Month: April 2016

A bouquet for Statistics New Zealand

Michael Reddell Statistics

(and some questions as well).

I got home at lunchtime after a couple of hours out with the kids to find a very pleasant surprise.

Following the kerfuffle last week about the Reserve Bank’s leak inquiry, and the discontinuation of the Bank’s lock-ups for media and analysts, someone reminded me that not just Treasury but also Statistics New Zealand holds regular lock-ups involving market-sensitive macroeconomic information.   Statistics New Zealand runs lock-ups

for media and market commentators for Gross Domestic Product, Balance of Payments and International Investment Position, Consumers Price Index, and Labour Market Statistics releases.

I wondered (a) what procedures Treasury and Statistics New Zealand used,  and (b) whether either organisation had changed their procedures in light of the Reserve Bank’s leak inquiry and subsequent decision to discontinue lock-ups.

So last weekend I logged OIA requests with each organization, and assumed I’d hear something in a few weeks time.

But Statistics New Zealand responded this morning (in due course, their full response will be here).  Often enough, blanket refusals take 20 working days or more, but here was a department offering a prompt, clear and helpful reply, and offering to answer any follow-up questions.

Here are the SNZ procedures

Prior to the commencement of a media conference, Statistics NZ requires attendees to sign in and surrender their cell phones. In addition, Statistics NZ displays the following media conference rules for attendees to abide by:

  • the media conference is held as a ‘lock-up’
  • once you have entered the room, you must not leave until 10:45am when the embargo is lifted
  • please sign in, turn off your mobile phones, including smartphones, and put them in the compartment at the conference room entrance
  • laptop external wireless communication devices must be placed beside the laptop on the media room table for the duration of the media conference, and cannot be connected to the computer until the embargo is lifted
  • laptops or other devices that have internal wireless network capability must not connect or transmit until the embargo has been lifted
  • we reserve the right to inspect devices to ensure that internal wireless capability is turned off.

Statistics NZ staff are happy to assist you with any questions about these guidelines.

 Note: Before the media conference starts, attendees are permitted to call their office, from Statistics NZ provided phones, to set up redial capability for use at 10:45am.

And here is the response as to whether they have made any changes or reviewed their procedures

Statistics NZ has not undertaken any reviews or made any changes to the department’s policy for media conferences following the Official Cash Rate leak at the Reserve Bank of New Zealand and the subsequent Deloitte report into that leak released last week.

Unfortunately, Statistics New Zealand seems still to be relying, in effect, on trust  (in much the same way the Reserve Bank was doing).   But the headline statistics that they hold lock-ups for are highly market-sensitive, and will not infrequently move markets more than an OCR announcement will (as one would expect; it is the same data the Reserve Bank uses).  There is no sign of, say, any jamming technology (or other technical means) being used, to buttress the role of trust.

Statistics New Zealand notes that

While Statistics NZ has never had a breach, if that trust is abused and an embargo is broken, offenders and their organisation would be barred from attending future media conferences.

Unfortunately, that was probably the sort of discipline/incentive the Reserve Bank was implicitly relying on as well.

As I’ve argued previously, the case for pre-release lock-ups for monetary policy announcements is weak (with the possible exception of a highly secure 10 minute lock-up for core financial journalists, with no additional briefings –  something like the model the US Federal Reserve apparently uses).  Is Statistics New Zealand that different?  There is, obviously, no policy message SNZ is trying to put across with its releases, and so no risks of different messages getting to different people.  But the security risks are the same.  Perhaps it is simply more efficient to have everyone in the same room, to clarify key technical points, but couldn’t the same end be achieved –  on a more competitively neutral basis (to analysts based abroad, say) –  by a dial-in (even webcast) conference call held a bit later on the day of the release?

Anyway, the point of this post was to praise Statistics New Zealand for its timely (“as soon as reasonably practicable”) response to an OIA request.    Quite what approach Statistics New Zealand should take in future is a matter for them, but I would encourage them to think again about the risks, and about alternative –  perhaps preferable –  models for helping to ensure that users can get whatever technical insight SNZ can offer into the numbers it releases.    Breaches may never have happened, but when one does happen –  and (by accident or intent) with current systems  it must be a matter of time – it can suddenly get extremely uncomfortable.

UPDATE: For those with a taste for obscure historical episodes, chapter 1 of this document –  linked to by a commenter – is well worth a read on the great data leak of 1905.

