Productivity growth: failures and successes

As a parent I find it particularly disheartening to observe the near-complete indifference of governments and major political parties that might hope to form governments to the atrocious productivity performance of the New Zealand economy. If the last National government was bad, the Labour or Labour-led governments since 2017 have been worse. It is hard to think of a single thing they’ve done to improve the climate for market-driven business investment and productivity growth, and easy to identify a growing list of things that worsen the outlook – most individually probably quite small effects, but the cumulative direction is pretty clear. Before I had kids I used to idly talk about not encouraging any I had to stay in New Zealand, so relatively poor were the prospects becoming. It is harder to take that stance when it is real young people one enjoys being around, but…..at least from an economic perspective New Zealand looks like an ever-worse option, increasingly an inward-looking backwater.

One of the ways of seeing the utter failure – the indifference, the betrayal of New Zealanders – is to look at the growing list of countries that are either moving past us, or fast approaching us. Recall that for 50 years or more New Zealand was among the handful of very highest income countries on earth.

For doing those comparisons I prefer to focus on measures of real GDP per hour worked, compared using purchasing power parity (PPP) exchange rates. It is, broadly speaking, a measure of how much value is being added by firms – mostly in the private sector – for each unit of labour those firms are deploying. Real GDP per capita can be useful for some purposes – actual material living standards comparisons – but can be greatly, directly, affected, by demographics, in ways that don’t reveal much about the performance of the economy and the environment for business investment.

When I run charts here about productivity comparisons across countries I mostly use OECD data. Most – but not quite all – of what we think of as advanced economies are in the OECD (as well as a few new entrants that aren’t very advanced at all, and seem like “diversity hires”, incidentally making New Zealand look a bit less bad in “whole of OECD” comparisons). But once in a while I check out the Conference Board’s Total Economy Database, which has a smaller range of series for a rather wider range of countries, advanced and emerging. The latest update was out a few weeks ago.

As regular readers know I have highlighted from time to time the eastern and central European OECD countries – all Communist-run until about 1989 – that were catching or moving past us. I first noticed this when I helped write the 2025 Taskforce’s report – remember, the idea that we might close the gaps to Australia by 2025, when in fact policy indifference has meant they’ve kept widening – in 2009, so that must have been data for 2007 or 2008. Back then only Slovenia had matched us, and they were (a) small and (b) just over the border from Italy and Austria. The OECD and Conference Board numbers are slightly different, but by now probably four of the eight have matched or exceeded us (and all eight managed faster productivity growth than us over the last cycle). Turkey – also in the OECD – has also now passed us.

But what about the central and eastern European countries that aren’t in the OECD? As I glanced down the tables I remembered a post I’d written four years ago about Romania and comparisons with New Zealand’s economic performance. Romania had been achieving quite strong productivity growth prompting me to note

….one of the once-richest countries of the world is on course for having Romania, almost a byword in instability, repression etc for so many decades, catch us up.  It would take a while if current trends continue.  But not that long. Simply extrapolating the relative performance of just the last decade (and they had a very nasty recession in 2008/09 during that time) about another 20 years.

So how have things been going?

romania 21

Even if we focus just on the last hard pre-Covid estimate (for 2019) they were up to about 84 per cent of average New Zealand labour productivity. If these trends continue, they’d catch us by about the end of the decade.

To be clear, it is generally a good thing when other countries succeed. It is great that these central and eastern European countries moved out from the shadow of the USSR and non-market economies and are now achieving substantial lifts in living standards. The point of the comparisons is not to begrudge their successes – which have a long way still to run to match most of western Europe – but to highlight the failure New Zealand governments have presided over. We were richer than all these countries for almost all of modern New Zealand history, and soon our economy will be less productive than all or most of them. We were also richer and better off than most or all of today’s most productive advanced economies, and now we just trail in the their wake. Even as the most productive advanced economies have experienced a marked slowing in their productivity growth in the last 15 years or so

prod growth advanced

we’ve really only managed little more than to track their slowdown – and recall that the median of these countries has average labour productivity two-thirds higher than New Zealand’s so – as in the central and eastern European countries – there were big gaps that might have been closed somewhat. Most of those countries did so, but not New Zealand.

To revert to Romania for a moment, it is not as if it is without its challenges. It ranks about 55th on the World Bank’s ease of doing business index, and has been slipping down that ranking (although still doing very well on a couple of components). Corruption seems to be a major problem. The neighbours aren’t the best either – including Ukraine and Moldova. Reading the latest IMF report (pre-Covid) there were signs of some looming macro imbalances but the latest IMF forecasts suggests a pretty optimistic outlook still, including investment as a share of GDP climbing back to about 25 per cent of GDP. Perhaps something is going to derail that productivity convergence (with New Zealand) story but it isn’t there in the forecasts at present. And if corruption has to be a drag of some sort (but how large can that effect be?) government spending and revenue are both smaller as a share of GDP than in New Zealand.

In GDP per capita terms the picture (Romania vs New Zealand) is not quite as grim. That mostly reflects differences in hours worked

Romania hrs

Some of that is demographics, some not. Either way, hours worked are an input – a cost – not (mostly) a good thing in their own right. New Zealand struggles to maintain upper middle income living standards for the population as a whole by working a lot more hours (per capita) than many other advanced countries.

And then of course there is the difference that must be quite uncomfortable for the political and bureaucratic champions of “big New Zealand” – those politicians (both sides) just champing at the bit to get our population growing rapidly again.

romania popn

Romania is a pretty big country. When this chart started it had almost six times our population. 25 years on Romania’s population is a bit under four times ours. I mentioned earlier the investment share of GDP: Romania’s is averaging a little higher than ours, even with these massive population growth (shrinkage) differences, so just imagine how much more of those investment resources are going to deepen capital per worker (even public infrastructure per citizen). (For those interested the total fertility rates of the two countries are now very similar: the differences in trend population growth are largely down to immigration/emigration.)

Now, of course, I haven’t mentioned being in the EU or being located not too far from many of the most productive economies on earth (although Bucharest to Zurich isn’t much less than the distance Wellington to Sydney). Those are advantages. Of course they are. But then why do New Zealand officials and policymakers continue to champion a (now) purely policy-driven “big New Zealand” when (a) almost nothing has gone right for that story in (at least) the last 25 years, and (b) when so much else of policy choices only reduces the likelihood of the future under such a strategy being any better?

Romania really is a success story, and I’d like to understand a bit better why (for example) it has been doing so much better than Bulgaria and Serbia. But it isn’t an isolated success story: in addition to the OECD eastern and central European economies, Croatia isn’t doing too badly either.

But – and taking a much longer span – this chart still surprised me. It draws on different database – the Maddison Project collection of historical real GDP per capita data. Since it is per capita data it includes all those differences in hours worked per capita (data which simply isn’t available for most countries in the distant past). I’ve started in 1875 simply because that is when the Romania data start. I’ve shown only the countries for which there is 1875 data (the last observations are 2016 simply because that is when this particular database stops), with the exception of China and India which I’ve added in for illustrative purposes because there are a couple of estimates for years between 1870 and 1887 which I’ve simply interpolated. The chart shows the ratio of real per capita incomes in 2016 as a ratio of those in 1875.

romania maddison

Best of them all. New Zealand not so much (and yes we were about the top of the class in 1875, but the New Zealand story is submergence not convergence, given how many of these countries are now richer than us).

To be clear, over the last 140+ years New Zealand has been a far better – safer, more prosperous, fairer, more open – country in which to live than Romania. Whether it will still be so for most the next century is increasingly a very open question. Our politicians seem unconcerned, and if any of them have private concerns they do nothing about them – no serious policies in government, so no serious policy reform options in Opposition. Nothing. They seem to just prefer nothing more than the occasional ritual mention.

Still on matters productivity, I finished reading last night an excellent new book on productivity: Fully Grown: Why a Stagnant Economy is a Sign of Success by Dietrich Vollrath, a professor of economics at the University of Houston. It is incredibly clearly written, and is a superb introduction to economic growth and productivity for anyone interested (I”ll be commending it to my son who has just started university economics). I’m not really persuaded by his story about the US, but it is well worth reading if you want to think about these issues as they apply to one of the highest productivity economies on earth. It suffers (as so many US books) do from being exclusively US-focused, even though there is a range of northern European economies with productivity levels very similar to (a bit above, a bit below) those in the US and one might think that their data, their experiences, might be a cross-check on some of his stories. To be clear, his focus is on a frontier economy, not ones – whether New Zealand or the central and east European ones, or even the UK and Australia – which start so far inside the frontier. But it is a very good introduction to how to think about sum of the issues, and a summary of many of the papers that the research-rich US economy generates.

Banks, housing lending, and fixing housing

In my post yesterday about the Reserve Bank’s FSR and the subsequent press conference conducted by the Deputy Governor I included this

The sprawling burble continued with questions about whether banks should lend more to things other than housing – one veteran journalist apparently being exercised that a large private bank had freely made choices that meant 69 per cent of its loan were for houses. Instead of simply pushing back and noting that how banks ran their businesses and which borrowers they lend to, for what purposes, was really a matter for them and their shareholders – subject, of course, to overall Reserve Bank capital requirements – we got handwringing about New Zealand savings choices etc etc, none of which – even if there were any analytical foundation to it – has anything to do with the Bank. 

Someone got in touch about the 69 per cent line and suggested that it must be a sign of something being wrong, going on to suggest that the Reserve Bank’s capital framework and associated risk weights was skewing lending away from agricultural and (in particular) business lending.

My summary response was as follows:

I guess where I would come close to your stance is to say that if we had a properly functioning land market producing price/income ratios across the country in the 3-4 range (as seen in much of the US, incl big fast-growing cities) then the share of ANZ’s loan book accounted for by housing lending would be much less than 69%, and in fact the total size of their balance sheet would be much smaller.  But my take on that is that the high share of housing loans is largely a reflection of central and local govt choices that drive land prices artificially high, and then we need financial intermediaries for (in effect) the old to lend to the young to enable houses to be bought.  The fault isn’t the ANZ’s and given the capital requirements in NZ there is little sign that the overall balance sheet is especially risky, and therefore should not be of particular interest to the RB (except perhaps in a diagnostic sense, understanding why balance sheets are as they are).  I’m (much) less persuaded that there is a problem with the (relative) risk weights, given that every comparative exercise suggests that our housing weights are among the very highest anywhere (and, in effect, rising further in October).

But to elaborate a bit (and shift the focus from one particular bank) across the depository corporations as a whole (banks and non-banks) loans for housing are about 62 per cent of total Private Sector Credit (and total loans to households are about 64 per cent). A large chunk of the balance sheets of our financial intermediaries are accounted made up of loans for housing.

The gist of my response was that that shouldn’t surprise us at all, given the insanity of the land use restrictions that central and local government impose on us, rendering artificially scarce – and expensive – something of which there is an abundance in New Zealand: land. If, from the perspective of the economy as a whole, relatively young people are buying houses from relatively old people (or from developers) the higher house/land prices are the more housing credit there needs to be on one side of banks’ collective balance sheets and – simultaneously – the more deposits on the other. If median house prices averaged (say) $300000 – as they do in much of the (richer) US – there would be a great deal less housing credit in total.

One other way to look at the stock of housing credit is to compare it to GDP – in effect, all the economic value-added in the entire country. Since the GDP series is quarterly and the credit data are monthly, I haven’t shown a full time series chart here. The data start from December 1990, and then only for an aggregate of housing+personal loans (but personal loans are small in New Zealand). So I’ve shown lending to households in Dec 1990, in mid-97 (roughly the peak of the business cycle), Dec 2007 and Dec 2019 (two more business cycle peaks), and March 21 (for which we have credit data, but only an estimate for GDP).

lending to households

There was a huge increase in the stock of lending, as a share of (annualised) GDP over the first 17 years of the series. What I’ve long found interesting is how little change there was over the following full business cycle (there were ups and downs in between the dates shown), and then we’ve had a bit of a step up in the last year or so (and even if house prices stay at this level, future turnover will tend to further increase housing debt expressed as a share of GDP).

Since real house prices have more than tripled since 1990 it is hardly surprising the stock of housing debt (share of GDP) has increased hugely. Were real house prices to, for example, halve then we might over time expect to see the stock of housing debt drift gradually back – it could take decades – towards say the 1997 sort of number.

Implicit in the journalist’s comment was a suggestion that lending to housing somehow limits how much lending banks do for other things. That generally will not be so. Banks (as a whole) are generally not funding-constrained – not only do loans create deposits (at a system level) but international funding markets are available (and used to be very heavily used, when NZ had large current account deficits). Of course, there is only so much capital devoted to New Zealand banking at any one time, but in normal circumstances capital flows towards opportunities.

But what has the empirical record been? The Reserve Bank publishes data for business lending from banks/NBDTs (which isn’t all business borrowing by any means – between funding from parents and the corporate bond market) and for agricultural lending.

Here is how the full picture looks

sec lending

For what it is worth, intermediated lending to business in March was exactly the same as a share of GDP as it was in December 1990. For younger readers, December 1990 was just a couple of years into banks working through the massive corporate debt overhang that had built up in the few years immediately following liberalisation. Farm credit, of course, has increased very substantially – again particularly over the years leading up to 2007/08 with the wave of dairy conversions and higher land prices.

