Global impact visas

Almost two years ago, in July 2015, the government announced that it was planning to introduce a new visa class.

Mr Woodhouse says the Government is also considering a new Global Impact Visa to attract high-impact entrepreneurs, investors and start-up teams to launch global ventures from New Zealand.

At the time, I noted

The Global Impact Visa idea sounds superficially promising. But my impression from the Pathways Conference last week was that existing entrepreneur visa schemes had not worked particularly well.  It will be interesting to see the analysis behind this proposal, including an assessment of how the risks around it will be managed and overcome.  I remain a little sceptical of the attraction of New Zealand to “younger, highly talented, successful and well-connected entrepreneurs from places like Silicon Valley”.  The flow of people in that sector would seem more naturally to be in other direction.  I hope it is not an example of the old derogatory adage used about Britons working in Hong Kong:  FILTH  (“failed in London, try Hong Kong”).

But since then I’d paid no more attention to the Global Impact Visa, until my son pointed out a large article in last Saturday’s Dominion-Post.   And it seems that I had missed the first part of what was actually a two-part series on the new visa, and the role two wealthy young Americans appear to be playing in determining who gets these visas.

The second article is really focused on the new visa scheme itself.  It begins this way

They’re young, rich, Silicon Valley idealists who want to change the world from New Zealand. How did the Monahan brothers come to influence our immigration policy – and what’s in it for us? In part two of our series, we look at how the Americans convinced Immigration NZ they should be the ones to pick the best entrepreneurial brains to come here.

In it there is lots of high-profile publicity for Nigel Bickle, the public servant who runs the Immigration New Zealand division of MBIE.  Bickle was last noted on this blog after he appeared on Nigel Latta’s advocacy TV programme championing large scale immigration thus

Bickle  –  that “front-line service delivery expert” –  argues that we need lots of immigration because a country “can’t get wealthy trading with ourselves”.  There seemed to be quite a bit of confusion there.  Of course, small countries (in particular) need to trade internationally, but that tells one simply nothing about the case for (or against) large scale immigration.  As it happens, and as I’ve pointed out before, most countries –  and especially most countries of our sort of size (population) –  export and import a much larger per cent of their GDP than New Zealand does.

Under the Global Impact Visa scheme (approved by Cabinet as a four year pilot), up to 400 visas (plus spouses/partners and families) will be granted.   As MBIE puts it

The policy is designed to attract those with the drive and capability to launch global ventures from New Zealand who may not be able to qualify for other visa categories. They will have the combination of drive, risk appetite and global connections which enables them to launch or significantly contribute to successful innovation-based ventures in New Zealand.

After three years, whether the ventures work out or not, recipients of global impact visas will be able to apply for residence visas.

Legally, of course, only government agencies can grant visas.  But MBIE will be granting these visas only to people who are recommended by their private sector partner, the Edmund Hillary Fellowship  (EHF).  EHF is itself a joint venture, again as MBIE puts it

between the Hillary Institute for International Leadership, a not-for-profit organisation that identifies and celebrates mid-career leaders from around the world; and Kiwi Connect, an organisation promoting and connecting high-impact entrepreneurship in New Zealand.

It isn’t quite clear what a non-profit that “identifies and celebrate mid-career leaders from around the world” has to bring to either (a) New Zealand immigration policy, or (b) New Zealand policies around innovation and technology, especially when this particular programme seems to be mostly fairly oriented towards young people (“early in their wealth cycle”).  It looks a lot like they just offer access to the Hillary name.

As for KiwiConnect, it doesn’t really seem to exist any more.  Their website says

Kiwi Connect originally set out to be a bridge between New Zealand and the world for impact-driven talent to be able to engage with the NZ startup and business ecosystem. We have succeeded in that mission with the creation of the Edmund Hillary Fellowship, and consequently have put Kiwi Connect into hibernation to focus our team’s efforts 100% on delivering a world-class Fellowship programme.

You can read their burble, on their transition, here.