 

 

Regional GDP revisited: has Auckland really been that weak?

Michael Reddell Auckland, Housing, New Zealand economic performance

In a couple of posts earlier last week, I used the regional (nominal) GDP data, showing how weak Auckland’s per capita GDP growth appears to have been over the last 15 years (the period for which the data exist).   And it didn’t appear that terms of trade changes could explain the regional patterns, since most of the gains in New Zealand’s terms of trade has reached our shores in the form of lower import prices, the effects of which should have been quite pervasive across the economy.

But as I got to the end of the second of those posts, I started to get a bit uneasy about the data.  I had noted that over the 15 years, Auckland’s population had increased by 30 per cent, and that of the rest of the country by only 13 per cent.  And yet, over the years (to 2013, for which we have detailed industry breakdowns), construction had been a smaller segment of Auckland’s GDP than in most other regions in the country. This was the chart:

construction share of gdp

I started digging into the data a bit further, and also got in touch with Statistics New Zealand (who provided me with some prompt, very helpful, assistance, including suggesting that some readers might be interested in how they put the numbers together).  My digging didn’t resolve any puzzles, but it didn’t highlight any very obvious errors either.

In a city with a rapidly growing population one would normally see a larger share of GDP devoted to construction (than at other times, or other places).  Construction isn’t just about houses, but the whole panoply of structures that a growing population needs over time.

Over the 15 years to 2015, Auckland accounted for 50 per cent of all the population growth in New Zealand.  And yet here is the Auckland share of the value of all building consents, and the Auckland share of the construction component of GDP (for which we only have regional data to 2013).

akld consents

One wouldn’t expect an exact mapping, since the two series are measuring quite different things (quite a bit of construction won’t need a building consent), but both are a long way below Auckland’s share of population growth  (and Auckland’s share of population growth was highest in 2001 and 2002).

The regional GDP data also have two components that should normally have a strong relationship with housing, and also with population growth.  These are:

Rental, hiring, and real estate services
Owner-occupied property operation

The latter series is straightforward –  in effect, the rental value of living in an owner-occupied house, which is proxied using market rental data.

The “rental, hiring, and real estate services” is more complex.  It includes various sub-categories, for which the data are not provided separately.  Here is what is included, from a table SNZ sent me:

reg gdp categories

Ideally, I would like to look at only the LL12 and LL2 components, and thus exclude the non real estate leasing services (eg cars, machinery etc), but the data aren’t publicly available.

Surely, I thought, if Auckland’s population has been growing so much faster than the population in the rest of the country, this should be reflected in faster growth in these components of GDP.  I didn’t really expect it in respect of owner-occupied dwellings, because although Auckland rents have risen a bit faster than those in the rest of the country, rates of owner-occupation have been falling faster.  But everyone needs to live somewhere, renting if not owning, so I thought the effect should still show up if I combined the two components.  After all, the rental component also includes non-residential property, and more people generally implies more offices and shops too.

But this scatter plot is what I came up with (population growth on the x axis and growth in the sum of the two GDP components on the y axis):

housing scatter plot

I’d expected to see an upward-sloping relationship (recall, these aren’t GDP per capita components, but total GDP).  As I put it to SNZ, isn’t it a bit puzzling that growth in these two nominal GDP components over 13 years was greater in Southland than in Auckland?  Given where all the other regions sit, in a well-functioning housing market surely one might have expected the growth in these GDP components for Auckland to be up in the 140 to 160 range?

SNZ were able to tell me that there was a large growth, from a low base, in non-financial non real estate asset leasing in Southland.  That might help explain why these GDP components together grew surprisingly fast in Southland.  But it doesn’t explain why Auckland has been so weak relative to almost all the other regions (given the extent of its population growth).

Here is a chart showing Auckland’s share of total nominal GDP for each of these two components.

akld shares

And yet over this period Auckland’s share of the total population increased from 31 per cent to 33.5 per cent.

I guess that, overall, this is not wholly inconsistent with the divergence that has opened up in the population per dwelling numbers: trending down in the rest of the country but not in Auckland as house prices become increasingly unaffordable.

Out of curiosity, I redid the per capita regional GDP numbers excluding these two real estate related components.  In my original chart, Auckland had the third slowest growth in nominal per capita GDP from 200 to 2015.   In this alternative chart, we have the data only to 2013.    Over that period, Auckland had the slowest per capita total nominal GDP growth of any region.