On the business side of things, it is worth bearing in mind that business lending (share of GDP) was consistently weak throughout the last business cycle. Some will argue that banks had some sort of structural bias against business but even if so (a) over that decade or so there was no growth in the stock of housing lending as a share of GDP, and (b) there is little compelling evidence that systematic and large unexploited profit opportunities were going begging over that decade. It seems more likely that the markets – including banks – financed the profitable opportunities that were around, but there just weren’t many of them.

So my story remains one that if central and local government were to free up land markets and house price to income ratios dropped back to, say, 3-4 then over time the stock of housing debt (share of GDP) would shrink, a lot. There are some stories on which much cheaper house prices generate fresh waves of business entrepreneurship etc with workers able to flock to those opportunities, but I don’t find those stories convincing in New Zealand (in the aggregate). But simply repressing the financial system some more – the agenda the Reserve Bank and the government have been pursuing for several years now – will not change those business opportunities one iota.

(This post hasn’t tried to deal with the riskiness of the housing loans. My take on that is really the same as the Reserve Bank’s – at least when it isn’t champing at the bit to intervene. Capital requirements (and actual ratios) are high – materially higher than they were – and they are calculated in a fairly conservative way, with risk weights on housing that are fairly high, including by international standards. For what it is worth, the ratings issued by the agencies seemed aligned with that interpretation. )

That we have such a large share of total credit for housing isn’t, prima facie, a banking system problem – banks will follow the opportunities that (in this case) bureaucratic distortions create, and our central bank has demanding capital standards and in APRA one of the better banking regulators around – but rather just another indicator of how warped our housing market has been allowed – by governments – to become. But we knew that already. In fact, governments knew it to, but they prefer to try to paper over cracks, hide behind ever more pervasive RB controls, rather than tackle the core issue.

On which note, a couple of months ago the Wellington magazine Capital asked if I would contribute an article on what might be done to fix the housing market, with a Wellington focus. I wasn’t really familiar with the magazine – having previously seen it only in hairdressers, takeaway outlets and the like, for readers to glance through while they wait – but I said yes, and looking through the edition I picked up this week it looks like a mix of fairly geeky material (eg a whole article on lead-rubber bearings) and the lifestyle stuff.

Since I didn’t give them my copyright, many readers are out of Wellington. and the issue with my article seems to have been on sale for a while now here is the piece I contributed.

Free up the land: unravelling the unnatural housing disaster

Michael Reddell[1]

April 2020

New Zealand house prices, even adjusted for inflation, have more than tripled over the last 30 years.  The persistent trend was unmistakeable even before the latest surges.   Million-dollar houses were once the rare exception in Wellington, but now are almost the norm in too many suburbs.  The Wellington region median house price is now perhaps 10 times median income, putting home ownership increasingly beyond the reach of an ever-larger share of those in their 20s and 30s.

Most of the talk is loosely about “house” prices but what has really skyrocketed is the price of land in and around our urban areas; whether land under existing dwellings, or potentially developable land.  And this in a country with so much land that all our urban areas cover only about 1 per cent of New Zealand.

It is scandalous, perhaps especially because it is an entirely human-made disaster.   Land isn’t scarce, and hasn’t become naturally much more scarce, even as the population has grown.  Instead, central and local governments together have put tight restrictions on land use.  They release land for housing only slowly and make it artificially scarce, not just in and around our bigger cities but often around quite small towns.   And if there is sometimes a tendency to suggest it is “just what happens”, citing absurdly expensive (but much bigger) cities such as Melbourne, San Francisco or Vancouver, nothing about what has gone on is inevitable or “natural”.   

The best way to see this is to look at the experience in the United States, where there are huge regions of the country – often including big and growing cities – where price to income ratios are consistently under 4.    Little Rock, for example, is the state capital of Arkansas. It has a growing metropolitan population of just under 900,000, and a median house price of about NZ$300,000 –  little changed, after allowing for inflation, over 40 years.    The US also helps illustrate why it is wrong to (as many do) blame low interest rates:  not only are interest rates the same in both San Francisco and Little Rock, but US longer-term real interest rates are typically a bit lower than those in New Zealand.  The same goes for tax arguments: they have much the same tax code in both the high-priced growing US cities as in (much) more affordable ones.  High real house prices are a policy choice;  not necessarily the desired outcome of central and local government politicians, but the inevitable outcome of the land use restrictions they choose to maintain.

Both central and local government politicians sometimes talk a good game about making housing more affordable, but neither group seems to have grasped that in almost any market aggressive competition among suppliers is what keeps prices low.   People sometimes suggest there isn’t enough competition among, for example, supermarkets or building products suppliers, but if we really want widely-affordable housing again in New Zealand what we need is landowners aggressively competing with each other to get their land brought into development.  And that has to mean an end to local councils deciding where they think development should happen, whether within the existing footprint of a city or on its periphery.    We need a presumptive right for owners to build, perhaps to two or three storeys, on any land (and, of course, councils need to continue to be able to charge for connecting to, for example, water and sewerage networks).   It could be done now.  That it isn’t tells us that councils are the problem not the solution.  Too many –  including in Wellington –  seems to think it is their role to use policy so that in future lots of people are living in townhouses and apartments, even as experience suggests that what most (but not all) New Zealanders want, for most of their lives, is a place with a backyard and garden.  And they seem to fail to understand that simply allowing a bit more urban density, perhaps in response to a build-up of population pressure, hasn’t been a path anywhere else to lowering house prices. Instead, such selective rezoning simply tends to underpin the price of those particular pieces of land. 

Sometimes people suggest that even if this sort of approach would be viable in Hamilton or Palmerston North, it isn’t in rugged Wellington.    But as anyone who has ever flown into or out of Wellington knows there is a huge amount of undeveloped land in greater Wellington.    And if the next best alternative use should be what determines the value of land that could be used for housing, much of the land around greater Wellington simply does not have a very high value in alternative uses (not much of it is prime dairying or horticulture land).  Unimproved land around greater Wellington should really be quite cheap, although the rugged terrain would still add cost to  developing it to the point of being ready to build.

Some worry about, for example, the possibility of increased emissions.  But once we have a well-functioning ETS the physical footprint of cities doesn’t change total emissions, just the carbon price consistent with the emissions cap.  And for those who worry about traffic congestion, congestion charging is a proven tool abroad, which should be adopted in Wellington (and Auckland).

I’m not championing any one style of living.  The mix between densely-packed townhouses and apartments on the one hand, and more traditional suburban homes on the other, shouldn’t be determined by the biases and preferences of politicians and officials but by the preferences of individuals and families, exposed to the true economic costs of those preferences.  Similarly, policymakers should respect the (changing) preferences of groups of existing landowners what development can, or cannot, occur on their land.

The behaviour of councils over many years reveals them as, in practice, the enemies of the sort of widely-affordable housing which the market would readily provide (as it does in much of the US).  If councils won’t free up the land, to facilitate the aggressive competition among land providers that would keep prices low, central government needs to act to take away the blocking power of local councillors.

And this need not be the work of decades.  Of course, it takes time to build more houses, but the biggest single element of the housing policy failure is land prices. Once the land use rules look as though will be freed up a lot, expectations about future land prices will adjust pretty quickly, and prices will start falling.   We could be the boutique capital city with widely-affordable housing.  The only real obstacles are those who hold office in central and (especially) local government.


[1] Michael Reddell was formerly a senior official at the Reserve Bank, and also worked at The Treasury and as New Zealand’s representative on the board of the International Monetary Fund. These days, in additional to being a semi-retired homemaker, he writes about economic policy and related issues at http://www.croakingcassandra.com

Lacking in serious analysis, not well-grounded in law

Yesterday was the Reserve Bank’s six-monthly Financial Stability Report. It might these days almost be almost better labelled the “Make the financial system ever less efficient report”, and with little real challenge or scrutiny from the assembled media.

With the Governor off sick it was left to the Deputy Governor Geoff Bascand to front the press conference. He seemed ill-at-ease and a bit uncomfortable in the spotlight – surprising in one who has held senior positions for so long – and often offered answers that were longwinded without actually saying much.

One of the questions he was asked on several occasions was about the reforms announced last week, and whether they reduced or increased the powers of the Minister of Finance and/or the Bank when it came to imposing direct controls on lending. Bascand never once answered the questions directly, delivering lines about how the new law would provide “greater clarity” but in what he said, and in what he didn’t say, he more or less confirmed the interpretation I ran in a post last week that the de facto powers of the Minister will be reduced – since the Minister will have no say on which tools the Bank can use, whereas under the ad hoc convention of the last decade the macroprudential Memorandum of Understanding between the Bank and the Minister governed that. Under the planned new legislation the Minister will be able to stop the Bank putting in place controls on broad classes of lending (eg residential mortgages) but at least under this government that will be an empty power, since the government is already content with the Bank having LVR restrictions, and the Bank will be free to apply any other controls it likes, whenever it likes. You might think that is a good thing. The Bank probably does. But it hands over much too much power to an unelected unaccountable Board.

But what I really wanted to focus on in this post was the area the Bank itself (and much of the media coverage) focused on: housing. 

You would barely get the idea from any of the material that the Bank has no responsibility for housing at all.  Its financial regulatory powers over banks have to be exercised to promote the maintenance of a sound and efficient the financial system.   And that is pretty much it.     The government is in the process of reforming the law to downplay the efficiency dimension, but (a) the law today is as it is, and (b) even under their new law the focus is supposed to be on the soundness of the financial system.   A couple of months ago, as is his right, the Minister of Finance issued a direction to the Bank requiring them to “have regard to” this government policy:

But this direction alters neither the statutory purposes the Bank must exercise its powers for, nor alters the Bank’s statutory powers.   The Governor promised that the Bank would explain quite what import this section 68b direction actually had, but it appears that that would have been embarrassing or awkward, because no such explanation is offered or attempted in the FSR.  In fact, they both misrepresent the substance of the direction, and then do more than suggest that it “aligns well with the Reserve Bank’s objective to promote the maintenance of a sound and efficient financial system”.   But bear in mind that not even the Cabinet paper that discussed this direction (and the equally empty change to the monetary policy Remit) envisaged much effect on anything much.

So we are simply left with those twin goals of maintaining a sound and efficient financial system.    But amid all their talk of housing financing restrictions, old, new, and foreshadowed, there is barely a mention of the efficiency of the financial system.   Which is probably just as well (for them) as there is no conceivable way that there most recent restrictions, described here, do anything but seriously impede the efficiency of the financial system.

The Bank hasn’t even attempted to make an efficiency case for almost completely banning any loans to residential rental property providers in excess of 60 per cent of the value of the property (all the while allowing much easier access to credit for owner-occupiers). If there are any real differences in the riskiness of such loans, not already factored into pricing and capital requirements, they are small relative to these differences in rules. So what we have isn’t a set of rules that is about either soundness (which capital requirements already manage) or efficiency – in a banking system that has proved itself robust over many years – but purely political interventions, resting on no sound statutory foundations, to attempt to skew the playing field in the housing market, consistent with Labour Party wishes and political preferences. Thanks to the Reserve Bank the market in houses will function less well, and the market in housing finance will be much less efficient and effective (and that without even addressing the “new homes” carve-outs, which again are all about politics and not at all about risk – new developments tend to be riskier – or efficiency).

Now, on a good day there are still some shreds of economic rationality and logic buried somewhere in the Bank. Deep in the FSR we find this good paragraph

I especially liked that slightly desperate footnote “see it isn’t only us”.

Now the Reserve Bank can’t fix any of that stuff – it is all about central and and local government failure – but they are nonetheless quite happy to operate beyond their legitimate sphere and powers to feed a government narrative and paper over symptoms. providing aid and comfort to the government doing little to get to the heart of the issue (the government that disavows any suggestion that perhaps house/land prices should fall). But that’s Orr for you.

Now perhaps you are thinking “but isn’t the financial system imperilled by these higher house/land prices?” Well, the Bank itself doesn’t think so and in the rest of the report they are at pains to stress how resilient the system is, how sound the banks are – even while being just about to resume their never-well-justified drive to push further up capital ratios that are, in effect, already among the very highest in the world. At the press conference, the Bank was at pains to note that the system could cope quite well with even a large fall in house prices. The Deputy Governor rightly highlighted that if prices fell recent borrowers might be in a difficult position, especially if for some reason the unemployment rate was to rise a lot at the same time but…….that simply isn’t a financial system soundness issue.

Much of the discussion in the document and in the press conference etc was about what fresh horrors – housing finance interventions – the Reserve Bank might be cooking up, in league with the government. Unsurprisingly perhaps – since they’ve wanted this tool for years – their preference seems to a debt to income limit (or a series of them, perhaps further impairing the efficiency of the system by picking favourites). Even the Bank seems to recognise that LVR limits are already so tight, especially on residential rental providers, that it might be embarrassingly inconsistent with their mandate to go further, and (sensibly) they don’t seem at all keen on banning interest-only mortgages. It is all a bit hypothetical at present – since as they note the latest LVR controls only came into effect last week – but there is no stopping a bureaucrat with an agenda (Bascand used to be regarded as a fairly pro-market economist), so we heard lots of talk about what they’d be prepared to do “if needed”. There were no criteria outlined for what might warrant further interventions, let alone criteria grounded in the Bank’s act. It really was handwaving stuff, of the sort we might once have been familiar with under people like Walter Nash or the later Muldoon.

