A non-New Zealander as Governor?

The Australian newspaper ran an article yesterday on the appointment of a new Governor to the Reserve Bank of Australia.  Glenn Stevens’ term expires in September.  As it now March, I was a little surprised to read that

A spokesman for current Treasurer Scott Morrison said ….that the specific process for choosing the new governor was still under consideration.

But perhaps that just reflects the overwhelming expectation that the highly-regarded Deputy Governor, Phil Lowe, will get the job.

The Reserve Bank of Australia has had a long history of Governors appointed from within –  in its (fairly short) history, only one Governor was appointed from outside (Bernie Fraser who moved from being Secretary to the Treasury).  But the article explored the possibility that the Treasurer could look outside the Bank, or even abroad, for a replacement for Stevens.

Even allowing for the recent appointment of an expatriate Australian banker as Secretary to the Treasury, it seems pretty unlikely that the Treasurer would do much more than take a cursory look at possible candidates other than Lowe.   If the Reserve Bank of Australia has perhaps been inclined to be excessively upbeat in recent years, it is not obvious that the Bank’s conduct of affairs has been so egregiously wrong –  or upsetting to the government – that it would make sense to reach beyond the pretty deep bench of senior officials that the RBA has maintained over the years.

As the article notes, the appointment of a foreigner to a role as central bank Governor is not unknown –  Mark Carney at the Bank of England at present, and Stan Fischer at the Bank of Israel are two I can think of – but it isn’t at all common in stable and advanced countries.  (New Zealand’s former Deputy Governor Peter Nicholl served as head as Bosnia’s central bank in the aftermath of the civil war in the 1990s).

When inflation targeting was young, and there was a strong belief that it would be easy to hold a Governor to account, there was a view in some circles that it might even be best to get a foreigner as Governor –  after all, the world labout market was so much deeper than that here in New Zealand, and since it was all very technical and the target was well-specified, the only thing that really mattered was technical expertise (perhaps even more than good judgement).

But no one looks at it quite that way now.  It is widely accepted that central banks excess a considerable degree of discretion.  That is so whether they are inflation targeting, nominal GDP targeting, wage targeting –  in fact, anything other than a fixed exchange rate, or Friedman’s fixed money base target rule.  There is considerable discretion, limited effective accountability, and the discretion is in areas of activity that matter to many people (ie the entire economy and financial system).  In that sort of climate it seems reasonable that people would prefer to be governed, or administered, by people from their own country.  No matter how capable other candidates might be, we don’t consider allowing people from abroad to become MPs or Cabinet ministers –  at least not until they have lived here for a few years and become citizens themselves.  It isn’t that all New Zealanders, or all Australians or all Americans, share the same values or views, simply a slightly inchoate but deep-seated sense that we should govern ourselves.  Part of it perhaps is that in any of those roles –  senior political ones, or powerful independent bureaucrats – the ability to explain oneself to the citizenry is a key aspect of the job, and that involves the ability to draw on common reference points, shared experiences etc.

In the Reserve Bank of Australia case, one could mount an argument that these issues are less compelling.  After all, the Governor is chief executive of the Bank and chair of the Board, but he doesn’t get to appoint the Board, and he isn’t a single decision-maker.  Interest rate decisions – the main decisions the Reserve Bank of Australia makes – are made by an outside Board appointed by the elected government.  Even the Deputy Governor is directly appointed by the Treasurer and sits, as of right, on the Board.

But what about New Zealand?

Here the formal process for appointing a Governor is laid out in the Act. The Reserve Bank Board nominates a candidate, whom the Minister of Finance can accept or reject.  If the Minister rejects that nomination, the Board must come up with another one.  The process can go as many rounds as it takes, but at no point can the Minister just impose his or her preferred candidate.  Personally, I think that is a weakness of our system –  it is unusual to give the Minister of Finance so little so in the appointment of such a powerful official.  Ours is a system where, formally, all the powers vest in the Governor personally, so the Minister of Finance also has no say in the appointment of any of the other senior officials of the Bank.

