I wrote this morning that I didn’t really understand why the current government was not willing to do something about reforming the governance of the Reserve Bank. But it isn’t my only area of puzzlement around how politicians deal with Reserve Bank issues.
For the last day or so, I’ve been pondering the post-MPS statement put out by the (relatively) new Labour Party Finance spokesperson, Grant Robertson. It continues a line he has run for some time, in which he lauds Graeme Wheeler for doing what must be done on monetary policy, and speaking the truth to power around the state of the economy and the housing market. Wheeler as the active hero and Bill English as the neglectful spectator is the thrust of his story.
I understand that the point of Opposition is to become the government, and one does that by casting the current lot in a bad light. But Grant Robertson’s approach doesn’t seem to be a particularly well-chosen way to do that. Indeed, one could have some sympathy for the Minister of Finance. He appointed Graeme Wheeler, and signed him up to a more specific inflation target than previously, with an explicit focus on the 2 per cent midpoint. Three years on there is no sign of core inflation – or headline – being anywhere near 2 per cent. There might be good reasons for that, but the Governor has failed to do well his primary function. Believe the Governor and we’ll be back at 2 per cent next year, but then he said that last year, and the year before. And it was the Governor who raised interest rates by a whole 100 basis points last year, when there was never a clear and compelling need for any rate increases, and now it is the Governor who is only grudgingly bringing them down again. World dairy prices aren’t something the Governor can control, but the economy now would not be as weak as it seems to be, and – not incidentally – inflation would be nearer target if (a) interest rates had not been raised so much, and (b) if having been raised, they had been lowered more quickly. As I noted yesterday, we are probably the only OECD country that has real interest rates higher than they were at the start of last year, and that is Graeme Wheeler’s doing (and that of his staff). It certainly isn’t Bill English’s fault. Does anyone actually think it is?
But there is still room to criticise the Minister of Finance. The Bank’s Board is appointed by the Minister of Finance, and paid, to hold the Governor to account. The Minister has made the odd frustrated noise in public, and is probably more frustrated in private. But what is he doing about it? Has he sought advice from Treasury, and let it be known that he was seeking such advice? Has he sought advice from the Board, and let it be known that he was seeking such advice? Bill Birch did back in the 1990s when inflation was temporarily outside the top of the target range. But there is no sign of either action this time. And in his annual letter of expectation to the Governor earlier this year there was also no sign of any discontent or serious concern from the Minister, despite years of core inflation falling increasingly below target. The Governor has a lot of power, but it is the Minister’s job (directly and through his agents) to hold the Governor to account. To the extent that he fails to do so, he makes himself complicit in the Governor’s mistakes. Perhaps it would be too geeky and “inside the Beltway” for the Opposition to make these points, but they would be more telling charges than praising the Governor as a way to make the government look bad.
Robertson also seems to laud Graeme Wheeler’s contribution to the housing debate, while curiously suggesting that a “housing market that threatens banking stability [it doesn’t]” is “beyond the remit of the Reserve Bank”. If anything, the Reserve Bank’s contribution to the housing market debate is pretty disappointingly weak. Wheeler has rushed in with a series of relatively ineffective, but quite distortionary and nastily redistributive, interventions, for which he has no real mandate, all founded on very poor quality analysis and non-existent research. And all the while keeping secret any submissions that have been made on those proposals. In terms of wider housing policy preferences, he and the Bank simply seem to fall in line with the preferences of the current government – he likes things that were done in the Budget, and thinks there should be “more supply”, but offers no serious analysis of the role of policy-driven demand pressures, whether around tax or around immigration policy. And having done stress tests which suggest a pretty robust banking system, even in the face of very large adverse shocks, the Governor has been quite unable (certainly unwilling) to make a case for why his own interventions are appropriate, in terms of the statutory goals Parliament has given the Bank. The Reserve Bank’s job is to keep the financial system sound. It appears, on its own numbers, to have done that. Beyond that, if it is going to make a useful contribution to a debate around housing, as a public agency, it needs to do so on the basis of much richer and more robust research than we’ve seen to date. The Minister of Finance is responsible, on our behalf, for ensuring that they do rather better. Again, the Labour Party could point this out.
We have a poor system for governing our, now extremely powerful, Reserve Bank. The Labour Party could usefully make the case for change. They’ve toyed with it in the past, but seem uninterested now when the problems are more than just theoretical ones. Inflation is well away from target, and may drift further away, and all while the unemployment rate is rising. That is largely the Reserve Bank’s fault, but even in this area Robertson seems only interested in highlighting contrasts between the Reserve Bank’s latest projections and past government ones. Labour might point out that it is the government’s job to hold the institution, and the incumbent Governor, to account, and to fix the systemic/institutional problems. At present, it seems to be doing neither.