You will note that the Minister’s direction referred to the government’s desire to support “more sustainable house prices”. The Bank has picked up that line and has clearly been toying with how to give it substance – but appeared to have made little or not progress, one of their staff even suggesting it was a new phrase and there wasn’t much research around about it. All the FSR itself says is this

FSR 21 2

And that’s it. And it didn’t seem to have taken them far. Bascand claimed to be optimistic that in time the Bank would be in a position to opine regularly on whether house/land prices were above, below, or close to sustainable levels, but he offered no real hint of what he thought sustainability might mean in this context, let alone attempting to tie it back to the Bank’s actual role, around the soundness of the system. For now – clearly keen not to get out of step with his political masters – he couldn’t even bring himself to suggest that lower house prices would be a good thing, although for some reason he did claim (on RNZ this morning) that a gradual fall would be better than a sharp one (offering no clue on why the death from a thousand cuts might be preferable, and for whom).

And, from the few hints he offered, his concept of sustainability seemed idiosyncratic to say the least. Apparently if the population was trending up it was okay for house prices to rise and stay up – quite why was never stated (and he ran this population line several times). We heard a lot about interest rates, but no real suggestion as to why low long-term global neutral interest rates supposedly mean higher house prices (they don’t seem to in much of the US, places where it is easy to bring land into development). It was just a muddle. I guess he couldn’t bring himself to say that no sustained fall in house/land prices was likely unless/until the government sorted out the regulatory dysfunction around land use, nor could he easily own up to the fact that if such laws seemed set to remain problematic then, with well-capitalised banks, what was any of this to do with the Reserve Bank.

It really was all over the place, not well-grounded in any of the Bank’s statutory roles, and yet…….these are the people the government wants to hand more discretionary power to, to further mess up access to finance. It was all too characteristic of the pervasive decline in the quality of policymakers (political and official) and policy advisory institutions in this country.

The sprawling burble continued with questions about whether banks should lend more to things other than housing – one veteran journalist apparently being exercised that a large private bank had freely made choices that meant 69 per cent of its loan were for houses. Instead of simply pushing back and noting that how banks ran their businesses and which borrowers they lend to, for what purposes, was really a matter for them and their shareholders – subject, of course, to overall Reserve Bank capital requirements – we got handwringing about New Zealand savings choices etc etc, none of which – even if there were any analytical foundation to it – has anything to do with the Bank. (He did, in fairness, note that there wasn’t much sign of strong business credit demand.) But I guess once you start down the path of the highly regulatory and intrusive state, it is hard to get free of the tar baby – in fact, bureaucratic life then selects for the sort of people who relish this stuff.

On a quite different topic, there was a box in the FSR on what was described as “Maori access to capital”. The Bank has apparently decided that, with no evidence whatever that there are distinctive Maori issues around either monetary policy or financial stability, to spend scarce public resources promoting this sort of stuff. Again, it is all highly non-analytical – no sense, for example, of why these ill-identified so-called Maori issues (in the ambit of the Bank’s functions) might be different than those of (say) ethnic Indians or Chinese, Catholics or atheists, left-handers, ethnic Samoans, women, men or whoever. It is all just a political whim, pursuing the personal ideological agendas of the Governor and at least some of his senior management (one of his offsiders has an extraordinarily political speech out this morning).

Anyway, we are told that

This work aims to use the Te Ao Māori strategy to incorporate a long-term, intergenerational view of wellbeing into the Reserve Bank’s core functions. It will also inform the Reserve Bank’s financial inclusion work and the allocative efficiency elements of its monetary policy and financial stability mandates. The Reserve Bank is treating this work as a high priority within its strategic work programme.

So with no serious problem identification, no serious grounding in the Bank’s statutory functions (which incidentally have no “intergenerational” character at all) all this is – in the Governor’s view – a high priority use of scarce public resources.

One can’t help feel that the Bank’s core functions might be in need of any spare resources they happen to have.

Fearful or values-free?

In many respects one doesn’t even need to read the speeches of government ministers on the PRC to know the stance they are taking; one need only look at the audiences they choose to speak to.

Nanaia Mahuta’s speech a couple of weeks ago was to the New Zealand China Council, the heavily government-funded body set up to help out the China-focused bits of the business community, champion ties with the PRC, and never ever say anything critical of the regime. And yesterday the Prime Minister chose to share a platform with the PRC Ambassador – host last week of the egregious propaganda event in defence of the regime’s record in Xinjiang – in speaking to the China Business Summit – a commercial event organised by one of the council members of the China Council, and heavily oriented to trying to do lots (and lots) of business with PRC entities. Invited speakers tend not to set out to upset their hosts, and in this case both lots of hosts would clearly prefer business above all, and a government operating in the service of those specific business interests. And that is, largely, what they get. From accounts of yesterday’s event, only the visiting Australian speaker (former senior DFAT official) appeared to offer a discouraging word, a dose of geopolitical realism on the nature of the regime. From our political “elite”. leaders past and present, more or less crass (more in John Key’s case) opportunism and spin.

There were, perhaps, a couple of things to be said in favour of the Prime Minister’s speech, at least relative to Mahuta’s. There was no invocation of assorted deities or suggestion that she herself was one (“I bestow a life-force upon this gathering“), and the weird taniwha stuff was nowhere to be seen. More substantively, whereas Mahuta talked several times about the government’s plans to “respect” the PRC, that word appeared not once in the Prime Minister’s speech. At the margin, her framing seemed slightly less gruesome, even if – like some abused wife unable or unwilling to break free – she keeps talking, of one of the most heinous regimes on the planet, of how “areas of difference need not define a relationship”.

We are told that the Labour caucus is this morning going to discuss its approach to the ACT notice of motion to declare the situation in Xinjiang a genocide. Perhaps they will surprise us by allowing a debate, perhaps they will really surprise us and vote for it, or some substantively similar preferred government wording. But there was not the slightest hint of a change of tone or stance in yesterday’s speech. Here is the whole of what the Prime Minister said on the Xinjiang situation

We have commented publicly about our grave concerns regarding the human rights situation of Uyhgurs in Xinjiang. 

I have raised these concerns with senior Chinese leaders on a number of occasions, including with the Guandong Party Secretary in September 2018, and then with China’s leaders when I visited in 2019. 

Note first that all of these references are in the past tense. But more importantly, not how she describes the situation. Like Mahuta ( “the treatment of Uyghurs in Xinjiang”) it is depressingly neutral language (“the human rights situation”), and “grave” is only used to qualify the extent of her concerns. It isn’t much better on Hong Kong where she will only go as far as to refer to “negative developments with regard to the rights, freedoms and autonomy of the people of Hong Kong”. It is the sort of language bureaucrats and MFAT diplomats love.

Oh, and do note the observations about when the Prime Minister has allegedly raised these concerns previously. It is a bit of a stretch to take seriously the 2018 episode, when after that same meeting we were told that the Prime Minister and the Guangdong Party Secretary had agreed to strengthen “party to party exchanges”, and we know how effusive her own party president (and the National’s) was being about Xi and the regime at the time. It must have been a fearsome telling off….or not.

The contrast is striking with the stance taken by a growing number of legislators around the world. From the Prime Minister’s own side of politics, for example, take this recent statement from US House of Representatives Speaker Nancy Pelosi

“The Biden Administration’s coordinated sanctions on China are a strong and resounding step to hold China accountable for its barbaric atrocities against the Uyghur people.  These sanctions make absolutely clear that America and the international community stand as one to defend the rights and dignity of the Uyghur people from China’s abuse.

“China’s persecution of the Uyghur people – including its imprisonment of more than one million people in labor camps and the torture and extrajudicial killings of many more – is an outrage that challenges the conscience of the world and that demands action. 

I’m pretty sure that not once has Ardern ever uttered those sorts of words.

One could go on. The media like to report the line – also in Mahuta’s speech – that

As a significant power, the way China treats its partners is important to us.

Code, or so it is suggested, for “we don’t really like what the PRC is trying to do to Australia or Canada”. But what feeble words, so vague and general they aren’t going to bother the PRC, or given aid and comfort to anyone else.

Unlike, for example, President Biden and Prime Minister Suga, our so-called leaders are too feeble, scared of their own shadow, to even name economic coercion for what it is.

President Biden and Prime Minister Suga exchanged views on the impact of China’s actions on peace and prosperity in the Indo-Pacific region and the world, and shared their concerns over Chinese activities that are inconsistent with the international rules-based order, including the use of economic and other forms of coercion.

And so it went, No reference to the wider and brutal domestic repressions, nothing about the South or East China Seas, nothing about the threats to Taiwan, and nothing (of course) about the PRC’s influence and intimidation activities here.

But we did get a new line from the Prime Minister yesterday, although only in the question and answer session for which there is no transcript. I first saw it reported this way

finny 21

And a Reuters story reported it thus

When asked if New Zealand would risk trade punishment with China, as did Australia, to uphold values, Ardern said: “It would be a concern to anyone in New Zealand if the consideration was ‘Do we speak on this or are we too worried of economic impacts?'”

So we are left with a choice. Either the Prime Minister is speaking the truth, and she is shocked, nay scandalised, that anyone could even think that economic considerations played a part in her government’s choice to say little. In which case we would have to conclude that she and her government really have no values and principles when it comes to anything to do with China. I’m not an Ardern fan at all, but I simply don’t believe that. But the alternative interpretation is that yesterday’s comment was just an outright lie, made up to get round an awkward question. There really isn’t a middle ground I can see. And no serious observer is going to believe that she was telling the truth.

Her government’s stance is craven and cowardly, and all too many people – especially in the business community – commend her for it, even if they’d use different words to describe the policy (perhaps “realistic” or invoking that vapid cover for opting out of the world, “an independent foreign policy”).

Foremost among those champions of turning a blind eye, or just trading eyes wide open, were the former Prime Ministers John Key and Helen Clark, who also spoke at yesterday’s event. Both have a record of cosying up to the PRC regime, in Key’s case more recently as a lobbyist for the US company Comcast in advancing its business interests in China – not a role you get if you are known to be a robust defender of human rights, the rule of law and so on. Now perhaps in fairness to both, when they were in office (perhaps especially Clark) the regime was perhaps a little less egregious (and less evidently so) than it is now. But if times have changed, their approaches do not appear to have. Indeed, in his Politik newsletter this morning, Richard Harman – who has previously provided a platform for the PRC Ambassador’s propaganda – described Key and Clark as “taking direct aim” at the government and calling it back from a concern about the PRC and to a true “independent foreign policy”,

The weirdest of the comments from the former PMs came from Key. He was quoted as suggesting that heightened concern about the PRC was really all Trump’s doing (this was a bad thing) and not something New Zealand should get caught up with. What isn’t clear is whether he believed this nonsense (see Biden or Pelosi, for example) or was also just making things up on the day (or which interpretation reflects more poorly on him). He went on to suggest that really we are much more likely to have an influence on the PRC if we are good friends with them and only ever raise concerns privately. This time, not even he can believe that, but it is a good line to use to sway those who want to be swayed, and don’t want the government doing or saying anything. No one supposes that anything any democratic country – least of all tiny New Zealand – says is going to deflect Xi from the regime’s approach to Xinjiang, Hong Kong, Falun Gong, religious and political freedom, the South China Sea, or whatever. It isn’t as if these are little misunderstandings and a good friend can helpfully get them back on the right course. It is that not speaking – playing along and acting as if the PRC is some normal country run by decent people – directly serves the regime’s interest.

These New Zealand political figures really are despicable, and never worse than when chanting the mantra of the “independent foreign policy”, an empty phrase that at present just seems an excuse for moral abdication, burying the values and principles most New Zealanders champion in some hobbit hole in the south seas, free-riding in the hope that the trade, the trade, can be kept up a little longer, and life not made tougher for firms that voluntarily choose to sup with the devil.

In many ways, I thought the best piece on yesterday’s attempt at circling the wagons was one that appeared on the Guardian Australia website by Bryce Edwards.

edwards

It was pretty much the line I’ve run here, that both speeches were carefully crafted efforts to look and sound – to the general New Zealand market -a bit tougher than usual (and ministers have even found one or two erstwhile sceptics to suggest a real shift in tone), while actually saying little or nothing that would disconcert Beijing, and not being remotely in line with the global shift in opinion on the threat the PRC increasingly poses. Edwards – from the left – appears to think this a good approach, going so far as to note that “[Beijing] will be very happy with today’s speech”

He ends with an observation that seems, sadly, mostly accurate about New Zealand domestic opinion

What foreign observers might see as Ardern kowtowing to Beijing, will be seen domestically as her successfully swimming in turbulent global waters between China and the west.

Helped along, of course. by a National Party that at its upper levels is quite as dreadful on the PRC as Ardern and Mahuta.

(On the National Party, Monday’s Politik newsletter reported that at the National Party’s northern regional conference at the weekend party members “voted overwhelmingly” to call for an inquiry into CCP/PRC interference in New Zealand”. Assuming this is true – I’ve not seen it reported anywhere else – it seems quite significant, in a party led by Judith Collins and Peter Goodfellow, both with a record of being all-in with Beijing, And yet, welcome as the call might be, one couldn’t help thinking that any such inquiry might start with – or be preceded by – full disclosure by the National Party about, for example, what it knew about Jian Yang when they put him into Parliament and why they kept him on and promoted him after his past became known, about ties with CCP figure Yikun Zhang, and so on.)

Central bank independence

Bernard Hickey – fluent and passionate left-wing journalist – had a piece out the other day headed thus

hickey rbnz

with a one sentence summary

TLDR: Put simply, the sort of true independence enjoyed by the Reserve Bank of New Zealand as it pioneered inflation targeting for the last 30 years is now over, and that’s a good thing.

