Not Treasury at its best

On 25 June last year, I wrote to The Treasury requesting

copies of any material prepared by The Treasury this year on regional economic performance, particularly in New Zealand. I am particularly interested in any analysis or advice –  whether supplied to the Minister or his office, or for use internally –  on the economic performance of Auckland relative to the rest of the country (whether cyclically or structurally).

It wasn’t simply a request out of the blue, but was prompted by a speech given a few days previously by the Secretary to the Treasury, Gabs Makhlouf, The Importance of Being Auckland: Strengths, Challenges, and the Impact on New ZealandIn my post on that speech, I’d been quite critical of Makhlouf.

He’d begun his discussion this way

Why do I find this exciting? It’s because high levels of diversity provide dividends including through increases in innovation and productivity.

Auckland’s diversity is particularly critical for our international connections. There’s much more to international connections than trade. It’s the other international flows – flows of capital and people, and the accompanying flow of ideas – which are the key to reinventing trade, and which will lay the foundation for a more prosperous New Zealand in the long-run.

The high number of overseas-born Aucklanders can bring new skills, new ideas and a diversity of perspectives and experiences that help to make our businesses more innovative and productive. And perhaps most importantly, they often retain strong personal and cultural connections to other parts of the world, which opens up, and helps us to pursue, new business opportunities.

Auckland is truly New Zealand’s gateway to the world. It’s not just that there is a big number of companies here doing business internationally. It’s the port and airport linking the country to global markets; and tertiary institutions, researchers and innovators linking us to global knowledge.

To which my response was

Which might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

He might also have linked to the recent presentation by Jacques Poot (in a Treasury guest lecture), in which Poot was keen not to sound very optimistic about just how large those economic benefits of diversity really are, or to the work of Bart Frijns – an (immigrant) professor in Auckland (see last sentence of the extract above) –  whose recent work suggests that on some measures, in some contexts, there may be net costs, not benefits at all.

Of course, one can’t say everything in a single speech, but when a credible case could be made that the Auckland-centred model is in serious trouble, it is bordering on the seriously unprofessional to not even allude to any of these sorts of points, even if only to explain why the Secretary interprets then differently than, say, I might.

So I was curious about what background analysis Treasury had been doing, or what advice it might have been providing to the Secretary or the Minister, in support of Makhlouf’s “cheerleading” for the Auckland story.

It turned out that there was none –  or none recent anyway.  But it took some considerable time and effort to extract even that information.

Their initial response was fairly prompt.  It came on 12 July.  Treasury told me that they were “currently updating their analysis and advice on regional economic performance, including Auckland performance” and expected to include this analysis and advice in future strategic documents, including the next Long-Term Fiscal Statement.  Accordingly, they declined to release any material, citing as grounds under the Official Information Act the need to “maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials”.

I lodged a complaint with the Ombudsman.  Perhaps some “advice” did need to be kept confidential for the time being, but it was hard to believe that the underlying “analysis” could legitimately be withheld.  And then I didn’t think much more about the matter –  the wheels of the Ombudsman’s office often grind exceedingly slowly.

But last week, somewhat out of the blue, I got a letter from Treasury, to advise that

“following the release of our Long-Term Fiscal Statement…… I have revisited my decision and am now able to release the relevant material to you”.

Doing so eight months after the original request, and three months after the release of the LTFS itself, was no doubt just enough to avoid having the Ombudsman rule against them.

And what had all this been to protect?  Well, almost nothing.   It turned out that there was one internal discussion document (and a set of slides covering the same material) prepared for some discussion forum Treasury staff and management were participating in.   There was no advice to the Minister, or to the Minister’s office, at all, so it is a little hard to see how they can have legitimately invoked, as grounds for withholding this material last year, constitutional conventions protecting the advice tendered by ministers and officials.  Perhaps the fact that there was almost nothing was what they wanted to protect, but that isn’t good grounds under the Official Information Act.

For anyone interested here is the document they released (Treasury usually put OIA releases on their website, but this one doesn’t seem to be there yet).

official-information-act-response-auckland-regional-performance-michael-reddell-20160227-2

The document seemed mainly focused on trying to get ahead of potential political pushes for further specific interventions in poorer regions and local authority areas in New Zealand, and there is some interesting material there.   On Auckland, there was little beyond conventional pre-conceptions (these extracts are from various places in the document).

As agglomeration and clustering theory predicts, our more urban services-based regional economies (Auckland and Wellington and to a lesser extent Christchurch) are relatively more productive and generate higher incomes than our more resourve-based regional economies.

Our Treasury preference is usually to encourage or permit the continued concentration of economic activity in key centres (forces of agglomeration) where returns are expected to be greatest.  Resources and activities should be allowed to flow betwen regions over time.  Agglomeration suggests productivity benefits from large diverse cities and clusterng suggests some businesses benefit from being in smaller but specialised cities. This means higher economic performance but spatial differences.

This view was reinforced by the 2010 economic geopgraphy debate, which emphasised the importance of agglomeration (and Auckland especially), and implicitly downplayed the economic significance of “non-agglomerating” areas.

Not a mention of how the gap between Auckland levels of income and those of the rest of the country are small compared to those typically seen between largest cities and the rest of the country in other advanced countries.  And not a mention of how those gaps have been closing rather than widening.  In other words, little attempt to grapple with the specifics of the New Zealand experience at all.

We should expect better from our premier economic advisory agency, both in terms of the quality of the analysis and advice they are presenting, and in complying with both the letter and spirit of the Official Information Act.

And in the meantime, the grand Auckland Think Big experiment rolls on, cheered on by the Secretary to the Treasury.  After 25 years we might reasonably expect our officials and ministers to be able to point to evidence of the success of the strategy.  If it is there, they haven’t found it yet.  More likely, it just isn’t there, and decades of bringing more and more non-New Zealanders to Auckland (even as New Zealanders, net, leave Auckland in modest numbers), looks like a strategy that has unbalanced the economy, and produced few real gains, whether for Aucklanders or the rest us.

 

 

 

 

 

 

New Zealand Superannuation Fund: does it pass commercial tests?

There has been a great deal of coverage in the last few days of the New Zealand Superannuation Fund, all prompted by the news that the chief executive, Adrian Orr, had been given a substantial pay increase by the Fund’s Board, over the objections of the State Services Commission and the then Minister of Finance.

I don’t have a strong view as to how much the chief executive should be paid.  In general, I also don’t have a particular problem with that amount being determined by the Board, without ministerial involvement.  Then again, this is simply a body managing a large pool of (borrowed) government money, and I couldn’t see a particular problem if the relevant Act was to be amended to make the terms and conditions of the chief executive a matter determined by the Minister of Finance, or the State Services Commission, perhaps taking advice from the Board.   After all, that is exactly the model that applies for the Governor of the Reserve Bank.

Amid the recent media coverage, there has been a lot of hyper-ventilation about the performance of the Fund, and of Orr himself.  In his Dominion-Post article, Hamish Rutherford reports that

One commentator suggested if Orr had achieved such a return in New York he might have made a billion dollars.

That seems unlikely frankly.   Orr simply isn’t –  and I wouldn’t have thought he’d claim otherwise –  some investment guru, blessed with extraordinary insights into markets, prospective returns etc etc.  He was a capable economist, and a good communicator (at least when he doesn’t lapse into vulgarity), who turned himself into a manager and seems to have done quite well at that.   He always seeemed skilled at managing upwards, and his management style (in my observation at the Reserve Bank) seemed to err towards the polarising (“are you with us, or against us”), attracting and retaining loyalists, but not exactly encouraging diversity of perspectives or styles.  He isn’t exactly a self-effacing character. (That is one reason I’m not convinced he is quite the right person to be the next Governor of the Reserve Bank.)

The New Zealand Superannuation Fund has made money, both before and since Orr took over a decade ago.  Of course, amid a trend increase in global asset markets it has been hard not to.   The NZSE50 gross index, for example, has increased at an annualised average rate of about 9.8 per cent per annum since 1 September 2003 (when the NZSF opened its doors).

As for how good the NZSF have been, it is probably too early to tell.  Don’t take my word for it: here is how they themselves put it

It is our expectation, given our long-term mandate and risk appetite, that we will return at least the Treasury Bill return + 2.7% p.a. over any 20-year moving average period.