We also identified that the ecosystem growth wasn’t matched with the necessary level of global connectivity for New Zealand to be internationally competitive. This connectivity is important in turning size and distance from what has been a disadvantage in more traditional industries, to a new advantage for innovation.

Since founding Kiwi Connect, we have focused on filling the gap to connect New Zealand with world-class talent, impact capital, and cutting edge innovation, so that NZ can create a critical mass of entrepreneurial activity within a thriving ecosystem. We started with more questions than answers, facilitating multi-disciplinary, global conversations on what it will take for New Zealand to lead in innovation.

It is a certainly a novel proposition that distance and remoteness will not just be overcome, but might apparently be “a new advantage for innovation”.    One would hope MBIE rigorously evaluated that propostion.

Anyway, the Edmund Hillary Fellowship it now is.

The Edmund Hillary Fellowship (EHF) is a global platform that brings together the best of humankind’s creative potential and entrepreneurial spirit in New Zealand, to create a lasting positive impact for the world.

They are being paid quite a lot of public money ($4m) to get the global impact visa programme going and, according to their website, the first visa approvals are expected to be granted next month.

The Fellowship has a very useful set of FAQs on their website, which I’m drawing from here.

What is it?

The Edmund Hillary Fellowship (EHF) is an end-to-end programme that gives impact-driven entrepreneurs, investors and startup teams a platform to incubate positive impact ventures from Aotearoa New Zealand, and contribute towards a thriving innovation ecosystem in the country. EHF offers exclusive access to Immigration New Zealand’s new Global Impact Visa.

Who is it for?

EHF is for entrepreneurs and investors who are innovating in the industry or sector they operate within, with the ambition to build or support globally scalable ventures to solve significant challenges and influence the course of humanity. This programme is for individuals who align with our values, and who have the skills, capabilities, relentless drive and desire to leverage the unique opportunities New Zealand offers, and make game-changing impact on the world.

Which is where things start getting a little troubling.  Little old New Zealand, keen to develop its “innovation eco-system”, actually puts official weight and money behind a focus on influencing the “course of humanity” and drawing people who will “make game-changing impact on the world”.    If the Monahan brothers, or any else, want to pursue such dreams, I wouldn’t want to stop them –  I’m sure we could all think of ways in which the world could be a better place.  But this is almost “on another planet” stuff, with no sign in any of the published material as to how they think this might actually come to something, let alone offer something worthwhile for the citizens of New Zealand.

They go on

What are the personal qualities you are looking for in candidates?

Model Fellows are highly capable and motivated individuals who view the problems in the world as opportunities to significantly improve it. They are big-picture thinkers at the top of their game, who are able to unpack complex problems to understand all the angles, and come up with holistic solutions that connect the dots. They have unwavering passion, relentless drive, and the ability to execute with excellence. Edmund Hillary Fellows also take advantage of the unique opportunities that New Zealand offers.

Walking on water looks as though it might almost qualify one.   But one has to wonder whether even Bill Gates would have qualified.

After all, when asked about proposed “impact” they write

What do you mean by impact?

We define “impact” as solving problems of significance to humanity in a way that creates positive lasting economic, social and environmental value.

All three at once.  It is a tall order.  Did Microsoft or Google, let alone Facebook, create “economic, social, and environmental value”?

And it doesn’t seem very likely that any card-carrying conservative would qualify for this programme.  Perhaps you noted earlier that the Fellowship is looking for people who “align with our values”.    Here are their values.

The first marker of the left-liberal orientation is the repeated use of “Aotearoa New Zealand”.  It might be old-fashioned and conservative to make the point, but the country is actually called New Zealand.

Much of the rest is the sort of babble that probably appears on any agency’s “values statement”.  But these ones caught my eye from the longer list.

Simplicity inspires us.

We value collaboration over competition to help raise the tide for all.

We strive to act with care for people and land, and to improve intergenerational wellbeing through creativity and entrepreneurship.

Our work is not about us but about those we serve. We actively strive to be better versions of ourselves

and while they talk about how “We love challenging assumptions”  a bit further down the page we read that their person described as “Candidate Attraction Lead”

believes that startups will solve the world’s problems only when they represent the diversity of the world’s people.

