How many OIA requests do government departments receive?

The blogger No Right Turn, prompted by the Reserve Bank’s OIA charging policy, lodged requests with all government departments, and the Reserve Bank, about how many requests they had had in the last year, and how many they’d charged for.  His results are reported here –  unsurprisingly, charging is very unusual.

This chart takes his data on the total number of OIA requests each department received in the previous year (mostly the answers are for the financial year 2014/15). There don’t appear to have been responses yet from Environment and Corrections.

OIA requests

Every agency has different responsibilities, some are much larger than others (and one has to be a little wary of how things are classified, eg there is a note on the IRD response saying that their numbers include only requests handled at National Office (ones from media, MPs, and those of a sensitive nature)), but the Reserve Bank does not stand out among government departments as overburdened by requests.  The Ministry for Women, for example, or the Ministry for Pacific Peoples –  both with fewer requests – are tiny departments with little or no independent power or responsibilities.  The Treasury, it turns out, had five times as many requests as the Reserve Bank in this particular year.

By contrast to MfW or MfPP, the Reserve Bank independently sets monetary policy (with a huge short-term impact on the economy and the sectoral distribution of incomes), it regulates banks, non-bank deposit takers, and insurance companies (and now directly impinges on housing mortgage borrowers), it is a major payments system operator, it takes large financial risks in international markets, and it issues our notes and coins.  In some ways, against the backdrop of this data, it is a little surprising that such a powerful independent agency has not received more requests over the years.

 

 

 

Once telephones took forever….

Don Brash tells a good story of taking over as CEO of  the merchant bank Broadbank in the early 1970s and being told by the Post Office it would take several months to get some new phone system installed in the dealing room.  It wasn’t just merchant banks. Te Ara, the on-line encyclopaedia records that

business customers in particular wanted more sophisticated telephone services which were available internationally, and households were often frustrated by the time it took to get a telephone.

and

Delays in the installation of new telephones affected more than residential customers. In 1984 Treasury, at the forefront of the push for re-organisation of the Post Office, waited two months for existing telephone jacks to be shifted. Senior officials exchanged angry letters. Treasury argued that it was inefficiency, and the Post Office insisted it was pressure of work.

It is easy enough to get a telephone today.  It is a shame one can’t say the same about official information –  that reforming legislation having come a few years earlier than the telecoms ones.

As I noted the other day, last year I asked the Reserve Bank for any papers relating to work it had undertaken on reforming the Bank’s governance model (single decision-maker, role of the Board etc).  That request was lodged on 29 June.    On 24 August –  almost two months later, notwithstanding the “as soon as reasonably practicable” provision in the Act, the Bank declined my request almost in full (releasing one paper not that relevant to the issue).  They cited numerous reasons including the rather grandiose claim that to release such papers would damage “the substantial economic interests of New Zealand” .  I documented all of that here.

A few days later (27 August) I complained to the Ombudsman’s office.  They acknowledged receipt of the complaint and noted, as is typical, that it would probably take some time to get to it.

This afternoon, 17 February, a nice letter from the Ombudsman’s office was dropped into our letter box, informing me that they are just now getting underway with an investigation and that the Chief Ombudsman, Peter Boshier, will be investigating my complaint.  That is welcome.

It is a genuinely nice letter, quite apologetic about the “workload pressures” that “have led to delays in progressing this matter”.   I am not intending here to be critical of the Ombudsman’s office at all –  Parliament determines their resources, and they must do their best within those constraints.

But it is now almost eight months since the first request was lodged.  I presume it will take another month or two for the matter to be resolved.   Perhaps 10 months on from the initial request I might finally get an answer.

I think the specific issue is an important one, of some public interest, but it clearly isn’t that time-critical.  For plenty of other matters, time matters more.  But if this is a typical lag –  as I can only assume it is –  no wonder plenty of government agencies find it worthwhile to stall, and wait out the Ombudsman.

Telephone delays etc were quickly resolved once the industry was deregulated.  The same solution doesn’t look to be available here.    Perhaps not many problems can be solved simply by throwing more money at them –  and there may be scope for productivity improvements in the Office of the Ombudsman  –  but an effective well-functioning Ombudsman’s office, with prompt turnaround times, does have the feel of a currently underfunded public good.

Core inflation and the Reserve Bank

Since the Governor’s speech a couple of weeks ago (building on the January OCR review announcement), I’ve been reflecting again on how best to think about what is going on with inflation in New Zealand.

The Governor cited a single measure of core inflation, the sectoral factor model measure of core inflation, to assert his comfort with the current headline inflation rate.  As I noted at the time, it is very rare for any specific measure of core inflation to be cited in official Bank announcements.  The typical story has been along these lines

There is no agreed upon ‘best’ approach to measuring core inflation, and each approach has various advantages and limitations. Some work best in some circumstances; some in others.

That line is taken from the abstract to a nice Reserve Bank Bulletin article reviewing core inflation issues and measure, published a little earlier in the current Governor’s term).

The same year they published a nice Analytical Note on the sectoral core measure itself. The non-technical summary at the start of that paper notes

There are many ways to measure core inflation. Statistics New Zealand publishes a range of measures that involve removing volatile price movements before inflation is calculated, or excluding certain groups of items from the calculation. As well, the Reserve Bank of New Zealand has a set of models that produce core inflation estimates. Every model is different, and the Reserve Bank uses the full suite of measures when forming an assessment of what is going on with inflation.

(For the record, I edited both these publications, but both were widely circulated in draft, and were approved by the Assistant Governor  –  Chief Economist – and the Bank’s Communications Committee, on which all four governors sit and actively participate. I don’t recall such lines ever being contentious.)

The Analytical Note went as far as to publish this chart, illustrating the variety of measures the Bank looked at.

core inflation measures

Incidentally, note the nice longer-term time series for the weighted median and trimmed mean series.  The Bank no longer publishes these (linked) series on its website, just reporting the very short official series published by Statistics New Zealand.  This is something that should be remedied –  as, for example, the Reserve Bank of Australia does.

But now, apparently, the Governor favours the sectoral factor model to the exclusion of all other core inflation indicators.  It is certainly convenient that it is, at present, the highest of any of the range of core inflation measures, and that the inflation rate, on this measure, has increased over the last year.

Here is a table I ran a couple of weeks ago:

Annual inflation, year to Dec 2015
Trimmed mean 0.4
Weighted median 1.5
Factor model 1.3
Sectoral factor model 1.6
CPI ex petrol 0.5
CPI ex food and vehicle fuel 0.9
CPI ex food, household energy and vehicle fuel 0.9
CPI ex cigarettes and tobacco -0.3
Non-tradables ex govt charges and alcohol and tobacco 1.8

But neither the Governor, nor his officials, have given us any reasoning as to why they think that on this occasion this indicator is the single best representation of what is going on –  so much so that the other measures aren’t even worth mentioning.  I suppose one could lodge a request but (a) I doubt there would be anything to support the Governor’s preference, and (b) no doubt, we’d be told it was none of our business and that information had to remain secret to, for example, “prevent damaging the economy of New Zealand“.    For an institution that likes to hold itself out as being transparent about its economic reasoning and analysis –  and which has more (taxpayer-funded) macro analysts and researchers than any other agency –  it really isn’t good enough.

Relatedly, if the sectoral core model is really providing much the best steer, what has changed since the start of 2014?  Recall that sectoral core inflation then had been almost dead-flat at around 1.4 per cent for a couple of years –  and yet the Governor began an aggressive tightening cycle.  Perhaps it was a misleading measure then, but the best measure now?  It is possible, but surely we are owed an explanation?

sec core and headline

Why might we be a little sceptical that some “true” notion of core inflation is (a) rising, and (b) as high as 1.6 per cent  (itself still materially below the midpoint)?