The Fund has now been operating for only about 13.5 years.  In some respects, the returns to date look quite good –  they’ve averaged 5.6 percentage points per annum above the Treasury bill return –  but for a Fund with the sort of risk parameters they have adopted one can only really evaluate performance over very long periods.  And global asset returns have been pretty attractive over much of the last 15 years.  Will that be repeated?  Will there be a big sustained correction?  The only honest answer is that no one knows.  (And the 20 year time horizon is probably a reason why the institution’s CEO shouldn’t be remunerated to any significant extent on some investment performance formula –  unless there are clawbacks built in for the next 20 years).

But even on the returns to date, it might be reasonable to pose some questions.    The Fund puts a lot of emphasis on expected returns, and not a lot (at least in the published material) on the risk they are running.    In some respects, that is in line with Parliament’s mandate for them to be

maximising return without undue risk to the Fund as a whole;

What, we might wonder, is “undue”?   Who decides, and under what constraints?

A common measure of risk, especially on assets that are frequently marked to market, is the variability of returns.    One tool for relating returns to risk is the so-called Sharpe ratio, which compares the incremental returns obtained through the fund manager’s investment management choices (ie the margin above a risk-free rate) with the standard deviation of those returns.  If the resulting number is very low, the incremental gains might often be prudently best treated as “noise” –  good luck, perhaps, rather than the result of a consistently superior investment strategy.  On the other hand, all else equal a high Sharpe ratio, over a reasonable period of time, provides greater reassurance that the fund manager is adding value.   When I ran the Reserve Bank’s financial markets operations, we had able staff proposing all sorts of clever active management schemes to add value to our foreign reserves operation.  Sharpe ratios were one of the tools we used to evaluate prospective and actual results.

How has the NZSF done on that metric?  Since it opened the doors, the average annualised return has been 9.9 per cent (recall that NZSE50 return of 9.8 per cent).  Treasury bills –  the Fund’s risk-free benchmark –  provided an average return of 4.3 per cent, so the average margin over the Treasury bill return was 5.6 per cent.

But the standard deviation of those annual excess returns over the full period since September 2003 is around 13.5 per cent, for a Sharpe ratio of just over 0.4 per cent (and these are all pre-tax numbers).  That is pretty low.  In other words, while the headline returns –  through a period of strong asset price growth –  may have looked impressive, the risks they have been running have been (deliberately and consciously) high.   I checked, by way of comparison, the returns on the low-risk (low return) superannuation fund I’m a member (and trustee) of: since 2003 the standard deviation of the annual returns on that fund since 2003 have been around 4.5 per cent.

Adrian Orr has now been CEO of the NZSF for almost a decade.  In that decade, annual returns (above Treasury bill) look to have averaged just over 5 per cent, but the standard deviation of those annual returns has been higher at around 17 per cent.  In other words, the Sharpe ratio for the Orr years, is even lower than that for the full period of operation.  But, as a reminder, the Fund itself reckons one needs a 20 year run of data to evaluate their investment management performance.

Based on the NZSF’s own data the monthly returns are also pretty volatile.  The standard deviation of monthly returns (over the risk-free rate) over the life of the Fund has been around 3.3 per cent.    Given that many of the Fund’s holdings are quite illiquid, one probably shouldn’t put too much weight on the monthly return numbers, but it is a reminder of just how much risk the NZSF is incurring –  not for itself, but for the taxpayers of New Zealand.  At best, they might just have been getting compensation for the risk they’ve taken, but there doesn’t seem to be anything exceptional about their performance given that level of risk.    That, in itself, isn’t intended as a criticism: why would we expect a public agency in New Zealand to be able to add much (risk-adjusted) value, whether through asset allocation, or tactical departures from their own internal benchmarks?  But it is a bit of a reality check.  And as Hamish Rutherford noted, on deals like Kiwibank, the super fund’s returns are, over time, likely to be flattered by the privileged position NZSF had going into negotiations –  there were very very few buyers acceptable to the government, and ACC and NZSF will have known that, and reflected it in the price they offered NZ Post.

My own unease about NZSF is rather more fundamental, and doesn’t reflect on any of the individuals involved in managing the funds or the organisation.   The NZSF is often loosely described as a sovereign wealth fund.  In fact, it is nothing of the sort.    Norway and Abu Dhabi have sovereign wealth funds –  accumulated from the proceeds of the sale of state-owned natural resources (oil and gas).   It is real wealth, and needs to be managed somehow.  Of course, it could all be passed on to citizens to do with as they please, but there are plausible –  not necessarily 100 per cent compelling –  reasons for managing the flow of the proceeds of the sale of a large non-renewable natural resource over time.    If so, the money is there and has to be managed somehow.

By contrast, the New Zealand Superannuation Fund arose because successive governments took more in taxation from New Zealanders than they needed to fund their operations.  At one stage at looked as though the New Zealand government would manage to build up a large financial asset position.  But, except briefly just prior to the 2008/09 recession, they didn’t even manage to do that.  Instead, we now have a quite large stock of government debt outstanding, $33 billion of which is used to run a state-sponsored and managed quite-risky hedge fund.   It is a discretionary commercial operation, and it should be evaluated on the same sorts of grounds Treasury and the government lay down for other investment projects.  And given that risk imposed on us by the government is risk (capacity) we could ourselves otherwise choose to utilise elsewhere, it should also be evaluated by looking at the sorts of returns private sector businesses require in analysing possible uses of capital.

Treasury has recently revised downwards the pre-tax discount rates it recommends government agencies use in evaluating projects.  Their default recommended rate is now 6 per cent real (or around 8 per cent nominal), but over most of the period of the life of the NZSF they were recommending a real discount rate of nearer 8 per cent.  They continue to assume an equity risk premium of 7 per cent.  Against those sorts of asssumptions, average annual nominal returns of 9.9 per cent just don’t look that attractive, especially when subject to huge variability (that 13.5 per cent annual standard deviation).    I don’t know what assumptions NZSF are making about expected absolute returns over the next decade, but it would be a bit surprising if they were forecasting/assuming returns as high as those on offer for the last 14 years.

Another way of looking at whether the NZSF is a good business for the Crown to be in, on behalf of taxpayers, is to look at the returns private sector businesses require.  I’ve linked previously to a nice article from the Reserve Bank of Australia, drawing on a survey of private sector businesses asked about what hurdle rates they used in approving/declining investment decisions.  I summarised it previously thus:

They report survey results suggesting that most firms in Australia use pre-tax nominal hurdle rates of return in a range of 10-16 per cent (the largest group fell in the range10-13 per cent, and the second largest in a 13-16 per cent band). Recall that nominal interest rates in Australia are typically a little lower than those in New Zealand, and their inflation target is a little higher than ours.   In other words, it would surprising if New Zealand firms didn’t use hurdle rates at least as high in nominal terms as those used by their Australia peers.     The RBA reports a standard finding that required rates of return were typically a little above the firms’ estimated weighted average cost of capital. The literature suggests a variety of reasons why firms might adopt that approach, including as a buffer against potential biases in the estimated benefits used in evaluating projects.

And here is one of their charts

rba-hurdle-rate

Bottom line: private citizens shouldn’t want governments getting into businesses –  especially not relatively risky businesses –  where the returns are less than 10 per cent.

There are other reasons to be concerned about the economics of the NZSF:

  • putting money into NZSF required tax rates to be higher than otherwise (as would the shared commitment to resume contributions at some point).  Higher tax rates discourage some economic activity that would otherwise occur here, and New Zealand tax rates are not now unusually low by international standards (our company tax rate is quite high),
  • the scheme involves all New Zealanders in direct financial exposures to companies/industries they may disapprove of. NZSF attempts to get round that with their ‘socially responsible’ investment policy, but your view of “socially responsible” companies/activities may well differ from that of your neighbour.  Personally, I’d be quite happy to have money invested in whale fishing companies.  Many others might not.    Making those choices simply isn’t a natural or necessary business of government.
  • large pools of government financial assets encourage the misuse of those funds in the event that the country/government comes under financial stress at some point in the future.  Those sorts of tail risks aren’t captured in the monthly or annual standard deviation numbers.
  • NZSF, being a quite high risk fund, tends to perform well in periods when the government’s finances are not under stress, and to perform badly (very badly in 2008/09) when government finances come under most stress. Because the assets are quite widely held, it provides some protection against some sorts of shocks, but in any severe global economic and asset market downturn –  the sort of event New Zealand is never immune to – the NZSF investment strategy simply ensures that when problems hit they are compounded by investment losses.  As the government is already, in effect, an equity holder in all New Zealand business (through the tax system), it isn’t obvious quite why it should be attractive for New Zealanders to have the government further compound their exposures.  To take those risks might be reasonable for the prospect of exceptional returns, but the NZSF strategies look to do little more than cover a bare minimum cost of capital –  while aggravating our problems when things turn bad.

