again, with hugely high (by international standards) rates of non-citizen immigration, did Makhlouf and Treasury have anything remotely specific in mind?

He gets a little more specific on “markets”

In the Treasury’s view we need to continue to lift the competitive intensity of the New Zealand economy.  The pressure of competition pushes firms to be more productive, for example by innovation to improve quality or cut costs.  We need to ensure our markets are as competitive as possible by reducing the barriers to entry, including for imports (whether in goods or services), or by regulating the price and quality of goods and services in markets where there is little or no competition, such as in our telecommunications and electricity markets.  And we need to maintain the effectiveness of competition laws and institutions.  If we want competitive markets and the productivity gains they bring, we have to ask ourselves: what are the regulatory barriers preventing competition and what can we do about them?  How bold do we want to be to invite competition?

It isn’t really my area, but if there is useful stuff to be done in this area how plausible is it that it can materially explain 45 years of relative economic decline?  Say what you like about competition in New Zealand now, but in almost all areas there is a great deal more than there used to be.

Then he moves onto natural and physical resources.  Here he includes housing.

Our natural and physical resources are next.  One of the most high profile issues we’re examining in New Zealand – housing – illustrates how these resources are a significant factor in productivity.  We are all aware of issues in house price growth in Auckland and the inefficiencies in our use of land which are proving to be a bottleneck in New Zealand’s growth and productivity.

I’m not sure there is really any evidence for this proposition.  If there is, in a New Zealand context, perhaps The Treasury could publish it.    Dreadful as our housing policies are, when the city that is worst affected by them has (a) had very rapid population growth, and (b) has a very small margin by which productivity exceeds that in the rest of country, it suggests that overseas studies –  on places like San Francisco and New York (which have had little population growth, and very high productivity margins) –  may not be of much direct relevance here.

Still on housing

the degree of its affordability or unaffordability is a product of our entire urban development chain and of multiple interacting areas of policy. We’re considering these issues holistically, as well as particularly how land owners capture the economic rents and potentially magnify the problems. We see the concept of competitive land markets as an important part of the way forward.

Surely if there is something there, it could have been written a great deal more simply?  And portentous words about “the concept of competitive land markets as an important part of the way forward” almost make a mockery of people priced out of home ownership right now.

In some areas, I’m not sure Makhlouf really knows what he is saying

At the moment, it can be argued that too much of our natural resource use is determined by incumbency rather than most efficient use.

Does inumbency here mean “the person who owns it”?   But, surely, land is our greatest natural resource.  Mostly, it is pretty freely tradable.    Anyone with a better, more profitable use, in mind can surely make an offer?  Or (but surely not) is the Secretary perhaps a bit worried about private land ownership?

Actually, despite what he said, he seemed to be mostly talking about water rights and pollution.  What he says on water sounds sensible

To use water as an example, the ‘first-in first-served’ approach to water allocation means it may not always be allocated to the highest value use, and the current system lacks sufficient incentives for use to move to a higher value one. The Freshwater Allocation Work Programme is considering options that could be more appropriate to ensure that we are getting the best use of our water resources.

And I’m sure there are some real issues around pollution too.  But when he says

Better rules around use and around pricing externalities such as pollution are critical to making best use of resources and are likely to be key to promoting significant diversification of the economy and contributing to an improvement in productivity.

I think he makes it sound all too easy.  For example, it is all very well to talk of water pollution arising from more intensive dairying, or indeed of the implications for carbon emissions, but without a great supporting analysis it sounds a lot like feel-good rhetoric to suggest that restricting such industries is likely to be significant in lifting overall productivity in the economy.  What channels, one wonders, does the Secretary have in mind?

His final category was rules

The making of rules and regulations – whether by central or local government or even by self-regulated occupational groups – has an impact on productivity.  All rule-makers help shape the environment in which investment, enterprise, and job creation is either promoted or limited.  Rule-makers in the public sphere have a double responsibility: to ensure effectiveness in public spending and decision-making, and to provide the best possible regulatory and policy settings.