First, the sectoral factor measure is the product of a model, and that model has error bands around it. Even the historical period numbers are midpoint estimates of a range which the Bank tells us is around 0.6 percentage points wide.

sec factor uncertaintyAnd, as with all of these sorts of models, the problems are particularly acute for the most recent observations. The model is, in effect, trying to discern the common trends in the various component price series, but it can do that increasingly reliably with the benefit of more time and more data. That makes tools like this most valuable for identifying the underlying inflation processes in periods of history (eg looking back now on the pre 2008 boom) and relatively less useful for “spot” reads on what is happening right now. In that sense, it is a little like filter-based estimates of the output gap, and it is similarly unwise to put too much weight on real-time estimates of any one model of the output gap.

Second, there is no sign of any pick-up in wage inflation, or in measure of inflation expectations.

Third, the measures that are easier to disentangle mostly aren’t suggesting core inflation is rising, or that it is as high as 1.6 per cent. Take, for example, the internationally quite commonly used approach: CPI inflation rate excluding food, household energy and vehicle fuels is only 0.9 per cent.   It isn’t always reliable – in 2007 it ran below most other measures of core inflation because of some large changes in government charges (childcare subsidies). But we know (SNZ tells us) this time round that taxes and government charges are not, overall, affecting the inflation rate. It is a good example of why one needs to look at all the measures, and use them to develop an overall story. Focusing on a single indicator is often likely to be quite dangerous – especially when it is something of a black-box, prone to endpoint problems.

And here is a concrete illustration of something that bothers me about the sectoral factor model results at present.

We know that the repeated increases in tobacco excise has been having a big impact of overall non-tradables inflation in recent years (and the overall CPI). More recently, cuts to ACC motor vehicle registration charges have worked the other way. Statistics New Zealand do not give us a series of overall CPI inflation excluding tobacco and government charges, but they do provide one for non-tradables inflation (at least from 2007). And the Reserve Bank helpfully publishes separately the non-tradables component of the sectoral factor model.  The chart shows overall non-tradables inflation as well. (The 2010 surge is the increase in GST, administratively excluded from the sectoral factor measures.)

sec core NT

Over the period since 2007, the combined effects of tobacco tax increases and central and local government charges have substantially boosted non-tradables inflation (the red line has been well above the blue line). So it is troubling that the non-tradables sectoral factor model component looks so like the overall non-tradables series over the period since 2009, even though it is substantially boosted by factors that no one would regard as core inflation – they are administered (by governments) prices.   I’m less bothered by the idea that sectoral core inflation in the non-tradables sector might have been flat – a lot of the inflation in recent years looks to have been in the construction sector (think Christchurch) and the model will tend to look past that as not representative of the whole economy.

But if the Bank is going to drive policy – its assessment of the current inflation situation relative to target – off a measure that has looked more like a series that includes lots of administered taxes and prices, than it does the series that excludes those effects, they need to give us a lot more explanation than they have done to date. It is possible that there is a good and convincing story, and that the sectoral factor model is really capturing something important that has been going on in non-tradables inflation that simply isn’t visible to the naked eye (or in other price series), but we need to see that story. and the other supporting evidence for it. What is it, for example, that is leading to the sectoral measure holding up, and even rising, just as the overall non-tradables inflation rate converges (downwards) on the series excluding those government-determined prices?

Personally, I think it would be safer for the Bank to work on provisional basis that core inflation is around 1 per cent at present. That is around where the exclusion measures would suggest, and well above the trimmed mean – the approach to core inflation approach that, for example, tends to get most coverage among analysts in Australia.

[UPDATE: And don’t lose sight of the fact that the average of the blue line –  excluding the GST spike –  has been below 2 per cent since 2009.  No one I know of would expect non-tradables inflation to be at or below 2 per cent if core or underlying inflation in total were anywhere near the 2 per cent target midpoint.]

This whole episode is pretty unsatisfactory, and a poor reflection on the Bank. Reasonable people might differ on the appropriate stance of monetary policy. But the attempt to justify the stance on a single (complex) core measure, without substantive elaboration or explanation, when that same core measure would appear to have warranted policy easings when the Bank began aggressively tightening two years ago, looks disconcertingly like a Governor fixing for a time on the highest convenient measure of inflation. That isn’t good policy or good governance. And I suspect it makes many of the Bank’s own economists quite uncomfortable.

As a reminder of the Deputy Governor’s 2013 report of the Bank’s aspirations

The Reserve Bank is deeply committed to transparency – of policy objectives, policy proposals, economic reasoning, and of our understanding of the economy, and of course of our policy actions and intent. Clear communication and strong public understanding make our policy actions more effective.

We are working to enhance the openness and effectiveness of our communications

It just isn’t happening.

And note that all these quotes are from 2013, early in the Governor’s term, before things started going really wrong. And before they responded to those mistakes  –  which any humans will at times make –  by turning inward, pretending that nothing is wrong, and avoiding serious scrutiny and debate.  Digging deeper holes doesn’t usually solve such problems.

It was wryly amusing to note the other day that the Governor of the People’s Bank of China – central bank of a brutal repressive state not know for any sort of transparency – had given an extensive interview (not necessarily revealing a great deal) to a publication not historically known as a party mouthpiece. Our Governor has, I’m told, not given a single substantive interview in his three and half years in the job.

 

 

 

Negative interest rates: some thoughts

I’ve been keeping an eye on the range of commentary and analysis appearing recently on negative policy interest rates –  options and limitations.  The issue has come back to prominence because of the BoJ’s recent modest move to introduce a negative policy rate, and amid the rising concerns about global growth and, perhaps, financial fragility that have been reflected in market prices –  equities, bonds, commodities, CDS spreads etc –  since the start of the year.

Doing something about removing, or markedly easing, the near-zero lower bound on nominal interest rates has been a cause of mine for some years.  While I was working for The Treasury in 2010 I wrote a discussion note, that got some circulation inside and outside the institution, concluding (somewhat to my own unease) that in some respects the world was less well placed than it had been in, say, 1930  – the early days of the Great Depression.   Back then, countries could get rid of the Gold Standard –  and eventually did so –  markedly easing monetary conditions in the process.  Having got nominal interest rates to around zero in much of the advanced world, there wasn’t a great deal else monetary policy could do if economies were to turn down again (or simply fail to recover).  Unsterilised fiscal policy (direct purchases of goods and services) might be an option on paper, but by then the tide had already turned against expansionary fiscal policy, and public debt levels in many countries were becoming worryingly (to the public, and conventional political wisdom) high.

The remaining option was to do something about the near-zero bound, which existed –  in a fiat money system –  only because of policy and legislative choices (typically, a state monopoly on currency issue, and a commitment to convert bank deposits into those state issued notes at a fixed one for one parity).   Why hold large proportions of one’s wealth at materially negative interest rates when –  once a few set up and holding costs were negotiated –  one could hold bank notes at a zero return?  (Some earlier thoughts on these issues are here and here)

No central bank had taken policy rates negative during the 2008/09 recession.  For some –  New Zealand was a good example –  there was simply no plausible need.  But in others –  the US and the UK appear to have been the prime examples –  it didn’t happen partly because the relevant authorities really weren’t sure about the implications would be.  Whole business models –  money market mutual funds, which had run into troubles in 2008 anyway –  had been built around the idea the interest rates don’t go negative.  And, at the time, it seemed to pretty much everyone that interest rates would be extremely low for only quite a short period, so why risk creating a mess, disrupting well-established business models, for a small short-period additional kick.