The NZSF may have been a sensible practical political option back at the start of the 2000s.  Governments were running large surpluses, positive net financial assets were in prospect, and the retirement of the babyboomers was still a decade away.   It makes little sense now, and if anything is a distraction from the necessary discussion about adjusting the NZS eligibility age in line with the longer-term trend improvements in life expectancy.  Rather than debate how to remunerate the CEO, or whether Board members should be replaced, we’d be better to look seriously at winding up the Fund now,  reducing the risks taxpayers ar exposed to and using the proceeds to repay government debt.

 

 

 

Labour on monetary policy

Alex Tarrant of interest.co.nz had an interesting article earlier this week on the approach the Labour Party plans to take on monetary policy and Reserve Bank issues.    It seems that we should take it as a reasonably authoritative description, even though the formal policy has yet to be released. Labour’s finance spokesman Grant Robertson  described it thus

Useful write up from Alex Tarrant on monetary policy in NZ, including some thinking from yours truly.

From the article

Labour’s stance that the Reserve Bank of New Zealand’s (RBNZ) price stability goal should be accompanied by a focus on employment will not see it propose a specific, nominal employment or unemployment figure for the central bank to target, finance spokesman Grant Robertson told interest.co.nz.

Meanwhile, Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.

Being picky, one might hope that Robertson appreciates the difference between real and nominal targets:  ‘nominal’ is usually a term referring to price measures, money supply measures, or even nominal GDP (the dollar value of all the value-added in New Zealand), while “real” usually refers to quantities/volumes, or to a price-change adjusted for the movement in the general level of prices (eg real house prices, or real interest rates).    Employment or unemployment are “real” variables, not nominal ones.

Mostly I don’t have too much concern if a Labour-led government were to seek to amend the Reserve Bank Act, or to put words in the policy targets agreeement for the new Governor next March, that made some reference to employment or unemployment.  So long, that is, as no one thinks it will make any difference.

No one seriously doubts that monetary policy choices can affect employment/unemployment in the short-term.  But, equally, no one seriously thinks that monetary policy can make much difference to those variables over the longer-term.

Monetary policy affects employment/unemployment in the shorter-term to the extent it affects economic activity.  And thus, when the Policy Targets Agreement states, as it has since 1999 when the incoming Labour Minister of Finance inserted the words, that the Bank should avoid “unnecessary instability in output”….

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

….it was already enjoining the Bank to be concerned about the shorter-term employment/unemployment implications of its monetary policy choices.  And in inserting those words it was really just describing –  to help make it better understood to a wider audience –  what it was the Reserve Bank had been doing anyway.  Those considerations were the reason why, from the very first Policy Targets Agreement, price stability had been something to be pursued over the medium-term, with explicit provision for various shocks to prices.  If the Reserve Bank had attempted to fully offset those shocks –  GST increases, or petrol price increases for example –  it would have come at a cost of unnecessarily disrupting output and employment.

So one option for Labour could simply be to add in “employment” or “unemployment” to the existing list of things the Bank should try to avoid unnecessary instability in.

It is also worth noting that Policy Targets Agreements have long opened with descriptions of what a monetary policy focused on low and stable inflation is trying to achieve –  again, mostly an opportunity to remind people that price stability isn’t just an end in itself.   Under the current government, those words have read

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders.  Price stability plays an important part in supporting this objective.

Although it isn’t stated explicitly, presumably high employment/low unemployment is part of that mix.

But under the previous (Labour-led) government, it was explicit.  These words were added to the PTA in 2002 by Michael Cullen when Alan Bollard took office

The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

Of course, those words made no discernible difference to how the Bank ran monetary policy. But then they weren’t really meant to: it was more a matter of “virtue-signalling”: “we care, and monetary policy isn’t just some Don Brash thing”.

And so a challenge that should be put to Grant Robertson and his colleagues is to clarify whether they think that adding a “focus on employment”, whether to the Act or the PTA is intended to make any substantive difference whatsover, and if so how?

In his interview, Robertson refers to the example of the United States, where the Federal Reserve is often described as having a dual mandate.   In fact, in statute that isn’t really true.  Here is what the Federal Reserve Act says of the objectives of monetary policy

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The goal, in the somewhat outdated language of the 1970s, is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production”.    All the rest of it is simply a description of outcomes that, over time,  pursuing that nominal (money and credit) target can help achieve.

Of course, you won’t often hear Federal Reserve officials highlight that statutory goal –  and they will often talk of “dual objectives” –  but it does highlight that there isn’t an easy off-the-shelf model of legislative wording for Labour to adopt.

A few years ago, recognising that these issues were now the subject of active debate in New Zealand, the Reserve Bank did a Bulletin article collecting and classifying the statutory and sub-statutory (eg PTA type documents) monetary policy objectives for a variety of advanced countryies  If I say so myself, it remains a useful reference (partly in highlighting the different roles that different ways of framing objectives can play –  some are explicitly aspirational, some more accountabilty focused, some language is old and some new etc).  In many of the countries, employment pops up somewhere or other –  but mostly, apparently, in that same sense that we’ve seen in New Zealand, or in the US statutory objective, that a well-run monetary policy will contribute over time (perhaps in quite small ways) to a well-functioning economy, and labour market.

Robertson has also talked about the statutory language in Australia.  The Reserve Bank of Australia Act specifies (as it has since 1959)

It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

a.the stability of the currency of Australia;

b.the maintenance of full employment in Australia; and

c.the economic prosperity and welfare of the people of Australia.

But surely the challenge for Robertson is “so what”?    Is there any evidence he can point to suggesting that, over time, the Reserve Bank of Australia (or the Federal Reserve) have run monetary policy materially differently from the Reserve Bank of New Zealand?    Past research the Reserve Bank has done looking at exactly that issue suggested not.

Perhaps this might seem a curious stance for me to be taking.  I’ve been repeatedly critical of the Reserve Bank’s conduct of monetary policy over the last couple of years  at a time when the unemployment rate that has lingered well above estimates of the NAIRU  (while, curiously, Robertson has often been a defender of the Governor).    But it is most unlikely that any sort of weak reformulation of the statutory goal would make any material difference, especially when  according to Robertson

Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.

and

He told interest.co.nz that Labour is not going to tell the RBNZ whether one is more important than the other.

The Bank’s failures over the last few years, to the extent that they can be seen as such, have been mostly about forecasting, combined with some over-confident priors, not about policy preferences, or an aversion to seeing high employment/low unemployment.

But if Labour really wants to give the Reserve Bank two objectives, and not even subordinate one to the other (on, for example, the basic grounds that in the long run nominal instruments –  monetary policy –  can only really achieve nominal targets), it is simply fairly explicitly abdicating what are inherently political choices to unelected technocrats.    The strongest case for an independent Reserve Bank is when there is a widely-accepted single target.

Then again, perhaps what is really going on is just “virtue-signalling”.  I’m sure Labour has access to plenty of people who can tell them that the RBA, the Fed, the Bank of England and the Bank of Canada –  all with different ways of phrasing monetary policy goals –  don’t do things much differently from each other, or from the Reserve Bank of New Zealand.  Each will make mistakes at times, each with have idiosyncrasies, and from time to time each might have poor decisionmakers, but there is just no evidence that the framing of the New Zealand target keeps the Reserve Bank from making good policy.  But promising to tinker with the central bank goals probably sounds good in certain quarters –  suggesting that the speakers aren’t dreaded “neo-liberals” and might be “sound” on other stuff.

The Tarrant article also confirms that Labour is looking at governance changes for the Reserve Bank.  Sadly not the right ones.

If Labour leads the government after the 23 September general election, it will immediately launch a review into its proposals. This will also include a look at a Labour preference of taking sole rate-setting responsibility from the RBNZ Governor in favour of a rate-setting board that includes the Governor, his deputies and potentially other voices within the bank.