Hard to disagree really.  But is this really the best the Secretary to the Treasury –  an agency with key responsibility for regulatory review policy – can do on the contribution of New Zealand regulation to productivity?       There isn’t even an attempt to draw some of his points together, and note that (for example) well-intentioned but flawed rules help explain the absence of a well-functioning market in urban and peripheral land.

Overall, there is no sense of urgency, and no hint of any fresh insights either.

Makhlouf ended his speech this way

We need to continue to test our assumptions about what does and doesn’t work, and to apply new things where they make sense.  I know there’s a lot of willpower and brain power here to ask questions, find solutions and take actions to raise New Zealand’s productivity.

Of course, it is elected politicians, not officials, who would get to “take actions to raise New Zealand’s productivity”.  Sadly, despite the approaching election, there is little sign among any of them –  or those competing to take their place –  of much will to change, or much interest in attempts at serious answers to decades of decline.

Should there be more urgency?  I’d have thought so.    There has been plenty of talk in the last few years of New Zealand and Australia relative economic performance.  Australia is our biggest trade and investment partner, and of course historically an outlet for New Zealanders pursuing the far higher incomes typically on offer there.       It is certainly true that the Australian labour market has been cyclically weak in recent years, even more so than ours.   But here is the latest update of labour productivity in the two countries (in NZ, using an average of the two GDP measures, and an adjustment to hours worked for the break in the series last June).   The chart is indexed to 2007q4, just prior to the recession, but remember that even then we were well behind Australia (incomes and productivity levels)

GDP phw NZ vs Aus June 17

As it happens, Makhlouf’s appointment as Secretary to the Treasury was announced on 28 June 2011.   We’ve had barely any productivity growth since then (none for the last five years).    That, of course, isn’t directly his fault, but one does have to ask whether The Treasury under his stewardship has even once put forward a compelling set of policy proposals to end even this multi-year drought, let alone to reverse the 45 years and more or relative decline.  On the basis of this latest speech, we shouldn’t be very hopeful of what they might have to offer a government formed later this year.

 

 

 

Answers from Switzerland?

A month or so ago, prompted by a Herald news article talking up a New Zealand Initiative study tour to Switzerland to learn “the secrets of their success”,  I pointed out that Switzerland wasn’t such an obvious place to look for lessons on lifting New Zealand’s continuing disappointing economic performance.  After all, since 1970 they were the only OECD country to have had slower productivity growth than New Zealand

switz 70 to 15

and although the average productivity level in Switzerland is still much higher than that in New Zealand, it is no longer among the very best in the OECD.   Denmark, Belgium, and the United States are among the countries doing much better than Switzerland, and even they don’t top the rankings.

A few days later it turned out that the author of the article, veteran journalist Fran O’Sullivan, was actually participating in the study tour, not just talking it up.  At the time, I noted that it would be interesting to hear, in due course, what she learned from Switzerland, while being a little sceptical as to how detached from a New Zealand Initiative perspective she would prove able to be.

In Saturday’s Herald, O’Sullivan devoted a substantial article to reporting back on what was learned on the tour (this time with all the appropriate disclosures, including her partial sponsorship from one of the Initiative’s member companies).   Much of the article is quotes from New Zealand Initiative people.  And the answer it seems, at least on O’Sullivan’s summary take, is in the headline: Education key to Swiss success.

Near the start she observes of her own past trips to Switzerland

Other times I have been to Switzerland, it has been straight to Geneva to the World Trade Organisation’s HQ for trade discussions, or to observe the World Economic Forum in Davos. Not to look at what underpins Switzerland’s own resounding economic success.

I’m still quite genuinely puzzled at where she –  or the Initiative –  get this idea of “resounding economic success”.  I’m sure there are many things to like about  Switzerland but –  despite a very strong starting point a few decades ago –  it just isn’t one of the great economic success stories of modern times.  Productivity growth has been underwhelming –  to say the least –  and although GDP per capita in Switzerland is higher than in, say, France or Germany, it is so mostly because the Swiss put in a lot of hours.  Average productivity is higher in France and Germany, while Switzerland is like New Zealand in that total bours worked per capita are very high in both countries.