I found it a strange piece on a number of counts, and I say that as someone who (a) does not think financial regulatory policy (as distinct from the implementation and enforcement of that policy) should be handed over to independent agency, and (b) is probably less compelled now than most macroeconomists by the case for operational independence for monetary policy. So I’m not responding to Hickey’s piece to mount a charger in defence of central bank independence. Mostly I want to push back against what seems to me quite a mis-characterisation of the effect of the Robertson Reserve Bank reforms – those already legislated, those before the House now, and those the government has announced as forthcoming. But also about the responsibility of central banks for the tale of woe Hickey sets out to describe.

It is worth remembering that, by international standards, the Reserve Bank’s monetary policy independence – de facto and de jure – was always quite limited by international standards. Under the 1989 Act the Minister and the Governor jointly agreed the target, but every Governor largely deferred to the Minister in setting – and repeatedly changing – the objective, even if details were haggled over. And with a fairly specific target, and explicit power for the Governor to be dismissed for inadequate performance relative to the target, it was a fairly constrained (operational) independence. The accountability proved to be weaker that those involved at the start had hoped, but it could have been used more.

The monetary policy parts of the Act were overhauled in 2018. There were some good dimensions to that, including making the Minister (alone) formally responsible for setting the monetary policy targets. The Minister got to directly appoint the chair of the Bank’s (monitoring) Board. And a committee was established by statute to be responsible for monetary policy operational decisions. But setting up the MPC didn’t change the Reserve Bank’s operational independence, and if it had been set up well could even have strengthened it de facto over time. The Minister did not take to himself the power – most of his peers abroad have – to directly appoint the Governor or any of the other MPC members. As it is, the reforms barely even reduced the power of the Governor – previously the exclusive holder of the monetary policy powers – who has huge influence on who gets appointed to the MPC (three others are his staff) and who got the Minister to agree that no one with any ongoing expertise in monetary policy and related matters should be appointed as a non-executive MPC members. Oh, and got the Minister to agree that the independent MPC members should be seen and heard just as little as absolutely possible (unlike, say, peers in the UK or the USA).

Hickey cites as an example of the reduced independence the Bank’s request for an indemnity from the Minister of Finance to cover any losses on the large scale asset purchase programme the Bank launched last March. I’d put it the other way round. The Bank did not need the government’s permission to launch the LSAP programme – indeed it is one of the concerns about the Reserve Bank Act that it empowers the Bank to do things (including fx intervention and bond buying) that could cost taxpayers very heavily with no checks or effective constraint. It seemed sensible and prudent of the Bank to have sought the indemnity, partly to recognise that any losses would ultimately fall to the Crown anyway. Operational independence never (should meant) operational license, especially when (unusually) the Bank is undertaking activities posing direct financial risk to the Crown. (And I say this as someone who thinks that the LSAP programme itself was largely pointless and macroeconomically ineffectual.)

What about the other reforms? I’ve written previously about the bill before the House at present, which is mostly about the governance of the Bank. It will make no difference at all to the Bank’s monetary policy operational independence (although increases the risk that poor quality people are appointed in future to monetary policy roles). That bill transfers most of the Governor’s remaining personal powers to the Board. The Minister will appoint the Board members directly (unlike the appointment of the Governor) but even then the Minister will first be required to consult the other political parties, so it is hardly any material loss of independence for the Bank. The Minister will, in future, be required to issue a Remit for the Bank’s uses of its regulatory powers – and we really don’t know what will be in such documents – but those provisions don’t even purport to diminish the Bank’s policy-setting autonomy (notably since it is much harder, probably not sensibly possible, to pre-specify a financial stability target akin to the inflation target).

Details of the next wave of reforms were announced last week. Of particular note is the provisions around the standards that the Bank will be able to issue setting out prudential restrictions on deposit-takers, including banks. I wrote about that announcement last week. Since then more papers, including the (long) Cabinet papers and an official sets of questions and answers has been released. We do have the draft legislation yet, so things might change, but as things stand it is clear that what the government is proposing will amount to no de facto reduction in the Bank’s policymaking autonomy, and only the very slightest de jure reduction.

Why do I say this? At present, the Bank regulates banks primarily by issuing Conditions of Registration (controls on non-bank deposit-takers, mostly small, are set by regulation, which the Minister has control over). Under the new legislation is proposed that Conditions of Registration will be replaced by Standards, which will be issued (solely) by the Bank, but will be subject to the disallowance provisions that are standard for regulations via theRegulations Review Committee. In between the Act (which will specify – loosely, inevitably – objectives and principles to guide the use of the statutory powers) and the Standards, the Minister will be given the power to make regulations specifying the types of activity the Bank can set standards for. Note, however, that empowering the Bank to set standards in particular areas does not compel the Bank to do so (in practice, it is likely to be a simultaneous process)

There was initially some uncertainty about how specific the Minister could get – the more specific, the more effective power the Minister would have. But the Cabinet paper removed most of the doubt.

standards 1

Backed up in the relevant text of the official questions and answers released on The Treasury’s website.

standards 2

That isn’t very much power for the Minister at all; in effect nothing at all in respect of housing lending (since once the new Act is in force the Minister will simply have to regulate to allow a Standard on residential mortgage lending, if only to give continuing underpinning to LVR restrictions). Perhaps what it would do is allow a liberalising Minister to prevent the Bank setting specific standards for specific types of lending but……that doesn’t seem like the Labour/Robertson approach. And once a Minister has allowed the Bank to set standards for residential lending, the Minister will have no further say at all: the Bank could ban lending entirely to particular classes of borrowers, ban entirely specific types of loans, impose LVRs, impose DTI limits, perhaps impose limits of lending on waterfront properties (we know the Governor’s climate change passion). For most practical purposes it is likely to strengthen the independence of the Bank to make policy in matters that directly affect firms and households, with few/no checks and balances, and little basis for any formal accountability. Based on this government’s programme, the age of central bank policy-setting independence is being put on more secure foundations (since the old Act never really envisaged discretionary use of regulatory policy, which crept in through the back door).

Hickey argues that the introduction of LVR controls in 2013 by then-Governor Graeme Wheeler required government consent. In law, it never did. If the law allowed LVR controls – a somewhat contested point – all the power rested with the Governor personally. It may have been politically prudent for the Governor to have agreed a Memorandum of Understanding with the Minister on such tools, but he did not (strictly) have to. At best, it was a second-best reassertion of some government influence of these intrusive regulatory tools.

Now perhaps some will argue that there might be something similar in future too: the Minister might have no formal powers, but any prudent central bank might still seek some non-binding agreement with the government. But I don’t believe that. If the government had wanted any say on whether, say, DTI limits were things it was comfortable with, or what sorts of borrowers they might apply to, the prudent and sensible approach would be to provide explicitly for that in legislation. The old legislation may have grown like topsy, but this will be brand new legislation. The Minister is actively choosing to opt out and given the Bank more policy-setting independence (including formally so for non-banks) on the sorts of matter simply unsuited to be delegated to an independent agency, that faces little effective accountability (see the table from Paul Tucker’s book in last week’s post).

Whether independence should be strengthened or not, the Ardern/Robertson government has announced plans that will do exactly that, while at the same time weakening the effective accountability of the Bank (since powers will be diffused through a large board, with no transparency about the contribution of individual members).

That was a slightly longwinded response to the suggestion that actual central bank independence (monetary policy or financial regulation) is being reduced, in practice or by this goverment’s reforms. I favour a reduction in the policymaking powers of the Bank around financial regulation (the Bank should be expert advisers, and implementers/enforcers without fear or favour, not policymakers – the job we elect people to do).

What about monetary policy. Hickey reckons not only (and incorrectly so far) that monetary policy operational independence has been reduced, but that it should be reduced.

As it happens, I’m now fairly openminded on the case for monetary policy operational independence. One can mount a reasonable argument – as Paul Tucker does – for delegation to an independent agency (since a target can be specified, there is reasonable agreement on that target, there is expertise to hold the agency to account etc). But it has to be acknowledged that much of the case that was popular 30 years ago – that politicians could not be trusted to keep inflation down and would simply mess things up on an ongoing basis – is a lot weaker after a decade in which inflation has consistently (in numerous countries) undershot the targets the politicians (untrustworthy by assumption) set for the noble, expert and public-spirited central bankers.

What I’m not persuaded by is any of Hickey’s case for taking away the operational autonomy. Five or six years ago, I recall him – like me – lamenting that New Zealand monetary policymakers were doing too little to get the unemployment back down towards a NAIRU-type rate (it lingered high for years after the recession) and core inflation back up to target. But now, when core inflation is still only just getting back to target, unemployment is above any estimate of the NAIRU (notably including the Bank’s) Hickey seems to have joined the “central banks are wreaking havoc, doing too much etc etc” club.

One can debate the impact of the Bank’s LSAP programme. Personally, I doubt it has any made material useful macroeconomic contribution over the last year (good or ill – I don’t think it has done anything much to asset prices generally, and not that much even to long bond prices), and as I’ve argued previously it has mostly been about appearing active, allowing the Governor to wave his hands and say “look at all we are doing”. But even if you believe the LSAP programme has been deeply detrimental in some respect or other – Hickey seems to be among those thinking it plays a material part in the latest house price surge (mechanism unclear) – why would anyone suppose that a Minister of Finance running monetary policy last year would have done anything materially different to what the Bank actually did. After all, as Hickey tells us the Minister did sign off on the LSAP programme anyway, and a decisionmaking Minister of Finance would have been advised primarily by…..the Reserve Bank and the Treasury (and recall that the Secretary to the Treasury sits as a non-voting member of the MPC, and there has been no hint that Treasury has had a materially different view).

I think the answer is that Hickey favours a much heavier reliance on fiscal policy – even though he laments, and presents graphs about, how much additional private saving has occurred in many advanced economies in the last year, the income that is being saved mostly have resulted from….fiscal policy. Again, I think the answer is that he wants the government to be much more active in purchasing real goods and services – not just redistributing incomes. I suppose it comes close to an MMT view of the world.

But again there is little sign of anyone much – not just in New Zealand but anywhere – adopting this approach, or even central bank independence being restricted in other countries (what there is plenty sign of is central bankers getting out of their lane and into all sorts of trendy personal agendas – be it climate change (non) financial stability risks, indigenous networks or whatever.

None of this agenda seems to add up when it comes to events like those of the last 15 months. We know that monetary policy instruments can be activated, adjusted, reversed almost immediately. We know that governments are quite technically good at flinging around income support very quickly. But governments – this one foremost among them – are terrible at, for example, wisely using money to quickly get real spending (eg infrastructure) going in short order, and such projects once launched are hard to stop or to adequately control. Monetary policy is simply much much better suited to the cyclical stabilisation role.

Hickey is a big-government guy, and there are reasonable political arguments to have about the appropriate size and scope of government, but they haven’t got anything much to do with stabilisation policy – and nor should they. One doesn’t want projects stopped or started simply for cyclical purposes – brings back memories of reading of how the Reserve Bank wasn’t able to build its building for a long time because the governments of the day judged the economy overheated.

The (unstated) final part of his story seems to relate to a view that perhaps monetary policy has reached its limits. It would be a curious argument, given that much of his case seems to rest of the damage monetary policy is doing (impotent instruments tend to be irrelevant, even if deployed). He repeat this, really nice, long-term Bank of England chart

hickey 2

The centuries-long trend has been downwards, and many advanced country rates are either side of zero. But interesting as the chart genuinely is, including for questions about the real neutral interest rate (something monetary policy has little or no impact on), it tells one nothing about (a) who should be the monetary policy decisionmaker, or (b) the relative roles of fiscal and monetary policy. After all, the only reason why nominal interest rates can’t usefully go much below zero yet is because of regulatory restrictions and rules established – in much different times – by governments and central banks. Scrap the unlimited convertibility at par of deposits for bank notes – not hard to do technically – and conventional monetary policy (the OCR) immediately regains lots more degrees of freedom, able to be used – easily and less controversially – for the stabilisation role for which is it the best tool.

To end, I wouldn’t be unduly disconcerted if the government were to legislate to return to a system in which the Bank advised and the Minister decided on monetary policy matters. It might just be an additional burden for a busy minister, but it would be unlikely to do significant sustained harm (and one of the lessons of the last 30+ years is that central bankers and ministers inhabit the same environment, have many of the same ideological preferences etc) in a place like New Zealand. But to junk monetary policy as the primary cyclical stabilisation tool really would be to toss out the baby as well as the bathwater, no matter how big or active you think government tax and spending should be.

Economic coercion

It is pretty clear that the main (external) reason our two main political parties have been so reluctant to say very much at all critical of the increasing threats posed – to people in China or abroad (not overlooking there the ethnic Chinese New Zealanders) – by the CCP-controlled People’s Republic of China relates to the fear that New Zealand exporting firms might find themselves subjected to the PRC’s attempts at economic coercion. Quite possibly the flow of political party donations might be part of the story. No doubt the anti-Americanism that pervades much of the left in New Zealand (and a detestation of the current Australian government), combined with that weird belief that somehow New Zealand is better than both – perhaps able to be some sort of “honest broker” – plays some part. That self-regarding nonsense of the “independent foreign policy” – as if we didn’t make our own choices (rightly and wrongly) to support the UK in the Chanak crisis, to support sanctions in the 30s at the League of Nations Council, to enter World War Two, to offer support on Suez, to participate in Vietnam, to provide a frigate at the time of the Falklands, to play a part of the first Iraq war, and not to play a part the second – seems to be there, although mostly as cover, an excuse. Perhaps for a few individuals the prospect of lucrative or prestigious post-government roles plays a part, although I doubt that is really a serious driver for many (though those now holding such posts – and wishing to continue doing so – are themselves effectively silenced).