Perhaps she is right –  although actually for the last few hundred years most really useful innovations have come from a handful of cultures and countries –  I suspect she might not welcome a candidate challenging that proposition.

And this stuff matters because it isn’t just about getting accepted into the Edmund Hillary Fellowship in the first place.  To get a residence visa, you have to stay on good terms with the programme for three years.   I suspect there are many people who could genuinely make quite a difference, who would struggle to put up with the globalist waffle, and what social pressure goes with it, for three years.    Being able to put on a good front looks a highly valuable skill in this context.

And if you don’t already get the sense of what part of the political spectrum these people are coming from, I refer you back to the first of those Dominion-Post articles.   Take their annual innovation festival held near Wellington.

Every February since 2014, an eclectic bunch of people from around the world have descended on Whitemans Valley, an easy 30-minute drive from downtown Wellington, for a week-long “eco-innovation” festival called New Frontiers, a kind of techie’s version of Nevada’s Burning Man.

Think yoga, yurts, giant domes, composting toilets, campfires, more yoga, drum circles, dancing, vegan food and talking – lots of talking.

Guests have included film director James Cameron, Immigration NZ head Nigel Bickle, Conservation Department director-general Lou Sanson, regional mayors, US digital artist Android Jones and dating site guru Eben Pagan, poets, painters and inventors, as well as curious locals. It’s either a beautiful gathering of like minded thinkers or a weird cult, depending on your point of view. “There’s some freaky looking punters down there camping out in their domes, doing yoga and singing Kumbaya to the moon,” one local says.

Mike O’Donnell, a tech investor formerly of TradeMe who attended last year’s festival, was impressed by the diverse range of people and open exchange of ideas.
“They’re kind of 21st Century cyber hippies,” he says. “It’s a little bit overwhelming, but it’s quite cool. It’s a combination of 60s values, together with sustainable business models, truckloads of vegetarian food and exotic fruit juices.”

and then of the sorts of view championed

Matthew [Monahan] nominates Charles Eisenstein, who has spoken at New Frontiers, as his favourite author. That’s instructive of the brothers’ world outlook – Eisenstein is known as a proponent of “degrowth”, a movement based on “ecological economics” that rejects consumerism and capitalism.

Brian [Monahnan] raps about building a culture “not based on commerce, but on kindness”.

The brothers gave $4m to set up their non-profit Namaste Foundation, which has gifted money to everything from Black Lives Matter to climate change groups.

The Monahans’ philosophy is, of course, the polar opposite of Trumpism.
​”I’m definitely not a Trump supporter,” Matthew says. “I think the environmental challenges we have ahead of us are real. They are really giant problems that require all hands on deck.”

Doesn’t give a strong sense of a place with the Edmund Hillary Fellowship for, say, the large number of Americans with a different take on the world, politics and so on.

And all this is even aside from the bigger challenges a programme of this sort faces.    Adverse selection, notably.  Groucho Marx once famously remarked that he wouldn’t care to join a club that would have him as a member.  Realistically, why should we think that anyone who applies for this programme, to come and live in relatively poor remote (albeit non-Trumpian) New Zealand, is really likely to be the sort of person who can build a business that would “change the world”?        Take just the other OECD countries: every single one of them (even Chile) is closer to “the world” (markets, suppliers, knowledge clusters etc) than we are.   Most put on a pretty good show of democracy and the rule of law.   Quite a few have English as their first language –  and, of those, all look more attractive places in most respects than New Zealand does, for such transformative businesses (even Trump will be gone in, at most, seven years and seven months).   There  are isolated areas in which our regulatory provisions may be world-leading, but looking across the range of policy settings, we don’t really stand out.    And, frankly,  clusters of industries –  be it in Silicon Valley in tech, or London in finance, or wherever, exist for a reason.  The economics of agglomeration are real.

And when even venture capitalists, with their own money on the line, expect that relatively few of their investments will really pay off, why should we suppose that the Edmund Hillary Fellowship will manage even that sort of performance?  Is there any reason to suppose that they will successfully identify any people who will really turn out to “change the world”, or even add much sustained value to New Zealand?  Where are the focused incentives?   Perhaps there is such a basis, but it isn’t clear what it is.