I quite like the sound of the Swiss political system –  highly decentralised, lots of quite small, and competitive local authorities.  It is the antithesis of something like the Auckland “supercity” put in place a few years ago by our government.     But one has to wonder quite what economic gains it might have produced.    The New Zealand Initiative seems dead keen on the highly decentralised system

“Private and central bankers, economists and journalists, federal and local politicians alike – in fact everyone we talked to – agreed that this was the most crucial component to the Swiss success formula,” says NZ Initiative executive director Oliver Hartwich.

But when your country has had the weakest productivity growth in the OECD over 45 years, you have to wonder whether the alleged contribution to “economic success” is not mostly one of those myths that all countries have, that don’t necessarily line up that well with the evidence.  I’m sure the decentralised system is cherished, but in modern times it has seen (although not necessarily caused) Switzerland drifting backwards.

But the political system isn’t the thrust of O’Sullivan’s article.  Rather, the education and vocational training systems seem to be.  In fact, even Hartwich seems to agree

Concludes Hartwich: “The most important insight was the fact that a solid vocational apprenticeship is just as respected as a university degree (and sometimes leads to better salaries, too). New Zealand businesses should not only co-operate with institutions but lead the debate on the required reforms.”

And a couple of quotes to give you the flavour of the rest

It may seem ruthless to stream students at an early level into academic and vocational education training (VET) streams. But Switzerland does just that.

About 20 per cent go into the university stream and the rest into the upper secondary school vocational education training stream, where students combine school learning with skills developed in the workplace.

This system serves 70 to 80 per cent of Swiss young people, preparing them for careers ranging from high-tech jobs to health sector roles and traditional trades. Both white collar and blue collar roles are appreciated. There are about 230 vocational categories.

and

The upshot is that Switzerland enjoys virtually full employment, the youth unemployment rate is among the lowest in developed countries and the Swiss enjoy a very high standard of living. Those doing the VET stream are not locked out from university education, which they can do at a later stage.

….

Asked if they could import one feature of Switzerland to New Zealand, the consensus of the visiting business leaders was that it would be the vocational training system.

ASB chief executive Chapman says any growing economy relies on a pipeline of skilled and motivated workers for momentum, and “in that context I think there is a lot to learn from the Swiss”.

“The Swiss have an enviable record of high youth employment.

I don’t know anything specific about the Swiss vocational training programmes, so there may well be some specific aspects that New Zealand firms, or New Zealand governments, could learn from.     But as I reflected on O’Sullivan’s article, the story about education etc didn’t seem terribly convincing as an explanation of Swiss “economic success”.

Overall employment rates in New Zealand and Switzerland are very similar (on OECD data 66.2 per cent in both countries last year).  But on youth employment, Switzerland does appear to have had a consistently higher employment rate.  Among those aged 15 to 24,  62 per cent of Swiss were employed last year, and 54 per cent of New Zealanders.

Employment among young people is a bit of an ambiguous indicator.  After all, if young people are in full-time study (school or tertiary) they often won’t be in employment at all.  Youth employment rates were probably higher in both countries 100 years ago.

But what about youth unemployment: people who want a job, are looking for a job, but can’t find a job?   Here, Switzerland seems unambiguously to do better than New Zealand.

U rates Switz and NZ

And what are some of the things that affects the ability of young people to get into work?  Minimum wage laws are likely to be one of them.  I recall the New Zealand Initiative’s Eric Crampton, when he was at Canterbury University, making some very useful contributions  (eg here) to the debate about the impact of the much more stringent minimum wage provisions, especially as they affect young people, that were put in place here about 10 years ago.

Readers may recall that, relatively low as New Zealand wages are, our minimum wage relative to median wages –  the sort of metric relevant when thinking about whether minimum wage provisions exclude some people from employment –  are very high by OECD standards (fourth highest in fact).

And what about Switzerland?   Well, in Switzerland there is no minimum wage law at all.   And not that long ago, Swiss voters overwhelmingly rejected an attempt to establish one.     Perhaps in the course of the Initiative’s study tour no one thought to ask the question about minimum wages.  But whatever the reason, it looks as though it could be a rather important omission.  It isn’t the really skilled young people who typically have difficulty getting jobs, but the less skilled and more troubled ones.  Our systems works against them getting established in the labour force, while the Swiss one seems not to.   As the ASB chief executive put it:

“You can’t underestimate the power this has on the optimism and confidence of their youth as they look to their own future.”