But no one really doubts that the biggest consideration is trade. There was a time when we used to hear, over and over again, the nauseating line that “New Zealand’s foreign policy was trade”, but if that line hasn’t been heard much in recent years, it is the subtext to so much around the PRC. In fact, often not even the subtext: Newshub had a story in the last day or so in which National’s foreign affairs spokesman Gerry Brownlee is quoted. The first bit sounded relatively encouraging (for the National Party)

Gerry Brownlee, National’s Foreign Affairs spokesperson, hopes Mahuta shares any information she receives with other parliamentary parties. He’s also pushing for an independent observer to be sent to Xinjiang. 

“I think that should be advanced as soon as possible as this isn’t going to go away until there is greater certainty about it nor can there be a clarity of action until there is a greater certainty about it one way or another,” he told Newshub.

He said if there are atrocities found to be taking place “on the scale we are told about, that might make the genocide test”.

But….

“But you have got to bear in mind that there are hundreds of thousands of New Zealanders at work today largely because of our trade with China. It is not a simple matter, it is not a straightforward matter, it is one the Government should definitely have a position on.”

“Genocide” (or even “just” gross and systematic state sponsored and administered human rights abuses) or trade. Sounds like Mr Brownlee thinks it a tough choice. (And in fairness, if it is particularly crassly expressed, there is no sign his basic view is much different from of his Labour counterparts).

There seem to be twin (related) mythologies at work. The previous National government sometimes liked to run the (deeply fallacious) line that somehow New Zealand firms’ trade with PRC entities had “saved” the New Zealand economy from the ravages of the 2008/09 recession – which allegedly would otherwise have been much worse here otherwise. No evidence was ever advanced for this proposition – that Murray McCully seemed particularly found of – and it seemed to (conveniently) escape notice that New Zealand’s total trade shares (of GDP) were falling not rising over this period, that New Zealand’s productivity performance over this period was woeful, and that it took 10 years for our unemployment rate to get back to pre-recession levels, slower even that the US – the country at the epicentre of the financial crisis that helped precipitate that recession.

And that mythology – less heard these days – is supplemented by a story that – so it is claimed – much of our prosperity (such as it is) rests of trade with the PRC, with the implication (from some) that we should be suitably grateful, or at least simply keep quiet, think kind thoughts privately, and be thankful for small mercies (our prosperity). Again, the argument simply doesn’t stack up. To a very large extent, countries (all of them) make their own prosperity (or lack of it). We weren’t among the very richest countries in the world in the first half of last century because of any other country, but because of some mix of technology, institutions, people, natural resources and so on. We don’t languish well down the per capita income league tables (albeit still a long way ahead of China) because of anyone else’s choices, but mostly because of our own policies. China didn’t make us rich or poor. It made China first (last century) poor, and eventually middle-income.

Now, middle-income only as the PRC may now be, there are a lot of Chinese, so China’s share of total world economic activity and demand is substantial, and likely to be growing for some time. And perhaps there are a few products and a few countries where it might be said that China makes a real and sustained difference to the country concerned: Australia, for example, has 30 per cent of the world’s iron ore reserves (and a larger share of production) and China currently consumes a very large share of world iron ore production. But even if Chinese demand makes a difference to Australian average incomes, Australia was a prosperous first world country before Chinese iron ore demand became so large, and would be still without it. Total gross iron ore exports from Australia are equal to about 5 per cent of Australia’s GDP.

The world price for commodity products is determined by world demand and supply conditions, a point given far too little attention in the timid New Zealand discussion of PRC issues. A severe and sustained recession in China would represent a significant (but cyclical) blow to the world economy, and to New Zealand – and would do so whether or not New Zealand firms traded much directly with PRC counterparts. That is also true – as we saw in 2008/09 – of severe US recessions. That sort of shock – and others like them, at home or abroad – is why we have a floating exchange rate and discretionary monetary and fiscal policy.

What is much less clear is how significant the economywide impact might be of any one country – the PRC – attempting economic coercion on New Zealand. There would clearly be an impact on some individual firms (big and small) but that shouldn’t be a first order consideration for New Zealand governments in setting foreign policy and considering articulating perspectives on human rights abuses.

We can set some issues to one side. Yes, we are small, but that isn’t terribly relevant to anything. Yes, New Zealand firms trade internationally, but contrary to the rhetoric about being a “small highly open economy”, actually the share of our economy accounted for by foreign trade (exports and imports) is (a) much less than one would normally expect for a country our size, and (b) has been shrinking. And, yes the PRC recently moved a bit ahead of Australia as the country where the most two-way trade is done with, but – as people have noted for decades – one notable thing about New Zealand is that our trade isn’t very concentrated with any single other country/region (much less so than is the case for Australia). Total New Zealand exports to China, pre-Covid, were about 5 per cent of GDP. Even the EU apparently now has the PRC as the country with which the most foreign trade is done.

I’ve written on this issue before, and suggested then that the sectors of greatest vulnerability might be export education and tourism. As it happens, Covid has dealt to those particular markets for the time being (as it has for Australia). That isn’t a good thing in and of itself, but it does take those considerations off the table if the government were to think of taking a stronger stance at present. The focus for now is commodity exports (dairy, forestry, meat, crayfish etc).

And here it is helpful to look at the experience of (a) the Australian economy, and (b) Australian firms – keeping the two as distinctly different – in the face of blatant PRC economic coercion over the last year or so. There are some sub-sectors and firms that appear to have had it very tough – watch the ABC documentary screened the other day – and listen to the anguish of some of the small crayfish operators (who could still sell crayfish, but only at much lower prices). For reasons that aren’t clear to me, the wine producers exporting to China don’t yet seem to have been able to re-direct their sales (fortunately, in that sense, New Zealand wine exports to China are small). On the other hand, barley producers don’t seem to have been that much adversely affected at all. That is pretty much what you’d expect in a commodity product: some cost, some disruption, some stress for firms involved, but at the end of the day overall global demand and supply conditions won’t have changed much if at all. What we don’t see is any sign of severe economywide consequences: there is no mention of the issue (or risks) in the Reserve Bank of Australia’s latest (lengthy) minutes (by contrast, changes in New Zealand population growth actually get a mention). It seems to a third-order issue at a macroeconomic level – and the overall economy is what governments should be thinking about when they consider economic risks and consequences.

Were it otherwise, by the way, that is what we have macroeconomic policy for, fiscal and monetary, to help smooth the economy in the face of disruptions, whether Covid, coercion, or whatever.

Would it be any different for New Zealand? It is always possible, but it is not as if Australia is the only country the PRC has tried coercion on. They’ve had a go at Norway, at South Korea, at Taiwan, at the Philippines, at Mongolia, at Japan, in one form or another. In some case the governments have buckled – lobbying for special interests will do that – but in no case was there any evidence of a very large adverse macroeconomic effect. Nothing of the bogeyman story that our “elites” would like us to believe, that to offend China would be to jeopardise our very economic security or prosperity.

Of course, people will point out that China has not yet tried sanctions on Australian iron ore (but they did with coal, only to run into problems, because they still needed coal). But isn’t dairy different? The whole path of industrial development and infrastructure does not hang on dairy in the way perhaps it does on iron ore. No doubt, but PRC consumers have a clear demand for milk products, Chinese production is still nowhere near Chinese consumption, and the PRC has a history of attempting coercion mostly on things that don’t affect them, and their people, too much. So, sure China could ban New Zealand dairy exports for a time, but the underlying demand won’t change, and if China takes a large chunk of New Zealand exports at present, China’s imports are small chunk of world production. Now there are complications: “dairy” is not some single homogenous product, and cross-border trade in dairy is small compared to global production, but markets will adjust. Perhaps the world price for our specific products would fall a bit, and for a time, but….the nature of commodity markets is that prices are volatile. Perhaps luxury products like lamb for the restaurant trade might be a more likely target, but then the experience with Norwegian salmon was that total Chinese imports of salmon barely changed, with suggestions that quite a bit of Norwegian made its way back into China via Vietnam.

Whatever the potential disruptions for individual firms – and they are real (for them) – it simply is not credible – given the (smallish) size of our total exports, the commodity nature of most, the share of trade with China – that any sort of conceivable economic coercion would represent a serious sustained threat to the New Zealand economy. Production of most of our commodity products would be unlikely to change much at all, and if the prices of some were to fall, well we are not unused to terms of trade fluctuations. And floating exchange rates are part of the mechanism for buffering such shocks if they do end up a bit larger than expected. The Governor continues to swear by the potency of monetary policy and the many champions of active fiscal policy do the same for it. There is little that is unique about our economy or our risks vis-a-vis China. Just the choices of our governments, egged on by business and university leaders (the interesting thing about Australia now is the lack of business voices calling for the government there to pander anew).

Perhaps also we might have more sympathy for individual New Zealand exporting firms if it was five years ago, when PRC issues and risks were just beginning to emerge, and the experience of economic coercion was both newer and little known here. But no firm that trades with Chinese counterparts now can say they are unaware of the risks. They continue to trade with their eyes wide open (or prefer to pretend a different reality). When you sup with the devil, the standard advice is to take a long spoon. It simply isn’t obvious why firms that deal with Beijing – that perhaps have CCP cells in their subsidiaries in China – warrant our sympathy or support at all; one might argue rather the contrary, in that their voices – lobbying the government to do and say as little as possible – serve the interests of Beijing more than those of New Zealanders as a whole. (And one can’t help wondering how willing New Zealand firms will be to send staff to China once travel is easier, given the sort of travel warnings other countries have issued – and the arbitrary kidnappings the regime has engaged in).

Thus, when the government talks of how it wants to “respect” China – and even has the gall to suggest Australia might show more “respect” – the “respect” they want to offer to these thugs and bullies (to understate the evil of one of the very worst regimes of the planet) is a kowtow not on behalf of you and me – the voters who elected them, the citizens they supposedly represent – but a small group of firms (small and large) only too happy to have you and me pay the price of insurance for their business (we see it also in the substantially government-funded China Council which mostly serves business interests too). The government might want people to believe all those interests are aligned, but they aren’t.

The government has talked a little of encouraging diversification, and of the need for firms to have resilience plans. It probably doesn’t have much substance unless and until the government is willing to tell firms that they are on their own, and to back that up consistently. Most firms don’t trade with Chinese counterparts because of any love for the CCP, but because they perceive the risk-adjusted returns are best there. But that risk seems to be underwritten – diminished sharply – at our expense by a government that chooses to go as soft as it possibly can on Beijing, to feed lines that – wittingly or not, and probably not intentionally – give aid and comfort to the regime.

Finally, it is worth remembering that there is no suggestion that New Zealand should cut trade with the PRC (although individual New Zealanders might increasingly choose to avoid tainted products and companies). The trade threat we are discussing here is entirely something the PRC might choose. It isn’t the way normal or decent states operate, and yet our government would prefer us to pretend that the PRC is just a normal state, run by decent “respectful” people. We can’t stop them disrupting two-way trade – which isn’t some gift to New Zealand firms, but of mutual benefit in normal circumstances – but we can be clear about the values we hold, the interests we want our governments to serve, the real threats that everyone knows but which the government refuses to discuss openly. Values are things that you are willing to pay a price for, and the test of whether they really are values only comes when the possible price has to be faced. I don’t suppose Jacinda Ardern, Nanaia Mahuta, Judith Collins or Gerry Brownlee really like the CCP and its action any more than I, or many readers of this blog, do. I don’t suppose the CCP thinks they do either. They don’t care a jot what leaders think privately. It is what they are willing to speak up about, and act on, that bothers them. And they are right to draw the distinction: private thoughts and feelings signify nothing, especially in a purported leader, without follow through.

As it happens, any “price” New Zealand as a whole might pay seems likely to be modest at worst (worse for some firms, but they’ve chosen – entirely voluntarily – to keep trading with the thugs). It isn’t as if any better stance New Zealand might take would now be world-leading or ahead of the pack. And there would be the comfort of working together – with likeminded countries, of the Five Eyes or beyond, to name evil where it is found, where it threatens values we hold dear, other democratic countries, and the freedoms of the Chinese people themselves.

Listening to Mahuta

Following on from her speech last week, and the (rather overblown) controversy her subsequent remarks about the use of the Five Eyes grouping gave rise to, the Minister of Foreign Affairs Nanaia Mahuta fronted up for extended interviews with the two weekend TV currrent affairs shows.

I wrote about the speech in a post last Tuesday. Rereading the speech itself, and the post, I’d stand by what I said then. It was dreadful – whether the bizarre folk religion stuff, the absence of any evidence of any serious framework for thinking about the growing threat the PRC poses, and just for being more of the same old approach of being very very reluctant to ever openly name the evil done in the name of the CCP and its PRC. It is not that what was said was new: it wasn’t, it was just another example of the craven approach adopted by both sides of New Zealand politics, as evidenced by the support offered for the Minister’s speech by senior National Party figures.

I have read alternative perspectives, but don’t find them persuasive. Professor Anne-Marie Brady, for example, seemed to bend over backwards to defend the Minister and the government’s approach, suggesting of the contents of the speech

For New Zealand this was strong stuff. 

