The boondoggle

Earlier this week, Kiwirail released its most recent half-yearly financial result.  Once again, the taxpayer was poorer for their operations.   They make great play of a modest “operating surplus” but I rather liked this summary table from their latest Annual Report


In other words, no returns to shareholders at all; in fact losses in one year of a third of the (periodically replenished) shareholders’ funds

Last year, they had operating revenues of $595 million, and an overall loss of $197 million (much the same as the year before).  So roughly a quarter of their overall costs are not covered by income.   As an organisation –  and with all due respect to the energies of individual employees (including the five earning in excess of $500000 per annum) – it has all the appearance of being a sinkhole, absorbing more of the scarce resources of taxpayers each year.

And before people start objecting that roads don’t make a profit, it is worth remembering that airlines do and coastal shipping operations do –  and, if they don’t, they usually go out of business.

An organisation that operates such large losses (acquiesced in by successive shareholder governments) clearly isn’t one that applies the most demanding tests possible to the question of whether individual lines should be opened or closed.  Occasionally people attempt to justify government intervention in this or that activity on (questionable) grounds that the private sector is applying too high a cost of capital.  But in this case, the state operator’s average return on capital (ie over all its operations) is substantially negative, and it has no expectation of changing that.

A few years ago, Kiwirail closed the Gisborne to Napier line.  Rail volumes had been low and falling –  some trivial portion of the volume that Kiwirail estimated would have been required to make the line viable.  But ever since, there have been people hankering for the line to be reopened.

And yesterday, as part of the first wave of projects approved under the new Provincial Growth Fund, the Minister of Regional Development announced that

“We’re also providing $5 million to Kiwirail to reopen the Wairoa-Napier line for logging trains, taking more than 5700 trucks off the road each year.”

 In the more detailed material released with the announcement there is a suggestion that the Hawkes Bay Regional Council may also be putting in money.

There is no sign of any cost-benefit analysis of this proposal having been released at all. But we can assume that the proposal wouldn’t pass any standard (weak) Kiwirail commercial test since otherwise Kiwirail would have reopened the line without taxpayers’ having to chip in more money directly.

There used to be some logs/timber carried on the Gisborne-Napier line, but a reader pointed me to the numbers: in the final full three years of operation, a total of 327 tonnes of it.

There are, apparently, going to be a lot more logs to move in the coming years.  In the Minister’s words

“The wall of wood is expected to reach peak harvest by 2032 so reopening this line will get logging trucks off the road and give those exporting timber options that they currently do not have,” Mr Jones says.

“It makes sense to consolidate that timber in Wairoa and use rail to take it to the Port of Napier.

Except that apparently officials and Kiwrail had already looked at this option a few years ago.  In a report released only a few year ago it was noted that

“We note that Kiwirail was not convinced this would be finanically viable for users given the relatively short distance involved and the need to double-handle the logs.  Industry feedback has also indicated that transport of logs on rail across the study area was unlikely to be economic.”

Perhaps the economics has suddenly changed?  But, if so, where is evidence?  None was published yesterday.   We aren’t even told what assumptions are being made about how much of the logging business will be captured.

The Minister’s release also argued that there were climate change benefits from this move

“It will also mean 1,292 fewer tonnes of carbon dioxide released into the atmosphere each year.”

Even if this were relevant –  don’t we have an ETS supposed to deal directly with pricing emissions? –  and accurate (what assumptions are being made, including about the carbon costs of the double-handling?), it sound doesn’t terribly impressive.  A single 747 flying to London and back once apparently emits 1100 tonnes of carbon dioxide.

This is just one of the numerous projects the government is going to spend money on in the next few years.  I’ve only looked through the Gisborne/Hawke’s Bay list, and none of it fills me any confidence.   What, for example, is central government doing on this?

The Provincial Growth Fund will provide $2.3 million to redevelop the Gisborne Inner Harbour as part of a wider tourism investment programme.

If, as the Minister claims,

“Tairāwhiti is brimming with potential and untapped opportunities

you would have to wonder why the private sector, and the local authorities, don’t seem to think them worth spending money on.  (On my story, a materially lower real exchange rate would help quite a bit, but the government shows no sign of addressing that.)

A couple of weeks ago, I commented on the Minister of Finance’s underwhelming exposition of what the government was going to do to transform the productivity outlook in New Zealand.   The Minister noted

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First.  This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

To which my response was

If it ends up less bad than a boondoggle we should probably be grateful.  It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister –  with a vote base to maintain –  is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.  

hen again, the Secretary to the Treasury might quite like the idea of paying to reopen the Napier-Wairoa line.  I’ve told previously the story of Gabs Makhlouf, fresh off the plane from the UK, lamenting that the one thing New Zealand hadn’t sufficiently taken from the British Empire experience was to invest more heavily in rail (in response, assembled Treasury officials were not quite being sure where to look).

Sometimes economic policy in this country seems almost designed to defy reason and evidence in an effort to make us poorer, to hold back national productivity prospects.  Spraying around $5m here and $5m there –  $3 billion over three years, in some scheme reminscent of congressional earmarks in the United States – not backed, it seems, by any robust supporting analysis, seems just another  step along that path.

Advocating for the CPTPP

A couple of days ago MFAT released its National Interest Analysis of the new CPTPP preferential trade, investment (and all manner of other stuff) agreement.  Unsurprisingly, given MFAT’s own heavy involvement in negotiating the agreement for the government of the day, MFAT concludes that New Zealand should sign the agreement.

They may well be correct that, taking all the aspects of the agreement together, and recognising that the other countries would probably have gone ahead even if New Zealand hadn’t signed, entering the now-concluded agreement would be in the best interests of New Zealanders as a whole.    But the National Interest Analysis (NIA) isn’t the resource an interested and informed citizen would turn to for a considered assessment of all the pros and cons.  The NIA is really best seen as an advocacy document, written to make the government’s case.    In particular, the document seems targeted to the government’s (generally) left-of-centre constituencies.  And there are some pretty questionable claims included, for example about the gains from past preferential agreements (notably, the implication that all the growth in trade with China in the last decade is the fruit of the trade agreement, a suggestion which is simply without credible foundation).

That doesn’t mean the document has no value at all.   There is some useful summary descriptive material in it, but it is not the sort of independent professional assessment that the public (indeed Parliament itself) deserves before reaching a final view on the deal.    It seems unlikely that there will such an assessment done.   There will be select committee hearings on the deal but, even if they had the inclination, parliamentary committees don’t have the resources to commission such research and advice, and successive governments have had no interest in doing so.  That’s a shame.  A well-regarded agency like the Productivity Commission, hiring in specific expertise, could have made a valuable contribution to the debate.

The agreement is so large, covering such diverse ground, that there is no easy single, or agreed, metric for reaching a final conclusion.  Some might put the highest weight on the likely, but modest, trade and GDP gains.  But others, equally rationally, might use a quite different set of weights: not denying the probable trade benefits, but putting greater weight in things like ISDS provisions, or the way in which these agreements reach behind the border to influence domestic policy, on matters historically seen as simply matters for national governments.  For others still, just the risks of “being out of the club” might weigh most heavily.   In that sense, no independent agency can reach some definitive bottom line number that the deal is or is not good for New Zealand.  But, done well, such an assessment could still canvass the full range of issues, advantages and disadvantages, static effects and dynamic ones, leaving voters (and MPs) to make their own final assessments.

Much of the attention inevitably focuses on the bits where MFAT has produced some numbers: estimates that, when all new liberalisation measures (tariff reductions and non-tariff measures) have come into force (15 or 20 years away) annual GDP might be anything from 0.3 to 1.0 per cent higher.   Those aren’t tiny numbers (in the scheme of the sorts of model results one gets for micro reforms) but they need to be discounted to some extent precisely because the full effects are quite a long way into the future (and we have the highest interest rates –  and discount rates –  in the advanced world).  Perhaps a little more concerningly, MFAT does not appear to have published the modelling work they commissioned (all we have is a couple of summary tables), and thus it isn’t easy to know what assumptions they’ve made.  For example, in MFAT publications a lot is made of the gross value of the reductions in tariffs New Zealand exporters will pay, but we aren’t told what assumptions are made about the incidence of those tariffs.  When New Zealand removed most of its import restrictions the biggest winners were, almost certainly, New Zealand consumers rather than other countries’ exporters.

I’m not uncomfortable with the idea of a small gain in GDP as a result of the deal.  Almost inevitably it will be quite small, because New Zealand already has other agreements with most of the other CPTPP countries, and of the remaining four only Japan is really a large export destination for New Zealand producers.