And compared to most central banks, the Reserve Bank of New Zealand exercises a large amount of discretionary powers in a wide range of areas.  In addition to monetary policy, the Governor has considerable autonomy in setting prudential regulatory policy (and the application of that policy), in foreign exchange rate intervention, in payment system operations, and in the physical currency.  On each individual limb, other central banks can be found that do what our Reserve Bank does, but take as a whole it would be difficult to find any central bank which (a) covers so many functions, (b) has so many powers formally delegated to the Bank, and (c) where all those functions vest with a single individual, the Governor.  It is a role at least as powerful as that of most Cabinet ministers – partly because of the actual powers the Governor wields, and partly because of how much more difficult it is to get rid of a person if they mess up (compare, say, Judith Collins and Nick Smith, as two senior ministers in the current government to have been dismissed when they erred).

As the Reserve Bank Board and the Minister approach the end of Graeme Wheeler’s term next September, there must be a temptation to consider overseas candidates.  After all, the current deputy chief executive will be in his mid 60s, a similar age to Wheeler, and was passed over when he sought to become Governor last time.  None of the other internal senior managers look like outstanding candidates –  and it was 1982 when an internal candidate was last appointed Governor (itself a pretty internationally unusual statistic).  Outside the Bank, the list of plausible contenders in New Zealand doesn’t seem overly deep either – and for almost all the names I’ve heard suggested I can think of material arguments against.

But I think it would still be a mistake to go global.  Some aspects of the role could be done by any able person –  revitalising, for example, the Bank’s research and analysis across the range of its policy functions.  That is partly just about good second and third tier appointments, and partly about being a voracious customer for the insights that analysis throws up .  But the role also needs someone who understand the New Zealand economy, the New Zealand system of governance, and someone who understands the New Zealand financial system.  And it needs someone who is comfortable, and credible, in telling the Bank’s story – and sometimes it will be a controversial or difficult story –  to New Zealand audiences.  Plenty of people criticized Don Brash over the years, but few doubted that his heart was in this country, and that its best interests were his priority.  In a small country, with a foreign-dominated financial sector, a very powerful central bank, and ongoing controversy about the role of monetary policy and New Zealand’s economic performance, it is hard to imagine any foreign appointee successfully filling the bill.

Of course, it might be a little easier if the governance of the Bank was reformed.  For example, in a system in which the Governor was chief executive, but had no more voting rights on monetary policy or financial regulation policy matters than others members of the respective committees, the stakes are a little lower.  But even then, I think such governance reform more appropriately opens the way to the appointment, from time to time, of a foreign expert as a member of one or other of the voting committees.  Since the Bank of England’s nine-person Monetary Policy Committee was established by legislation almost 20 years ago it has not been uncommon to have a foreigner sitting on that committee. In a New Zealand context, supplementing local expertise with outside perspectives in that way could have some appeal – if New Zealand government board fees were sufficient to attract quality candidates –  but we are still likely to be best, in all but the most exceptional circumstances, to look for a Governor from home –  as we do when we choose ministers, judges, (and these days Governors-General), military chiefs and so on.

As I’ve noted before, the next gubernatorial appointment is in any case complicated by the timing of next year’s election.  Graeme Wheeler’s term expires just beyond three years since the last election, and most of the opposition parties have been campaigning on changes to the monetary policy framework.  If they are serious about reforms, they are also likely to revisit the governance arrangements, to shift towards a model that is (a) more internationally conventional, and (b) more in line with how we govern other independent government agencies in New Zealand.  The current government would no doubt be within its legal rights to make an early appointment for the whole of a new five year term (having obtained a suitable recommendation from the Bank’s Board –  all of whom have been appointed, or reappointed, by the current Governor).  But given the timing it would seem an inappropriate use of power, that could materially complicate relations between the Bank and a future government.  Somewhat reluctantly, I think Graeme Wheeler should be asked to stay on for an additional year or so, allowing whichever party forms the next government to appoint a Governor to work with whatever model of monetary policy and central bank governance emerges from the electoral process.

Krugman on the case for more public investment

Paul Krugman had a piece on his blog a day or two ago making the case for increased (“much more”) public investment spending in the US.

There are three strands to his case.

