Wheeler and his critics

The print issue of today’s NBR has a double-page feature on “Wheeler and his critics”. It includes – with a few transcription errors – the heart of an interview I did with Rob Hosking in early July.

There are few broad issues touched on in the article:

The first is monetary policy. Hosking correctly points out that market economists’ forecasts of inflation have been even less accurate than those of the Reserve Bank. That doesn’t reflect well on the market economists, who in 2013 and 2014 were also often even more “hawkish” on policy than Graeme Wheeler has been. The same results are reflected in the survey results of the NZIER’s Shadow Board.

Being less wrong than market economists is convenient defensive cover for the Reserve Bank. During the 2003-2007 boom, we used the argument on the other side. We (the Bank) let inflation drift too far up, and tightened too slowly. But, on average, the markets (pricing and economists) were more dovish – constant looking for the first easing.

And if the Governor has to make mistakes – and inevitably every central bank will from time to time – it is better to be in good company than out on his own. But only one agency – in New Zealand, one individual – is charged by law with keeping inflation near target. And the Governor has been given a lot of public resources to do the analysis and research to support his policy decisions.  In this cycle, our Reserve Bank wasn’t doing that well in 2013 – core inflation was below the target midpoint (although 2013 outcomes were largely a result of Alan Bollard’s choices). But then they tightened policy – at a time when no other advanced country central bank was doing so – and kept on tightening. And core inflation just kept edging lower (and unemployment began to rise again). They were bad calls – increasingly clearly so with hindsight – and should be acknowledged as such, by the Governor – and by those paid to hold him to account, the Bank’s Board, and the Minister.

So I’m not one of those arguing that the Governor has put too much focus on inflation. Instead, he seems to have put far too little focus on actually keeping the medium-term trend in inflation on target. And that focus on the 2 per cent midpoint was one that Graeme Wheeler and Bill English added to the PTA less than three years ago.  He seems to have been distracted by Auckland house prices – a serious issues, for political leaders –  and by beliefs about what “normal” interest rates should be.

The second issue is around governance, and particularly the decision-making structures Parliament set up for the (rather different) Bank back in 1989. I get the sense that no one is really now defending the current system, which has no counterpart anywhere else in the advanced world. A single unelected individual is responsible for all the Bank’s analysis, and for all its decisions – not just on monetary policy, but on banking supervision, insurance supervision, note and coin designs, housing finance regulation, foreign exchange intervention, and so on. No other country does it that way. No other New Zealand public agency I’m aware of does it that way. The Greens have been raising concerns (and do so again in this NBR article), the Treasury has been suggesting changes, market economists have favoured change. In this article, now-independent economist Shamubeel Eaqub calls for change. And, of course, I’ve argued that it is past time for change. Actually, I suspect Graeme Wheeler favours change – although his preferences as to how are likely to be different from those of most others. This is not an ideological issue. It is common-sense one where reform is needed to bring the governance structures up to date. There are important discussions to be had about precisely what alternative model to adopt. I’ve made the case for something like the model the British government has recently adopted for the Bank of England, but there are reasonable arguments for other possible solutions. Unfortunately, the obstacle to reform now is the current government. I’m not quite sure why.

The third issue is around LVR controls. Shamubeel worries that active Reserve Bank involvement in housing finance restrictions invites, over time, a more direct political involvement in future Bank decisions, perhaps including around monetary policy. I think that is a risk. My points about LVR restrictions are twofold.  These are really the sorts of decisions that should be made by politicians, if anyone is to make them. Direct controls of that sort, that impinge of so many people’s finances and businesses aren’t the sort of thing unelected officials should be deciding, But, in a sense, that is a decision Parliament needs to make, to take back (and then take) responsibility for such decisions.

But perhaps more importantly, the Bank – the Governor – has still not made a compelling case that the soundness of the New Zealand financial system requires such controls. They have not made a clear and convincing public case that investment housing lending is riskier than owner-occupier lending. More importantly, even if such lending is a bit riskier, there is no sign that lending is growing rapidly, or that even very major falls in house prices and rises in unemployment would threaten the health of New Zealand banks. The Reserve Bank did the stress tests, not me – and they seem to be very demanding tests. My response to their consultative document is here. In the meantime, they are now hiding behind provisions of the Official Information Act, and highly questionable provisions of the Reserve Bank Act, to keep from the public the submissions people have made on the proposals.   Here are the submissions on some of the government’s housing initiatives. But where are the submissions on the Governor’s planned direct controls? The provisions the Bank rests on to keep them secret were never designed to shelter public submissions on major new macroeconomic policy initiatives. I’ll come back to this issue next week.

The interview reports a few areas where I have been critical of the Governor. In particular, I noted that he seemed very reluctant to engage in serious or robust debate on any of the policy or analytical issues.  That was certainly the case internally, but I think it is true externally as well. Various people have made the point to me that the Governor seems uncomfortable with the media, or with the sort of scrutiny that inevitably should go with the sort of power he wields. I’m not sure that we’ve yet seen a serious and searching interview about his proposed new LVR restrictions, or about his conduct of monetary policy over the last 18 months or so. (Incidentally, I’m reported as calling the Governor “Action Man” – in fact, the credit for that description, emphasising action rather than analysis and reflection, belongs to one of the Governor’s own current direct reports.)