I’m rather more uncomfortable with the claim (made repeatedly in the document) that the agreement will increase employment in New Zealand.  Frankly, that seems unlikely and I’m not sure what they base their claim on.  Monetary policy tends to be run in a way designed to keep the economy not too far from “full employment” (the rate of unemployment consistent with stable inflation).  From that base, trade agreements –  or other reforms – might boost GDP, and wage rates, but they are unlikely to boost employment numbers.  People employed in one industry can’t be employed in another, so if the CPTPP agreement really does boost exports (and employment in export industries) it will have to do so by shaking some labour out of other sectors.  Over time, higher exports will be matched by higher imports (a good outcome).  It might seem a small point, but overclaiming in one area that I know something specific about makes me even more nervous about the rest of the document.

What of the assessment of some of the other aspects of the agreement?

The government has gone on record as opposing ISDS clauses on principle, but has nonetheless signed up to an agreement which still has extensive scope for the use of such dispute settlement arrangements.   MFAT attempts to downplay the disadvantages to New Zealand (and highlight some potential benefits to New Zealand foreign investors).   But they never once highlight one of the most fundamental arguments against: the importance of the rule of law and, within that, the principle of equal access to justice.  ISDS provisions allow foreign investors recourse to resolution procedures not open to domestic investors engaged in exactly the same business.   Particularly in a country with a robust, independent, judiciary that should be simply unacceptable.   But it doesn’t seem to be a perspective that had occurred to our MFAT officials in their enthusiasm to sell the deal.

MFAT officials also seem not to recognise that, under some models (ways of thinking about how to organise society) there might be downsides to the fairly extensive way in which this agreement reaches behind borders into matters that the principle of subsidiarity suggests should really be solely for national governments.     Perhaps most of the left-wing constituencies rather like the idea of having labour and environmental chapters in the agreement, tying the hands of others governments and our own.  On the pro-business side, agreed procedures around regulatory issues might appeal to some.  But a principle like that, once adopted, can be a double-edged sword: other governments will commit to other regulatory limits that the enthusiasts for this particular set of controls won’t like.

MFAT, of course, seems to buy into all this without question.   In describing the labour chapter, for example, they talk blithely of it being ‘inappropriate to encourage trade or investment by weakening or reducing labour laws”, and assert that the agreement “helps ensure that CPTPP Parties’ competitive advantage in trade is not undermined” by agreement to “level the playing field for New Zealand companies and employees by setting minimum labour obligations for all parties”.    So microeconomic reforms that liberalise the labour market –  perhaps reducing the ratio of the minimum wage to the median wage – can never in future be adopted, lest some other government (perhaps under pressure from its own unions or firms) invoke dispute settlement provisions?   And what do they think real exchange rate adjustments are, but competing on the basis of changed real relative unit labour costs?  Some defenders of these sorts of provisions will talk of how these sorts of provisions aren’t very binding or effectively very enforceable. Even if so –  and only time will tell –  that just makes them bad law.  And there is a reasonable argument (in economics, and in principles of responsive democratic government) that they just shouldn’t be in a trade agreement at all.  But that perspective (and the risks) doesn’t even seem to be recognised –  even to be discounted – by MFAT.

And then there are near-vacuous provisions, which MFAT suggests have no disadvantages.    What business is it of governments to be, for example, encouraging enterprises to adopt “corporate social responsibility” initiatives?  And even if there is a case, surely there are downsides (more bureaucrats if nothing else) to the proliferation of feel-good initiatives.  Or around the creation of fora in which countries (bureaucracies) might work together on topics like work-life balance or “innovative workplace practices”.

There are so many of these sorts of provisions with no serious evaluation, guided (presumably) by an officials’ view that more meetings, more international coordination can only be “a good thing” or at least harmless.  There is, for example, an entire Development chapter, which establishes a whole new Committee on Development, explicitly designed as a talkfest on such topics as “women and economic growth” and “broad-based economic growth”.  Even if these are flavour-of-the-day topics right now, this agreement is presumably planned to live for decades  For decades, officials will cross the world, adding carbon miles as they do, all at the expense (perhaps small) of domestic taxpayers.  And yet MFAT explicitly state that there are no disadvantages.

There are all sort of more substantive provisions that aren’t seriously evaluated.  For example, countries are free to impose some temporary exchange controls in the event of a serious economic crisis, but under this agreement they won’t be able to restrict flows associated with foreign direct investment. In effect, this amounts to preferencing foreign investors over domestic investors in a crisis: domestic owners can be forbidden from shifting proceeds abroad, but foreign owners can’t.  Perhaps there is a good case for it –  although when I was an official I argued against it – but there is simply no serious attempt at evaluation, either of this line item or of the overall approach to crisis exceptions.

I’m still ambivalent about the overall agreement.  Perhaps for foreign policy reasons we had to be part of the deal once it was done.  Probably there will be some modest overall real GDP gains.  But undermining equal access before the law – not carving out special jurisdictions for cross-border investors – isn’t a principle that is priced here, and it seems to me it is something we just shouldn’t be sacrificing.    Others will reach different overall conclusions, but the process of doing so –  in an informed way –  would have been much assisted by a more independent, and far-reaching, assessment of the many provisions of the agreement.

(For those interested in ISDS issues, there was an interesting new article in the latest issue of the American Affairs magazine by a Yale law professor.)


“We could be the next Albania” – Brady

To their credit, the Herald yesterday ran a substantial op-ed from Professor Anne-Marie Brady on the influence-seeking and interference by the People’s Republic of China (PRC), and the Communist Party that controls the state, in New Zealand.

Professor Brady has been in the headlines in recent days over a burglary at her Christchurch home in which several laptops, phones etc (but nothing else of value) were stolen, the burglary occurring after she had received a letter warning that she was being targeted by the PRC regime.   The media has –  rightly –  sprung to her defence, suggesting a need to get to the bottom of just what is going on.   Another article in yesterday’s Herald suggested that the Police weren’t doing much about the break-in until the Prime Minister herself expressed concern.  In general, it is a bad look (and bad practice) for ministers to be putting pressure on Police to investigate, or not investigate, particular cases.  But perhaps on this occasion the end might almost justify the means.

Professor Brady’s article ran under the heading ‘We could be the next Albania’,  a reference to the reported observation last year by a senior Chinese diplomat that (in Brady’s words) “favourably compared New Zealand-China relations to the closeness China had with Albania in the early 1960s”.    Having fallen out with the Soviet Union, Albania sought refuge in ties with the PRC (a relationship described by one Western scholar as “one of the oddest phenomena of modern times: here were two states of vastly differing size, thousands of miles apart, with almost no cultural ties or knowledge of each other’s society, drawn together by a common hostility to the Soviet Union.”) before later also falling out with them.

Brady reports, and presumably is in a position to know, that this “startling and telling analogy…disconcerted New Zealand diplomats”.   She perhaps over-eggs the Albania point, arguing that

In the late 1970s the relationship ruptured over China’s failure to deliver economic development assistance. By the end of the Cold War era, Albania had become one of the poorest, most politically divided, and most corrupt of the former Eastern Bloc states.

Perhaps, but if we look at Angus Maddison’s collection of historical estimates of GDP per capita, Albania had long (well before the Communist era) been one of the poorest of those countries and had not exactly been a byword for political stability either.  Their failings were their own.

But I guess the real point –  and probably the one the Chinese diplomat was getting at –  was that New Zealand was seen from Beijing (with perhaps just a bit of exaggeration for effect) as small, remote (clearly both true), somewhat detached from its former allies, and diplomatically and economically subservient.   True or not, the suggestion will have put MFAT noses out of joint.

Brady goes on

Xi Jinping has been emboldened to pursue an increasingly assertive foreign policy and insisting that its strategic partners such as New Zealand fall into line with its interests and policies.  Accompanying this more assertive foreign policy has been a massive increase in the CCP’s foreign influence activities. China did not have to pressure New Zealand to accept China’s soft power activities and political influence: Successive New Zealand governments actively courted it. Ever since PRC diplomatic relations were established in 1972, New Zealand governments have sought to attract Beijing’s attention and favour. New Zealand governments have also encouraged China to be active in our region.

And not a word of scepticism is ever uttered openly, whether by politicians or by the (mainly government-funded) entities like the China Council and the Asia New Zealand Foundation.   No doubt, in most cases they genuinely believe their stance (quiescence) to be in the interests of “New Zealand” –  however those interests are defined.  In all too many cases, it also appears to have been in the personal economic interests of those involved.