I hope Robertson and his colleagues bear in mind that governance reforms along exactly those lines –  entrenching a legislative role for internal technocrats –  was rejected by the previous Labour government in 2001.  I thought they were right to do so then (even though at the time I held a role that Labour’s independent reviewer, the academic expert Lars Svensson, thought should be a statutory member of the decisionmaking monetary policy committee), and I hold to that view.

At very least, a decisionmaking committee comprised of internal line managers would necessitate wider changes.   Since the case for moving away from a single decisionmaker is to reduce the risks associated with one person, one shouldn’t just move to a system where that one person, together with people s/he appoints/remunerates, make the decisions.  In the right hands, it might work fine, but we build institutions to protect us against bad outcomes and people who turn out to be poor appointees.  The sort of Governor one might have to worry about isn’t likely to be appointing people who will systematically differ from him/her.  If deputy or assistant governors are to be given statutory decisionmaking powers, those appointments (and that of the Governor) need to be ministerial appointments.  But I’m not aware of any other New Zealand government agency where a group of line managers get to make key policy decisions (perhaps Robertson is?).  Far better to use line managers to service (provide the research and analysis to) a decisionmaking committee, appointed by the Minister of Finance, and made up of a mix of internal and external people (as in Australia or the UK, and –  in a different system of government –  the US).

Although I don’t agree with their specific solution, on this issue I think the Green Party is much closer to proposing a good model than Labour (at least on the evidence of this article) is.  The same goes for enhancing the openness and transparency of the Reserve Bank –  another issue Labour seems not greatly interested in.  On that score, one option perhaps the parties on the left could think about is to require the Reserve Bank to publish, at least six-monthly as part of a Monetary Policy Statement, its estimates of the NAIRU (and perhaps other medium-term trend real variables, such as the natural rate of interest, and the projected trend rate of labour productivity).

There are plenty of aspects of the Reserve Bank legislation and practice that warrant review and reform.  Time has moved on, the Bank’s responsibilities have changed gradually etc.   If Labour is in the position to lead a government after the election, I hope they would be open to setting the terms of their review sufficiently broadly to encompass those issues (eg decision-making, appointment procedures, transparency, openness, the allocation of prudential policymaking powers between the Bank and the Minister etc).  I doubt any of these are really vote-winners, but they are the sort of issues that a modern responsible competent government would put on its agenda, for a tidy-up and modernisation.

Perhaps there are votes in promising to rearticulate the monetary policy objectives. But if so, it is more likely to be through “virtue-signalling”, than through the likelihood that  the sort of stuff Labour is talking about would make any material difference at all either to how monetary policy is actually run, or to the resulting economic outcomes.  Surely Labour must know that.  But does it bother them?

New Zealand has serious long-term structural economic underperformance challenges that need to be grappled with.   Sadly, the current government seems largely indifferent to them.  One can only hope that as policy programmes emerge over the next few months, the opposition parties will be offering some serious alternatives.  At present, there doesn’t appear to be much reason for hope on that score.

 

Bouquets and brickbats for the ANZ

In July last year, while the Reserve Bank was consulting on the latest extension in its (seemingly) ever-widening web of controls –  this one, restricting mortgages for residential investment properties to 60 per cent LVRs –  David Hisco, the chief executive of the local arm of the ANZ bank, went very public arguing that the Reserve Bank wasn’t going far enough.

Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust.

It was an interesting stance.  As I noted at the time (a) there was nothing at all to stop the ANZ tightening up its lending conditions along those lines if they thought such restriction was prudent, but (b) the ANZ’s own economics team, in a piece issued the very same week, had been less than convinced of the case for even the Reserve Bank’s own more-modest proposed restrictions.

To us, the case for requiring investors to have a 40% deposit is not overly
strong. This is particularly considering the RBNZ’s own stress tests and the fact that most investor lending was already done at sub-70 LVRs anyway.

I noted then that

There must be some interesting conversations going on at the ANZ.  It would be very interesting to see the ANZ submission on the Reserve Bank’s proposals, and if the Reserve Bank won’t release it, there is nothing to stop ANZ itself doing so.  I’ll be surprised if they do, and even more surprised if the submission recommends limiting all investors throughout the country to LVRs not in excess of 40 per cent.

The Reserve Bank has long been quite resistant to releasing submissions made on regulatory proposals –  even though if, say, you make a submission to a select committee on a proposed new law that submission will routinely, and quite quickly, be published.  Under pressure, the Reserve Bank has slowly been backing away. First, they agreed to release submissions from entities they didn’t regulate, while refusing to release anything from regulated entities (banks in this case).  They rely in their defence on a provision of the Reserve Bank Act which, even if it legally means what the Bank has claimed it does, was never intended to enable permanent secrecy for submissions on general policy proposals.  The Bank has now reviewed its stance again, and has now agreed to release/publish submissions made by regulated entities but only if those entities themselves consent (and subject to normal provisions allowing commercially sensitive information to be withheld).  Partly presumably because I had appealed to the Ombudsman over the withholding of bank submissions on last year’s extension of the LVR controls, they have now decided to apply this new stance retrospectively.

Yesterday I received a letter from the Reserve Bank

The Reserve Bank has sought the consent of the registered banks to provide to you their submissions from the consultation on adjustments to restrictions on high-LVR residential mortgage lending. We have obtained consent from ANZ Bank to release its submission to the consultation. Accordingly, the submission from ANZ Bank is being provided to you under the provisions of section 105(2)(a) of the Reserve Bank of New Zealand Act 1989.  Some parts of the submission have been redacted by ANZ Bank as a condition of its consent.

Other registered banks have not provided consent and submissions provided by other registered banks continue to be withheld

Of course, ANZ could have released the submission itself months ago, but they still deserve credit for agreeing to the release even at this late date.   I hope this move foreshadows routine willingness to allow ANZ submissions to the Reserve Bank to be published.

The ANZ stance contrasts very favourably with that of the other banks.    Given the risks of regulators and the regulated getting too close to each other, at risk to the public interest, getting the submissions of regulated entities published should be a basic feature of open government, and the continued reluctance doesn’t reflect well on either the Reserve Bank or the other commercial banks.  What do they have to hide?

Apparently the Reserve Bank will be putting a link to the ANZ submission (as redacted) on their website shortly [now there, together with all the other LVR submissions and material they’ve released over the years] but for now here it is.

anz-response-to-lvr-consultation

Perhaps to no one’s surprise, there is nothing in the submission suggesting that ANZ would have favoured a more restrictive approach (of the sort outlined by the chief executive a few weeks earlier).

anz-on-lvr

It wouldn’t have cost them anything to have advocated the chief executive’s preferred position –  after all, it wasn’t likely that the Reserve Bank would adopt it anyway –  but there is no suggestion, not even a hint, that our largest commercial bank thought the Reserve Bank wasn’t going far enough.

I noted at the time

But I don’t suppose we will actually see ANZ move to ban all mortgages for residential investors with LVRs in excess of 40 per cent.  Instead, Hisco wants the Reserve Bank to do it for him.    That would enable him to tell his Board that he simply had no choice, and provide cover when profits fell below shareholder expectations.  That should be no way to run a business in a market economy –  although sadly too often it is.

Reality seems to be even worse, in some respects.   Not only did ANZ not pull its own LVR limits back to 40 per cent, they didn’t even take the opportunity of a (then) private submission to the regulator to make their case for a tougher policy.  Instead, it looks a lot like they were just going for the free publicity of a call for bold action, while never having had any intention of doing anything about it.   It isn’t exactly straightforward.  Of course, they are free to do it if they can get away with it, but it doesn’t look like the sort of ethical behaviour we might hope for from senior figures in major financial institutions.

Although the Reserve Bank was consulting on extending LVR restrictions, quite a lot of the ANZ’s submission is devoted to what appear to be mostly sensible concerns about the possible extension of the regulatory net to include debt to income limits.  The Reserve Bank is apparently about to launch a consultation on the possible addition of debt to income limits to its “approved” tool-kit (technically it doesn’t need anyone’s approval to use them).  I hope that the forthcoming consultative document takes seriously the practical problems various people, including the ANZ, have already raised.

I welcomed the recent decision of the Minister of Finance to require the Reserve Bank to undertake public consultation now, not just at the point they want to use DTIs.  Perhaps his motivations were somewhat mixed –  there is after all an election only a few months away –  but there is probably a better chance of the Governor taking submissions seriously now than at a point when the Governor has already decided he wants to use the tool, perhaps as a matter of urgency.    Having said all that, I was a little bemused at the suggestion from the Minister that the Reserve Bank should now do a cost-benefit analysis on the use of DTIs. I’m all in favour of such analysis, and am concerned that too often there is no attempt to quantify the costs and benefits of proposed interventions, but……it isn’t clear how one can do a cost-benefit analysis on an intervention except in the specific circumstances that might arguably warrant the deployment of the instrument.  One surely needs to know the specific threat to be able to evaluate the chance that a proposed intervention might mitigate the risks?