What about on this adjusted, non-real estate, measure?

adjusted regional GDP growth

It doesn’t improve the picture.

I’m still not quite sure what to make of all this.  Ideally, we would have regional real GDP  data, but unfortunately that does not appear likely any time soon.  But on the basis of what we have, Auckland seems to have done particularly poorly over the last 15 years, despite (or partly because?) all the policy-induced population growth.  Some of that seems to relate to the poorly functioning housing supply market.  But even abstracting from the direct effects of that, it has to be seen as a pretty disappointing outcome, leaving many questions on the table.

(It also leaves me with some new questions, which I have not yet attempted to work through in my own mind, about my explanation for New Zealand’s persistently high (relative to other countries) real interest rates.  A topic for another day.)

 

China and New Zealand

Michael Reddell China, Exports, FTAs

The Prime Minister, a large flock of New Zealand business people, and various media representatives are in China.  It is not a particularly attractive sight, perhaps one of many reminders of why bilateral or regional preferential trade agreements are such an unfortunate policy option (as leading trade experts, and entities like the Australia Productivity Commission often remind us).  Allow for some trade diversion risks, and the ever-more-entangled rules of origin, and such deals are often bad enough.  And then there is the matter of making repeated obeisance before the leaders of a tyrannical regime, begging for their favour; the crumbs off their table.   Perhaps worst of all, our elected leaders don’t even seem to find it distasteful.

New Zealand firms do a fair amount of trade with Chinese firms, and that trade has increased considerably in the last decade. Despite some breathless commentary, China was never our largest “trading partner”,  but New Zealand firms do more trade with the Chinese than with firms and individuals in any other country than Australia.  But then our trade is quite widely spread across many countries, and much of it is in products which are pretty homogeneous (it isn’t clear that it much matters whether New Zealand firms export dairy products to Venezuela, Saudi Arabia, or China: New Zealand producers sell somewhere whatever is produced, and what matters most is the global prices for dairy products).  There is a great deal of talk about the benefits (or risks) of being concentrated on whole milk powder (WMP), but the prices of the various different dairy products all seem to cycle together, and idiosyncratic patterns for individual products don’t seem to last for long.   (GDT only has a long run of data for these three, but over the last five years one can also see it in a chart from a wider range of dairy products).

dairy prices components

Here are our merchandise (goods) exports to China as a share of GDP.

exports to china % of GDP

Services exports data by country is only available annually.  Here are total New Zealand exports to China for the last four (June) years.

total exports to china

But how much difference has it all made?  The government has made much of trying to lift the export share of GDP, but here is a chart of that series.

total exports as % of GDP

Which has, as I’ve noted previously, been going nowhere for 25 years now.

Of course, New Zealand firms import a lot from China as well.  Here is the merchandise trade balance between New Zealand and China since 1981.

merch trade balance with china

But once services trade is included, for the last three years New Zealand has run a goods and services surplus with China.

It was a little surprising to hear the Prime Minister in pursuit of investment from China

“But we in New Zealand will take that view from a Government perspective, that we’re a fast-growing economy, we want to to develop great international relationship and we also want to have a higher standard of living. We fundamentally don’t have enough private-sector capital of our own to fund that growth.”

Set aside the “fast-growing” economy claim for now – I guess the total economy has been growing quite a bit by OECD standards, even as per capita growth has been pretty dismal –  but what really struck me was the observation that “we fundamentally don’t have enough private-sector capital of our own to fund that growth”.  If the Prime Minister simply means that we run current account deficits (in which total domestic investment exceeds total national savings) that is, of course, true.    But it is not as if we have any trouble financing that current account deficit on world markets –  apart from any other indicators, that is evident in the persistently high level of the exchange rate.  Countries that have trouble financing themselves tend to have persistently weak real exchange rates.  We don’t.