The real point of Brady’s article appears to be to encourage the new government to think seriously about doing things differently.   As she highlights, the Australian government is taking these issues much more seriously   (for those still sceptical of the significance of these issues, in addition to Anne-Marie Brady’s main Magic Weapons paper, various of the submissions on the new Australian legislation make sobering reading –  for example, no 20 (by an academic whose new book on the subject –  already the subject of PRC threats –  is due out next week), or no 33 (from a national security academic at ANU) or no 32 (from an ethnic Chinese group, the Foundation for a Democratic China).

Brady appears to think there is a realistic possibility of change

In order to deal with the issue it can’t just attack the policies of the previous government, it also has to clean its own house. Significantly, unlike the previous National government, Ardern’s government has not endorsed Xi Jinping’s flagship policy the Belt Road Initiative, bringing New Zealand back in line with its allies and nearest neighbours.

It will take strenuous efforts to adjust course on the direction the previous National government set New Zealand. New Zealand has to address the issue, but the Ardern government must find a way to do so that does not invite pressure it cannot bear from the CCP, which is watching closely.

But is there any sign that this government is any different?  I’d like to believe that not having yet endorsed the Belt and Road Initiative (a sprawling massive geopolitical play, designed to extend PRC reach and in some cases load up poor countries with additional debts in ways that further extend PRC political influence) is significant.    But the New Zealand China Council –  largely taxpayer-funded, and with the Secretary of Foreign Affairs sitting on its Council –  was promising late last year that early this year they would have a report out on how New Zealand can engage with the initiative.  And senior Labour backbencher –  chair of a major select committee –  Raymond Huo seemed right behind the initiative

Meanwhile, China-born legislator Raymond Huo believed the Belt and Road Initiative can help solve the problem of infrastructure development facing many developed nations.

“There is a dilemma. New Zealand, Australia and other developed countries including the US and Canada are all facing the same problem,” Huo told Xinhua.

“We haven’t done much upgrading, so we need money, we need capital, and we need the construction capacity. China has both,” he said.

Huo said he first realized the potential of Belt and Road Initiative when he attended two high-level conferences in China, and he believed New Zealand should seize the opportunities it offers.

Along with other experts on China and leading business people, he has established a think tank and foundation on the Initiative.

What other straws in the wind are there?

As recently as this week, interviewed on Radio NZ about the Brady break-in and other matters the Prime Minister refused to express concern at all about PRC influence-seeking and interference in New Zealand. At one level, it is fine to talk about being concerned about any foreign influence from any source (as we all should be), but there is a real and specific issue around the PRC, which needs serious political leadership to address.  But instead there is a void.

It isn’t just the Prime Minister of course. In a post late last year, I highlighted that her minister responsible for the intelligence agencies, Andrew Little, was specifically dismissive of concerns around the PRC activities.

Andrew Little, the Minister Responsible for the SIS, said he was not aware of any undue Chinese influence.
“I don’t see evidence of undue influence in New Zealand, whether it’s New Zealand politics, or New Zealand communities generally.

“We have a growing Chinese community. We have a strongly developing trade relationship and diplomatic relationship with China. I don’t think those things, on their own, connote undue influence.

“If there’s other things she says constitutes undue influence, we’d have to know what that is.”

It was documented in Brady’s substantive paper minister, a paper which has had substantial coverage around the world.

Then, of course, there was the Deputy Prime Minister and Minister of Foreign Affairs.  Out of office he had occasionally been heard to express concerns, including around National MP Jian Yang.   In office, at a New Zealand event marking 45 years of diplomatic relations with the PRC, he wouldn’t even address the issue, stressing how cordially he would raise (privately) any concerns he ever had, and went on to suggest that, after all, one had to break a few eggs to make a omelette, and really no should get too bothered about human rights issues in China either.

“Sometimes the West and commentators in the West should have a little more regard to that and the economic outcome for those people, rather than constantly harping on about the romance of ‘freedom’, or as famous singer Janis Joplin once sang in her song: ‘freedom is just another word for nothing else to lose’.

“In some ways the Chinese have a lot to teach us about uplifting everyone’s economic futures in their plans.”

And since the election, Labour president Nigel Haworth –  presumably with his leader’s knowledge and approval – hobnobbing with the Chinese Communist Part itself, has been effusive in his praise of Xi Jinping and the Chinese regime.

One could add to the mix the stony silence of the Labour Party leadership –  pre and post-election – on the succession of revelations around National MP, and former PRC intelligence officer, Jian Yang.  From anything they say (or don’t say) in public, the Labour Party, and their allies in the Greens and New Zealand First, seem quite unbothered about the presence in Parliament of someone who acknowledges misrepresenting his past in his residency/citizenship applications,  who is widely regarded (by experts in the field) as likely to still be a member of the Communist Party, who closely associates with the PRC embassy, and who has never once been heard to criticise the Party-state that is the PRC.  Recall, former diplomat Charles Finny’s line, that be was always very careful what he said around Yang (and Raymond Huo) since both were known to be close to the PRC embassy.    But is there any sign that any of this bothers our new government?

Professor Brady calls for the government to emulate its 1980s predecessor

the Fourth Labour government made a principled stand on a matter that affected our sovereignty and our values with the nuclear issue; then it passed legislation to back up these principles. Now is the time for the sixth Labour government to take another principled stand to defend our sovereignty and values and make legislative changes such as to the Electoral Finance Act.

In truth, and whether you supported the anti-nuclear stance of not (I didn’t and don’t, and certainly don’t see it as a matter affecting our sovereignty) this one is a great deal harder.  For a start there wasn’t really money at stake around the nuclear-free issue.

I presume one of the issues that will be exercising ministers, and their MFAT officials, will be the negotiations around the proposed upgrade to the preferential trade agreement with China.  It would be easy enough for the PRC to put those negotiations on a slow track, or simply halt them altogether.  Such agreements might not matter very much taken as a whole, but they might matter quite a lot to a small group of people (with good political connections).  In the Australian context, there already appear to be some signs that the PRC is reacting to tougher Australian stance (and new legislation) by damping down the flow of foreign students.  We’ve already seen here the apparent ability of the export education industry to see off for now Labour’s promised changes to student work visa arrangements.  Those would have mostly affected the lower-level PTEs.  But our more prestigious – and government owned/controlled – universities get a lot of PRC students, and several attract direct PRC funding for their Confucius Institutes.  Chancellors and vice-Chancellors will be very nervous that if the government actually looked like taking a stand, their flow of revenue might be disrupted.  And they will constantly be bending the ears of ministers and officials, if ever the government showed any sign of self-assertion, and a respect for New Zealand values (and the interests of New Zealand citizens of Chinese origins).  And then there will be Auckland airport and the tourism operators too.

I’ve noted previously that during the Cold War it was much easier to maintain a moral clarity.  Most Western countries –  including New Zealand –  didn’t do much trade with the Soviet Union, and so there wasn’t a major self-interested constituency in New Zealand (or the US, or the UK) for simply bending over and letting a hostile regime, practising a completely different set of political values, have its way.  I noticed yesterday a recent interview with former (Obama-era) US Defense Secretary Ash Carter making much the same point.

Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people.

I’m not sure that economists can necessarily help much, except perhaps to repeat the point I’ve made here before: the PRC does have the ability to severely adversely affect the fortunes of individual firms/sectors (ask the Norwegian salmon industry, or some of the South Korea firms last year), but the PRC did not make Australia and New Zealand rich and it cannot, whatever unsubtle economic sanctions it attempted, make us poor.  Our prosperity, as a whole country, is very largely in our own hands.   And the very fact that we can worry about the possibility of such sanctions is perhaps the best case for making a stand now, rather than continuing to roll over, keep quiet, and hope that Beijing is happy.

But perhaps the other piece of economists’ advice might be, in this as in other fields, “beware of rentseekers”, people/institutions who will seek to use governments to advance their own economic interests, at the expense of the values, the freedoms, the self-respect, of the nation as a whole.  Governments have a poor track record of doing so, and there is little sign at this point that the current government will be any different.  As I wrote earlier

One of things we need to remember is that the interests of businesses (and universities) who deal in countries ruled by evil regimes, are not necessarily remotely well-aligned to the interests and values of New Zealanders.   Selling to China, on government-controlled terms, isn’t much different than, say, selling to the Mafia.  There might be money to be made.  But in both causes, the sellers are enablers, and then make themselves dependents, quite severely morally compromised.

Professor Brady’s Herald column seemed to build on an earlier (and somewhat longer) paper she produced shortly after the new government took office on things the government could do if it were serious about addressing the PRC political influence activities.   I wrote about it here (and here is the updated link to the paper itself).  In that earlier piece she had quite a list of things that could, or should, be done.