As we know, interest rates have now been very low for a very long time.  Some argue that wasn’t necessary, or wasn’t desirable, but whether one focused on an inflation target, on the level or growth of nominal GDP, or even economywide credit, it is difficult to conclude that interest rates in most countries should have been any higher in the last few years than they have been.  One could, in fact, mount a good argument that they (a) should have been lower, and (b) would have been lower if the technological/regulatory bound had not been there.   If, for example, inflation targets in the previous 20 years had been 4 per cent, not 2 per cent, I think there is little real doubt that real interest rates would have been lowered further.

In the last few months of Alan Bollard’s time as Governor of the Reserve Bank of New Zealand –  when yet another wave of the ongoing euro-area crisis was upon us –  I led an internal working group looking at some of our options if there were to be a new global crisis and a material downturn in New Zealand.  We concluded that in our relatively simple system there were few or no obstacles to taking the OCR negative should that be needed –  there was, for example, nothing like the money market mutual fund sector to trouble us.  We didn’t reach a firm view on how far the OCR could be cut before banks and other investors might turn to physical cash instead, but it seemed reasonable that we would have been able to cut to perhaps -50 or -75 basis points.  With a few suggestions to check that our technology could handle negative interest rates, we put the report aside as that wave of tensions eased.  Negative interest rates have not yet been needed in New Zealand.

What we didn’t do was to explore how to get around the floor that would inevitably be there at some point. I guess it wasn’t a high priority for the Reserve Bank of New Zealand –  with policy rates among the highest in the world, we were further from the floor (whatever it was) than most countries.  And –  always a comfort  – if our interest rates ever did get to zero (or negative) it seemed likely that the New Zealand exchange rate would be very weak.  We aren’t a surplus country, or any sort of serious “safe haven”, and if there are no yield advantages to holding NZD assets, in most circumstances there won’t be much foreign demand to hold them.

But as far one can tell, no one else in the senior levels of officialdom  anywhere else was doing very much about it either.  One can –  and should – bemoan the lack of contingency planning, but it probably just reflects the same mistake that has been made around the world since the crisis and downturn started to get underway in 2007.  There was a reluctance to recognise what was coming[1], a slowness to react even as the crisis was open us, and once the immediate worst of the crisis was over the constant relentless focus has been on “normalisation”.  And it wasn’t just central bankers…..market economists and participants were often just as focused on the tightenings that, it was confidently assumed, were to come.  It was the path that led various central banks into premature tightenings and then policy reversals  –  New Zealand leading the way, with two lots of reversals.  And it hasn’t just been about small central banks, or big ones –  pretty much everyone has shared in the delusion that it wouldn’t be long until we were well on the way back to “normal” –  real interest rates perhaps not much lower than they had been on average in, say, the decade prior to 2007.   The US Federal Reserve has often been as fallible as anyone, and it seems increasingly likely that its own “normalisation” programme might be brought to an end, and reversed, after just one tightening.

It all means that dealing with the zero lower bound doesn’t seem to have been treated very seriously by central banks and finance ministries.   We now have several advanced economies –  covering a large chunk of the advanced world’s economies –  with negative policy rates, but in each case it still comes with the question “how far can they go”, and in each case so far the move to negative rates has been less than whole-hearted. Central banks look and sound as though they are backed into it very reluctantly, rather than embracing enthusiastically what needs to be done.

Negative rates have been applied to only a portion of banks’ balances at the central banks –  structured, it seemed, to have as little impact as possible on banks and their customers.  There has been a logic to that –  the focus in many of these countries was on the exchange rate channel, and the announcement effects of moves to adopt negative rates appear typically to have been to weaken the respective exchange rates.  But it hasn’t exactly been a ringing endorsement of the efficacy of negative policy rates.  It all seems to have been accompanied by a fear of upsetting established business models, and a fear that before too long the limits of negative rates will be reached.

JP Morgan has an interesting note out last week looking at how far various central banks could take policy rates negative, without imposing more of a “tax” on banks than is being imposed in the most negative central bank now.  They suggested that some central banks could take a (tiered) negative rate as low as perhaps -4 per cent.

But monetary policy isn’t supposed to work by imposing taxes on banks, but by influencing private sector behaviour through a variety of channels.  Substitution effects matter.  And so do expectations channel.

But if central bankers don’t believe that they can do much more, or that their tools won’t really have much impact –  or perhaps, in their heart of hearts don’t really want to do much more ( after all, surely we need to keep “normalisation” in mind) –   it is hardly surprising that people more generally (not just market participants) become nervous when new risks come to the fore (China, Portugal, Italian banks, stresses on commodity producers or whatever)   When there is no ringing endorsement from central banks for banks to pass negative rates decisively through to firms and households (savers and borrowers) no wonder banks are tentative in doing so.  And that central bank tentativeness further undermines the potential effectiveness of the tools they might still have.  We see that with global inflation expectations falling, so much that central banks are struggling to avoid rising real interest rates.

I’m reading Scott Sumner’s The Midas Paradox at present, a stimulating take on the Great Depression.  As he notes, in that climate for a country to devalue, or go off gold, was stimulatory.  But when markets feared a country might go off gold, even if it had no desire to do so, that was severely contractionary (people –  and institutions – ran to gold, rather than paper money, with a cumulative contractionary effect). There wasn’t a belief that central banks could credibly do much to offset that sort of tightening in conditions.   There aren’t direct parallels to today’s situation, but if people think that the monetary options are almost exhausted it amplifies the adverse impact of any emerging bad economic news

It is all unnecessary.  If central banks five or more years ago had put their minds to dealing with the zero bound, we’d be far better positioned today.  Authorities could say with conviction that there was no limit to how far policy rates could be cut.  Banks –  and savers/borrowers –  would be that much more attuned to the possibility of materially negative rates (nominal, not just real).  As people like Miles Kimball have pointed out, it doesn’t take the abolition of all physical currency – which continues to have real convenience value for many people/transactions.   And that is why it still is not too late to act.  Central banks could cap the issuance of their currency, and work with ministries of finance to enable variable conversion rates.  These are unfamiliar concepts to the public –  and would take some socialisation.  But every day that is lost in beginning work on these sorts of initiatives exposes the world economy to really serious threats if the current set of risks crystallise (or another lot do a little further down the track).

In having delayed so long, when central governments and governments do finally move it risks looking like a panic measure.  It isn’t clear how to avoid that now –  but the best chances to avoid that sense is in those countries that still have some conventional monetary leeway (New Zealand and Australia among the few).

And, of course, the other option that could have been pursued was a higher inflation target.  I’ve written about this previously, as have others.  I still regard it as less desirable than the alternative  – doing something directly about the near-zero bound. That is particularly so in countries that have already pretty much reached the limits –  if the central bank has no effective instruments why would anyone give much weight to an increase in an announced inflation target.  Again, the options are different for New Zealand and Australia.

Central banks and governments have delayed far too long already, and they now risk reaping a very nasty harvest –  or, more accurately, seeing it imposed on their populations.  It was when central banks and governments finally moved off the Gold Standard –  usually just as reluctantly as today’s central bankers are too fully embrace negative rates and/or higher inflation targets –  that economies finally began to sustainably recover from the Great Depression.  Today’s threats are a little different in the details, but there is a pressing need for markets, the public and politicians to come to believe with some conviction that inflation will return, and that authorities have the instruments to raise inflation effectively and without question.  Persistent doubts on that score  –  including doubts of self-belief among the central bankers –  only increase the risks of a very nasty global deflationary period over the next few years.  Cutting policy rates barely as fast as inflation expectations are dropping away isn’t a recipe for boosting demand –  or creating any sort of robust confidence that inflation targets will be met.   Central bankers barely believe they will. Why would anyone else?