Experts

A few months ago, I wrote a post on the role of “experts”, responding to a British journalist and author’s lament for the apparent willlingness of voters/societies to downplay, or even dismiss, the role of experts when it comes to making significant public policy decisions.

In his column in yesterday’s Sunday Star-Times, local economist Shamubeel Eaqub returns to the theme.

Experts are increasingly side-lined. Political leaders openly ridicule them and the public emphatically ignore their advice when voting.

Our public servants at Treasury must have identified – “yes, someone feels our pain” – even unusually taking to Twitter over the weekend to draw attention to Eaqub’s column.

I’m not sure when this golden age was, when “experts” apparently held sway with voters. I can’t think of a time in New Zealand, or British, history and although I know the modern electoral history of other Anglo countries less well (and those of continential European countries hardly at all) I struggle to think of examples in those countries either.

One can’t help thinking that Eaqub’s complaint –  and that of various other writers abroad who run similar lines –  is mostly that the voters, and politicians. aren’t endorsing the particular expert opinion favoured by Mr Eaqub.  I can understand that: I’d prefer my “expert” opinions on various matters were taken up and embraced by the voters and politicians.   But if they aren’t, it tells one nothing obvious about the failure of the system.  Housing, for example, is one of those topics on which both Eaqub and I have written on and thought about –  even if perhaps neither of us would count as high-level experts.  But we reach quite different conclusions on what bits of policy should be tweaked to solve the problem.  If I understand him correctly, he would emphasise tax reform, state-house building and no doubt some freeing up of urban density restrictions.  I’d emphasise freeing up land use restrictions (while protecting the rights of individual residents/owners to act collectively to protect their interests), and a marked cut in the target level of non-citizen immigration.  The Productivity Commission, a body with some claims to expertise in the area, goes as far as to favour allowing government agencies to seize private property, as one means of assisting.  Ongoing research and analysis can, and should, shed some light on the implications of each of these options.  In some cases, such research might even suggest that a particular option was unlikely to achieve the desired end, but the really hard choices aren’t likely to be resolved in battles of the experts.  They are often more about the sort of society/polity different groups want – including the respective roles/powers of the collective and the individual.  Perhaps theologians and philosophers might be some help there.  Economists aren’t likely to offer much.

Eaqub falls back quite quickly on the Brexit example.

In the UK, expert consensus was that Brexit would be bad for the economy. They signed open letters and argued their case in media. Well-known experts like Bank of England governor Mark Carney, warned of the costs of Brexit.

Less of a servant of government, rather more of a prince – but even he could not convince the voters.

I’m not sure that the Governor of the Bank of England, a Canadian banker temporarily employed by the British government (and by a Chancellor who was one of the leading figures in the Remain cause), particularly counts as a disinterested expert on the interests of the British people.  But lets grant that most economists, even those close to the specific technical issues, thought that Brexit would come at some economic cost (lower future GDP per capita) to Britons.    Those views weren’t kept secret, and they weren’t only expressed in abstruse language.  And a small majority of British voters nonetheless favoured Brexit.

When the Australian federation was being devised in the 1890s, there was a real possibility that New Zealand could have joined –  after all, at the time, New Zealand was just one among the various British colonies of Australasia.   At the time, the average New Zealander had much more in common with the average citizen of New South Wales or Victoria than, say, the average Briton today has in common with the average Italian or Pole (almost whatever measure of homogenity/heterogeneity one wants to use).    And yet economists at the time could quite easily have pointed to the potential economic costs to New Zealand from staying out of the federation –  including facing external tariffs on exports to Australia rather than being part of the free trade area, and loss of potential economies of scale in central government functions.  Those seem like quite plausible arguments, and yet our ancestors chose to take their own path, and not join the federation.   Perhaps even today we are poorer as a result, but I suspect most New Zealanders don’t regret the choice.  If economists today were to, as I’m sure they could, produce model results suggesting that New Zealanders would be perhaps 5 per cent better off by joining Australia, I’d be surprised if that result shifted public opinion much –  not because people despised expert economists, but because other things matter more to them in the choice to be independent.

But Eaqub does have an interesting take on the issue, in that he appears to think that much of “the problem” is with how experts –  and especially expert economists –  communicate.

They often focused on very specific issues that could only interest other experts.

Worse, a lot of their writing was in expensive journals, accessed and read mainly by other experts. Academics’ performance is often linked to their volume of publications in expert journals – it’s a self-reinforcing isolation cycle. The writing is often in obtuse and highly technical language, designed to exclude non-experts.

Except for a handful, most academics are invisible in public life.

The absence of academic economists in public life has been filled by bank economists. Their brand of simplistic and high noise commentary on the to-ing and fro-ing of the economy, is the public understanding of economists. Rather than the more complex social and political aspects that relate to economics.

I have some sympathy, and probably many people do.   Whether it is the PBRF here, or similar mechanisms abroad,  the incentives seem to be to publish as many papers as possible, cited as often as possible, in technical journals –  however small the potential advance of knowledge might be.    Those reforms were well-motivated –  most reforms are – and probably did deal effectively with people like one Victoria University academic I recall from student days, who wasn’t much of a teacher and didn’t seem to have published anything in 20 years.  But they have had undesirable consequences.  I recall being on the organising committe a few years ago for a well-resourced conference The Treasury and the Reserve Bank were promoting, looking for authoritative insights on New Zealand’s long-term economic underperformance and threats to its macroeconomic stability.  We were commissioning papers, and offering a reasonable amount of money to potential authors.  We ended up with some pretty good foreign authors, but didn’t get a single substantive submission/proposal from a New Zealand based academic –  apparently, in part because for papers on some of these intractable issues, we couldn’t guarantee subsequent journal publication.

I think it is a shame that we don’t, at present, have much contribution to New Zealand public debate from academic economists –  although I’m less sure it is true of other disciplines (for good or ill, think of public health, climate change or child poverty).   There have been times in the past when it was different, but it isn’t clear that public policy –  or the interests of voters in deferring to “experts”  –  was much better/different then than now.

One of Eaqub’s other concerns is what “experts don’t take account of”

Experts’ increasing irrelevance has much to do with their tendency towards insularism. Their awful communication – they talk to each other in anachronistic and technical language – excludes a large majority of society.

Their theoretical models exclude obviously real-life things like politics.

In some areas no doubt, but his sweeping dismissal seems far too broad –   and gives no weight to the importance of trying to make issues tractable.  And economists have developed whole literatures around notions of “government failure” and difficulties people (including voters) have in getting those who notionally work for them to pursue the interests of the principal.  Our Reserve Bank Act is just one example of legislation influenced by a recognition that neither officials, politicians, or voters are saints or angels.    We have models like the Open Bank Resolution arrangements explicitly because expert advisers recognised the politicial incentives governments typically face in the midst of crises.

Towards the end of his column, Eaqub argues that

We have to understand that the role of the economist and expert is as a citizen and advocate for our society. Not simply as hired guns to advise political leaders or as technocratic rulers.

But I’m struggling to know what he means, or  at least how realistic his aspiration is.  I’m sure that all the so-called experts have the best interests of their country –  or perhaps the wider world –  at heart.  But they also approach issues with their own predispositions and background, typically have to feed themselves and their families, and have their own career interests to look to.   Who funds “experts” –  and especially in a small country?  Mostly, the public sector.  Who provides fora and venues within which expert voices, talking expertly, are heard?  Mostly the public sector.  Even in a US context –  with a rich hinterland of well-endowed universites and think-tanks –  I’ve read arguments previously about how much easier, and well-rewarded, it is likely to be to be producing research on monetary issues that is well-received at the Federal Reserve (with its huge body of researchers and network of conferences etc) than to step outside that mainstream.  It isn’t impossible to take an alternative view, and produce alternative results, but it results in a skew towards work supporting the interests and priors of powerful state agencies and their managers.  The process becomes self-selecting over time –  those disinclined to produce results supportive of the interests of the incumbents tend over time to go and do something else with their lives.  On policy issues,  (as distinct perhaps from a expert plumber, or expert oncologist) so-called “experts” –  all too often, even then expert on very narrow points –  are not, as a group, some disinterested group that citizens can, or should, rely on for guidance.