What should be done?  At an overarching level she says

The Labour-New Zealand First-Greens government must now develop an internally-focused resilience strategy that will protect the integrity of our democratic processes and institutions. New Zealand should work with other like-minded democracies such as Australia and Canada to address the challenge posed by foreign influence activities—what some are now calling hybrid warfare. The new government should follow Australia’s example in speaking up publicly on the issue of China’s influence activities in New Zealand and make it clear that interference in New Zealand’s domestic politics will no longer be tolerated.

Getting specific she calls on the government to

The Labour-New Zealand First-Greens government must instruct their MPs to refuse any further involvement in China’s united front activities.

That would be Raymond Huo I presume.

The new government needs to establish a genuine and positive relationship with the New Zealand Chinese community, independent of the united front organizations authorized by the CCP that are aimed at controlling the Chinese population in New Zealand and controlling Chinese language discourse in New Zealand.

And there is a list of six other specifics

  • The new Minister of SIS must instruct the SIS to engage in an in-depth investigation of China’s subversion and espionage activities in New Zealand. NZ SIS can draw on the experience of the Australian agency ASIO, which conducted a similar investigation two years ago. 
  • The Prime Minister should instruct the Department of Prime Minister and Cabinet to follow Australia’s example and engage in an in-depth inquiry into China’s political influence activities in New Zealand. 
  • The Minister of Commerce and Consumer Affairs should instruct the Commerce Commission to investigate the CCP’s interference in our Chinese language media sector— which breaches our monopoly laws and our democratic requirement for a free and independent media. 
  • The Attorney General must draft new laws on political donations and foreign influence activities. 
  • The New Zealand Parliament must pass the long overdue Anti-Money Laundering and Countering Financing of Terrorism legislation.
  • The new government can take a leaf out of the previous National government’s book and appoint its own people in strategically important government-organized non-governmental organizations (GONGOs) which help shape and articulate our China policy, such as the NZ China Council and the Asia New Zealand Foundation.

Most of those suggestions look sensible (although I’m no fan on AML/CFT legislation, with all its inane consequences –  goodbye ipredict, hello ID cards for 94 year olds changing banks).  There has been no sign of activity on any of these fronts.  Quite probably – based on what we saw in their BIMs, and Professor Brady’s mention of a Five Eyes discussion (itself repeated in the New York Times article last year on these issues –  our intelligence agencies themselves are worried).  But intelligence agencies can only apply the (current) law.  It is the political leaders who can bring forward legislation (on matters amenable to legislation, which not all of these are) and can display the leadership and moral standing that say “enough”  –  whether about Jian Yang, political donations, control of the Chinese-language media, university funding, PRC activities in the South China Sea, or whatever.   They could display such leadership, but there is no sign –  from any political party –  of anyone doing so.

I noted the other day that perhaps some journalist could ask the five contenders for the National Party leadership about their attitude to these issues, including (but not limited to) matters around Jian Yang and political donations.  A reader reminded me yesterday of Chris Finlayson’s arrogant and dismissive attitude before the election, when he was both Attorney-General and minister responsible for the intelligence services.  Finlayson still sits on the National Party front bench, and is still shadow Attorney-General.  Perhaps, five months on, someone could ask him if still thinks there is just nothing there, that Professor Brady is jumping at shadows etc.  Or is it that he just doesn’t want to know?

(I linked the other day to a couple of reports on PRC influence activities in other advanced economies.  For anyone interested –  including those doubting the seriousness of the PRC agenda –  I suggest searching out the (easy to find) serious articles about PRC involvement in places like the Philippines, the Maldives, Sri Lanka, Cambodia, and Pakistan.  The issues aren’t primarily about the internal nature of the PRC –  domestic human rights etc –  but about external expansionism, power projection, and the attempt to have other countries including (in Professor Brady’s words) “New Zealand fall into line with its interests and policies”, policies that are generally hostile to open and free societies.)

UPDATE:  Interesting ABC article based on an advance copy of Clive Hamilton’s book on PRC influence activities in Australia (book to be published next week).


Hankering for normalisation

Really ever since the end of the immediate financial crisis in the first half of 2009 there has been a hankering –  often more than that –  among some central bankers, some former central bankers. and some agencies that associate with and support central bankers (ie the BIS –  Bank for International Settlements) for things to “get back to normal”.   What leaves these people particularly uncomfortable is the level of official interest rates, which in most of the major advanced economies (and quite a few smaller ones) have been very close to zero (sometimes modestly negative).    And it is now almost nine years since the end of that first intense crisis phase.   And, at least in nominal terms, there had been no precedent for such low official interest rates.

It was, perhaps, an understandable reaction in the immediate aftermath.  I certainly shared it then.  I was on secondment to The Treasury, and recall talking things over with a colleague who had previously been at the Reserve Bank.  We agreed that the Reserve Bank (Alan Bollard personally) appeared to have done a thoroughly excellent job in cutting the OCR aggressively during the crisis/recession, but that it seemed likely –  and appropriate – that many of those cuts should soon be reversed.  We welcomed early indications that that was exactly the Bank’s intention.  I also recall pointing out to colleagues that bond markets appeared to be pricing a reasonably prompt, and near-full, rebound in policy interest rates (not just in New Zealand but in range of advanced economies).

It all made sense at the time: very sharp cuts in policy rates had been appropriate in a sharp economic downturn accentuated by an extreme rise in uncertainty and liquidity preference, but once those fears eased (with time and various direct interventions) it didn’t seem obvious that anything very structural about economies had changed.  If so, it wasn’t obvious that future average interest rates would be much different from those of the previous decade or two.

That was then.  But now it is 2018.  And the median policy interest rate among OECD central banks (that have their own monetary policy) is about the same now as it was in the trough in 2009.   Some individual countries have lower rates now, and some higher (the US notably), some have tried to raise rates and had to reverse themselves (eg New Zealand twice, Sweden, and the ECB).   No OECD central bank has simply left its policy rate unchanged since 2009.

And throughout that period inflation (headline and core) has remained pretty quiescent. Here is an indicator of core inflation across OECD countries (well, monetary areas, so the euro-area is a single observation).

CPI ex OECD jan 18

Not all central bankers like to own up to paying any attention to (indicative) measures of excess capacity, but over the decade unemployment rates have typically dropped back quite slowly (as in New Zealand) and output gaps are still estimated to be around zero, often negative.  As a reminder, these outcomes have come about with interest rates very (historically) low.  They aren’t themselves an argument for much higher policy rates.

And yet the anguishing continues.    Some of it has become almost pro forma in nature.  The former Governor of the Reserve Bank used to regularly talk about how “extraordinarily stimulatory” he thought interest rates were and openly hankered for “normalisation” here and abroad.  His temporary successor (the “acting Governor”) throws in occasional references along similar lines.  I suspect it makes them more reluctant to lower the OCR than they otherwise would be but –  in fairness –  they do eventually seem to be led by the data rather than by their mental model of how the world should work.

Others seem to want to translate the model into action.  I noticed one example yesterday, in the form of a new column by former ECB board member (in effect he served as chief economist) and former Bundesbank Deputy Governor, Jurgen Stark.   Former BIS chief economist (and former Bank of Canada Deputy Governor) Bill White has had a succession of speeches and articles along similar lines, and his latest was published in the Financial Times a few days ago.

Stark opens his argument with the recent sharp dip in US share prices which, he asserts

revealed just how addicted to expansionary monetary policy financial markets and economic actors have become.

Possibly, but since the S&P this morning is still a touch higher than it was on 31 December 2017 –  a mere seven weeks ago – I’m not sure it is particularly compelling evidence.

He moves to a somewhat more macroeconomic argument

The fact is that ultra-loose monetary policy stopped being appropriate long ago. The global economy – especially the developed world – has been experiencing an increasingly strong recovery. According to the International Monetary Fund’s latest update of its World Economic Outlook, economic growth will continue in the next few quarters, especially in the United States and the eurozone.

I’m not sure we should be particularly encouraged that “economic growth will continue in the next few quarters”, but nor am I sure how it is relevant.  First, projections of continued growth –  even growth a bit faster than medium-term potential growth –  are, in part, reflections of –  and, at very least, consistent with –  the low interest rates.  And second, inflation –  or some other nominal variable – is supposed what central banks focus on first and foremost.

The US Federal Reserve has been raising interest rates, but it isn’t enough for Stark.

But the Fed’s policy is still far from normal. Considering the advanced stage of the economic cycle, forecasts for nominal growth of more than 4%, and low unemployment – not to mention the risk of overheating – the Fed is behind the curve.