Finally, Rob Hosking highlights the issue of possible comparisons between the Governor and the late former Minister of Finance, Sir Robert Muldoon. As I noted, I did not make such a comparison, and I don’t think it would be helpful to do so. There is a sense in New Zealand debates that the first person to invoke Muldoon comparisons loses. And Sir Robert was Minister through some of the most difficult years New Zealand faced, and his record in response was a mix of the good and the rather less good.

But through the post-war decades, we had an extraordinary piece on legislation on the books, the Economic Stabilisation Act. It was introduced by a Labour government, and used and abused by both Labour and National governments over the decades. It gave ministers the power to impose wide-ranging economic controls (in Geoffrey Palmer’s words) “without resort to Parliament in ways that were unique in the western world”.  It was finally repealed by the Labour government in 1987.

But it is worth noting that these decisions had to be made by a committee (the Governor General by Order in Council) and perhaps more importantly had to be made by people with an initial electoral mandate to hold office: Cabinet ministers are elected MPs, and can be tossed out again.

By contrast, Parliament just a few years later (in the original 1989 Reserve Bank Act and subsequent amendments) passed legislation allowing an unelected official to single-handedly (not even by Order in Council) impose far-reaching controls on almost any aspect relating to banking, which has potentially pervasive influences on whole classes of economic activity. The scope is, of course, nowhere near as wide as the powers under the Economic Stabilisation Act, but there are even fewer checks and balances, in an age that typically puts much greater weight on openness and transparency.

Graeme Wheeler is not responsible for having passed the Reserve Bank Act. That was Parliament’s choice. But the Governor has choices about whether, and how, he deploys those powers.   Without a much stronger case, establishing the serious prospect of a threat to the soundness of the financial system, simply banning people from using banks to finance their residential rental businesses, when the initial exposure would exceed 70 per cent, seems unwise, and a step too far. Several serious people have argued to me that the Governor’s proposals are ultra vires. I’m not a lawyer, and issues of that sort can really only be resolved in the courts.   But when banks are willing to lend, and customers are willing to borrow, and there is no evidence of any serious deterioration in credit standards, we should be wary about the prospect of a single public servant telling them they just can’t.

Greece’s impressive economic performance

There was nothing new on this blog yesterday because

  1. On Wednesday evening I accidentally hit “publish”, went I meant to schedule it for release yesterday, on the post about the striking anomalies between the fairly heavy penalties the Reserve Bank Act provides for breaches by bank directors of the Reserve Bank’s disclosure requirements, and the somewhat derisory penalties the Superannuation Schemes Act provides for scheme trustees for breaches of the disclosure obligations under that Act, and
  2. Because I’ve been dealing with a bunch of historical events, which included what has now been established to have been a breach of the disclosure requirements of the Superannuation Schemes Act by past trustees of the Reserve Bank staff superannuation scheme.  Unfortunately, this involved, inter alia, some people with strong (and otherwise well-deserved) records on issues around transparency and disclosure.    Current trustees have now issued an apology.  As I noted on Wednesday, “You wouldn’t want to be in a scheme where the rules could be changed without you being aware of it”.

But this post is about Greece.

I’ve just finished reading Mark Mazower’s book, Salonica: City of Ghosts.  the story of Greece’s second largest city, and its hugely varied past. In Christian history, it was the first city in which the apostle Paul is recorded as having preached the gospel.  Little more than 100 years ago it was still a major city in the decaying Ottoman Empire, birthplace of Mustafa Kemal, with a population that was much more heavily Jewish and (to a lesser extent) Muslim than it was Greek. Earlier in the year, I reading Twice a Stranger, an account of the brutal and murderous expulsion of hundreds of thousands Greek Christians from Turkey to Greece, and of the (rather less brutal but just as effective) removal of the Muslim population of Greece to Turkey, in and around 1923.   We might think of Greece as an ancient country, and it certainly has many ancient places, but modern Greece became independent only in 1832 – just a few years before the Treaty of Waitangi and the British annexation of New Zealand. Greece’s current borders weren’t settled until the 1920s.

And within whatever boundaries it had, Greece’s history has hardly been a settled one. Reinhart and Rogoff have documented the history of sovereign debt defaults. But I had in mind foreign wars, occupation, civil war, political assassinations, suspensions of democracy, and a military junta that gave up power little more than 40 years ago.

And yet…. as Scott Sumner pointed out recently, in some ways it is remarkable that Greece has done as well economically as it has.  Add to the turbulent history, scores in any of the global competitiveness indices that are really very bad

The Heritage Foundation publishes an annual ranking of 178 countries, in terms of economic freedom.  This ranking has some flaws, but it gives a ballpark estimate of how “market-oriented” an economy is.