As I noted a couple of years ago when the programme was first mooted, it would be “interesting to see the analysis behind this proposal, including an assessment of how the risks around it will be managed and overcome”.    As it happens, the government pro-actively released the Cabinet paper from last April on the proposed new programme.

But there was very little there.  There was no Regulatory Impact Statement, and although there is lots of talk about the scheme could be scaled up even before the pilot finished if the programme is “more successful than foreseen”, there is not a single indicator or marker in the entire paper that would have given Ministers (or now us, as citizens) any basis for knowing what counts as success, let alone whether any actual success is more than was foreseen.

There is lots of detail about the programme –  and the choice between MBIE running something directly or going with a private sector partner –  but almost no supporting analysis of the substance.   In putting the paper forward, the Minister of Immigration never touches at all on the incentive or potential adverse selection issues and risks.  There is lots of talk of the Business Growth Agenda, and aspirations to have New Zealand as an “innovation hub” (whatever that is), but nothing at all robust or rigorous on what MBIE thinks holds us back.   There is also really nothing on how a handful of people, focused on “changing the world” are really likely to favourably affect the economic performance of New Zealand and New Zealanders, including (in their strange words),  meeting “the entrepreneurial needs of New Zealand”.   Apart from anything else, if the rare one succeeds, are they likely to stay?

One’s confidence isn’t greatly enhanced when the Dominion-Post reports that one of the first proposals (and remember EHF provided this to the Dominion-Post, so they presumably thought it was one of the leading propositions) was “research into legal innovations that might arise from the recent granting of “person” status to the Whanganui River”.  World-changing?  Productivity-enhancing?

As the Dominion-Post article notes, there is plenty of disquiet about some aspects of the scheme in the immigration community.  Some of that may just be sour grapes and business rivalries –  the Monahans got the ear of the government when the critics didn’t.

I don’t have anything against the Monahans, although their much-vaunted respect for all seemed to run into a roadblock when they bought into Whitemans Valley –  named for a pioneer 1840s farming family –  and thought it was both a terribly amusing and  unsettling name, and decided to refer to the place as Aroha Valley instead.  But it isn’t hard, reading the MBIE material and the EHF material, to conclude that a bunch of idealistic, probably well-intentioned, Americans, ran into a government that wanted to look like it was “doing something” innovative, and out popped a programme with little hard-headed rigorous analysis to back it, not that much prospect of success, but which was good for some feel-good headlines for a while (note that back in 2015 even my initial comment was guardedly positive).

On the government’s side it looks a lot like another play from the MBIE “smart active government” playbook, which very rarely (and not surprisingly) seems to come to anything much.   I dug out a few articles last night about assistance to Sovereign Yachts –  lauded by a then Minister for Economic Development.  And there was a Simon Collins Herald article from 2003 on the “benefits of a helping hand” from the government

Most spectacularly, support for business and regional development jumped from $14.2 million to $100.5 million.

In the year to last June, Industry NZ handed out $7 million to 89 companies to help “significant expansion”, did business appraisals for 252 firms and helped 38 of them raise capital.

It gave $1.5 million in total to 15 business incubators and brought together 22 “clusters” ranging from organics to software.

It put $10.4 million into regional strategies, including $2 million each for four big projects – a technology park at Hamilton, forestry training in Rotorua, food processing research in Napier and wine research in Marlborough.

It gave a $500,000 “guarantee of assistance” to the American company Jack Links to build a meat snack factory in Mangere, another $500,000 to US company Media Lab for a research centre in Wellington and $50,000 to Hit Lab, a joint venture between Washington and Canterbury Universities.

Trade NZ’s investment arm helped expatriate yacht-builder Allen Jones set up in Whangarei, and this year gave $1.5 million to computer giant EDS to install call centres and researchers in Auckland and Wellington.