It isn’t clear that “the advanced stage of the economic cycle” means much more than that it has been a few years now since the US had a recession.  Nominal GDP growth –  currently around 4 per cent –  shows no sign of racing away, and has averaged 3.8 per cent per annum since 2010.  And core PCE inflation –  the Fed’s target variable –  is currently 1.5 per cent, while the Fed’s self-chosen target is 2 per cent.  Yes, the unemployment rate is low, but as on the one hand some analysts suggest the headline number is underestimating residual labour market slack, and on the other the Fed is actually raising policy interest rates (and is expected to continue to do so), it is hard to find any backing for Stark’s claim that the Fed is “behind the curve”.    And even if, for example, the latest round of ill-judged fiscal stimulus does end up providing the boost that lifts inflation nearer target, it is hard to believe (and there is no obvious evidence for) that inflation expectations are so weakly anchored that a lift in inflation to target (after all these years) will destabilise expectations in a dangerous and damaging way.  This isn’t 1974.

But if the Fed is bad, on Stark’s reckoning, many other advanced economy central banks are “even worse”

The ECB, in particular, defends its low-interest-rate policy by citing perceived deflationary risks or below-target inflation. But the truth is that the risk of a “bad” deflation – that is, a self-reinforcing downward spiral in prices, wages, and economic performance – has never existed for the eurozone as a whole. It has been obvious since 2014 that the sharp reduction in inflation was linked to the decline in the prices of energy and raw materials.  In short, the ECB should not have regarded low inflation as a permanent or even long-term condition that demanded an aggressive monetary-policy response.

The ECB’s policy is also out of line with economic reality: the eurozone, like most of the rest of the global economy, is experiencing a strong recovery.

I think there is quite a bit to argue about over the way the ECB interjected itself into the euro crisis, and one can mount arguments –  as Stark did –  about the appropriateness of the quasi-fiscal policies the ECB ended up adopting.   But what about inflation –  the macro variable the ECB says it targets, under its treaty mandate to pursue price stability?

euro area CPI

The ECB targets something “below, but close to, 2%” (in practice something like 1.9 per cent).   Headline inflation certainly fluctuates –  there (as Stark notes) and other places fluctuations in oil prices make a big difference in the short-run.   But the last time euro-area wide core inflation was at 1.9 per cent was the end of 2008.   And there hasn’t been any obvious sign in the last 12 or 18 months that core inflation is picking up strongly again.  Now Stark is German, and activity and demand in Germany have done better than in the rest of the euro-area.  Inflation in Germany is also higher than in the euro-area as a whole but on neither headline nor core measures is it as high as 1.9 per cent –  and monetary policy is supposed to be set for the region as a whole, not just for the single largest national economy.

As for the “strong recovery”, things in the euro-area are certainly a great deal better than they were, but in its last published forecasts the IMF estimated that for the euro-area as a whole, there was still a negative output gap last year, and forecast one around zero this year.  And that with interest rates at (historically) very low levels.

The sort of argument that Stark uses might make a bit of sense if he wanted to argue that interest rates at these levels are having no effect (on demand/activity).  If they were having no effect, there might be no harm in having them higher again.  But that isn’t his argument.  Instead

One of those consequences is that the ECB’s policy interest rate has lost its steering and signaling functions. Another is that risks are no longer appropriately priced, leading to the misallocation of resources and zombification of banks and companies, which has delayed deleveraging. Yet another is that bond markets are completely distorted, and fiscal consolidation in highly indebted countries has been postponed.

This “misallocation of resources” line often pops up in commentaries like Stark’s (it is there is White’s FT article as well) although it is never clear quite what is meant.  It really only seems to make much sense if one can confidently assume that their model –  in which interest rates should be so much higher –  is correct, and thus relative to that benchmark choices are made differently than they would be in the alternative universe.  Perhaps it is right, but we have no very obvious means of knowing that it is –  after all these years.  If neutral rates are lower than they think, “misallocations” might just be “choices”.

And the claim seems to involve the suggestion that some real activity is now happening which wouldn’t happen if only interest rates were higher.   Stark actually states it more or less directly: in his view current policies have ‘delayed deleveraging”, and the “fiscal consolidation in highly-indebted countries has been postponed”.   But had a whole succession of governments actually been under more pressure to run lower deficits/larger surpluses, cutting their debt levels, where and how does he suppose the replacement demand might have come from?  It isn’t as if any monetary area in the advanced world has had consistent excess demand this decade.   There are, of course, standard responses about confidence effects, and private demand replacing public spending –  at times even the New Zealand experience in the early 1990s is cited –  but those offsetting adjustments typically take place in part through lower interest rates and a lower exchange rate (governments cut spending, central banks ease monetary policy, and additional private spending is crowded in ).  Stark’s model rules out that process almost by construction.  Much the same story is likely to hold for corporate or household deleveraging: the process by which it occurs usually involves (incipient) weaker overall short-term demand and activity.  Oh, and if Stark was right and the ECB raised policy interest rates in the current climate and it seems reasonable to expect that the euro exchange rate would be higher.  There is no guarantee about exchange rate effects, but (probabilistically) it is another channel that would weaken demand and activity further.

I’m not convinced there is a particularly good case at present for the ECB to still be buying large volumes of bonds.  But the case for higher interest rates –  across the whole euro-area, or even just for Germany –  seems threadbare in the extreme.

Stark ends his article this way, generalising beyond just the ECB.

Today, monetary policy has become subordinate to fiscal policy, with central banks facing intensifying political pressure to keep interest rates artificially low. As the recent stock-market turmoil shows, this is drastically increasing the risk of financial instability. When more – and more severe – market corrections take place, possibly affecting the real economy, what tools will central banks have left to deploy?

The evidence for these claims seems thin at best.  There has certainly been a huge increase in net government debt in some of the larger OECD countries in the last decade –  France, Italy the US, the UK, Japan, although not Germany –  but it isn’t obvious that monetary policy is playing out materially differently in those countries than in places like Switzerland, Sweden or Israel (where net debt has fallen as a share of GDP over the decade –  and where official interest rates are very low) or in places like New Zealand or Canada that have seen only modest increases, from low bases, in the levels of net public debt.

And what of the claim that “interest rates are artificially low”?  Well, that simply seems to impute far too much power to central banks.  Central banks set very short-term interest rates, and over those short-term horizons no one else can do much about it.  Central banks do not set long-term interest rates and typically have very little direct influence on extremely long-term interest rates.   The longest German inflation-indexed government bond matures in 2046: the current yield on that bond is negative.  Perhaps Stark would argue that the ECB bond-buying programme directly or indirectly influences those yields.  But in most countries, central banks aren’t engaged in bond buying programmes at all, and very long-term nominal and real interest rates are extremely low.   Swiss 10 year conventional bond yields, for example, are basically zero.  US 30 year inflation-indexed bonds (and the US currently has by far the highest interest rates among the larger economies) are currently around 1 per cent.  And even in little old New Zealand –  typically with the highest real interest rates in the advanced world –  our 22 year government indexed bond is yielding just slightly over 2 per cent (down from 5 per cent 20 years ago).  It is a global phenomenon, and it can’t just be down to the (misguided or otherwise) choices of central banks.   Rightly or wrongly, some mix of demographics, weak expected productivity or whatever, seem to be at work.  Central banks might not fully understand what is going on –  nor might anyone else –  but it would brave, nay foolhardy, for the central banks of the world to stake out a stance that relied on a completely different view (“interest rates should be much higher”).

Which, of course, brings us to that very last line in Stark’s article.  When things really go wrong, what tools will central banks have left to deploy?

That is, of course, a serious issue, and it is one that ever central bank, every finance ministry, every Minister of Finance should be worrying about.   After all, they’ve had years of notice of the issue now.    When the next serious recession happens –  and one will happen again –  it looks as if most central banks in advanced countries will have little or no room to cut interest rates, the typical counter-cyclical stabilising policy instrument.  Even countries like New Zealand and Australia will have far less room than typical (the Reserve Bank could probably cut the OCR by 2.5 percentage points, but had to cut by 6.5 percentage points after the last recession).     Markets know that constraint, which in turn risks exacerbating the severity of the downturn once it begins.    Most major advanced countries also have very little fiscal leeway left (whether as a matter of technical/market limits or political limits).

I’m all for growth-enhancing structural reforms.  They would benefit countries now, and in the future (both lifting demand and activity, and raising market assessments of neutral interest rates).  There are few signs of those sorts of reforms in most countries (indeed, often –  probably including New Zealand –  the reverse).  But what is the best path now, around macro policy, to provide greater leeway when the next serious recession comes?