The first is a proposition that the US is still “in or near” a liquidity trap. I’m not sure I’d use the term, but the general point is one I sympathise with.  Under current legislation and central bank practices (easy convertibility into banknotes on demand), few countries are very far from the effective lower bound on nominal interest rates.  And if a new downturn comes, that could make it very difficult for central banks to do much to help stabilize economies.   To me, that argues for action (legislative and administrative) to remove (or greatly ease) the lower bound constraint.

The second is a proposition that the last few years of disappointing real economic growth are helping to bring about a sustained reduction in future potential growth –  in his words,

demand-side weakness now breeds supply-side weakness later, so that there are big payoffs to boosting the economy through public spending

In principle, it might be a plausible idea. But there is no real evidence that things turned out that way during the Great Depression when, extremely weak as demand was, TFP growth remained strong.

The third –  actually first in Krugman’s list –  is that public spending as a share of GDP is now very low:

Government borrowing costs are at record lows; markets are in effect pleading with the government to borrow and spend. So why not do it? It’s completely crazy that public construction as a percentage of GDP has declined to record lows even as interest rates have done the same

And he includes this chart

krugman chart

That chart only goes back to the early 1990s.  But here, for the US, is general government gross fixed capital formation as a per cent of GDP since 1970.

us gen govt gfcf

It is at a record low, which might seem to support Krugman’s case.

But then here is the annual rate of growth in the US population, in this case going back as far as the FRED series went, to 1953.  And what do we find, but that population growth is also estimated to be at its lowest for decades –  quite possibly in the entire history of the US.

us popn 2

If the population growth rate slows, less investment (as a share of each year’s GDP) is needed to maintain a desired stock of capital per person.  That is a good thing, on the whole –  available resources can be used for other stuff.  These effects are quite large.  Much of the government capital stock is in the form of quite long-lived assets, which depreciate slowly (schools, hospitals, roads etc).  Depreciation is one –  quite substantial –  component of the gross fixed capital formation spending, but a large share of government capital spending is about supporting the needs of a growing population.

It isn’t just the US population growth rate that is slowing –  global population growth rates have been slowing markedly too.

world popn

A lower rate of population growth, and associated lower need for investment, is now pretty widely recognized as one of the factors that has been driving real interest rates down around the world.  One could argue, with Krugman, that markets are “begging governments to borrow and spend”, but it might be better to interpret is as markets as reflecting the twin declines, in population growth and in underlying multi-factor productivity growth.  There simply aren’t as many attractive projects around as there were.  It can take time for (desired) savings rates to adjust to that deterioration in investment prospects –  and that is usually where monetary policy has a part to play.  More government capital expenditure, if the remunerative projects aren’t there, doesn’t look like a particularly attractive way to boost the country’s longer-term economic fortunes. And as the US government is still running deficits, cuts in government savings don’t look particularly sensible either.

Perhaps the US is different, and the high-returning public projects (covering not just the low cost of debt but the overall cost of citizens’ equity) are there and able to be implemented effectively in a way that achieves those returns.  But the political process is such that even if, in principle, a large pool of such projects are there, there is no guarantee that those would be the projects that would be picked.

What of New Zealand?  Here is the chart of general government gross fixed capital formation as a per cent of GDP back to 1987.

gen govt gfcf

It hasn’t fallen, but then again our population growth –  while volatile –  has recently been higher than at any time since the 1970s.  There is an awful lot of wasteful public capital spending here, that fails to pass reasonable economic tests – Transmission Gully, the Auckland rail projects, the Dunedin stadium, and the fearful prospect of large amounts of ratepayer money extending Wellington Airport’s runway –  and we should be wary of the siren calls, even here, to increase government capital expenditure as a way of stimulating the overall economy.  Poor quality projects make us poorer.

Are there exceptions –  cases where demand might be so weak that perhaps even poor quality projects might help kickstart the economy (Keynes’s example of paying people to dig holes and fill them in again).  I’m not sufficiently doctrinaire as to say “never”, but equally it is difficult to think of any actual historical episodes where “sorting out monetary policy”, and complementing that with growth-oriented structural reforms, would not have been a better option.  It was in the Great Depression. It would have been in 1990s Japan.  It looks that way in most of the world, including New Zealand, now.