Less successfully, Industry NZ and Technology NZ promised $1.6 million to the Ericsson-Synergy software joint venture which closed late last year, and helped Sovereign Yachts to get land at Hobsonville, only to see it lay off staff last February.

Meanwhile, our productivity performance remained as weak as ever, and our tradables sector has been under even more pressure.  Why, one wonders, should this latest clever-sounding programme be so much different?  Why, for example, are the incentives right?

 There is a real reluctance in MBIE, and apparently among Ministers, to believe in New Zealanders.  OECD data tells us that New Zealanders are, on average, among the most skilled people, including in problem-solving skills, in the OECD.  And so many New Zealanders do impressively well abroad.      But still the cargo cult mentality seems to hold sway.  Nigel Bickle –  service delivery expert, in charge of Immigration New Zealand –  provides the concluding quote to the Dominion-Post series.  Matthew Monahan is quoted thus:
“Probably the best summation is the kaupapa set by Nigel [Bickle] at the outset,” he says. “Go get the world’s best people New Zealand needs to prosper.”

Plenty of foreigners have done well in New Zealand, and no doubt will continue to do so.  But New Zealand has the people to prosper –  the skills, the drive, the energy –  as it did 100 years ago.  Successful countries mostly make their own success, from their own people, institutions and cultures.   It isn’t clear why Michael Woodhouse, Bill English, and –  for that matter –  Nigel Bickle seem to think the answer lies in people over the water.

 

Immigration and New Zealand’s economic performance

That was the subject of last night’s Law and Economics Association seminar.    Eric Crampton (from the New Zealand Initiative) and I each spoke, and a good discussion followed.    The LEANZ flyer captured the essence of our own different approaches

Our speakers have differing views on the subject:

According to Michael Reddell, for most of the last 70 years successive governments have promoted large scale inflows of non-New Zealand citizens. Through various channels, this helps explain why New Zealand has been the worst performing advanced country economy in the world over that time – before and after the 1980s economic reforms. Located on remote islands, in an age when personal connections are more important than ever, that performance is unlikely to improve much, whatever else we do, until the government gets out of the business of trying to drive up our population, against the revealed preferences and insights of New Zealanders. We can provide top-notch incomes here – as we did in the decades up to World War Two – but probably only for a modest number of people.

Eric Crampton on the other hand says: It’s easy to scapegoat immigrants for all of the world’s problems – and many do. Proving immigrants do any harm at all is substantially more difficult. The New Zealand Initiative’s 2017 report on immigration looked to the data on immigration and found it difficult to reconcile popular fears about immigration with the data. As best we are able to tell, immigrants have lower crime rates than native-born New Zealanders; the children of immigrants are more likely than Kiwis to pursue higher education; and, immigrants integrate remarkably well into New Zealand society. Arguments that immigrants are to blame for slow productivity growth in New Zealand are inconsistent with either the international evidence of the effects of immigration on wages, and with what New Zealand evidence exists. And where the benefits of agglomeration seem to be increasing, restricting immigration against the revealed preferences of migrants, of those selling or renting them houses, and of those employing them, is likely to do rather more harm than good.

Eric’s presentation (here) was largely based around the Initiative’s advocacy piece on immigration published earlier in the year, which I responded to in a series of posts (collected here).    The text that I spoke from was under the title Distance still matters hugely: an economist’s case for much-reduced non-citizen immigration to New Zealand.  We engage pretty amicably, and I’m still grateful for Eric’s post about this blog in its early days, in which he noted

Michael believes that too high[a rate] of immigration has been substantially detrimental for New Zealand, where I’m rather pro-immigration. But his is the anti-immigration case worth taking seriously.

But in many respects, we were probably talking about different aspects of the issues.   When he focused on New Zealand, the points Eric made mostly weren’t ones I disagreed with.  We have been relatively successful in integrating large numbers of migrants, and migrants to New Zealand have been more skilled than those to most other advanced OECD countries.  Migrants don’t commit crimes at higher rates than natives: if anything, given the prior screening, probably at lower rates.   We both agree that housing supply and land use laws need fixing – although I’m more pessimistic than he is, because I’ve not been able to find a single example of a place that has successfully unwound such a regulatory morass.  But much of his story seemed to be on the one hand an acknowledgement that there isn’t much specific New Zealand research on the economic impact of our immigration, and on the other an empassioned call for us therefore to simply follow the “international consensus” and international evidence on the issue, because he could see no reason why our situation would be different than that of other advanced countries.