In a US context, for example, it is well-recognised that there is a massive imbalance among academics –  less so in economics than many other disciplines –  in favour of Democrats.  I’m not sure if there are comparable data in New Zealand, but it would be surprising if the picture were so very different.  We shouldn’t suppose that people’s political preferences, and the instinctive preferences that lead them one way rather than another, don’t also shape the sorts of issues they research, they questions they ask in framing that research, and even how they interpret and frame their results.

I’m not suggesting anything corrupt or inappropriate at an individual level, simply highlighting some of the ways in which the rise of big government-   often championed by technocrats and related “experts” – can become self-reinforcing over time.  All too often one technical problems begets proposals for yet more technical, intrusive, solutions –  doing so feeding the inclinations of the academic “experts” and the bureaucratic administrators.  If the public ever become suspicious, and unconvinced that the bureaucratic solutions are well- aligned with their own interests, there is little reason why they should be inclined to defer to the preferences of the same “experts” who helped devise what no longer satisfies them.

 

Trump and Muldoon

Over the last few days, a couple of local commentators (here and here) have been drawing parallels between Donald Trump and our own former Prime Minister, Sir Robert Muldoon.  I commented on one of those pieces, somewhat sceptically, and didn’t give it much more thought.    But yesterday Tyler Cowen devoted his Bloomberg column  to attempting to make exactly the same comparison, which prompted me to think about the case more carefully.

What would you think of a Western democratic leader who was populist, obsessed with the balance of trade, especially effective on television, feisty and combative with the press, and able to take over his country’s right-wing party and swing it in a more interventionist direction?

Meet Robert Muldoon, prime minister of New Zealand from 1975 to 1984. For all the comparisons of President Donald Trump to Mussolini or various unsavory Latin American leaders, Muldoon is a clearer parallel case.

I’m still not remotely convinced.  Any parallels seem superficial at best, and deeply unfair to Muldoon.  Without claiming any particular expertise in Italian politics/history, I’m not sure why Cowen would go past Silvio Berlusconi if he wants to find parallels among leaders in modern democratic states. –  and, even then, it is hard to believe that Italian governments were quite as shambolic as the Trump administration has been in its first few weeks.

If the similarities are few and superficial, the differences are pretty profound.  We can start with the personal:

  • Muldoon served in the army for several years in World War Two.  Like many prominent Americans (Cheney, Clinton) Trump avoided military service in wartime.
  • Despite suggestions of an extra-marital affair, Muldoon had one wife, for life.
  • Muldoon was neither a product of, nor revelled in, celebrity culture.
  • Muldoon wasn’t a wealthy man, and didn’t trade in influence or connections to build personal wealth.  He lived pretty modestly and his finances weren’t a secret.
  • Whatever people thought of him and his government’s policies, few doubted his genuine concern for New Zealanders, and no one ever thought that his motivation for being in politics was some sort of narcassism or craving for respect.

One can easily think of other differences.  Muldoon held high office for almost 15 years –  almost six years as Minister of Finance and then Deputy Prime Minister in governments led by other people, and eight and half years as Prime Minister (and Minister of Finance).  Ours is a parliamentary system, with no history of outsiders suddenly ascending to office  –  and so, for all the talk of “taking over his country’s right-wing party”, Muldoon joined it young, worked hard for it, rose gradually within it, had his undoubted talents recognised by those who worked closely with him, was selected (by his fellow members, all selected at a local constituency level), first as deputy leader, then as leader.  As leader of a parliamentary party –  able to be ousted at any week’s caucus meeting, at any time –  he won three general elections.  And Trump?   How many leading Republicans voluntarily chose him as their candidate?

As Cowen notes, Muldoon was also well-known for his fearsome command of detail.  He was a highly effective minister with a huge capacity for work.    And if he didn’t always agree with officials, those who worked for him recognised his respect for the role of public servants, as advisers.   Muldoon ran a disciplined administration –  in contrast, say, to the weak Prime Ministerial leadership and management in the administration that followed his.   Trump has published numerous books under his name, but Muldoon wrote books himself.

Of course, some of these sorts of comparisons aren’t new.   I pulled down from a box in the garage this morning, my copy of the Citizens for Rowling publication.   Six weeks or so before the 1975 election –  Muldoon’s first as party leader – a group of fairly prominent New Zealanders launched this high profile campaign, notionally in support of the then Labour Party Prime Minister, Bill Rowling.  In fact, it was pretty openly a “Citizens against Muldoon” movement –  people appalled at Muldoon’s pretty aggressive style, and at his popularity (“I ask the Nationals how they would feel if Mr Muldoon was the leader of the Labour Party” –  I imagine the answer would be “worried that we were about to lose badly”).  One of New Zealand’s leading journalists outdid himself lamenting the threats to individual freedom

“it happened in the United States during the era of Senator Joe McCarthy; it happened in Germany in the 1930s. I used to believe that it couldn’t happen in New Zealand.  Now I am not so sure.”

It didn’t of course.

Was Muldoon’s style one I was particularly comfortable with?  No, not really. He was a self-described “counter-puncher”, and willing to take on pretty aggressively those who challenged him.  Politicians like Muldoon’s predecessor as National Party leader, John Marshall, and his predecessor as Prime Minister, Bill Rowling, probably naturally appeal more readily.   But as party leaders, those two won no general elections at all.  Rowling, a profoundly decent person and effective minister, fought three elections against Muldoon, and lost them all.  The second and third were close, but the first wasn’t –  it was one of the biggest electoral reversals in New Zealand history (popular vote, and parliamentary seats), led by Muldoon, who was a fearsomely effective campaigner.   Not many people voted for Muldoon in 1975 because he “wasn’t Clinton” (or the New Zealand equivalent).

What of policy?   Muldoon became Minister of Finance in early 1967.  A year later, faced with a collapse in commodity prices, he oversaw a devaluation and an IMF-supported programme of macroeconomic stabilisation.  It was tough –  cuts to subsidy, fiscal restraint, markedly reduced access to credit –  and effective.  His first term as Minister of Finance saw a continuation of the slow progress towards financial sector liberalisation.

But when people focus they most often concentrate on his term as Prime Minister, in which he also served as Minister of Finance  (in New Zealand until the late 1980s it wasn’t uncommon for the Prime Minister to also hold a major portfolio –  Forbes and Holland has also been Ministers of Finance, several Prime Ministers had also been Minister of Foreign Affairs, and David Lange also served as Minister of Education).   Even then, the focus is often on the later years of his term –  and recall, by contrast, we are less than one month into the Trump presidency.

The external circumstances were probably the most difficult any New Zealand government has faced since the Great Depression.  The terms of trade had fallen very very substantially and New Zealand was grappling with reduced access to its major foreign market, the United Kingdom, following the UK entry to the EEC.  Official opinion was quite divided about the best way forward –  how temporary should the fall in the terms of trade be treated as for example.  In the earlier years of the Muldoon government, much of the policy news was  pretty positive:  elected on a mandate to “restore New Zealand’s shattered economy”, Muldoon markedly cut back key consumer subsidies, and –  over the doubts of some key officials –  undertook a quite far-reaching (for its time) liberalisation of the financial sector.  The fiscal deficit was reined in.   (A few years ago one pro-market former senior public servant, not exactly a fan of the Key government was to note to me his view that the first three years of Muldoon were materially better than the first three years of Key).

There were mistakes: the new public pension system, materially better in concept that what the previous government had put in place (and still the basis of our effective system) was excessively, and unnecessarily, generous.  But the details had been explicitly campaigned on –  policy wasn’t simply a matter of few idle phrases and atttitudes.

For those looking for direct parallels, the early days of the Muldoon government did see a defeat in the courts.  Having campaigned forthrightly on replacing the system of public pensions, Muldoon on assuming office indicated that contributions to the prevous system could now cease.  That hadn’t yet been legislated by Parliament, although with the huge parliamentary majority National had, there was never any doubt it would be.  In Fitzgerald v Muldoon the courts did their job in restraining executive over-reach.