On monetary policy, the standard prescription is pretty clear: higher inflation expectations are the only thing monetary policy can do to underpin higher medium-term nominal interest rates.  In other words, the best things central banks could have been doing in recent years was to aggressively pursue higher demand and inflation (there being no sign that weak inflation was a result, all else equal, of strengthening productivity growth).  Cut interest rates so as to later raise them by rather more (the opposite of the Reserve Bank strategy which turned out to be, in effect, “raise interest rates only to cut them more later”).    Few or no central banks have had the courage to adopt this course (or to openly consider higher inflation targets), partly (I suspect) transfixed by the desire for “normalisation”.   And what of fiscal policy?  In some of the countries with large deficits and high debt, it might well make sense to look to secure fiscal consolidation (giving, among things, more room for countercylical stimulus in the next recession).   For a country like the US, more or less back to a fully employed economy, that makes particular sense.   But it is far from obvious that the same logic follows in France or Italy  (still with negative output gaps): all else equal, fiscal consolidation will tend to worsen economic activity now, and yet euro-area monetary policy has all but reached its limits and can provide no offset.  Increasing the chances of a new recession now to slightly reduce the chances/severity of one five years hence is, to say the least, a difficult call (economically or politically).

At present, I’m reading one of the numerous books on my shelves about the politics and monetary policies of the inter-war period.  It is, I think, now widely accepted that monetary policy problems were at the heart of the seriousness of the Great Depression in many of the major economies (even New Zealand for that matter); in particular the way the Gold Standard had been run –  and patched back together (“normalisation”) during the 1920s after the extreme disruption of World War One.

Some of the abler observers in the late 1920s realised that problems were building up – including that perhaps two-thirds of the world’s monetary gold being held in France and the United States, without the natural stabilising mechanisms being allowed to work freely –  but there was never a sufficiently strong shared sense among policymakers that something needed to be done, and promptly.  In the US, for example, there was constant unease about the stock market boom, and thus a reluctance to allow the Gold Standard mechanisms to work as they should (when gold floods in interest rates fall, demand increases etc).   As I read through the book, I was reminded of the Governor of the Bank of England deliberately accentuating the risks to the UK peg to gold, to keep the pressure on British ministers to make large fiscal cuts (that were probably never substantively warranted).  And, even when the UK finally, reluctantly, went off the gold peg in September 1931, instead of embracing the opportunity, for some time all the great and the good (even Keynes) were focused on generating conditions that would warrant a return to gold.    Economic historians are now pretty clear that monetary expansionism –  made possible as countries slowly, and mostly reluctantly, broke the link to gold –  was a significant part of economic recovery in the 1930s.

Historical parallels are never exact but is hard not to see the constant hankering for “normalisation” –  and vigorous calls for it in some circles –   and even unease about asset prices, as akin to the well-intentioned policy mistakes of the late 20s and early 30s, leaving our world badly exposed when and if the next serious downturn occurs.

(And if –  as White and Stark claim –  financial stability is your real concern, use financial regulatory instruments and agencies to attempt to tackle those issues directly.  Sometimes monetary policy “mistakes”/shocks can be closely linked to subsequent financial stability problems.  Arguably that was the situation in Ireland and Spain in the 2000s – interest rates that suited German conditions but not Irish or Spanish ones –  but I doubt anyone can point to a single example today of an advanced economy dramatically overheating as those two did.)

Other people OIA the Reserve Bank too

Occasionally I have a look at the Reserve Bank’s website page on which they post selected OIA responses.  This time I was just checking to see whether a response I got yesterday –  after 2.5 months, and still only partial –  was there (it wasn’t).  But I spotted this response to someone else, released last Friday

Dear …..

On 12 December 2017 the Reserve Bank received a request from you, via and pursuant to section 12 of the Official Information Act 1982 (the OIA), asking:

In the recent recruitment process to appoint a new Governor of RBNZ (which resulted in the Board recommending to the Minister of Finance that Adrian Orr be appointed as Governor), please advise: 1. How many of the total applicants/individuals considered for the role were: a) women; or b) non-Pakeha; or c) both.

2. What was the total number of applicants/individuals considered?

3. If there is a shortlisting process, how many of the individuals who were included on that shortlist were: a) women; or b) non-Pakeha; or c) both.

4. If there was a shortlisting process, how many individuals were included on the shortlist in total?


The Reserve Bank is declining your request, as allowed by section 9(2)(a) of the OIA, in order to protect the privacy of the candidates considered for the role of Governor.

Given the nature of the process and the final pool of candidates, releasing the information that you have requested is likely to identify people who were considered but not appointed – which is private information.

In other words, they refused to release any of this information at all.

Which should be pretty extraordinary really.   The Board’s defence is that they are withholding the information to protect the privacy of candidates.    But they ran a search process that included a public advertisement inviting applications.  I suspect they had several dozen applications, some less serious than others.   How could anyone’s privacy be breached by releasing the total number of applicants (plus the number of any people the Board themselves put directly into the mix)?     How could anyone’s privacy possibly be breached if it were known that three women and three “non-Pakeha” had applied (we know there was at least one in the latter category, since Adrian Orr has some Cook Islands ancestry)?  And how could anyone’s privacy be breached by revealing how many people were on the shortlist?

I’m a little more sympathetic in respect of question 3.  If there was, say, one woman on the shortlist, that might reasonably invite some speculation as to who, but even then it is hard to see how –  in a universe of say 1.5 million adult women in New Zealand –  a person’s privacy could have been breached.  And, given that the Bank has been notoriously weak (for whatever reason) in appointing women to senior positions, it might have been somewhat reassuring to the public that one (or more) women had made the shortlist.   As it is, we know there was at least one “non-Pakeha” in the list since –  as the Board tells the requester later in the letter –  Orr is quite open about the Cook Islands aspect of his heritage, and if perchance there was more than one “non-Pakeha” on the shortlist it is still hard to see how any one specific person’s privacy would have been jeopardised.

But in a sense, the really interesting bit of the letter is the final paragraph of the extract above.  It is factually false for one thing (names of people the Board considered are official information –  not private information –  even if protected from disclosure by the “privacy of natural persons” section of the Official Information Act).  But, if the Board is to be taken at its word.

releasing the information that you have requested is likely to identify people who were considered but not appointed

They don’t say “invite speculation on possible names” but “likely to identify people”. It is hard to imagine how it could do so –  reasoning outlined earlier – unless the shortlist included the name of a “non-Pakeha” woman (the subset of potentially credible candidates fitting this description seems likely to be very small indeed).   But even if it did, it would require a wider knowledge and a richer imagination than mine to guess –  let alone “identify” – who such a person might have been.

I rather doubt the Board should be taken at its word on this point –  rather they probably just didn’t want to release anything and waved their hands to construct a defence –  but if any readers do want to take them at their word, I’d welcome suggestions as to who the person might have been.

Retired politicians in demand

A few days ago, shortly after Bill English announced that he would shortly be leaving Parliament, Stuff had an article on his post-politics prospects.

English, credited with steering New Zealand through the global financial crisis, is likely to be in strong demand on company boards. He has both the experience and contacts needed.

The demand may be especially strong in Australia, where the business media often fawned at the performance of the former National-led government, in comparison to its own governments.

There is quite a bit of hype there  – recall that, despite the fact of the “fawning”, Australia’s productivity growth substantially outstripped that of New Zealand over recent years.  But while business is very different from politics, and the Australian business/political environment is quite different than that in New Zealand, quite possibly English’s services will be in considerable demand.

The article goes on to suggest that a bank board might be a possibility

One of the early rumours circulating on Tuesday was that English was set for a seat on the board of a major Australian bank, with an investment banker speculating that he could soon be a director of Westpac on both sides of the Tasman.

John Key, after all, turned up not long ago as chair of ANZ’s New Zealand subsidiary.

Whether or not there is anything to the possibility of English turning up on a bank board I (obviously) have no idea (although the Westpac main board looks chock-full of bankers, lawyers, and accountants) but what concerns me is the lack of concern about the idea (or about the fact of John Key being recruited directly to chair ANZ’s New Zealand board).

Until just over a year ago, Bill English had been Minister of Finance for eight years.  In that role he had responsibility for the framework of legislation (primary and secondary) governing the prudential regulation of banks,  non-banks, and insurers.  He was minister responsible for the Reserve Bank of New Zealand, the prudential supervisory agency (including for banks).  He appointed the people who appointed the new Governor (and – single decisionmaking – supervisor). His department –  The Treasury –  was a key participant in the trans-Tasman banking council.  Even in his year as Prime Minister, there was no sign that he had lost interest in matters economic and financial.