[1] I recall a serving G20 Governor telling me at a conference in early 2008 that he couldn’t understand what the Fed thought it was up to cutting interest rates.  A few months earlier, at another international meeting, a senior Fed staffer told us that while the market was beginning to look for cuts, the Fed still thought the next Fed funds move was upwards.

The Reserve Bank’s OIA charging policy release

Thanks to Eric Crampton for alerting me to the Reserve Bank’s OIA release (to Alex Harris) around its new charging policy.

The documents are interesting in that they provide us with some data.  The Reserve Bank has complained about a large increase in the number of OIAs they have been receiving, and used that as one justification for the new charging policy.

 18 requests in calendar 2010

21 requests in calendar 2011 – up 17% from previous year

30 requests in calendar 2012 – up 42% from previous year

45 requests in calendar 2013 – up 50% from previous year

47 requests in calendar 2014 – up 4% from previous year

70 requests in calendar 2015 – up 49% from previous year

As they acknowledge, the Reserve Bank has been rather more active in a number of policy areas in the last few years –  LVR restrictions are the most obvious example –  which might have been expected to generate more requests, and more (attempted) scrutiny of the Bank.

But what is a reasonable baseline?

In their paper, the Bank staff note that the Treasury informed the Bank that they had a team for four full-time staff to handle OIA requests (and had charged only one person –  an academic with a large research grant – some years ago).  We don’t know how many OIA requests Treasury deals with each year (for requests to The Treasury itself, and those it handles for the Minister of Finance), but on the Treasury website there  are more than 100 OIA releases in the last 12 months –  and that list is described as “selected responses” and also excludes pro-actively released material (such as the post-Budget large pro-active release).

The Treasury is a larger organization than the Reserve Bank (around 420 staff to the Bank’s 260 or so), and covers a wider range of functions.  On the other hand, the Reserve Bank has a large amount of delegated power in a variety of very significant areas (monetary policy and banking regulation), and with a very large balance sheet.  It isn’t obvious that 70 OIA requests a year is an unreasonable number for an organization of the power, size, and importance of the Reserve Bank.  Perhaps –  as various people have suggested –  it is just that the Reserve Bank was getting off surprisingly easily in the previous few years?

In the note to the Bank’s Senior Management Group I am listed as one of the culprits –   having, at that time, apparently lodged 16 OIA requests in 2015 (the final total would have been 2 or 3 higher).  Curiously, the Bank proposes in the documents a benchmark for charging in which charges would apply to people making more than a rolling average of two requests per month.  Not even I managed that last year –  and I haven’t lodged a request with the Bank this year to date.   As the No Right Turn blog puts it:

The bank’s cutoff for when it will refuse a request for “substantial collation and research” is a mere three hours, while their definition of a “high volume requester” is someone who makes two requests a month for two months. Combined, these basically rule out any use of the OIA for serious research or investigation of the bank’s policies, whether by academics, investigative journalists, or the public. And while MPs won’t be charged, their requests will still be refused if they take more than that three hour limit. The net result: less scrutiny, and a specific incentive against regular scrutiny. Which means less accountability to the public.

I had a quick look through my email inbox to refresh my memory of last year’s requests:

  • four related to issues around the Bank’s superannuation fund. I am an elected trustee of that Fund, and we have been grappling with some difficult and serious issues raised by a pensioner about events in the late 1980s and early 1990s.  The Governor’s alternate (Geoff Bascand) had been actively seeking to close the issues down, without further investigation (even though they have already led to the discovery, disclosure, and apology for the fact that past trustees –  chaired by Don Brash, and including the current head of the New Zealand Transparency International –  had broken the law).  The only way to get some of the information needed was to request it from the Bank under the Official Information Act.    In no case was any substantial research or collation faced by the Bank (in one case I was simply told to photocopy the pages I wanted).
  • When I left the Bank I sought approval to use old discussion notes and memoranda that I had written.  This was an entirely friendly approach, designed to minimize future requests by, in effect, seeking general approval to quote old papers (I even excluded from the request one paper I knew the Governor was sensitive about).  Approval could have been granted, at least for older papers, with no Bank resources at all.
  • I sought the release of background papers to one of the 2005 MPSs.  These were 10 year old documents, nicely collated and stored. The point of the request was to establish the principle that such papers should be public, at least with a lag.  The request should have involved no material costs to the Bank, and when the papers were finally released –  well beyond 20 working days –  there were no deletions at all.
  • In two cases, I sought background papers after major changes of view by senior bank management –  changes where no reasoning was provided at the time.  One related to capital gains taxes, and the current one relates to immigration.  Since they were current issues, (of material public interest) there should have been limited resources required to respond promptly.
  • I requested background papers relating to 2012 Policy Targets Agreement. As this is the key document governing monetary policy, and no background papers had been released at the time the PTA was signed, it seemed desirable to better understand what the Minister and Governor had had in mind (especially in light of the current monetary policy stance debates).
  • I requested papers relating to the extensive work programme the Reserve Bank had been doing on reforming  the governance of the Reserve Bank.  The Bank has refused to release anything of substance, a quite extraordinary stance for a work programme that has now (apparently) ended (and quite in contrast to the Treasury’s approach to a request on that work).
  • I sought papers provided to the Bank’s Board relating to the September MPS.  The Bank will have spent next to no resources on this request, since was refused completely (as I expected, but I wanted to establish the point).
  • I sought minutes of the Bank’s Governing Committee for a defined period last year.  The Governor has been keen to stress the role the Governing Committee plays in decisionmaking, and as is well known it is common for minutes of key policy committees in other central banks to be released.  Totally refusing this request will also have taken almost no resources, since there was no sign in the response that they had considered the individual meeting minutes.
  • I requested one specific paper I had written about fiscal and monetary events in 1991 –  the first big test of the inflation targeting framework.  This request was, of course, necessary only because the Bank had (see above) refused my general request to be able to cite my old papers.
  • I requested copies of the submissions on the new investor finance restrictions.  After great difficulty, and only after another media request, were some of these documents released (in total). It remains common practice elsewhere in government to publish submissions pro-actively.
  • I requested copies of submissions on the regulatory stocktake.  Comments as for the previous item: costs and resource pressure arise entirely from the Bank’s choice to be non-transparent.
  • And I made two requests relating to the (TPP) Joint Macroeconomic Declaration, to which the Reserve Bank is a party.  The second request followed when the first request was denied in full.  The second request is still pending.

Reviewing that list with the benefit of hindsight they seem like exactly the sorts of requests that a central bank and financial regulator might expect in the course of a year like last year.  Most would have been avoided if the Bank adopted the sort of pro-active transparency, as regards process, that is now best practice, or (in some cases) had simply explained itself.  Even when material was released, it was almost always done on the last lawful day, or after an extension or two.

(Of course I would say this), but none of the requests appear vexatious or deliberately time-wasting.  I have been encouraged to make other requests of the Bank –  to seek information on the process they have used on each of the requests they have stalled, obstructed or refused, but have chosen not to.  I’m less interested in the details of any particular request than in the general pattern of obstruction and (despite their claims) non-transparency.