The three countries directly above Greece in economic freedom are Niger, India and Suriname, the three right below are Bangladesh, Burundi and Yemen. It’s a strange neighborhood for a developed European country.

Here are the Angus Maddison estimates of GDP per capita for Greeece and New Zealand since 1913.  They are only estimates, and no doubt could be contested on many details, but the general picture seems plausible.

Greece maddison

I found the chart striking for two reasons.  The first is that in 1913, Greece is estimated to have had GDP per capita less than one-third that of New Zealand.  That is a really large gap.  Of course, at the time New Zealand had some of the very highest living standards in the world.  But, by comparison, the poorest EU and OECD countries today (Mexico, Turkey, Romania, and Bulgaria) now have incomes about half those of New Zealand’s.

On this measure, at peak, in 2007/08, Greece’s GDP per capita is estimated to have been around 80 per cent of ours.  On other (better) measures,  but for which there is no comparable long-term time series, Greece is estimated to have had higher GDP per capita than New Zealand by then.   Of course, New Zealand has been one of the worst performing advanced economies in the last 100 year, but even last year the Conference Board estimates that Greek GDP per capita was around half that of the United States.  Greece has managed a great deal of convergence

The other thing that struck me about the chart was the variability in the estimates of Greek GDP.  For New Zealand, the Great Depression of the 1930s was the largest dip.  Greek GDP fell then too, but it is barely noticeable.  And even the catastrophic fall in Greek GDP in the last few years is shaded by the earlier falls –  those associated with, first, World War One, and then with World War Two, the occupation, and the subsequent civil war.  Other occupied countries experienced a sharp fall in GDP per capita during World War Two –  France’s fell by around 50 per cent, but had surpassed 1939 levels by 1949.  Greece didn’t get past 1937 levels of GDP per capita until 1957.

Perhaps depressions of the magnitude Greece is experiencing now feel different with those sort of historical memories in mind?

My other recent reading about Greece was last week’s New Yorker profile of Yanis Varoufakis (here), until recently Minister of Finance in the Syriza government.  I didn’t find Varoufakis a sympathetic character, at all, but the profile is well worth reading, as background to the continuing crisis.  But it was some of the biographical stuff that really caught my eye.

As we drove, Varoufakis talked of his father, George, whose example of stubbornness had helped shape him. In 1946, during Greece’s civil war against Communist insurgents, George Varoufakis was arrested as a student leftist, and refused to sign a denunciation of Communism. He was imprisoned for four years, and repeatedly tortured. His signature would have freed him. I later met the senior Varoufakis—the courtly chairman of a steel company who, at ninety, still goes to the office every day. He told me that for years after he was freed he couldn’t listen to Johann Strauss: his torturers had “put on waltzes, very high, in order not to hear our voices, our screaming.”

After George Varoufakis returned to college, a female student kept an eye on him for a paramilitary right-wing group—“Stasi stuff,” as Yanis put it. But she fell in love with George, and they married. Yanis was born in 1961. During the military dictatorship of 1967 to 1974, Varoufakis’s uncle, a libertarian, was imprisoned for participating in small-scale terrorism. Varoufakis recalled his excitement when charged with smuggling notes to him on prison visits.

What a country.

Of course, plenty of other European countries had a bad time in the 20th century –  Spain, Portugal, and most of eastern Europe.  But it helps make more sense, to me at least, of why the Greek population seems so unwilling to leave the euro, despite the peacetime economic disaster they are now living through.

I’m now reading a contemporary account of the political situation in Europe written in 1936. It is widely recognised now that countries that came off the Gold Standard and devalued their currencies recovered fastest from the Great Depression.  France was one of the last to do so.  This book was written just after France had finally gone off the Gold Standard in mid-1936.  The author, John Gunther, observes

“Why did the rentiers, the small capitalists, the peasants with savings, swallow such a [deflationary] programme when devaluation of the franc might much less painlessly lighten the burden?  The reason is, of course, largely psychological.  The terrors of deflation were comparatively known; those of inflation [rife in France in the 1920s] were known and doubly feared”

And if I were a Greek voter today, remembering the extreme instability of my own country, perhaps I too might cling to the euro and the EU, even amid all the humiliation and economic dislocation, rather than risking a leap into what might reasonably be seen as an abyss.  It is easy for macroeconomic analysts to talk of real exchange rate adjustments, unemployment rates etc. But what are they against the memories of torture, betrayal, civil war, military government, occupation, forced mass relocations – a precariousness that is difficult for those in the handful of countries who’ve had settled boundaries, no military conflicts on our territories, and stable democratic government for the last century [1] to fully grasp.

The current arrangements, limping from month to month, seems no way to consolidate that 20th century closing of the Greece/New Zealand income gap. Staying on the Gold Standard until 1936 wasn’t that wise for France either, but it happened. History is context.

[1]  A list no longer perhaps than Australia, New Zealand, Switzerland, Sweden, Canada, and the United States?