By contrast, my presentation was really devoted to making the case –  grounded in New Zealand’s economic history and experience – that New Zealand’s situation (and Australia’s for that matter) really is different than that of most advanced countries.    Along the way, I suggested that the overseas evidence is less persuasive than it is often made out to be.   After discussing the 19th century migration experiences, where the economic literature is pretty clear that migration contributed to “factor price equalisation”  –  lowering wage growth in the land-rich settlement countries, and raising it in the European countries the migrants left –  I turned to the literature on the more recent experience.

There are two broad classes of empirical literature on the more-recent experience (in addition to the model-based papers in which the models in practice generate the results researchers calibrate them to produce):

  • Studies of how wages behave in different places within a country depending on the differing migration experiences of those places, and
  • Studies that attempt to estimate real GDP per capita (or productivity) effects from a multi-country sample.

There are lots of studies in the first category, and not many in the second.   And almost all are bedevilled by problems including the difficulty of attempting to identify genuinely independent changes in immigration (if a region is booming and that attracts lots of migrants, higher wages may be associated with higher immigration without being caused by it, and vice versa).

I’ve never found the wage studies very useful for the sorts of overall economic performance questions I’m mainly interested in.  Precisely because they are focused on different regions within a country, they take as given wider economic conditions in that country (including its interest rates and real exchange rates).  They can’t shed any very direct light on what happens at the level of an entire country – the level at which immigration policy is typically set –  at least if a country has its own interest rates.  I’ve argued, in a New Zealand context, that repeated large migration inflows tend to drive up real interest rates and exchange rates, crowding out business investment especially that in tradables sectors.    In the short-term, it is quite plausible that immigration will boost wages –  the short-term demand effects (building etc) exceed the supply effects –  but in the longer-term that same immigration may well hold back the overall rate of productivity growth for the country as a whole.

There really aren’t many cross-country empirical studies looking at the effects on real GDP per capita (let alone attempting to break out the effects on natives vs those on the immigrants themselves, or looking at superior measures such as NNI per capita).   Those that exist tend to produce what look like large positive effects.  So large in fact that they simply aren’t very plausible, at least if you come from a country that has actually experienced large scale migration.   In one recent IMF paper, discussed in their flagship World Economic Outlook last year, an increase in the migrant share of the population of around 1 percentage point appeared to boost per capita GDP by around 2 percentage points.   As I noted, if that were so it suggested that if 10 per cent of the French and British populations swapped countries – in which case the migrant share in each country would still be lower than those in NZ and Australia –  both countries could expect a huge lift in per capita GDP (perhaps 20 per cent).   Nordic countries could catch up with Norway in GDP per capita simply by swapping populations between, say, Denmark and Sweden.

And countries that were seeking to reverse decades of relative economic decline could reverse that performance by bringing in lots of migrants.  Except, of course, that that more or less described New Zealand.  Over the last 25 years we’ve had lots of policy-induced non-citizen immigration (and many of the migrants aren’t that lowly-skilled by international standards).  And we’ve made no progress catching up with the other advanced countries; in fact we’ve gone on having some of the lowest productivity growth anywhere.  As it happens, Israel –  with more migrants again than we had –  had similarly dismal productivity growth.

I could go on.  For example, a country like Ireland certainly experienced a huge surge in productivity, but it was half a decade before the real surge in immigration started.    And, the way the model is specified, the per capita GDP gains are sustained only if the migrant share of the population remains permanently high –  if the migrant share dropped back so would the level of GDP per capita.  None of it rings true.  It speaks of models that, with the best will in the world, are simply mis-specified, and haven’t at all captured the role of exogenous policy choices around immigration.