The Official Information Act is about improving access to official information –  an idea that the Bank appears to be rather uncomfortable with.  As I’ve noted before, it may be that their charging policy is lawful, but if so there is something amiss with the law itself. Whether or not it is lawful, it is not good practice, and not consistent with the sort of image –  an open and transparent institution –  that the Bank regularly tells us it wants for itself.

A transparent central bank? Not our one.

Readers may recall that on the day of the December Monetary Policy Statement I lodged a request for analytical papers the Bank had considered in recent months on the economic impact of immigration.  The background was (a) the Governor’s press conference endorsement of New Zealand immigration as “a good thing”, and (b) the explicit statement in the MPS that the Reserve Bank had changed its view of how immigration affects the short-term balance between supply and demand pressures.  As they stated in the key policy judgements chapter:

Record net immigration is adding materially to demand and to labour supply.  Given continued strong flows, we have revised up our projection for net immigration (see chapter 5).  Based on the cycle to date, we assume the future population boost and associated increases in the labour force will translate more quickly into supply potential than we have assumed in the past.

That has important implications for monetary policy.

But there was nothing in the rest of the document, or in the answers at the press conference, to explain this quite marked change of stance.  As I have pointed out, the new stance is not just different from their past view, but different from quite recent Bank published research, in which demand effects exceed supply effects in the short-term, meaning that all else equal the OCR tends to rise when net immigration does.

As I noted a couple of weeks ago, when the Bank extended my quite limited request, it had seemed at the time like a fairly simple request: show us the analysis you are using to back what represents quite an important change of view.

A short time ago, I received the Bank’s final response.  The heart of the response is here (I’ve highlighted the section in bold)

The Reserve Bank holds 20 documents within the scope of your request, which are all related to either the Monetary Policy Committee or the Governing Committee’s discussions of Monetary Policy.

The Act explicitly recognises, in section 4(c), that there are times when releasing information is against the public interest and provides for such circumstances with different types of reasons to withhold information. The Reserve Bank is withholding these 20 documents under the following grounds of the Act:

  • s6(e)(iv) – to prevent damaging the economy of New Zealand by disclosing prematurely decisions to change or continue government economic or financial policies relating to the stability, control, and adjustment of prices of goods and services, rents, and other costs;
  • s9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between officers and employees of any department or organisation in the course of their duty;

The papers about immigration that you’re seeking were prepared in the context of monetary policy discussions, including setting the Official Cash Rate and publishing the Monetary Policy Statement. As you are aware from your time working at the Bank and from your previous requests for information related to both the Monetary Policy Committee or the Governing Committee, the Reserve Bank considers that information provided to and discussed recently by policy committees in relation to setting the Official Cash Rate must be kept confidential in order to ensure that free and frank discussion occurs and that free and frank advice is provided to the Governor. The Bank considers that the need to maintain confidentiality abates over time as the economic cycle moves along, but that current and recent advice must remain confidential in order for the Bank to effectively perform its monetary policy function. Public disclosure of current and recent advice occurs, in summary form, via publication of the Monetary Policy Statement and associated news statement. The process of deciding what to publish in the Monetary Policy Statement recognises and balances the tension between disclosure and confidentiality.

Frankly, if they had told me that they had no papers within scope I might not have been unduly surprised.  Sometimes forecast assumptions are tweaked to produce the bottom line the Governor wants (always have been, probably always will be).

But to suggest that no paper on any aspect of immigration that went to the Monetary Policy Committee  at any time over the five months or so leading up to the Monetary Policy Statement can see the light of day, on principle, seems completely inconsistent with the statutory purposes and principles of the Official Information  Act –  designed to make information more available.  And there is no sign that the Bank has considered the papers one by one: it looks a lot like a blanket refusal.

As for the statutory provisions they quote:

  • section 6(e)(iv) simply cannot be used here. It refers to premature disclosure of decisions.  My request was for background analysis or research.
  • and the invocation of the “free and frank” provisions is also, at best, a stretch.  I didn’t ask for minutes or records of discussion at meetings.  I don’t even ask for individual pieces of OCR advice (the one page notes advisers submit), but for pieces of analysis –  prepared, most probably, in one or other of the sections in the Economics Department.  The material clearly exists.  It is official information.  We should be able to see it –  especially, when it has “important implications for monetary policy”.

As I’ve noted repeatedly there is a far higher degree of transparency (and timely transparency) around background papers feeding into the government’s Budget deliberations.

I noted recently that “the Reserve Bank constantly tries to convince us of how transparent it is.  As Deputy Governor, Geoff Bascand, put it in his first on-the-record speech

The Reserve Bank is deeply committed to transparency – of policy objectives, policy proposals, economic reasoning, and of our understanding of the economy, and of course of our policy actions and intent. Clear communication and strong public understanding make our policy actions more effective.

We are working to enhance the openness and effectiveness of our communications

Mine wasn’t a request for anything obscure.  It didn’t have a “gotcha” agenda –  though legally it doesn’t matter if it did. (And, if anything, their change of view happens to support my current view on monetary policy).   It was just a request to see the background papers that appear to have led to a large change of view, on an important part of how current shocks affect the economy and inflation pressures –  a change not elaborated on at all in the document they did make available, the Monetary Policy Statement.    To enable us to better appreciate, in Bascand’s words, their “economic reasoning, and…our understanding of the economy”.

The Bank simply isn’t very transparent at all.

I will pass on this response to the Office of the Ombudsman.

The cause of getting some insight into the Bank’s view of immigration is not, apparently, totally hopeless.  At the end of today’s email they did include this

The Bank holds other information that is not within the scope of your request but that nevertheless may help shed light on the Bank’s views about immigration. This material is currently being worked on with a view to publication and the Bank will inform you when it is available.

I’ll look forward to seeing that material when it eventually appears.  But, as they note, it isn’t within the scope of my request, or within the sort of 20 working day OIA timeframe.  It continues the Bank’s longstanding approach of acting as if the principles of the Official Information Act really don’t apply to them, and that as far as possible only things that the Bank has written for external publication should see the light of day, not “official information” as defined by Parliament.

 

TPP: some more economists

In a post a couple of weeks ago,  I highlighted the comments several New Zealand economists had made about the TPP agreement.  Reasonably enough –  since to evaluate the full detail involves a great deal of in-depth work –  none seemed overly confident in their views, but none seemed to see the agreement as any sort of landmark beneficial economic advance for New Zealand.

Since then, a couple of other economists have put views on record. Jim Rose, a consultant who has worked for various New Zealand and Australian government agencies (including the Australian Productivity Commission), starts by observing that the “correct” economists’ reaction to regional trade agreements, in principle, would be one of “lukewarm opposition”, reminding us that this is also the stance of Paul Krugman who – whatever his politics – built a stellar academic career thinking about trade issues.

Regional trade agreements risk making all parties to the deal worse off, not better off –  by increasing trade between country pairs that are party to the agreement, rather than those best able to produce goods and services most efficiently.  The Australian Productivity Commission has been quite forthright in highlighting this risk as regard Australia’s various regional trade agreements (including CER, but most notably including the US-Australia FTA).    A new, quite recent study, by Shiro Armstrong, a senior academic at the Australian National University, reviewed the US-Australia FTA.    He concluded

Australia’s historic trade liberalization efforts produced clear welfare gains, and the winners and losers from these reforms were determined by market forces and competition. Trade agreements that introduce distortions and discriminatory treatment mean that winners and losers are largely determined by preferences and privileges assigned through negotiated treaties.