The economists’ indictment of Muldoon mostly focuses on his second and third terms.  Fiscal deficits weren’t kept in check –  although the high rates of inflation then quite common in advanced countries (Muldoon’s biographer notes that as late as 1981, Australia, the US, the UK and New Zealand all had double-digit inflation) –  tended to exaggerate just how bad those deficits were.  And if I think Cowen is quite wrong to describe Muldoon as “favouring easy money” –  it was mostly a case for favouring low unemployment, in a country where for several decades there had been almost none, and where everyone accepted that getting on top of inflation might involve transitional unemployment costs –  there was no consistent sustained effort to get inflation down, even gradually.  He’d rather have had inflation down, and kept unemployment low –  thus his ill-fated heterodox approach in 1982 (a wage and price freeze, and a cessation of the continuous devaluation of the exchange rate, all designed to break the cycle of wage inflation expectations and high wage settlements).  But then not wildly dissimilar policies had been tried in the US only a decade earlier.

Cowen also calls Muldoon a protectionist.  There is little evidence for that claim.  He wasn’t the enthusiast who drove the CER agreement with Australia –  generally seen as material liberalising measure, even allowing for trade diversion risks –  but as the process went on he was instrumental in making it happen, despite the mutually disdainful relationship between Muldoon and his then Australian counterpart.  Initiatives that Prime Ministers really oppose typically don’t happen.  Muldoon recognised that an economically successful New Zealand required international trade, and more of it –  and his government was one constantly grappling with threats to access to the European markets for meat and dairy exports.  His government initiated industry studies to help wind back domestic protection for manufacturers servicing the domestic market (car assembly, TV assembly etc) and if the programmes of export incentives were expensive and misguided, the fundamental insight wasn’t –  a successful New Zealand was likely to be one in which New Zealand firms found competitive niches internationally, in a world in which we had no bargaining power and no one owed us any favours.

And what of Think Big?  Here is Cowen

His most significant initiative was called “Think Big,” and, yes, it was designed to make New Zealand great again. It was based on a lot of infrastructure and fossil fuels investment, including natural gas, and it was intended to stimulate the country’s exports and remedy the trade deficit. Because New Zealand’s parliamentary system of government has fewer checks and balances than the American system, Muldoon got more done than Trump likely will.

Yet this bout of industrial policy worsened the already precarious fiscal position of the government, and Muldoon’s public-sector investments did not impress.

Cowen elsewhere quotes Muldoon’s biographer, Gustafson, who makes it clear that Think Big was never primarily Muldoon’s project.  And while I won’t defend those projects, it is important to recognise some of the context: a take or pay agreement in respect of major gas resources that had been signed by the previous government, and yet another large upward shock to oil prices in 1979.  I’m deeply sceptical of most government investment projects –  perhaps especially those that rely on commodity price forecasts –  but I’m told that even within the Treasury at the time, a fairly large chunk of the staff were sympathetic to at least important parts of the set of projects eventually under the label “Think Big”.   It all ended up ruinously expensive, and Muldoon has to accept responsibility –  but it wouldn’t have happened without the able (if misguided) responsible senior minister at the time, Bill Birch.   And we run Cabinet government here.

New Zealand, of course, is rather unimportant to most people (New Zealanders aside).  The United States remains one of the most important international powers.  And so while our foreign policy doesn’t matter much to others, theirs does.   Whatever concerns people have about Trump’s knowledge of, or approach to, Russia, Iran, Saudi Arabia/Yemen, China, North Korea or wherever,  Muldoon was a consistent and fairly predictable member of the western alliance.  To the distaste of some, but consistent with our 30 year membership of ANZUS, he welcomed visiting American warships and –  whether he did it for reasons for sentiment or realpolitik trade considerations –  won my admiration for his military support for Britain in the Falklands conflict.

Even at this distance in time, I’d argue that Muldoon remains a profoundly ambivalent figure.  But I’d argue that, against extremely challenging circumstances, New Zealand moved forward rather than backwards under his stewardship.  There were plenty of backward steps, and quite a few mis-steps, and he was a politician not a saint –  so when Tyler Cowen writes of one policy that perhaps his “intentions might not have been entirely benign”, one might only observe that most politicians operate with the next election in mind –  but there was plenty of progress too.  Muldoon appointed plenty of able people as ministers (and some duds too), and if he was suspicious of some of them, he allowed or enabled a whole variety of useful reforms to happen –  small, certainly, on the scale of what came afterwards, but he was a product of his times, his party, and his background.

What do I have in mind?   Milk and bread were heavily subsidised when Muldoon took office, they weren’t when he left.   The CER agreement did facilitate a material opening of trade with Australia.   Saturday shopping was generally banned in 1975 –  it wasn’t by 1984.  Restrictions on road transport –  favouring rail –  had been materially woundback.  The Official Information Act was introduced on Muldoon’s watch.  The foreign exchange market was being freed up, and government bonds were being auctioned for the first time.  Even the price freeze had actually expired under Muldoon –  and official forecasts then suggested inflation subsequently could have been kept to 5-7 per cent.  Voluntary trade unionism became a reality late in Muldoon’s term, and one of his last acts as Minister of Finance had been to announce that subsidies to farmers would be wound back.

Was it a great record?  Probably not.  Were there mistakes?  For sure.   But was democracy, the rule of law, the freedom of the press, or the strong anti-corruption conventions that governed New Zealand society, government, and public sector seriously threatened or eroded?  Not at all.  Did he, or his ministers, enrich themselves or their families?  No.  And we had a Prime Minister with the attention span, and intellect, to make considered (if perhaps often wrong) decisions, and to defend them coherently.

From this standpoint, only a month in, Americans –  and the rest of the world –  should probably count themselves very fortunate if the Trump administration turns out anything like Muldoon’s.

And if people are still looking for precursors and comparators, the Berlusconi precedent looks more relevant, and frankly more disconcerting.

 

 

Getting the small things right

Readers may be getting bored with a full week of posts on nothing other than Reserve Bank topics.  In truth, so am I.    But here is one last post in the sequence.

Saturday’s Herald featured, as the front page of the business section, an interview with outgoing Reserve Bank Governor Graeme Wheeler.    This seems to have become a bit of a pattern –  the Herald gets access to the Governor the day after the MPS, to provide a bit of a platform for whatever the Governor wants to say.  The interviews are notable for being about as searching and rigorous as, say, the recent Women’s Weekly profile of Bill and Mary English.

The interview allowed the outgoing Governor to “launch the campaign” to become Governor for his deputy (and former Government Statistician), Geoff Bascand.    That shouldn’t surprise anyone.  Then again, it has now been 35 years since an internal candidate was appointed Governor.  Successful organisations – the Reserve Bank of Australia is one example –  are often seen promoting from within.

But my interest in the interview mostly centred on the Governor’s claim that “the economy is in very good shape”, and that we really should be grateful to the Reserve Bank for being a “big part of that outcome”.    I had to read it several times to be sure I wasn’t missing something.   Here was the full excerpt:

Broadly, if you look at where New Zealand is now “in terms of growth, inflation, unemployment rate, current account as a share of GDP, labour force participation and compare all that with a 20 or 30 year average, then the economy is a very good shape”, he says.

“It is puzzling to me why some of the commentators been so critical when the Reserve Bank is a big part of that outcome. We aren’t the whole story by any means, but our monetary policy configurations do have a major impact on the economy.”

In the initial version I read online on Saturday, and in the hard copy newspaper, that “compare all that with a 20 or 30 year average” read “compare all that with a 2009 year average”.    Quite which of them the Governor actually said, or intended to say, isn’t clear.  But either way, it isn’t very convincing.  2009 was the depth of the recession: economies tend to recover from recessions.  Pretty much every economy in the world –  perhaps with the exception of Greece –  has done so to a greater or lesser extent.  It is no great achievement to cut interest rates a lot in a recession.