But the thrust of my story was that New Zealand (and Australia) were different because their prosperity has, since first settlement, rested substantially on the ability of smart people, with good institutions, to make the most of fixed natural resources.   And our prosperity still rests on those fixed natural resources –  whereas that is no longer the case in most advanced economies – because it seems to still be very hard for many successful international businesses to develop and mature based in New Zealand (or Australia) when based on other than location-specific natural resources.  Our services exports, for example, are still lower as a share of GDP than they were 15 years ago, and represent a small share of GDP by advanced country standards (even with subsidies to the film industry (direct) or the export education industry (indirect)).

Of course, really energetic and smart people –  NZers and immigrants –  will start businesses here that seek to tap global markets (often going straight to the world, not starting with the domestic market).  But experience suggests that for all those talents and ideas, it is (a) harder to base and build such businesses here than in many other places, and (b) even among those that succeed, in time most will be even more valuable and more successful based somewhere nearer the markets, supplier, knowledge networks etc.   Mostly, it looks as though remote places will successfully specialise in production of things that are location-specific.   Gold or oil are where they are.  They aren’t in London or San Francisco.  Or Auckland.   Much the same could no doubt be said for hydro power, or good dairy or sheep land.

Heavy reliance on fixed factors (land and associated resources) doesn’t doom a country to underperformance.  But it does mean that if your country’s population is going to grow faster than that in other countries that are much less reliant on fixed natural resources, one needs a faster rate of underlying productivity growth just to keep up with the income growth in other countries.  Either that, or new mineral discoveries (always there but not previously recognised).   We’ve managed neither.

Against this backdrop, I concluded

Specifically, now we need deep sustained cuts in our immigration programme.  I’ve argued for 10000 to 15000 residence approvals a year.  Doing that wouldn’t be terribly radical – we’d actually be putting ourselves more in the mainstream of international experience with immigration policy.  Doing so would allow a rebalancing of our economy, and help us to meet pressing environmental challenges,  in ways that would offer a credible promise of materially higher living standards for, say, 4.5 million New Zealanders.     After 25 years –  perhaps even 70  –  when things have just gotten worse for New Zealanders relative to their peers in other advanced countries,  it is past time to abandon the failed experiment  –  and radical experiment, not mainstream orthodoxy, it is –  of large scale non-citizen immigration.     A population growing as fast as ours is, driven up by government fiat when private choices are mostly running the other way (birth rates below replacements, net outflows of New Zealanders), in a location so remote, just doesn’t make a lot of sense.

In the discussion that followed, there was quite a lot of what seemed to me like wishful thinking, and a reluctance to accept the apparent limitations of our location.  I can understand that reluctance.  In the past I’ve been there myself – I’ve just this morning re-read the text I wrote some years ago for the 2025 Taskforce’s report on why distance was overstated as a constraint.   I think Eric and I both accept that, if anything, personal connections are becoming ever more important (certainly than say 100 years ago, and perhaps even than 30 years ago).  Perhaps one day, technology really will markedly ease those constraints  –  eg the possibilities that might arise from mooted six hour flights to San Francisco instead of twelve.   As I responded to a questioner, if those ideas about the death of distance were being articulated in 1990, when New Zealand was just opening up, I’d probably have found them plausible.  But we’ve seen no evidence of it being enough –  no acceleration in (relative) productivity growth, no surge in city-based exports, really no nothing.

Eric also suggested that reliance on natural resources was a dangerous strategy, because of the potential over future decades for things like meat-substitutes to develop.  They may well.  And perhaps Ukraine (say) will get its act together, and a remote agricultural producer will be at even more of a disadvantage.  I don’t have any expertise in those areas, but even if they are a possibility that we may have to face, so what?  If the advantages/industries that have made New Zealand relatively prosperous were to go into further decline, it would be even more worrisome (for future living standards) if our policymakers had gone out on a limb and imported even more people.    Because there is simply no evidence, despite all the hopes, and all the high-flown bureaucratic words, that an Auckland-based alternative economic future is coming to anything very promising.  Auckland’s GDP per capita isn’t much above the New Zealand average –  unlike the situation in places (think London or New York) where service-based international industries now predominate –  and that margin has been shrinking further.   When the economic opportunities in places go into relative decline people rationally leave those places.  It is the way things work within countries.  There is no particular reason for it to be any different between countries (see for example, the huge outflow of New Zealanders to Australia in the last 40 years or so).