It would be a dreadful look if a retiring former Minister of Finance went (more or less) straight from politics onto the board of a Bank.   It would be almost as bad as if a retiring Governor of the Reserve Bank made a similar move.   The issue –  especially for the Minister of Finance case –  isn’t about inside information; ministers aren’t usually privy to much individual institution data, and the broad intended sweep of policy (a) usually isn’t that secret, and (b) is somewhat specific to particular governments.    It is about incentives, appearances, and our ability to be reasonably confident that our governors are governing in the public interest and not in their own interests.

Probably few people go into politics initially for the post-politics opportunities.  Nonetheless, people need to feed their families, and fill their days, and even if you eventually get to the very top, even being Prime Minister doesn’t last forever.   Bill English is only 56, and the current Prime Minister –  even if consistently successful –  is likely to be out of Parliament by the time she is 50.   And –  even in New Zealand –  private sector directorships can pay pretty well (it was suggested that John Key might be getting $200,000 per annum for chairing the ANZ –  a big bank to be sure, but an unlisted 100 per cent subsidiary of an Australian parent, pretty substantially controlled by that parent).

Whatever the sector, a Cabinet minister who legislates/regulates in ways which are welcomed by the regulated industry are much more likely to find the post-politics doors open than one who regulates in a way the industry finds costly or inconvenient.  It isn’t just an issue in banking – it could be telecoms, or electricity, or transport, export education or whatever.   I’m no great fan of most business regulation, but it exists –  and the community as a whole has made a decision that such regulation is necessary or desirable.  If so, it is easy to envisage cases of a conflict between the public interest and the private interests of the regulated entities.

I’m not suggesting that Bill English (or John Key) made any decisions during their terms in office for reasons other than some mix of their view of the best thing for the country, and their view of how best to get re-elected.     But the incentives, and risks around them. are things that need managing.  It would set a dreadful example if Bill English shortly turns up on the board of a bank (in John Key’s case, the concern might be more about his membership of the Air New Zealand board –  a majority state-owned company, with ownership sold down by Key’s government, and where Key himself had until quite recently been Minister of Tourism).

(It is interesting to note that the main boards of the four big Australian banks do not appear to have a single former politician on them, although one is now chaired by a former Secretary to the Treasury.)

I’m not sure if there are any rules on what ministers can do once out of office –  there is no sign of anything in the (non-binding) Cabinet Manual.  Quite probably it wouldn’t be easy to draw up a good, workable and reasonable set of rules.   But I’m also struck by the fact that it appears to be a relatively new problem, at least as regards former Prime Ministers.

Going back 100 years:

  • Massey died in office
  • Bell (PM for a mere 16 days) ceased holding active political office at 77,
  • Coates died while still an MP,
  • Ward died while still an MP,
  • Forbes left Parliament at 74,
  • Savage died in office,
  • Fraser died while Leader of the Opposition,
  • Holland left Parliament at age 64, already ill and never really recovered,
  • Holyoake went from Parliament to being Governor-General and finally left office at 76,
  • Nash died while still an MP,
  • Marshall left Parliament to practice law and held various prominent private sector directorships,
  • Kirk died in office,
  • Rowling held only government-appointed roles and governance roles in community bodies after retirement,
  • Muldoon died while still an MP,
  • Lange left Parliament at 54, and appeared to have only community involvements subsequently,
  • Palmer returned to the practice of law, at the interfaces with public policy,
  • Moore mostly held government-sponsored positions after leaving Parliament, although did for a time –  15 years after being Minister of Trade –  work for Fonterra,
  • Bolger held some lower-level commercial directorships, but not until several years after leaving Parliament (and the Prime Ministership),
  • Shipley has held numerous directorships,
  • Clark moved on from Parliament to head the UNDP (government-sponsored),
  • John Key left Parliament at 55, and appears to be picking up various directorships and the like, and
  • Bill English is leaving Parliament at 56.

I’m old-fashioned enough to think that being Prime Minister (or Governor of the Reserve Bank) should be a stepping stone to retirement, or at least a retreat to advocating the ideas one governed on, or doing good through community and voluntary organisations or government roles.  That isn’t an anti-business stance at all, just that the extent of the regulatory state has become so pervasive, and so much money is at stake, that it should trouble us, and cause questions to be asked, when senior politicians step so readily from politics into the board room (or consultancy rooms) of private businesses.  I’ve always  found oddly attractive the stories of Harry Truman –  who left office with almost nothing but his old army pension, but still wouldn’t do product endorsements –  or Clement Attlee who (reportedly) took the bus to the House of Lords in his retirement.   Or even George W Bush, who seems to have retired to paint, or John Howard.  I don’t wish poverty on our past leaders –   a decent parliamentary pension seems appropriate  – nor to make politics the preserve of the wealthy, but equally that public service shouldn’t be stepping stone to wealth, via regulated industries, either.  If the stepping stone is there, the risks to good government are real.

It would concern me if Bill English quickly shows up on a bank board, or even the board of a commercial entity much affected by specific government regulation/legislation.  But perhaps even more concerning should be if he follows in the path set by so many of our recent senior politicians (sadly, particularly National Party ones) and ends up being remunerated to serve the interests of –  or trade off the back of good relations with – the government of the People’s Republic of China and of the Chinese Communist Party (which, of course, controls the government).

There are the directorships of Chinese banks (former ministers Chris Tremain and Ruth Richardson, former Prime Minister, Jenny Shipley, and former National Party leader –  and Reserve Bank Governor –  Don Brash).   There are consultancy contracts (John Key, and Comcast’s interests in China).   Or Board memberships of Chinese government affiliated entities (Jenny Shipley).

Quite possibly all these people believe that are doing good.  But their positions put them in a situation where they have to think very hard if ever once they considered taking a stand against an aggressive expansionist repressive dictatorial state (from which, directly or indirectly, they are remunerated).  New Zealand isn’t unique in having former political leaders taking this path, but that we aren’t alone shouldn’t make it any more acceptable.  There were apologists for evil in the late 1930s too.

Might one hope for better from Bill English?  One might have  –  I would have – hoped so.  But when you’ve served as Deputy Prime Minister and Prime Minister for nine years and never once spoken out against the evils of the regime (domestic or foreign policy –  see continued illegal expansionism in the South China Sea), when as party leader you’ve kept on your list (and then promoted) an MP who has been, and probably still is, a member of the Chinese Communist Party, a former member of the Chinese intelligence services, someone who is repeatedly photographed with Chinese Embassy figures, and who  has never once been heard to criticise any aspect of the evil regime he once served, I’m not sure there is any reason for optimism.  This was the same party leader who, only a few months ago, refused to answer any serious questions about his MP Jian Yang, despite clear evidence that he had withheld information about his past in the intelligence services from New Zealand authorites when applying for citizenship or residence.    And who has never once engaged with the observations of a leading former diplomat who publicly stated last year that he was always very careful what he said around Jian Yang because the latter was known to be close to the Chinese Embassy.     In what sense did Bill English represent the attitudes and values of New Zealand and its people?

Last year, I repeatedly encouraged people to read, and engage with, Anne-Marie Brady’s paper on PRC party/government influence activities in New Zealand.    There is an increasing stream of reports and papers on these activities in other countries –  a recent testimony (full version number 20 here) to the Australian parliamentary committee on proposed new foreign political interference laws, or a substantial report from a German think-tank.    But where are our political leaders?      It is sad state we’ve come to when a former PRC intelligence official –  an open associate of an embassy of a hostile foreign powers, who withheld material information from the authorities –  gets to vote for the new Leader of the Opposition (will any media ask the candidates their attitudes to Chinese interference in New Zealand and other democratic countries?).

(And, to be fair and balanced, not that there is any sign that the parties that make-up the new government are any more willing to make a stand for the values that underpin our society. It isn’t many months since the President of the Labour Party was openly gushing about Xi Jinping and PRC regime.)



The Reserve Bank’s McDermott again

Earlier in the week I wrote about Reserve Bank chief economist John McDermott’s rather strange attempt to distract attention from the Bank’s own GDP forecasts –  which some had suggested were a bit optimistic –  by suggesting that private bank economists didn’t understand the process the Reserve Bank used, and even using the word “nonsense” in an attempt to bat away what seemed like quite legitimate questions.   Somewhat to my (pleasant) surprise, Westpac  – one of the banks that had questioned the Reserve Bank’s forecasts – actually went public in response , although being an institution regulated by the Reserve Bank they still seemed to feel the need to express due deference to the powerful, ending their note this way, (emphasis added)

We are comfortable respectfully maintaining that difference of opinion.