But lets grant that the Governor meant to refer to comparisons with a 20 to 30 year average (I’ve seen him make such comparisons previously).  How then do his claims stack up?  He lists several indicators to focus on. Of them

  • Per capita growth –  the only sort of growth that really matters –  has been pretty weak this cycle compared to that in previous recoveries and growth phases,real-gdp-pc-aapc
  • Inflation is (of course) low, but then it is supposed to be higher.  The target is centred on 2 per cent –  a rate we haven’t seen for several years –  and was previously centred on 1 per cent, and then 1.5 per cent.  Trend inflation outcomes are the responsibility of the Reserve Bank, but those outcomes have been away from target for some time.
  • The unemployment rate is below a 20 or 30 year average –  although well above the average prior to the mid 1980s –  but then all estimates (including the Bank’s) are that the NAIRU has been falling over that time, and no one claims that that has been because of monetary policy (any more than previous increases were).
  • The current account deficit is certainly smaller than it has been.  But that is mostly because interest rates have been so much lower than had been expected (s0 that the servicing costs of the large stock of external debt have been surprisingly low).  Much of the time, the Governor is more inclined to lament, than to celebrate, just how low interest rates have been, here and abroad.
  • Labour force participation is higher than the historical average, but it isn’t clear why this is unambiguously a good thing.    Work is a cost to individuals as well, at times, a source of satisfaction, but mostly people work to live.  In a subsistence economy, pretty much 100 per cent of adults work.  When New Zealand had the highest per capita incomes in the world, participation rates were lower.

But, of course, even then the Governor has cherrypicked his data.    There isn’t even any mention in this list of disastrously high house prices, or of the household debt stock, let alone of the real exchange rate, or the productivity growth performance, or the weak performance of the tradables sector, or of the large gaps between New Zealand incomes/productivity and those in most other advanced countries.

You might think that those are simply “Reddell hobbyhorse” indicators.   But we know the Governor cares a lot about house prices and household debt, and about the real exchange rate.  And it isn’t that long –  before he became embattled, and seemed to feel the need to become something of an apologist for New Zealand’s economic performance –  since he was talking about exactly the same sort of stuff.

Just a few weeks after he became Governor, he gave a speech in Auckland on Central banking in a post-crisis world . In the opening paragraphs of that speech he counselled

With these assets we should be capable of stronger economic growth. Internationally, and particularly in smaller economies, economic growth is driven by the private sector and its ability to compete on global markets. We need to reverse the slowdown in multifactor productivity growth since 2005 and the decline in value added in our tradables sector. And we need to reverse the shift of resources into the public sector and other non-traded activities.

Productivity growth hasn’t improved –  if anything the reverse – since then, exports as a share of GDP have been slipping, and there has been no sustained rebalancing towards the tradables sector.

t-and-nt-gdp-feb-17

They were the Governor’s words, not mine.

Another couple of months into his term, he gave another interesting speech, this time Improving New Zealand’s Economic Growth.   Back then he seemed concerned about productivity (and the lack of it)

Since 1990 we’ve outperformed many OECD countries on inflation and unemployment. Our inflation rate has been one and a quarter percent below the OECD median and our unemployment rate half a percent lower. But our per capita income has lagged behind and we’ve run large current account deficits. Real per capita GDP growth has been one and a quarter percent, about half a percent below the median and our current account deficit has averaged five percent of GDP – about the 6th largest relative to GDP in the OECD region.

There are two main ways in which our prosperity can improve over the longer run. The first is if the world is willing to pay more for what we produce. The second is by raising our labour productivity – that is by increasing the level of output per working hour. In the short term, we can generate higher income if we increase labour force participation or work longer hours. But we already have a higher proportion of our population in the labour force than nearly all other OECD economies and we work longer hours than most people in the OECD.

and

This is striking given the high international rankings for the quality of our institutions, control of corruption, ease of doing business, and according to the World Bank, the highest per capita endowment of renewable resources in the world.

Chart 2: Labour productivity growth in selected OECD economies, 1990-2011

(Average annual rate)

5124340_files/gw-improving-new-zealand-s-economic-growth-cecc-february-201301.jpg

Source: OECD

So why is our per capita income so far below the OECD median? Partly it’s due to our geographic location and small economic size. Distance and economic size matter a lot even in a more globalised world of trade, capital and knowledge flows, and increasing interdependence. This also partly explains why our export range is concentrated over relatively few products – with food and beverages accounting for almost half our exports. The OECD and IMF believe size and distance, which limit economies of scale and market opportunities, account for around three quarters of the gap in our per capita income compared to the OECD average.

But this is not the whole story. Despite our high international rankings in key areas, the latest World Economic Forum’s Global Competitiveness Report ranks New Zealand’s overall competitiveness at 25th out of 142 countries. Besides market size, we perform poorly on our macroeconomic environment, and especially on our budget deficit and low national savings. But regulatory and performance-related factors also diminish our growth potential. Many of the remedies to substantially improve our ranking lie in our own hands, and groups such as the 2025 task force, the Savings Working Group, and the Productivity Commission, emphasised reforms that can raise our living standards.

He thought then there were three areas governments should focus on

Three areas seem particularly important. The first, is to raise our level of saving and investment, and improve the quality and productivity of our investment.

The other two were to close fiscal deficits, and to lift human capital. On the latter he observed

The bottom income deciles are populated by those with lesser skills, and those who experience prolonged and recurrent spells of unemployment. Addressing these groups would both promote productivity and reduce inequality.

Very little has changed since the Governor gave those speeches early in his term.  The fiscal deficit has been closed, and no doubt the Governor would welcome that.  But in late 2012 and 2013, there was just no sign that he thought the economy was in “very good shape” –  rather it had key pretty deeply embedded structural challenges – and few of the key indicators he cited have changed for the better since then.

Now, to be clear, (and as central bank governors have pointed out for decades) very little of this is down to the Reserve Bank.  Central banks aren’t responsible for  –  and don’t have much influence on trends in –  house prices, current account deficits, productivity growth (labour or multi-factor), the health of the tradables sector, savings rates, participation rates or NAIRUs, let alone human capital and inequality.  So the fact that the economy isn’t in particularly “good shape” –  even if it isn’t doing that badly on some purely cyclical measures – isn’t the Governor’s fault, or that of the Reserve Bank.  What the G0vernor can do is keep inflation close to target, and help safeguard the soundness of the financial system.

Which makes that line of the Governor’s, from Saturday interview, so puzzling

“It is puzzling to me why some of the commentators been so critical when the Reserve Bank is a big part of that outcome. We aren’t the whole story by any means, but our monetary policy configurations do have a major impact on the economy.”

After all, since 2009, the Reserve Bank has twice started tightening monetary policy only to have to reverse itself.  I’m not today getting into the question of how much of that was a foreseeable problem.  Even if none of it was, the fact remained that the Bank twice (out of two times) had to reverse itself.    Neither episode –  tightening and then reversal –  had the sort of major positive impact on the economy that the Governor talks of.  At best, they probably did little damage.  And those episodes aside, the Reserve Bank just hasn’t done much on monetary policy for years.   People –  like me –  have been critical of the Reserve Bank’s monetary policy management because of (a) those reversals, (b) the refusal to even acknowledge mistakes, (c) more recently, almost laughable attempts to rewrite history to suggest they were easing when in fact they were tightening.  And, of course, the persistent deviation of inflation from target, and the concomitant extent to which the unemployment rate has been kept unnecessarily higher than required, or than the Bank’s own estimate would have suggested.  Those outcomes suggested that, on average, monetary policy has been a bit too tight, as well as unnecessarily variable.

Is the aggregate cyclical position of the economy terribly bad?  No, it isn’t.  But it isn’t great either, and the longer-term metrics give even less reason for an upbeat story.  The Graeme Wheeler who took up the job of Governor in late 2012 was better than this.  Back then, he was willing to highlight what he saw as some of the structural problems.  Perhaps it wasn’t his job –  central bank governors don’t need to get into that territory, but he chose to.   If he ventures into such territory, what we should expect is a Governor who calls things straight –  for whom black doesn’t become white just because the Governor himself has himself had a rough few years.  If he no longer feels he can name the serious economic challenges New Zealand still faces, perhaps he’d have been better to keep quiet rather than further undermine his good name with the sort of propaganda that we shouldn’t hope for, but might nonetheless expect, from a political party or lobby group.

Why do I bother, you might wonder?  I was reading this morning a brief piece written to mark the anniversary of the death of  US Supreme Court justice Antonin Scalia, by one of his former law clerks.   The author wrote about “five lessons for living well” that he had seen in the judge’s life.  One of them was

“Be honest in the small things, even if it makes life more difficult”

If our democracy and institutions are to be strong, it is what we should expect from people in powerful public office.    It is too easy to put out “propaganda” and for it to slide past, and for people to nod in acquiescence when they read stuff they don’t know a lot about.  At one level, Graeme Wheeler’s interview doesn’t matter much –  and he’ll be off to pastures new shortly –  but we deserve better, from our journalists and (in particular) from those who seek out and voluntarily assume high public office.