Count me unpersuaded because even if were true that the contents of the speech represented any movement by the government (and I think the evidence doesn’t really support that claim), starting points matter. The New Zealand government, backed by the Opposition, remains scared of its own shadow when it comes to the PRC, and simply fails to engage with the New Zealand public about the nature of the issue and risks. It won’t even engage in serious reform of our electoral donations law, even as investigations and criminal charges proceed about donations from CCP-linked figures. Neither party appears willing to state simply that it will not take donations from CCP-linked figures, let alone refuse to welcome such people as MPs.

Even on Anzac Day weekend, New Zealand’s Minister of Foreign Affairs chooses not to make a simple clear statement that she regards the PRC’s attempted economic coercion of Australia as unacceptable (or the regime’s hostage-taking of Australian and Canadian citizens). It is like a morals-free zone, presumably backed by the Prime Minister.

But it was interesting to listen to the Minister’s two interviews. I thought the Newshub interview was much superior – somewhat more searching (although there was a lot left unaddressed), but also more revealing (in a good way as well). Mahuta was put under some pressure both by the previous interview (a New Zealand citizen of Uighur origins) and by the House of Commons vote last week declaring the PRC approach to the Uighurs as a “genocide”. I didn’t think she emerged well from the interview, but (to her credit) she was finally willing to (more than once) use the word “atrocities” to describe what the PRC has done in Xinjiang – so different from the neutral “treatment of the Uighurs” in her (so we are told) carefully-drafted speech, or to the smart-alecky way she answered a journalist’s question after her speech. There must have been some rethink in the Beehive as the week went on, but only time will tell whether she is willing to use the line again.

But it was still mostly a line that consisted of playing for time, minimising things, avoid hard questions about New Zealand government choices, and so on. Challenged on the “genocide” issue she said she would be “willing to receive advice on that”, but gave no sign that (for example) she had already, or was now, actively seeking such advice. In other words it was clever line to fend off a journalist on the day, not a statement of substance. She says she is all for an independent UN observer to visit Xinjiang, but refuses to engage with the extensive published research of private scholars, or the judgements that various other governments or legislatures have reached.

She was asked about whether New Zealand should impose sanctions on, for example, imports from Xinjiang. She responded that New Zealand did not have an autonomous sanctions regime, without even addressing the point Prof Robert Ayson has made that New Zealand could impose travel bans (as it has in respect of Myanmar officials). Sadly, she was not grilled on why her government chose to scrap the Autonomous Sanctions Bill that had sat for some years on Parliament’s order paper. The thing about having an absolute majority in Parliament is that what does, or doesn’t, happen in Parliament is entirely your responsibility – and if Mahuta is not a top-ranked minister, she does sit in Cabinet and must have the confidence of the Prime Minister.

Oh, and we heard again several times from the MInister – unprompted – the claim that we – well, her government I suppose – wants to be “respectful” of the PRC. This is the same regime that she’d just said was committing repeated atrocities……

And one really had it confirmed that she was squirming and pandering when she was asked whether she thought she was on the “right side of history” as regards the PRC and Xinjiang in particular, and all the interviewer got in response was waffle. Surely there is only one answer any politician of decency and integrity should give to a question of that sort?

As with her speech, in her interviews she repeatedly gave the impression that the government was a trading body. It is a language and mindset that tends to suffuse bureaucracies and politicians, but there is an important distinction to be drawn. China – the PRC – is not “our largest trade partner”. Rather, individual New Zealand firms choose to buy and sell from/to firms in the PRC. Firms in the PRC may be more or less under the thumb of the Party/state, but here it is wholly a matter of private choice. And those choices – protecting them – are not a matter for the government. In fairness, to the Minister we did get a few repetitions of the old (many decades old) line about diversification and resilience, but never once a suggestion (even in muted language) that if you – your firm – chooses to sup with the devil you should bring a long spoon. More specifically, if you trade in a country that attempts economic coercion, that is really your choice, your problem, not that of the government or the rest of us. Governments are supposed to represent the wider interests and values of New Zealanders, not the business interests of a few firms and universities.

The New Zealand government’s approach to the PRC seems craven, fearful, and almost entirely mercenary (sure they make a few comments, and the PRC presumably lets them get away with it because (a) they rightly interpret the spirit (do and say as little as possible as feebly as possible, and (b) it suits them to drive wedges between New Zealand and other democratic countries. But the media scrutiny really isn’t much better. I’m pretty sure that in the course of those two extended interviews we heard and saw:

  • no challenge to the Minister to state simply that attempted economic coercion of Australia is unacceptable and that we stand with Australia (and no attempt to contrast New Zealand’s silence with the recent Biden-Suga communique)
  • no challenge to the Minister to state whether hostage-taking by the PRC is acceptable,
  • extraordinarily, no mention at all of Taiwan,
  • no questions about the PRC activities in the South and East China Sea (including the current standoff involving the Philippines),
  • no grilling of the Minister on the fate of the Autonomous Sanctions bill, why the government seems opposed to having one, and the past lines from the Minister that she wants UN-led responses (when she knows the PRC has a veto),
  • nothing on Hong Kong and the recent prison sentences handed out to leading respected figures in the democracy movement,
  • nothing on forced organ transplants,
  • nothing on intensifying religious and political repression,
  • nothing on the WInter Olympics in Beijing (will government officials or ministers or diplomats attend), will government money help fund New Zealand teams’ participation, should athletes go (to a place where “atrocities” are being committed on an ongoing basis as a matter of Party/state policy),
  • nothing on the sluggish and weak New Zealand response to the WHO Covid report.

The issue last week was never really about the Five Eyes intelligence and signals grouping, but about what everyone knows, that New Zealand governments (and most of the Opposition) simply lack any moral fibre when it comes to the PRC.   The issue isn’t which platform New Zealand speaks on, but the extreme reluctance of its government –  Prime Minister and Foreign Minister in particular –  to say anything much.  The PRC is one of the most heinous regimes on the planet –  probably the most heinous consequential one –  and our elected leaders simply refuse to name the evil.

(Which is not to suggest that I think any other government of any other democratic country does all it could.  A few –  notably Germany –  seem quite as bad as New Zealand.  But the New Zealand stance is shameful and unworthy, reflect of politicians who seem to see only dollars.   But the only values that really count as such are those one is willing to pay a price for.)

For those interested in the economic coercion issue, the ABC had a nice treatment of Australia’s experience in a programme that screened last night.

Regulating lending

The Minister of Finance yesterday announced the latest elements in the government’s overhaul of the Reserve Bank Act. As with so much of that multi-year multi-stage review it has good bits and bad bits.

I support the introduction of deposit insurance (with risk-based pricing), for second-best reasons canvassed here numerous times over the years (deposit insurance increases slightly the likelihood a big bank will be allowed to fail). I also support putting all deposit-takers under a common regulatory regime, replacing the weird halfway house we’ve had for the last decade or so where banks are under one regime and non-banks under another (with the Bank having key powers over the banks, but the Minister of Finance being responsible for key policy matters re the non-banks). So I’m not writing any more about those (well-flagged) aspects of yesterday’s announcement.

However, this –  from the Minister’s press statement –  was something of a bolt from the blue.

The reforms will also include a new process for setting lending restrictions, such as loan-to-value ratios.

“This will give the Minister of Finance a role in determining which types of lending the Reserve Bank is able to directly restrict. The Reserve Bank will then have full discretion to decide which instrument is best suited to use and how the restrictions are applied,” Grant Robertson said.

“As with other prudential requirements, lending standards policies will be subject to more general requirements such as consultation with other government agencies and the public, and the Reserve Bank needing to have regard to the Minister of Finance’s Financial Policy Remit.”

This was somewhat elaborated on in a Q&A document provided to journalists (which doesn’t seem to be on the Beehive or Treasury websites, but which one journalist sent me for my comments). The key bits are as follows (and apologies if it is a bit hard to read).

DTA standards

The first two rows there seem just fine, and indeed in some respects a significant step forward (notably treating future Reserve Bank prudential standards as secondary legislation, subject to proper parliamentary oversight and potential disallowance). They will also remove the current ambiguity around whether, for example, LVR restrictions are even a lawful use of existing legislation.

The problems – indeed, the oddity – is in the final two rows. Specifically

Cabinet has agreed that the DTA will include a requirement that the Minister of Finance can make regulations (following consultation with the Reserve Bank) defining the type of lending that lending standards may relate to. This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives.

I described this yesterday as a slightly curious step forward. It is a step forward because under the current Reserve Bank Act, applying to regulation of banks, all the policymaking powers rest exclusively with the Bank (the Governor personally at present), even though there are no clear and specific objectives, and thus little or no effective accountability. It is a really severe democratic deficit, only compounded in practice by the inadequacies of the Reserve Bank itself (see earlier posts on the weaknesses of their analysis, and the Governor’s bullying approach, around major regulatory policy initiatives).

There was an attempt some years ago to paper over this problem with the macroprudential memorandum of understanding between the Bank and the then Minister, which purported to give the Bank authority to, for example, use LVR restrictions. “Purported” because the Minister had no legal role, or authority – and could not formally stop the Bank doing what it wanted – but it may have provided some sort of political check (and without the MOU it is likely the Bank would have pressed ahead with debt to income limits).

Yesterday’s announcement appears to recognise that there was a problem, a weakness in the framework, leaving too much power in the hands of a central bank that has no mandate and no accountability. But the way the government has chosen to respond is really quite bizarre, the more so (it seems to me) the more I have reflected on it. As, frankly, are some of the other economists comments I’ve seen suggesting that this will take away the Bank’s “operational independence”.

Now, in fairness, some concerns may be allayed when the detailed legislation emerges. There are concerns that a government will be able to regulate that, say, credit to businesses they don’t like will be able to be regulated, but not that to businesses they do like, or (to take an absurd extreme) credit to National voters (or voting areas) could be restricted but not that to Labour voters. One would hope the legislation makes clear that any such regulation-making power – over which areas the Bank can impose lending standards – is subject to a clear and demanding statutory test, to ensure that such designations can be used only where there is a systemic-level threat to the financial system.

But then that is where the oddity comes in. You would expect the Reserve Bank to be (much) better positioned than ministers to determine where threats to financial stability might come from. While politicians are, in our system of government, the prime legislators and policymakers. They, after all, are the only ones we can toss out in elections, and the only ones facing day to day scrutiny and challenge in Parliament.

And yet, we are told, under this legislation the Minister of Finance will identify the risk areas (albeit “in consultation with” – but not subject to- the Bank), and then the Bank will be free to do whatever it likes in those areas. Of course, when I frame it as “the Minister of Finance will identify the risk areas”, it is also about “the Minister of Finance will identify the political no-go areas”. But that too is bizarre: the government might object to direct restrictions on lending to first-home buyers, but is unlikely to have the same objection to high capital requirements in respect of such lending – but the government can only determine the type of lending the Bank sets “standards” for, not the tools used. If there is a place for politicians in all this – and I think there is an important place – it should be about use of specific regulatory interventions (potentially very heavy-handed ones), not the identification of areas of risk.

Thus, I’ve seen no coverage of the fact that – on what we are told yesterday – in future the government will claim no right to determine whether or not debt to income limits can be imposed. That would represent a really big step back from the model the government and Reserve Bank tells us they have been using for the last decade or so. (And recall, again based on what we are told, if the government is okay with regulating housing lending – even first home owner lending – they won’t be able to (say) distinguish between LVR and DTI restrictions. That would be entirely a matter for the Bank, with no clear objectives and no effective accountability.

This is simply wrongheaded, giving official and up to date sanction to a near-unlimited potential set of regulatory interventions by an independent (and not very expert) agency. Those powers – if they are to exist at all – should rest with the Minister of Finance and Cabinet, taking advice from the Reserve Bank and Treasury.

It is also where some of the comments about “operational independence” get quite confused. As regards central banks the concept of operational independence grew up around monetary policy to distinguish the ability to adjust, say, an OCR in pursuit of a target, and the ability to set the target itself (which would be “goal autonomy”). The ECB has both goal and operational autonomy on monetary policy, but the Reserve Bank of New Zealand (like most central banks with modern legislation) has operational autonomy to pursue a target set for them by politicians. There is quite widespread support for that sort of model (even if the case is weaker than it once seemed). Not only is there a fairly clear objective and some reasonable way to assess whether or not the job is being done well, but central banks typically have quite limited (often no) direct regulatory powers as regards monetary policy: they can set their own interest rate, and can buy and sell assets (ie indirect influence), but that is about all.

By contrast, in bank (and now non-bank) regulation there is (a) no clear and specific objective, (b) no clear way of knowing whether the job is being done effectively (systemic bank failures are very rare, so there are few observations), but (c) there are few effective constraints on the direct regulatory interventions the Bank could use. It appears, for example, that they could simply ban some types of credit (provided by deposit-takers) if they so chose, or hugely impinge on household or business choices, in ways that – if done at all – should only be done by people we can hold to account. And that isn’t the Governor or the (new) Board. (As it happens, this is more or less the model – Bank advises, Ministers decides – that applies to non-bank deposit-takers, which is the reason why LVR controls don’t apply to them.)

We do want operational autonomy for the prudential regulatory agency. But that operational autonomy is about the implementation of policy powers that – at least in the broad – are set by elected policymakers. We do not want politicians interfering in how rules are applied to favour, say, one bank over another – any more than we want politicians interfering in which individuals get NZS, but the NZS policy parameters should be set by those we elect. There are grey areas (what is implementation, what is policy) but what the current government is proposing is a significant in increase in the policymaking powers of a bureaucratic agency – formally so in the case of non-banks, informally so (the prior constraint of the MOU) in respect of banks. That simply fails standard tests of good government, democratic accountability and so on – and would do even if the Reserve Bank were demonstrably an excellent agency.