The US agreement carries important lessons for Australia in its future trade and foreign policy strategy.  The conclusions of the Productivity Commission’s review apply to AUSFTA. Deals that are struck in haste for primarily political reasons carry risk of substantial economic damage. The question then is whether the economic costs of such policies are worth whatever the political gain, and indeed, how the balance of properly calculated political gains and costs might look.

Rose’s stance is informed by this sort of literature and experience, which barely seems to have factored in the New Zealand debate around regional trade agreements (and does not appear in the government’s National Interest Assessment).

Rose also highlights a number of other potential problems in the TPP

Trade agreements should not include labour or / and environmental standards as they, for example, limit our right to deregulate our labour market. Be careful what you wish for when you oppose international agreements on sovereignty grounds.
The intellectual property chapters of the TPP are truly suspicious. With each new day, the case for patents and copyrights is weakening in the economic literature. Some have made powerful arguments to abolish patents and copyrights altogether.
There are modest extensions of the term limits of drug patents and much more mischief on copyright terms. These should be watched carefully in future trade talks and one day will be a deal breaker.
Good arguments can be made against investor state dispute settlement provisions even after the carve-outs. These provisions have no place in trade agreements between democracies.

Notwithstanding all this, Rose’s bottom line is

For this lukewarm opponent of regional trade agreements, the TPP is a so-so deal with small net gains. There is no harm in it signing it.

I’m not entirely sure why he feels safe in concluding that there are net gains, but he appears to put some reliance on the modelling work suggesting that reductions in tariffs and non-tariff barriers will have some beneficial economic impact for New Zealanders.

Another independent consultant, Ian Harrison, has today released a fairly critical evaluation  (trenchantly headed “Garbage In, Garbage Out”) of the modelling work, on tariffs and non-tariff barriers, that was done for MFAT and the government.  That modelling is the basis for the government’s claims about the scale of the economic benefits the agreement offers.

Ian has gone back and looked at some of the papers that underpinned the assessment of the possible gains from the reduction/elimination of non-tariff barriers and improvements in trade facilitation (eg reducing customs clearances delays).  In fairness, the authors of the MFAT modelling do discuss how shaky much of this work inevitably is –  since there are not good, or agreed, metrics for non-tariff barriers (in a way that there are for tariffs),  but the rather shaky foundations seems to have been obscured in the politicized debate around the size of any benefits.  And the original authors seem to have done, or reported, little in the way of either sensitivity or plausibility analysis around the metrics they were using.

The Harrison paper suggests that the inputs are sufficiently flawed –  suggesting, for example, that New Zealand and Australia start with some of the highest non-tariff barriers around  –  that no serious evaluation of any gains from TPP can be done using them.  It is a difficult paper to excerpt, but I would suggest reading it.

Harrison also argues that there something distinctly odd about the estimated trade facilitation benefits, estimated at $357 million per annum.  He highlights the hugely, and implausibly, high estimates that appear to be assumed for the value of clearing products just a few hours earlier.  For some goods, those estimates might be very large –  but for most of sorts of products New Zealand trades in they won’t be.  If Harrison is correct, the model assumes, for example,

that an  oil importer values oil received in 30 days time at a third less than oil received today because of the time value effect.

The non-tariff gains dominate the estimated benefits in the National Interest Assessment.  But Harrison also comments more briefly on the estimated benefits from reduced tariffs and increased (export) quotas

harrison

Perhaps Harrison is missing something, but on the face of it this report seems to reinforce the case for an independent assessment of the economic costs and benefits of the deal, as finally agreed, perhaps by someone like the Productivity Commission.  It is hard to do such an exercise well –  a point Rose makes –  and reasonable people will still likely differ, but for such an extensive agreement it should be an almost automatic step in the process if we are serious about considered evaluation of policy.

The issue now isn’t really whether the deal should be ratified by the New Zealand government, but whether –  having been agreed – it represents a good deal for New Zealanders.  Regional trade deals often haven’t been.  Perhaps this one is different.  But without the detailed analysis and scrutiny it will be difficult to know.

 

 

Australia’s tradables sector….and Eaqub on the RB

In a post on Thursday I showed this chart, a rough and ready decomposition (pioneered by the IMF) of real GDP per capita into that produced by tradables sectors (bits exposed to competition from the rest of the world) and non-tradables sectors.  My proposition was that successful high-performing economies will usually be led by strong tradables sector growth.
tradables and non-tradables gdp

I was curious about how the comparable chart would look for Australia.

aus t and nt

Total growth in non-tradables per capita has been almost identical in the two countries over these 25 years (around a 60 per cent increase).

But look at the differences in recent years in (this proxy for) tradables sector output, per capita.

aus and nz T sector

In New Zealand, (this proxy for) tradables sector output per capita hasn’t increased over 15 years (notwithstanding the strong last few quarters).  In Australia –  which certainly isn’t a stellar economy –  the picture is much less negative.

At a sub-sectoral level, manufacturing output in Australia (per capita) has been even weaker than in New Zealand over the full quarter century.  The big difference, of course,  is simply the rapid growth in mining output.

Changing tack, just briefly…

Some readers perhaps find this blog a fairly unremitting critique of the Reserve Bank of New Zealand.  But today I’m sticking up for them.

Independent economist Shamubeel Eaqub has a column in today’s Dominion-Post, which in the hard copy version runs under the heading “Gorging a warm-up act for debt horror show”.   And “gorging” is Eaqub’s word, not just some sub-editors hype.   According to Eaqub, all New Zealand’s debt chickens are about to come home to roost –  notwithstanding, apparently, the fact that debt/GDP ratios are little changed over the last eght or nine years, and that no one has any good sense of what a sustainable, optimal, or equilibrium level of such ratios might be.

But according to Eaqub

The Reserve Bank is complicit, as they regulate banks. They say that the banking sector is not at risk. Their modelling shows sufficient capital buffers – which influence banks’ risk appetite to lend and vulnerability in a recession.

Their modelling has also shown higher inflation and interest rates for the last seven years – mistakenly.

It’s time the Reserve Bank better regulated banks to stop the repeating cycle of debt gorging and economic vulnerability.

This is really just a “guilt by association” slur.  Yes, the Reserve Bank has got its inflation and interest rate forecasts badly and repeatedly wrong, but what possible connection does that have to the question of whether banks hold adequate capital (whether risk weights, or required capital ratios)?    Or whether the stress test results are plausible?  Eaqub produces precisely no evidence to support his insinuations.  It is a short column to be sure, but surely he could at least offer readers a hint.

Lets recall that the stress tests involved a 40 per cent fall in house prices across the country, and something like a 50 per cent fall in Auckland.  And they involved an increase in the unemployment rate larger than any seen in any advanced economy with a floating exchange rate since World War Two.  And the banks still looked pretty resilient.

And as the IMF has previously noted, when they looked at a variety of other countries, risk weights on housing lending in New Zealand were materially higher than those in other countries.

I suspect there are tough times ahead for the New Zealand and world economy.  One can always argue for more capital, but to do so from the current situation  –  where New Zealand banks are better-capitalized than most –  one really needs more than simply the claim that “they got monetary policy wrong, so we shouldn’t give them credence on any other score”.

 

Roger Partridge on immigration

I was going to spend the afternoon watching the cricket but….it seems less bad with my back to it.

The New Zealand Initiative describes itself  as

The New Zealand Initiative is a business group with a difference. We are a think tank that is a membership organisation; we are an association of business leaders that is also a research institute

According to a recent interview with the chairman

Currently we have 37 full fee-paying members, including ANZ Bank, ASB Bank, Air New Zealand, Chorus, Contact Energy, Deloitte, Deutsche Craigs, EY, First NZ Capital, Fletcher Building, Fonterra, Foodstuffs, Forsyth Barr, Freightways, Google, Heartland Bank, KiwiBank, Microsoft, PwC, SkyCity, Todd Corporation, Vero, Vodafone and Westpac.