To be clear, I have no particular problem with foreign direct investment, and in general I think we should have fewer restrictions on it.   China is a slightly different issue, but mostly because all major businesses are ultimately state-controlled. I’m not suggesting any specific restrictions on Chinese FDI (except perhaps where national security considerations warrant it) but we need to remember just how badly distorted and underperforming China’s economy is.  It isn’t exactly one of the success stories of market capitalism, unlike say Taiwan.  New Zealand hasn’t done well in recent decades, but for all its fast growth (much real, some probably illusory), China’s overall levels of productivity are still astonishingly poor.

gdp phw nz china taiwan

The better of China’s firms may be very good at managing the twisted eddys of Chinese politics.  That is very different from thriving in a proper market economy, where the rule of law prevails, and connections to the powerful don’t (or are not meant to) matter much.  If FDI from China happens, so be it and some it may add wider value, but it isn’t the most obvious place to be pursuing FDI from (if politicians should be doing such marketing at all).  The real gains from FDI aren’t dollars of foreign capital but rather the ideas, technologies etc that really successful global firms can bring with them, with spillovers into the New Zealand business sector and the wider New Zealand economy.

And all this is without devoting space to our apparent studied indifference on the South China Sea issue (“we aren’t taking sides, we just want a resolution”, as if there is no difference between tyrannies and democracies –  Philippines and Japan for example), or talk of extradition treaties with China.  If people can be shown to have lied on their immigration applications, no doubt we should revoke their approval to be here, but are we seriously comparing the so-called “justice” system of China to that of countries like our own?   For all the talk of “fugitives” in New Zealand, we need to remember that much of the so-called anti-corruption programme of the last few years has been about purging those who got offside with the winners in the latest Party realignments.  Some of those now abroad might well be “bad guys”, but it isn’t clear that any people who matter in China’s government are, in any sense, “good guys”.

Finally, in all our enthusiasm for trade with emerging China, I amused myself yesterday by downloading the 1939 New Zealand Official Yearbook to see what trade we were doing with Germany and Japan in the 1930s.  Not much with Germany, but I’m imagining there must have been some breathless enthusiasm, at least in some circles, about our rising trade with large and emerging Japan, by then our third largest export market.

japan exports

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Housing: what can be done

Michael Reddell Housing

In the seemingly-endless housing supply debate, there is often a divide between those favouring greater intensification, and those favouring a larger physical footprint for growing cities.  My own policy view is squarely in the “it should be a matter of individual choice, provided the infrastructure etc costs of development are appropriately internalized, and the rights of existing property owners are protected” camp (and yes, I recognize that the definition of almost every word in that statement could be extensively debated). My practical prediction is that New Zealand is a society where most people –  people in their child-raising years –  will prefer to have a decent backyard (those living in Hastings or Timaru don’t flock to high rise apartment buildings or town houses with tiny sections), so long as regulatory restrictions don’t make that infeasible.  It was quite possible 50 years ago, when New Zealand incomes were much lower.  There is simply no reason, in a country with this much land, why it shouldn’t be now.

Apologists for the current disgraceful situation constantly cite Sydney, or Vancouver, or San Francisco or London, as if absurd regulatory restrictions in other places make it okay for us to mess up our housing/land supply market this badly.  Others look to the experience across the huge range of US cities.

Someone drew my attention to the chart below, drawn from the Wall Street Journal’s economics blog, and on a day when the house is over-run with builders (and holidaying children), it seemed worth reproducing.

scale of cities and house prices

Cities with rapidly growing populations (those big blue circles in the bottom right) have seen little or no increase in real house prices over the period 1980 to 2010.  They made it possible to build, relatively easily, and in turn made themselves attractive places for people to live.

I don’t know how large the increase in Auckland’s “developed residential area” has been over 1980 to 2010, or even how to go about trying to measure it, but I’d be astonished if it was anything close to even 100 per cent.

It is quite possible to accommodate rapid population growth without anything like the scandalous increases in real house prices we’ve seen in Auckland (or even, to a much lesser extent in many other urban areas in New Zealand).   Political leaders, of both main parties, who have failed to make it possible, posing a near-impossible burden on younger people in Auckland who don’t come from advantaged backgrounds, should really be held to account.  High house prices aren’t something to celebrate (NB Prime Minister)  –  and not even most existing home owners are better off, as they aren’t going anywhere –  but should really be a source of shame to those who rigged the market (or let the market stay rigged) and made it happen.

An underperforming taxpayer subsidised industry

Michael Reddell New Zealand economic performance, Uncategorized

Getting diverted again on Saturday, because of yet another road closure to assist the film industry, reminded me that I had been intending to write briefly about the screen industry data Statistics New Zealand released last week.