I’ve written here previously about the very useful book (Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State) published a few years ago written by Sir Paul Tucker, former Deputy Governor of the Bank of England. This summary table is taken from the book.

tucker2

Giving far-reaching policymaking powers to the Reserve Bank, particularly in areas that directly impinge on firms and households, simply does not pass the test. Cabinet seems to have rightly recognised that politicians have key responsibilities and accountabilities, and yet taken a strange – and weak – approach in response.

To be clear, I do not favour any of the sorts of interventions the Bank has adopted or tried to get introduced in recent years. The prudential regulatory (system soundness and efficiency) case for LVRs or DTIs has never been compellingly made, and if I had my way the law would prohibit either the government or the Reserve Bank from imposing such restrictions (without specific new primary legislation). But if such powers are to exist, they should be exercised only by those we elect, those we can properly scrutinise, those we can toss out.

(On which note, the government is currently advertising for members of the new Reserve Bank board, to take office in July 2022, when the Board will assume all the financial regulation powers statutes give to the Bank. The formal job description is not quite this bad, but note that in the big newspaper adverts for these roles “championing diversity and inclusion” and “sound understanding of Te Ao Maori” (even “operating with intergenerational horizons”) come before any specialist expertise in the subject matter the Bank is responsible for.)

Inflation

The possibility of a sustained rise in the inflation rate (internationally and here) has been getting a lot of attention in the last few months. Note that I call it a “possibility” rather than a “risk”, because “risk” often has connotations of a bad thing and, within limits, a rise in the (core) inflation rate is something that should be welcomed in most advanced economies where, for perhaps a decade now, too many central banks have failed to deliver inflation rates up to the targets either set for them (as in New Zealand and many other countries) or which they have articulated for themselves (notably the ECB and the Federal Reserve). I’m not here engaging with the debate on whether targets should be higher or lower, but just take the targets as given – mandates or commitments the public has been led to believe should be, and will be, pursued.

Putting my cards on the table, I have been quite sceptical of the story about a sustained resurgence of inflation. In part that reflected some history: we’d heard many of the same stories back in 2010/11 (including in the countries where large scale asset purchases were then part of the monetary policy response), and it never came to pass – indeed, the fear of inflation misled many central banks (including our own) into keeping policy too tight for too long for much of the decade (again relative to the respective inflation targets). Central banks weren’t uniquely culpable there; in many places and at times (including New Zealand) markets and local market economists were more worried about inflation risks than central banks.

I have also been sceptical because, unlike many, I don’t think large-scale asset purchases – of the sort our Reserve Bank is doing – have any very much useful macroeconomic effect at all (just a big asset swap, and to the extent that there is any material sustained influence on longer-term rates, not many borrowers (again, in New Zealand) have effective financing costs tied to those rates). And if, perchance, the LSAP programme has kept the exchange rate a bit lower than otherwise, it is hardly lower than it was at the start of the whole Covid period – very different from the typical New Zealand cyclical experience. In short, (sustained) inflation is mostly a monetary phenomenon and monetary policy just hadn’t done that much this time round.

Perhaps as importantly, inflation has undershot the respective targets for a decade or so now, in the context of a very long downward trend in real interest rates. There is less than universal agreement on why those undershoots have happened, in so many countries, but without such agreement it is probably wise to be cautious about suggesting that this time is different, and things will suddenly and starkly turn around from here. At very least, one would need a compelling alternative narrative.

Having said that, there have been a couple of pleasant surprises in recent times. First, the Covid-related slump in economic activity has proved less severe (mostly in duration) than had generally been expected by, say, this time last year when some (including me) were highlighting potential deflationary risks. That rebound is particularly evident in places like New Zealand and Australia that have had little Covid, but is true in most other advanced countries as well where (for example) either the unemployment rate has peaked less than expected or has already fallen back to rates well below those seen, for example, in the last recession. Spare capacity is much less than many had expected.

And, in New Zealand at least, inflation has held up more than most had expected (more, in particular, than the Reserve Bank had expected in successive waves of published forecasts. The Bank does not publish forecasts of core inflation, but as recently as last August they forecast that inflation for the year to March 2021 would be 0.4 per cent (and that it would be the end of next year before inflation got back above 1 per cent). That was the sort of outlook – their outlook – that convinced me that more OCR cuts would have been warranted last year.

As it is, headline CPI inflation for the year to March was 1.5 per cent. But core measures are (much) more important, and one in particular: the Bank’s sectoral core factor model, which attempts to sift out the underlying trends in tradables and non-tradables inflation and combines them into a single measure: a measure not subject to much revision, and one which has been remarkably smooth over the nearly 30 years for which we now have the series – smooth, and (over history) tells a story which makes sense against our understanding of what else was going on in the economy at the time. This is the chart of sectoral core inflation and the midpoint of successive inflation targets.

core inflation apr 21

It is more than 10 years now since this (generally preferred) measure of core inflation has touched the target midpoint (a target itself made explicit from 2012 onwards). With a bit of lag, core inflation started increasing again after the Bank reversed the ill-judged 2014 succession of OCR increases, but by 2019 it was beginning to look as if the (core) inflation rate was levelling-off still a bit below the target midpoint. It was partly against that backdrop that the Reserve Bank (and various other central banks) were cutting official rates in 2019.

The Bank’s forecasts – and my expectations – were that core inflation would fall over the course of the Covid slump and – see above – take some considerable time to get anywhere near 2 per cent. So what was striking (to me anyway) in yesterday’s release was that the sectoral measure stepped up again, reaching 1.9 per cent. That rate was last since (but falling) in the year to March 2010.

As you can, there is a little bit of noise in this series, but when the sectoral factor model measure of core inflation steps up by 0.2 percentage points over two quarters – as had happened this time – the wettest dove has to pay attention.

To be clear, even if this outcome is a surprise, it should be a welcome one. (Core inflation) should really be fluctuating around the 2 per cent midpoint, not paying a brief visit once every decade or so. We should be hoping to see (core) inflation move a bit higher from here – even if the Bank still eschews the Fed’s average inflation targeting approach.

Nonetheless, even if the sectoral factor model is the best indicator, it isn’t the only one. And not all the signs are pointing in the same direction right now. For example, the annual trimmed mean and weighted median measures that SNZ publishes – and the RBA, for example, emphasises a trimmed mean measure – fell back in the latest quarter. The Bank’s (older and noisier) factor model measure is still sitting around 1.7 per cent where it first got back to four years ago. International comparisons of core inflation tend to rely on CPI ex food and energy measures. For New Zealand, that measure dropped back slightly in March, but sits at 2 per cent (annual).

Within the sectoral factor model there is a non-tradables component – itself often seen as the smoothest indicator of core inflation, particularly that relating to domestic pressures (resource pressures and inflation expectations). And that measure has picked up a bit more. On the other, one of the exclusion measures SNZ publishes – excluding government charges and cigarettes and tobacco – now has an inflation rate no higher than it was at the end of 2019 and – at 2.4 per cent – probably too low to really be consistent with core inflation settling at or above 2 per cent (non-tradables inflation should generally be expected to be quite a bit higher than tradables inflation).

I think it is is probably safe to say that core inflation in New Zealand is now back at about 2 per cent. That is very welcome, even if somewhat accidental (given the forecasts that drove RB policy). As it happens, survey measures of inflation expectations are now roughly consistent with that. Expectations tend not to be great forecasts, but when expectations are in line with actuals it probably makes it more likely that – absent some really severe shock – that inflation will hold up at least at the levels.

But where to from here?

Interestingly, the tradables component of the Bank’s sectoral factor model has not increased at all, still at an annual rate of 0.8 per cent. All indications seem to be that supply chain disruptions and associated shortages, increased shipping costs etc will push tradables inflation – here and abroad – higher this year. But it isn’t obvious there is any reason to expect those sorts of increases to be repeated in future – the default assumption surely has to be that shipping, production etc gradually gets back to normal, perhaps with some price falls then.

And if one looks at the government bond market, participants there are still not acting as if they are convinced core inflation is going higher. If anything, rather the opposite. There are four government inflation-indexed bonds on issue, and if we compare the yields on those bonds with the conventional bonds with similar maturities, we find implied expectations over the next 4 and 9 years averaging about 1.6 per cent, and those for the periods out to 2035 and 2040 more like 1.5 per cent. Again, these breakevens – or implied expectations – are not forecasts, but they certainly don’t speak to a market really convinced much higher inflation is coming. One reason – pure speculation – is that with the Covid recession having been less severe than most expected, it isn’t unreasonable to think about the possibility of a more serious conventional recession in the coming years with (a) little having been done to remove the effective lower bound, and (b) public enthusiasm for more government deficits likely to reach limits at some point.

So I guess I remain a bit sceptical that core inflation is likely to move much higher here, even if the Reserve Bank doesn’t change policy settings. Fiscal policy clearly played a big role in supporting consumption last year but we are likely to be moving back into a gradual fiscal consolidation phase over the next few years. And if the unemployment rate is now a lot lower than most expected, it is still not really a levels suggesting aggregate excess demand (for labour, or resources more generally). For the moment too, immigration isn’t going to be providing the impetus to demand, and inflation pressures, that we often expect to see when the economy is doing well (cyclically). And if you believe stories about the demand effects of higher house prices – and I don’t- house price inflation seems set to level off through some mix of regulatory and tax interventions and the exhaustion of the boom (as in numerous previous occasions).

What should it all mean for monetary policy? Since I don’t think the LSAP programme is making much difference to anything that matters – other than lots of handwaving and feeding the narratives of the inflationistas who don’t seem to realise that asset swaps don’t create additional effective demand – I’d be delighted to see the programme canned. But I don’t think doing so would make much sustained difference to anything that matter either. So in a variant of one of the Governor’s cheesy lines, it is probably time for “watch, hope, wait”. The best possible outcome would be a stronger economic rebound, a rise in core inflation, and the opportunity then to start lifting the OCR. But there is no hurry – rather than contrary after a decade of erring on the wrong side, tending to hold unemployment unnecessarily high. And there is little or no risk of expectations – or firm and household behaviour – going crazy if, for example, over the next year or two core inflation were to creep up to 2.3 or 2.4 per cent.

But what of the rest of the world? I’ve tended to tell a story recently that if there really were risks of a marked and worrying acceleration in inflation it would be in the United States, where the political system seems determined to fling borrowed money around in lots of expensive government spending programmes.

But for now, core inflation measures still seem comfortably below 2 per cent (trimmed mean PCE about 1.6 per cent). The Cleveland Fed produces a term structure estimate for inflation expectations, and those numbers are under 2 per cent for the next 28 years or so (below 1.7 per cent for the next 15 years). And if market implied expectations have moved up a lot from the lows last year, the current numbers shouldn’t be even remotely troubling – except perhaps to the Fed which wants the market to believe it will let core inflation run above 2 per cent for quite a while before tightening, partly to balance past undershoots. Here are the implied expectations from the indexed and conventional government bond markets for the second 5 years of a 10 year horizon (ie average inflation 6-10 years hence).

5x5

These medium-term implied inflation expectations are barely back to where they were in 2018, let alone where they averaged over the decade from about 2004 to 2014 – for much of which period the Fed Funds rate sat very near zero.

What of the advanced world beyond the US. It is harder to get consistent expectations measures, so this chart is just backward-looking. Across the OECD, core inflation (proxied by CPI inflation ex food and energy) has been falling not rising (these data are to February 2021, all but New Zealand and Australia having monthly data).

OECD core inflation apr 21

Are there other indicators? Sure, and many commodity prices are rising. And markets and economists have been wrong before and will – without knowing when – be wrong again. Perhaps this will be one of those times. Perhaps we’ve all spent too much time learning from the last decade, and forgetting (for example) the unexpected sustained surge in inflation in the 60s and 70s.

But, for now, I struggle to see where the pressures will come from. Productivity growth is weak and business investment demand subdued. Global population growth is slowing (reducing demand for housing and other investment). We aren’t fighting wars, we don’t have fixed exchange rate. And if interest rates – very long-term ones – are low, it isn’t because of central banks, but because of structural features – ill-understood ones – driving the savings/investment (ex ante) balance. For now, the New Zealand story is unexpectedly encouraging – inflation finally looks to be near target – but we should step pretty cautiously before convincing ourselves that the trends of the last 15 or even 30 years are now behind us, or that high headline rates – here and abroad – later this year foreshadow permanently higher inflation (or, much the same thing, higher required interest rates).

Just dreadful

There hasn’t been much, if anything, here over the last year or so on the (successive) New Zealand governments’ subservient and fearful relationship with the Peoples’ Republic of China. For some months I’ve had sitting on my pile to write about two books on the wider PRC issues (Hidden Hand by Clive Hamilton and Mareike Olberg, and Insidious Power: How China Undermines Global Democracy, a collection of papers including Anne-Marie Brady’s Magic Weapons paper on New Zealand). Perhaps one day.