The Initiative has produced some interesting material since they were formed a few years ago, and I often find what they write stimulating even when I don’t agree with them.

Like many, I’m signed up to receive the weekly newsletter.  It usually has two or three brief pieces from staff on something or other that has been in the news that week, often overlapping with work the Initiative has been doing.

This week’s newsletter was a bit different.   It has a piece from Roger Partridge, the chair of the Initiative, which can really only be described as a bit of a rant.  Under the heading Immigration Grows the Pie he gets underway wanting to close down debate

Sadly, our island state is not enough to stop a vocal minority chanting their own exaggerated anti-immigration claims. In recent times, calls to halt immigration have focused on Auckland’s overheated housing market. But, as economic conditions softened last year, back came the protectionist clichés about immigrants stealing Kiwi jobs.

As it happens, we do agree on one thing.  Partridge is responding to suggestions that immigration “takes away jobs”, and as I’ve argued for years, the demand effects of immigration typically exceed the supply effects in the short-run. In the short-term, if anything, immigration lowers unemployment, all else equal (also consistent with previous Reserve Bank research).  In the longer term, immigration probably doesn’t make much difference to unemployment rates –  labour market regulation, the welfare system etc determine that.  So I agree with Partridge that

In a market economy, the number of jobs is not static. More migrants create more jobs. They mean more teachers, more retail staff, more factory workers, and more managers. In fact, more of almost everything.

But that isn’t the real question –  it is one about whether New Zealanders, as a whole, benefit, in the form of higher incomes than they would otherwise earn.

Partridge then gets rather carried away with his enthusiasm

And that is not the end to the good news. Countless international studies have shown that increases in immigration not only tend to increase jobs, but also to increase the prosperity of the host nation. We benefit from their productive endeavours, their ingenuity and their diversity. And the more skilled the migrants, the greater the benefits.

That there are gains from immigration has received cross-party support in New Zealand since at least the 4th Labour Government. Let us hope the anti-immigration demagoguery falls on deaf ears. Going down that path we all lose.

The challenge is not keeping out the migrants; it is keeping out the bad ideas. Luckily, that does not need a wall, just clear thinking.

Well, we can debate the “countless international studies”.  As I’ve pointed previously, plenty of studies actually show that in the last great age of globalization, immigration actually narrowed income differentials –  incomes in the countries people were leaving rose relative to incomes in the countries they were coming to.  Economic success –  resulting from combination of better institutions, productivity shocks, or resources –  enabled countries to support immigrants at no undue cost to themselves, and relieved (just a bit) a burden on the source countries (Ireland, Sweden, Italy, UK etc).

But, actually, my reading of the literature and international experience on immigration is really an “it depends”.  Has immigration to Uruguay, Chile and Argentina benefited either side?  Most immigrants came from Spain and Italy, and the destination countries have Spanish-shaped institutions etc.  But income per head in all three Latin American settler countries is well below that in Italy and Spain –  two of the less successful Western European countries.  With hindsight, those immigrants probably should have stayed at home.

But our interest is surely New Zealand.  Can Partridge produce a single study –  let alone “countless” ones – that demonstrate that high rates of immigration have benefited New Zealand, whether in the post-war decades, or since the new National-Labour consensus developed at the end of the 1980s and early 1990s?

I’ve read pretty widely in the New Zealand literature and I’m not aware of any such studies.  MBIE and Treasury, in their advice to ministers on immigration can’t point to such studies.  Mai Chen’s recent taxpayer-supported  “superdiversity” report couldn’t.    There is a single paper around –  a modelling exercise from 2009 –  which purports to show such gains, but in fact it doesn’t. It can’t in fact  –  it is the sort of model that produces the answers you set it up to produce (something the authors recognize if not all the users).

There are simply no empirical studies demonstrating that one of the highest rates of immigration in the advanced world has actually produced any gains for New Zealanders as a whole (of course some gain, but many others lose, from (eg) the interaction of a distorted housing market and immigration policy, or the transfer between New Zealand diary workers and foreign ones).  Our productivity is lousy (total factor productivity included), and the tradables sector struggles to produce a much per capita as it was doing 10-15 years ago. Our own people keep leaving.  There is no simply evidence of any overall benefits for New Zealanders.  I’d be inclined to agree with Partridge that skilled (and innovative) immigrants would be better than the alternative,  but as I’ve illustrated previously  (and here) most of the immigrants we get aren’t particularly skilled at all.

Partridge is, of course, quite correct that

That there are gains from immigration has received cross-party support in New Zealand since at least the 4th Labour Government

The political and bureaucratic elites have been at one on that.  But there is simply no actual evidence, about specific developments in New Zealand in these few decades, that actually supports their belief about what our immigration policy would do for New Zealanders.    Perhaps it was a reasonable policy to adopt 25 years ago –  there was a lot of  belief that New Zealand was about to flourish, and perhaps there would be plenty of gains to share around.  But we haven’t flourished. We’ve languished, and it increasingly looks as though the migration policy was a misguided and perhaps quite damaging choice in our specific circumstances.

What New Zealand needs is some rigorous debate on the issues and evidence, not rather desperate attempts to simply rule any debate on immigration issues out of court.

 

 

 

John Kay on banks, regulators and politicians

The Treasury has had Professor John Kay in town this week.  Kay has had a long and distinguished (microeconomics-focused) career in the United Kingdom as an academic, adviser, FT columnist, author etc and last year published a new book Other People’s Money: Masters of the Universe or Servants of the People, the introductory chapter of which is here.  Key’s Treasury guest lecture was built around the ideas in this book.  To be clear, I have not read the book –  although despite the skeptical comments that follow I may now do so.

It wasn’t a lecture, and apparently isn’t a book, about the 2008/09 financial crisis per se.  That said, the book probably wouldn’t have been written without the crisis, and he clearly sees the crisis as a manifestation of what, in his view, has gone wrong with the financial sector. In a line from his website :

The financial crisis of 2007-8 has dominated subsequent discussion of economic policy. In my view the responses are characterised by two widespread misunderstandings. The first mistake is to believe the crisis is an inexplicable, once in a lifetime, event, rather than another demonstration of an increasingly dysfunctional financial system.

Kay began with a line many have used –  the changing nature of the people who go into banking.  In the 1960s, when he grew up in Edinburgh, banking was for the people not quite smart enough to get into university (as in New Zealand, only a small proportion of school leavers then went to university).  By contrast, these days finance attracts many of the smartest graduates from top universities.  The range of products is, of course, much more complex.  But not, Kay would argue, so correspondingly socially useful, despite the staggering remuneration on offer to a fairly small number of people in these institutions (if I recall rightly, he notes that most people in the big UK bank Barclays actually earn less than the UK median wage).  And, of course, the incidence of financial crises is much greater today than it was in the post-war decades.

For a time, politicians across much of the advanced world fell at the feet of bankers.  Kay showed an amusing clip of Gordon Brown, then Chancellor of the Exchequer, opening a new headquarters in Europe for Lehmans only 10 years or so ago.  And in the United States in particular, there is the ongoing unease over the revolving door that seems to operate between senior government positions and highly-remunerated positions in the financial sector  (it isn’t just Goldmans’ alumni going into government and back into the financial sector (eg Robert Rubin), but the flow from government positions into the financial sector –  be it Bernanke, Summers, Geithner or whoever).  Bernie Sanders is currently tapping that anxiety.