I have sought to advance a narrative to explain as many as possible of the stylised facts of New Zealand’s underperformance, including

·        There is still no sign of any labour productivity convergence (if anything, on average, real GDP per hour worked is falling slowly further behind),

·        Total factor productivity is hard to measure, but on the measure there are we’ve kept on doing very badly there too,

·        We’ve had 25 years of the highest average real interest rates in the OECD  (which could be a good thing if we had lots of productivity growth, but we haven’t)

·        Not unrelatedly, even though our productivity has slipped behind over decades, our real exchange rate hasn’t adjusted downwards in the way that standard theory would teach,

·        We’ve had weak business investment (bottom quartile of OECD countries, even though population growth has been in the top quartile), even though we started with low levels of capital, and

·        We are still experiencing weak growth in exports (unlike most countries, we’ve seen no growth in exports/GDP for 25 years or more) and weak growth in the tradables sector of the economy (in per capita terms, no growth at all this century.

·        Among those exports, there is little sign of any sustained move beyond reliance on natural resource based exports.

·        Oh, and our one half-decent sized city, Auckland, has experienced declining GDP per capita, relative to the national average, over the 16 years for which we have the data.

Eric’s response last night was that there were many alternative narratives to explain our dismal long-term productivity performance.  But, in fact, whether in their full report earlier in the year, or in discussion last night, the Initiative hasn’t really sought to outline a credible alternative story.   In practice, any alternative seems to amount to “well, it would, or could well have been, worse without the large-scale immigration”.  Perhaps it could have been. but surely it would be helpful to offer a story about the channels through which those worse outcomes could have come about, and how those channels are consistent with the indicators we’ve actually seen?

I ended the text I spoke from with an appendix setting out the key elements of how I’d change our immigration policy.  Much of it will be more or less familiar to regular readers, but for the record here is the list.

Appendix

Some specifics of how I would overhaul New Zealand’s immigration policy:

  1. Cut the residence approvals planning range to an annual 10000 to 15000, perhaps phased in over two or three years
  2. Discontinue the various Pacific access categories that provide preferential access to residence approvals to people who would not otherwise qualify.
  3. Allow residence approvals for parents only where the New Zealand citizen children have purchased an insurance policy from a robust insurance company that will cover future superannuation, health and rest home costs.
  4. Amend the points system to:
    • Remove the additional points offered for jobs outside Auckland
    • Remove the additional points allowed for New Zealand academic qualifications
  5. Remove the existing rights of foreign students to work in New Zealand while studying here. An exception might be made for Masters or PhD students doing tutoring.
  6. Institute work visa provisions that are:
    • Capped in length of time (a single maximum term of three years, with at least a year overseas before any return on a subsequent work visa).
    • Subject to a fee, of perhaps $20000 per annum or 20 per cent of the employee’s annual income (whichever is greater).

I argue that this sort of approach would take more seriously the constraints of location, and offer much better prospects for lifting the productivity and living standards of something like the existing population of New Zealanders.  Much of modern economics doesn’t pay much attention to fixed natural resources, and economics of location (at least in a cross-country sense).  That is understandable –  they aren’t the big issues for most other advanced countries (UK, USA, Belgium, Switzerland and so on).  What is less readily pardonable is the willingness of our own political leaders, and supporting bureaucrats, to give so little attention to those factors and what they mean for our prospects.  Firms, families, and societies all manage within constraints.  Our governments do so when it comes to managing their own financial accounts.  But otherwise, they seem free to just pretend that we are in a different situation than we are actually are, to persist with a modern Think Big that, decades on, still shows no sign of working out well for New Zealanders as a whole.   Quite why New Zealanders allow ourselves to be carried along, when the evidence is against it, is something of a mystery.

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.