But yesterday we had the first speech on the New Zealand/PRC relationship from our (relatively) new Minister of Foreign Affairs, Nanaia Mahuta. There was no reason to suppose it would be anything other than dreadful. Mahuta’s only other on-the-record speech as foreign minister had been a largely unserious word-salad of little substance. Her track record on the PRC has been dreadful, right since her first (perhaps mis-spoken) substantive TV interview in the role in which she loftily declared that she “knew” the PRC valued diversity, through the persistent reluctance to say anything much if at all possible – and then apparently as late as possible – on the growing catalogue of PRC abuses and threats. Oh, and of course the speech was being given to the New Zealand China Council, the propaganda and apologist body set up by the previous government (and substantially taxpayer funded, with key government officials directly involved). The Council has never so much as uttered a word of criticism of the PRC and its chair and former Executive Director were often quite vocal in pushing back against the concerns expressed by people like Professor Brady. And, of course, if Mahuta has been bad, the Prime Minister – who will no doubt have cleared yesterday’s speech – has been even worse, utterly silent.

Nonetheless, I watched the livestream of yesterday’s speech and carefully read the full text. It really was dreadful, on multiple counts. And here I’m not even going to focus on such bizarre bits as this, from her introduction.

I invoke the inspiration and guidance of the universe and the gods, I bestow a life-force upon this gathering.

Is she both a polytheist and (claiming to be) a deity herself, to be “bestowing a life-force”, whatever that means?

Or her incomprehensible suggestion – having gone and on about “taniwha” – suggesting that “we [who?] share common taniwha with the Pacific”. Would any serious foreign minister from any serious country talk like this? Perhaps the goblins unite Europe?

And who knows what, if anything, she means by her suggestion of a foreign policy “founded in” the Treaty of Waitangi. Perhaps she has in mind it being okay if the PRC gets a few Taiwanese leaders to agree to cede sovereignty and then simply moves to annex the rest? Probably not, but it is just another example of the vacuousness – which, I suppose, must sound good to someone, but seems to be simply a deliberate distraction and an excuse of opting out and being unserious about the global challenges, notably those posed by the PRC.

My bigger concerns – the focus here – are around (a) the utter lack of any sign of a serious, transparent, framework for how the New Zealand government thinks about the PRC, and (b) the continuing signs, nonetheless, of some mix of deference, sheer cowardness, and indifference to what the PRC is doing to other free and democratic countries.

This was the first speech on the PRC relationship by a new foreign minister, delivered to a China-focused (well, more likely a dollar-focused) audience. And yet there were no thoughts on the nature of the PRC challenge – none, not even to suggest, say, that the government thought everything was just rosy and the PRC’s intentions were entirely benign. There was no structured or systematic engagement with the rise of China, in any dimension whatever, just the odd passing allusion to this or that (really amounting to little more than “China is big”), There was no engagement at all with the literature on PRC interference/influence – this in a country with a figure closely linked to the PRC/CCP faces electoral donations criminal charges this year – nothing on China and the international agencies, nothing on China and the South China Sea (or the East China Sea for that matter), nothing on the PRC reach into (and intimidation of) ethnic Chinese communities in other countries, nothing on the history and experience of economic coercion. Just nothing, no framework, nothing. Either there is such a framework and the government just prefers to keep the public in the dark (the government that used to boast that it would be the most open and transparent ever), or – more likely – there isn’t one and the government’s entire approach amounts to saying and doing absolutely as little as possible, always aiming to keep on the right side of Beijing come what may, without totally alienating traditionally like-minded countries (perhaps not even that bothers them, but they probably worry that significant chunks of the public might worry if it become too clear how explicit the sellout was). Recall that this is the political party whose then president only a few years ago was lauding the PRC and Xi Jinping.

There might be reasonable debates to be had about how best to respond to the PRC threat, but without a proper analysis of the issues and risks there is no real leadership to any such debate. Of course, one can’t fit everything in a 20 minute ministerial speech, but the government has the full resources of MFAT at its disposal, and there is no sign of any serious engagement or analysis from them either. For an issue, and series of threats, of this magnitude, it is simply not good enough. In fact, it probably isn’t going too far to call it a betrayal of democracy and open government, when there really should be a wider public engagement on how New Zealand, and likeminded countries, should respond to the PRC. All, it appears, to keep a few exporting firms happy from month to month.

So if there was no serious analytical framework in the speech – and clearly it was the Minister’s intention not to provide one – what about what was there? I’ve seen some champions of the government suggesting there was really quite a lot (of good) there, just expressed very subtly. Seems to me that a better way of putting it is that there a few lines in the speech – drafted in ways likely to be minimally offensive to a Beijing (that would continue to prefer to keep New Zealand onside and drive wedges between it and other free and democratic countries) – designed for exactly that purpose, but signifying almost nothing. And there is much else that, while perhaps diplomatic boilerplate language, shouldn’t be being used of one of the most heinous consequential regimes on the planet (itself the sort of line an honest and courageous government might use).

Thus stepping through the speech we have pandering lines like

“As we approach the 50th anniversary of diplomatic relations next year,”

Which is, of course, true of the Peoples’ Republic (well, the CCP’s Republic) but we were allies with pre-Communist China in both world wars.

Or this one, which I’ve seen suggested as significant

“This has been a journey. Today we acknowledge the interests we share. Equally we have become more alert to the values that differentiate us.”

Well, okay, I guess there is a first derivative in that second sentence, but what of it? The Minister won’t even name these values that differentiate us, let alone do anything about the difference.

This line has also garnered a few headlines

In thinking about long-term economic resilience we also understand that there is value in diversity. Just as the Council has noted, it is prudent not to put all eggs into a single basket. The New Zealand government will continue to work with business to pursue a range of trade opportunities. 

As most of the media failed to report, the Minister was alluding to an utterly innocuous comment in the China Council’s own last Annual Report (you know it to be innocuous because nothing else gets in their Annual Reports). No country ever wants to have all the trade of its firms with those in a single other country – never has, never will. And that final sentence is really just a reminder of the fact that (for example) in the normal course of business New Zealand is currently negotiating preferential trade/investment agreements with the EU and with the UK. I’ll start to get interested when a minister says something like “if you deal in a country like the PRC you expose yourself to big risks with a regime unafraid to use trade as a coercive tool. If you get caught up in those you should go in with your eyes open, knowing that the New Zealand government isn’t here to help individual exporting firms, but the interests and values of wider New Zealand”.

Instead there were observations about the good relationship the Minister and Damien O’Connor had with their PRC counterparts – as if, in the current climate, this was a good thing. Neville Chamberlain seemed to like to think he had a good relationship with Hitler.

Then, of course, we get the line this government just loves to use – our allegedly shared commitments re climate change.

Beyond the regional agenda, many countries –including New Zealand – will continue to engage with China on climate change. The undertakings China has already made and its future actions, along with those of other big economies, will be hugely consequential.

As many others might note, in the unlikely event those “undertakings” are honoured.

She moves on to suggest that the New Zealand government “needs” to respect the values of the PRC/CCP? On what planet? One might well do to recognise what those “values” and priorities evidently are and engage the New Zealand public on what that means for us, but “respect them” Perhaps Ardern and Mahuta do? Most decent New Zealanders won’t. Forced organ transplants anyone? Compulsory sterilisations? Extreme repression of political and religious expression? The pre-eminence of the Party? You respect them if you must Ms Mahuta, but that tells us more about you.

And then we get another line that looks as though it was put in to be able to point to (“see, we did say something”).

And we look for a similar spirit of respect and engagement to be shown to all international friends and partners.  As a significant power, the way that China treats its partners is important for us.

This is probably a very muted suggestion that perhaps using economic coercion on (what was) our closest friend and ally, Australia, isn’t really on (perhaps also that holding Canadian citizens hostage isn’t our preferred option either) but so what? It is so muted it isn’t going to offend Beijing (no one supposes they really think we are okay with that sort of thing) and it says nothing starkly, doesn’t openly stand us alongside likeminded countries being coerced by the PRC. (She never even takes the opportunity to cite the recent paper suggesting that overall economic effects of PRC coercion efforts on Australia have been minimal, at least to date).

Then we get back to more pandering.

In terms of whanaungatanga the Dragon and the Taniwha may share similar characteristics but they exist in very different environmental conditions. The perspective each holds about the “optimum” environment for survival such as a country’s political system, democratic institutions, freedoms and liberties can and have shown to be significantly different.

Different perspectives can be positive, and underpin cultural exchange and learning,

But some differences challenge New Zealand’s interests and values.  There are some things on which New Zealand and China do not, cannot, and will not, agree.

While it is good to know that there are some things on which her government “cannot” agree with the PRC, isn’t it a trifle disconcerting that core aspects of our political systems are listed just before she just differences can be positive and implies we can learn from the PRC?

We then get the standard line – beloved of the previous government too – that

On many occasions New Zealand has raised issues privately with China. 

Except that no one, probably including the Chinese, take this seriously. When they won’t openly state – for the New Zealand public that they supposedly represent – what they say to the PRC, we can assume it is mostly “well, General Secretary Xi, you know our people don’t much like some of the things you do, but we won’t say anything openly, and lets get down to the next trade facilitation agreement”.

They keep trying to pretend to us that the PRC is a normal country, a normal regime, not the most heinous consequential regime on the planet, with generally malevolent intent.

Towards the end of the speech Mahuta briefly mentions a few public comments

Sometimes we will therefore find it necessary to speak out publicly on issues, like we have on developments in Hong Kong, the treatment of Uyghurs in Xinjiang, and cyber incidents.  

But notice the feeble, almost neutral, framing even there – nothing about egregious abrogation of an international agreement, imprisonment of long-respected democratic figures, gross human rights abuses (which some of our international friends consider amount to “genocide’). Oh, and “cyber incidents”, not even attacks. (Although I will acknowledge that this comment ties China to cyber attacks more than I think the New Zealand government has previously done, but in a way so obscure designed for the public not to notice).

Of course, no mention of the things her government chooses not to comment on, such as the recent WHO report which she told us previously they couldn’t comment on because officials had not yet had the chance to study the report. Slow reading officials? Or a government and officials that prefer to look the other way? I think we all know which.

The final line that I’ve seen it suggested gave substance to the speech was this one

China can play a role in the long term economic recovery of the region but there is a substantial difference between financing loans and contributing to greater ODA investment in particular to the Pacific. We must move towards a more sustainable Pacific that respects Pacific sovereignties, and builds on Pacific peoples’ own capabilities, towards long-term resilience.

But there is nothing new in this whatever. As previous people have pointed out, we can never compete with the PRC in throwing money at the Pacific, but we do like to highlight that we give rather than lend (even though concessional loans often have a substantial grant element).

So that was what was in the speech. What there wasn’t was any mention of included:

  • the recent imprisonment (or suspended sentences) for leading Hong Kong figures like Martin Lee and Jimmy Lai (no statement from the government either)
  • no mention of that WHO Covid report. Still unread?
  • no mention of PRC interference in New Zealand, including the intimidation of resident ethnic Chinese people, or the attempts to silence Anne-Marie Brady,
  • no mention of the growing international concern about the threat to Taiwan, or the current standoff involving the Philippines in the South China Sea,
  • no mention of how New Zealanders might consider taking their own (boycott) actions against companies using forced labour in Xinjiang,
  • nothing about the sanctions the PRC has been imposing on various western figures recently,
  • nothing about her government’s refusal to put sanctions of key PRC XInjiang figures, or the government’s decisions to scrap the Autonomous Sanctions bill that was before Parliament

Perhaps there is a case to be made for the government’s stance on each of these issues. but Mahuta didn’t make those cases, preferring to pretend the issues didn’t exist. It really was shameful.

And if all that was bad then there was what she said afterwards in response to questions. For example, it is reported that she dealt with a question on the Uighur situation by answering only in Maori (that presumably few present would have understood) but which a local academic reports includes this egregious line

“It’s important that we keep our perspectives on the situation of indigenous peoples elsewhere, they have complex, different laws, different government systems,

The Minister also grabbed headlines for her remarks distancing New Zealand from the use of the Five Eyes group of countries in responding to the PRC, suggesting that her government preferred the Five Eyes stuck to intelligence and that they would often prefer to walk alone on the PRC. Personally, I don’t have a strong view on the Five Eyes label, but these are countries that we might normally think we’d have an affinity with on such issues (and several of them – notably Canada – have not been particularly robust on the PRC themselves). But we all know that the issue isn’t really the Five Eyes – much though much of the far-left in New Zealand would probably prefer we weren’t part of it at all – but the New Zealand government’s preference – Ardern and Mahuta – to say as little as possible as rarely as possible, and keep in Beijing’s good books as long as possible as much as possible, pretty much whatever the regime does. And that is despicable. It might be one thing to distinguish ourselves from the Five Eyes grouping if New Zealand were becoming a uniquely courageous country working with wider groups of courageous countries willing to call out the regime internationally and act against it at home and abroad. But that isn’t it. It is simply a cowardly, mercenary, and utterly short-sighted, stance.

Of course, if Mahuta and her boss are dreadful on these issues – and despicable isn’t really too strong a word – it shouldn’t pass without notice that no party in Parliament, not even any individual MP, is any better. If, just possibly, a few words may be a little better now than at times under the previous government, the nature of the issues and threats is starker now, and all parties – all MPs – have less excuse for their willed blindness, their refusal to exercise any moral leadership. Two of our MPs – one each from National and Labour – (were allowed to be) signed up for the Inter-Parliamentary Alliance on China, and occasionally they have signed on to joint statements with large groups of MPs from other countries. But that is it. Neither one has given interviews or speeches domestically differentiating themselves from the shameful New Zealand political and business consensus that (a) dollars come before everything, and (b) that if we appease today, and appease tomorrow well….who can worry about beyond that.

UPDATE: A commenter sagely observes that in our culture, in days gone by, we celebrated St George and the tale of him slaying the dragon.