Kay isn’t “anti-finance”.  As he notes

A country can be prosperous only if it has a well-functioning financial system, but that does not imply that the larger the financial system a country has, the more prosperous it is likely to be. It is possible to have too much of a good thing. Financial innovation was critical to the creation of an industrial society; it does not follow that every modern financial innovation contributes to economic growth. Many good ideas become bad ideas when pursued to excess.

And so it is with finance. The finance sector today plays a major role in politics: it is the most powerful industrial lobby and a major provider of campaign finance.

He seems to be arguing some combination of the following:

  • Banks are too large, and encompass too many different types of activities within them,
  • Banks should be broken up.
  • There is “too much finance”
  • Banks have huge political clout (especially in the US and the UK), and exercise that in their own interest, in particular in the (successful) pressure for bailouts.
  • Someone should pay for what went wrong in 2008/09.
  • Banking regulation has become too prescriptive and detailed.

I didn’t find the overall story that persuasive, partly because it doesn’t seem to generalize across countries, and partly because it doesn’t even seem to get to the heart of the 2008/09 issues.  There are bits of the story I agree with  –  concerns about the volume of increasingly detailed, lawyer-driven, focus of regulation, often in effect more concerned with process and form than with economic substance.  And I sympathise with his unease about the hubris implicit in the belief among central bankers that they can somehow determine what risk weights to use for each and every type of credit.

So what bothers me?

First, is there any evidence that banks were “bailed out” because of the political clout of the sector?  I’ve read huge number of the books written since the crisis, and tracked events through the crisis very closely, and that interpretation simply just doesn’t ring true –  in the US, the UK, Ireland, or anywhere else for that matter.  After all, by and large it was not bank shareholders (or senior management) who were bailed out –  and many of the senior management of banks had large proportions of their own wealth tied up in shares in their own banks.  The bailouts typically primarily benefited creditors  (not exclusively –  after all, even Bear Stearns shareholders walked away with a small amount of their money)  and – so the argument went –  the economy as a whole.  Creditors weren’t always voters, but most voters were creditors of banks in one form or another, and most were employees –  alarmed at the prospect of extreme economic disruption.

This isn’t the place to debate whether any or all of the bail-outs were good things or not, simply to note that –  as things were by 2008 –  they would have happened, largely as they did, if financial sector interests had had no clout and no superior access to politicians at all.

And what of the line that banks are simply too big and complex to be run effectively?  Well, for decades we saw that argument run about corporate conglomerates across the western world (including our own Fletcher Challenge).  But actually the market had ways of taking care of that problem –  companies were bought up, restructured, dismantled etc, by purchasers who could make more of the assets that the unwieldy conglomerates could.    The “asset strippers” weren’t always attractive personalities, and some probably went close to (or even beyond) the edge of the law, but the point simply was that the market has a way of ensuring that assets are owned by those who can place the highest value on them.   Bank takeovers aren’t always easy, but they happen.  It isn’t obvious what the (financial stability) policy problem is, unless a strong case can be mounted that some combination of size and complexity effectively buys a bailout insurance policy.  I don’t think the evidence for that point is particularly persuasive either.

At one point is his lecture drew the distinction between whether we thought as banks as a “den of thieves” or as a “monastery”.  I’m not sure either description is remotely warranted.  Avaricious, arrogant and unpleasant as many of these leading bankers seem to have been, I don’t see any sign that the crises of 2008/09 –  in any country –  occurred because anyone systematically set out to dupe anyone else.  Don’t get me wrong: I’m not suggesting there was none of that sort of activity, simply that much more of what went on is down to some combination of:

  • choices of politicians (choosing to adopt the euro, which involved holding interest rates well away from natural interest rates for year after year –  most obviously in Spain and Ireland –  and the high degree of political pressure brought to bear in the United States on the financial system to take on low quality housing loans)
  • collective over-optimism, among borrowers, lenders, citizens and politicians.

Were people let down?  Yes, no doubt.  Banks failed, but so did most of the world’s leading regulators and central bankers (as Kay put it, the effortless subsequent continued rise of several, who had been quite dismissive of risk before the crisis, illustrates the “unimportance of being right”), and most of the world’s leading finance ministers (and most of those who might have wanted to replace those central bankers and finance ministers).  So who should pay, and in what form?

And of course there is the “so what” question.  If one believes that the financial crises (or even the build up of debt prior to the crisis) was responsible for the world’s current economic travails (eg GDP per capita 15 per cent or more below pre-crisis trends) one might perhaps regard the financial sector as a dangerous bacillus, attacking the common wealth.  But as I’ve noted here several times, I don’t think the case is that strong.  Through its history, for example, the US was plagued by financial crises, and yet each time the economy bounced back  – usually quite quickly –  to much the same growth path it was previously on

What of New Zealand?  Is there too much finance here?    We don’t have complex banks (they lend, mostly in quite vanilla forms, and the borrow –  domestic households and institutions, and from abroad.)  We don’t have many complex instruments either –  actively traded or not.  It isn’t obvious banks have huge political clout either –  for better or worse, in the midst of the crisis we forced them to join the deposit guarantee scheme, we forced through the local incorporation policy, we compelled them to pre-position for OBR, and we’ve imposed higher effective minimum capital requirements than most of the countries.  We didn’t have a domestic loan losses financial crisis during 2008/09 (actually neither did the UK), and yet, as I’ve repeatedly highlighted, our economic performance over the last decade has been distinctly mediocre.  There is a lot going on globally, insufficiently understood, but it isn’t yet remotely clear that finance is the problem, rather than just another symptom.

finance and insurance

The New Zealand financial sector is larger than it once was. But much of that isn’t about  over-mighty financial institutions and their “master of the universe” bosses  – although we had our period of craziness in the mid-late 80s.  But if high house prices here  –  as in much of the West –  are about the interaction of supply restrictions and population pressures, the increase in the stock of credit is substantially an endogenous response to those structural distortions.  If governments make urban land really scarce and expensive, younger generations will need to borrow more real resources from older generations to be able to afford a house at all.  The stock of credit (on the one side) and deposits (on the other side) rises, and financial institutions facilitate that-  and value-added associates with that activity and accordingly appears in the national accounts.  Don’t blame banks for that, but governments that so badly mess up the markets in housing supply.

I’m left uneasy about what social value much of the activity in the financial sector generates.  As an analyst, even as a citizen, I’m curious about that.  But I’m not sure that Kay –  or others –  have made a convincing case that is deeply harmful either. In principle it could be –  as others might argue that sugar, alcohol, fast food, or fast cars could be harmful.    Kay avers that he wants less intrusive regulation, but in fact the thrust of his arguments tends to give aid and comfort to those who want more of it.  That appeals to regulators, responds to a public itch “something is wrong, and banks aren’t overly sympathetic causes”, but doesn’t rest sufficiently on a hard-headed analysis of the role of governments and regulators in past crises, and the importance of markets –  messy as they often are – as “a chaotic process of experimentation…the means through which a market economy adapts to change”.

That last quote comes from an excellent lecture, The Future of Markets, which I return to often, given by one John Kay in 2009.

In conclusion, I would just note that at one of his sessions this week, Kay was apparently asked about deposit insurance. He asserts that it is simply imperative: without it the pressure for bailouts of all creditors inevitably becomes almost impossible to resist.  It was a point I made here last week, and remains good advice for our political parties, our government, and for those among the official agencies who continue to believe that the OBR tool deals with these pressures.