After each Monetary Policy Statement the Reserve Bank’s senior staff fan out across the country to do a series of post-MPS presentations (I used to do some of them myself).   These events are all hosted, and paid for, by the commercial banks, and commercial clients of those banks are the invited guests.  It is an arrangement that is convenient for the Reserve Bank –  the banks rustle up an audience –  but which has always seemed a bit questionable to me: preferential access to senior public officials, on sensitive policy issues, for the invited clients of particular banks.  The tone and thrust of questioning might be a little different if some such occasions were hosted by the Salvation Army or unemployed worker advocacy groups.

These occasions are supposed to be off-the-record, whatever that means.  The Bank defends it on the basis that it is supposed to let them speak more freely.  But the reason people turn up is to garner information and perspectives from –  and ask questions of – senior public officials.  And no one supposes that financial markets people in the room don’t (a) use, and (b) pass on to clients anything interesting, any different angles, that are raised when the Governor (in particular) and his leading offsiders are talking.     As I’ve noted previously, the contrast with the Reserve Bank of Australia is striking: senior officials will give speeches to private audiences, but the standard practice is, wherever possible, to post the text of the address and a webcast or audio of the address and any question and answer sessions, to minimise the extent to which some have access to Reserve Bank information/views others don’t have.

After my post the other day, a reader who had been at the post-MPS presentation John McDermott had given last Friday got in touch to pass on some of what McDermott had said there.  My reader felt –  and based on his report I agree –  that they didn’t put this senior official, or the Reserve Bank, in a particularly good light.   The reports are secondhand (ie I wasn’t there), so I’m relying on my reader to have captured the thrust of what McDermott said reasonably accurately.  But having worked closely with McDermott in the past, what I read had a ring of authenticity to it.   My reader has given me explicit permission to quote from the email I was sent.

He spent the first five minutes of his short presentation defending their record by displaying a chart showing CPI, broken down into tradables and non-tradables components, over the last 50 years or so. Essentially he was highlighting how insignificant the recent deviations from target look when you compare it to the extreme volatility in prior, pre-OCR, decades. He also claimed the RBNZ can only influence the non-tradables component and was rather self-congratulatory in how well they had done there.

Something didn’t sound quite right about that (the tradables vs non-tradables breakdown doesn’t go back that far), so I asked the Bank for a copy of McDermott’s slides (which, legally required to respond as soon as reasonably practicable, they supplied within 24 hours).    In fact, this paragraph was summarising two slides.  The first is, from memory, one of McDermott’s favourites.

mcdermott 1

In the 70s and 80s inflation was very high and volatile, and for the last 25+ years it hasn’t been.  It is a worthwhile point to make from time to time, but doesn’t have much bearing on anything to do with how monetary policy should be run right now (a bit looser, a bit tighter or whatever).  Apart from anything else, almost every advanced country could show a similar, more or less dramatic, chart.    And in the earlier decades, inflation wasn’t being targeted –  until 1985 the ‘nominal anchor” was the (more or less) fixed exchange rate.

The second chart was this one

mcdermott 2

This is presumably what McDermott was talking about when, as my reader reported,

He also claimed the RBNZ can only influence the non-tradables component and was rather self-congratulatory in how well they had done there.

There is no doubt that, in the short-term, the Reserve Bank is a pretty minor influence on tradables inflation, which is thrown round quite a bit, and most obviously, by fluctuations in petrol prices (changes in which closely track international oil prices) and the influence of weather events of fresh food prices.   The Reserve Bank can’t do much about those, and is specifically instructed (in every PTA) not to focus on them.  Of course, in the very short-term the Reserve Bank can’t do much about non-tradables inflation either –  it is quite persistent (ie not very volatile), and inflation right now is a response to monetary policy choices from perhaps 18 months ago, and economic forces (often hard to forecast) from the last year or so.

But it would be nonsense to suggest (if in fact McDermott did) either that tradables inflation is outside the Bank’s influence, or that the track record on non-tradables inflation is just fine.   New Zealand can’t do anything much about the world price of tradables, but monetary policy is a direct influence on the exchange rate, and thus on the New Zealand dollar price of tradables.    That can’t sensibly produce a stable tradables inflation rate quarter to quarter, but it can (and does) have a material influence on the trend –  “core tradables inflation” if you like.     And McDermott’s chart seems deliberately designed to avoid focus on the fact that, over time, tradables tend to inflate less rapidly than non-tradables.  As I’ve noted previously, the rule of thumb around the Bank used to be that if one was targeting 2 per cent inflation, that might typically involve something nearer 1 per cent tradables inflation and something nearer 3 per cent non-tradables inflation.

As it happens, the Reserve Bank produces estimates (from its sectoral factor model) of core tradables and core non-tradables inflation.  I ran this chart of those data a few weeks ago

sec fac model jan 18

Not only is this estimate of core tradables inflation not terribly volatile, but the gap between the two series isn’t unusually large or small.  Overall (core) inflation has simply been too low to be consistent with the target set for the Reserve Bank.  There isn’t anything for current Reserve Bank management to be proud of.

One of the reforms the new government is promising is the addition of some sort of employment objective (non-numerical) to the Bank’s statutory monetary policy responsibilities.  We don’t know the details, and probably neither does the Bank –  The Treasury was accepting submissions on that point right up to today – but I presume we will get a hint when the Policy Targets Agreement with the new Governor (under existing legislation) is signed and released next month.   But it is an obvious area of interest and apparently McDermott was asked some questions about the new environment.   You may recall that in the MPS the Bank released, for the first time, an estimate of the NAIRU (the estimated rate of unemployment at which there is neither upward nor downward pressure on inflation from the labour market) – “released”, but in a footnote (repeated in the press conference), citing analysis in an as-yet-unpublished research paper.

My reader reports that McDermott was asked about this, including

whether their estimate of NAIRU came about as a result of the likely addition of an employment mandate to the PTA, and … how they went about coming up with that number. His initial reply was “I’ve got a lot of very smart people working for me” and then he went on to basically say that the analysis and maths involved are too complicated for us to understand. He also highlighted, to the point of seeming rather proud of, the fact his team had decided to come up with the estimate on their own accord without any suggestion from him. It didn’t seem to me that even he knew how they  came up with 4.7%, nor that he particularly cared much.

The final sentence is clearly editorial in nature, and may or may not represent McDermott’s actual view, although it was clearly how he came across to this particular member of his audience.     As for the rest, when you put out a number in a footnote, don’t simultaneously make available the workings and background research, fall back on “very smart” staff,  and won’t even attempt to explain the intuition of the work that has been done, it isn’t a particularly good look from a senior public servant.    (I’ve also heard that in fact the “acting Governor” had been all over staff, as a matter of urgency, to produce publishable estimates of the NAIRU.)

I’m still looking forward to seeing the research paper when they finally get round to publishing it.  Perhaps the 4.7 per cent estimate of the NAIRU (with confidence bands) will prove to be robust, although it seems implausibly high to me.  But it is worth remembering that the Bank has form when it comes to rushing out new labour market indicators in high profile documents endorsed by senior managers, that play down any notion of ongoing excess capacity, without having first adequately road-tested and socialised the background research.    Persevering readers may recall the saga of LUCI , touted a couple of years ago by a Deputy Governor as the latest great thing, allegedly demonstrating that the labour market was already at or beyond capacity (and at least in that case the associated Analytical Note had already been published), before the interpretation of the whole indicator was quietly changed, and then it disappeared from view.

The questioner of McDermott apparently continued and

….suggested NAIRU will presumably become a more important consideration for the Bank going forward if they are handed a ‘full-employment’ mandate but he didn’t really address that question and instead spent 5 minutes explaining why it would need to be the Bank, and not politicians, who define what full-employment means at any given time, a suggestion I wasn’t aware anyone had made otherwise. He pressed the point that he didn’t believe the change to the mandate would make any difference whatsoever and sarcastically pointed out that they already consider employment when making decisions.

Since neither we, nor McDermott, has seen the new mandate, and since the new Governor (not yet in office) will be the single legal decisionmaker for a time, and then the new statutory Monetary Policy Committee will take responsibility, it isn’t clear how or why McDermott thinks he can say with any confidence that a new mandate won’t make any difference to policy.  Perhaps he wishes it to be so, but then he has been one of key figures in the regime of the last six-plus years that has delivered core inflation consistently below target even while (even on their own estimates) the unemployment rate has been above the NAIRU for almost the whole of that time.     As reported, it didn’t seem a very politically shrewd answer either –  it is one thing to emphasise that (as everyone agrees) in the long-run monetary policy can only influence nominal things (price levels, inflation rates etc), and quite another to suggest that there aren’t legitimately different short-run reaction functions.

We deserve better from our operationally independent central bank. Lifting the quality, and authority, of the Bank’s work around monetary policy will be one of the challenges for the new Governor, and needs to be borne in mind too by those devising the details of the new Reserve Bank legislation.