But I was also a little puzzled about the story that seemed to downplay the role of universities in Switzerland.  I’m as willing as next person (including New Zealand Initiative members) to think that perhaps New Zealand went through a phase where too many people went to university.   And a good builder or plumber will certainly earn more than many of the occupations our more-marginal university students end up in.

But what did the data show?  As it happens, the OECD Economic Survey on New Zealand came out on Thursday, and they had a whole chapter on the labour market, skills etc.   So I flicked through it looking for relevant charts.  Like this one.

skills young

Switzerland is “CHE”.   Relative to New Zealand –  and to the OECD as a whole –  Swiss young workers (25 to 34 year olds) now have a far higher rate of completed tertiary qualifications than New Zealand ones do.

And there was also this chart

skills swiss

Whether for younger people or older ones, Switzerland is ahead of New Zealand, particularly in the proportions with masters or doctorates.

And yet

Tertiary Education Commissioner Sir Christopher Mace says, “to be highly qualified technically rather than academically was totally acceptable in Switzerland.”

No doubt that is true –  or rather I have no reason to doubt it.  But a huge proportion of Swiss young people are getting strong academic qualifications.

Oh, and the OECD also makes much in their reports of the adult skills data I’ve written about here previously. Switzerland didn’t participate in that survey, but New Zealand workers came up with some of the very highest skills (notably problem-solving skills) of any of the many countries that did participate.

Still flicking through the OECD chapter, I found another interesting chart on employment.  Ideally it would be a chart of all sole parents, not just mothers, but it was part of another chart focused on maternal employment.

Swiss sole parents

Switzerland is at the far right end of the chart.

Which is by way of leading into another difference between Switzerland and New Zealand –  the overall size of government is a bit smaller there.  Here is the OECD data on current government receipts (mostly taxes) as a per cent of GDP.

govt size nz and swiss

The Swiss tax take is smaller than ours, as a share of GDP, but (a) the gap seems to have been closing, and (b) at least as much of that is coming from the Swiss raising average taxes as from us lowering them.   Again, if one is concerned about productivity, it isn’t obvious that the Swiss experience has a great deal that is positive to teach us, even if the reasons for their weak productivity growth might well be different from the reasons for our own.

The Swiss track record with weak productivity growth isn’t something new that no one had noticed before  –  the OECD, for example, has been offering thoughts on it for some time (eg here).  So it is still a bit of a mystery why the New Zealand Initiative is touting Switzerland as a success story to emulate, or why a senior journalist is channelling those lines.   Perhaps it would have offended New Zealand business leaders’ sense of amour propre to have gone further east, but if there are many lesssons to be learned for us in Europe about lifting overall economic performance, it seems more likely they might be found in countries like Slovakia or Slovenia, Estonia or Latvia (all now fellow members of the OECD) where productivity is fast catching up (in some cases already has) average levels in New Zealand –  and that in countries that for the whole of modern New Zealand history (ie since say 1840) have been much much poorer and less productive than New Zealand.

Travel generally broadens the mind, and almost any country can probably offers some experiences (good and bad) that visitors could learn from.  I’ve no doubt Switzerland does too (eg about minimum wages and company tax rates perhaps) .    But Switzerland’s overall economic growth performance has been poor for decades, and that even with the advantages that come from being a relatively-small government place in the heart of one of the most prosperous places on the planet (northern Europe).  It seems unlikely there is very much to learn from them, at least in a positive sense, about how to markedly lift the performance of another struggling country almost as far from anywhere (and from suppliers, markets, clusters of knowledge)  as it is possible to be.

One could wonder whether this group of leading business people, (having gone off to learn from Switzerland, where they would have found a system with no minimum wages and much lower company tax rates, but nonetheless want to tell a story about training and education as the secrets of what they see as Swiss success) are not perhaps preparing against the chance of a change of government later in the year.   All that talk in the article would, no doubt, have seemed like music to Grant Robertson’s ears.  Perhaps not, but I’m struggling to formulate a better hypothesis.   Because the data don’t really seem to fit their story.