Perhaps I missed the coverage in the local papers, but the only media story I’ve seen on these data was in the Wall Street Journal, in a story headed “With no hobbits, New Zealand movie industry is hobbled”. The author quotes a US industry figure observing that “New Zealand is a global hub for filmmaking with an exceptional reputation”. Perhaps, but the numbers don’t seem to be moving in the right direction.

Gross revenue of screen industry businesses was $3221 million last year, slightly up for the year, but still 2 per cent lower (in nominal terms) than in 2012.

Gross revenue from production and post-production of feature films was (down a lot last year and) less than half of that in 2012.

There are almost 10 per cent fewer jobs in the screen industry than there were in 2005 (and while I promise not to keep mentioning it, New Zealand’s population is a lot larger than it was in 2005).

And this in an industry where 40 per cent of the revenue for “production” comes from the New Zealand government: it makes the export incentives in places a few decades ago to encourage non-conventional exports look niggardly.

Statistics New Zealand also recently released a detailed breakdown of exports of servces for 2015.  Here is how exports of “motion picture production services” have gone over the last few years.

movie exports

There has been some growth in “Radio, TV, and other artistic services” but nowhere near enough to offset the fall in the movie side of things.

SNZ also reports some industry value-added estimates, but the most recent data relate to 2014 financial years.

screen industry VA

Presumably the 2015 numbers will be lower.

And although much the hype is around Wellington –  still important on the movie side of things – what is striking is the decline in the industry in Wellington.

screen gross revenue wgtn

Another way of seeing this over a longer period is to turn to the regional GDP numbers.

The published numbers don’t identify film or screen industry activities separately.  But they do have a category called “Information media, telecommunications and other services”.  Much of the screen business activity must be included in that industry segment.   But here is how the share of this industry segment in GDP has behaved for Wellington on the one hand, and for the median New Zealand region on the other.

film share of gdp

As I’ve noted in earlier posts, the industry breakdowns of the GDP data are only available to 2013.   When it is available, the relative picture for Wellington is likely to be even worse by 2015.

The Wall Street Journal article summed up the subsidies.

New Zealand, along with the UK, Canada, and several US states, offers incentives for businesses producing films here.  A cash grant was increased to 20%, from 15%, from 2014 –  partly to clinch the “Avatar” deal.  This allows international productions to claim back 20% of the money they spend in the country.  Some productions receive an additional 5% rebate.  And local ones receive a 40% grant.

Even MBIE was opposed to the increased subsidies.   The industry has the feel of a sinkhole, into which public money is poured with little very evident payoff.  At least when we subsidized manufacturing exports in the bad old days, we got more of them.  But screen industry exports have been falling.

The head of the government’s Film Commission is quoted as saying “we need to keep growing.  We want those jobs here”.   But do we?  If so, why?  And at what cost to the rest of us.  (And as the SNZ data show, most of these jobs aren’t even particularly well remunerated.)

Ah, but “industry experts say that the movie business’s economic contribution cannot be measured by revenue alone”.  Tourism spinoffs are apparently the thing.  WSJ readers are told of tourists spotted along “Miramar’s main retail strip”, but perhaps won’t appreciate that Park Road isn’t exactly Hollywood Boulevard.  More importantly, perhaps, as I highlighted last week, although tourism had a good year last year (and export education as well), New Zealand’s overall services exports remain weak by international standards (especially for small countries) and have been some of worst-performing among advanced economies over recent decades.

services X change since 2005

We massively subsidise the film industry with direct subsidies.  We also subsidise the tourism industry with the rapid expansion in working holiday programmes –  this time, the subsidy isn’t direct from taxpayers, but from lower-end New Zealand workers facing greater competition from temporary foreign workers.     Much the same could now be said for export education.

And yet we have so little to show for it all.  A better class of cafes in Miramar perhaps, but not much beyond that.  Sadly, it is all too typical of the disappointing New Zealand story –  although perhaps made worse by the direct government hand in these industries.

 

 

 

The OCR leak – some more thoughts

Michael Reddell OCR leak, Reserve Bank

I was re-reading the documents released on the OCR leak.  There are three of them: the Deloitte report, the Reserve Bank’s press release, and the MediaWorks press release.  The latter document doesn’t seem to be on the web (and certainly not with the company’s 2016 press releases), but someone did send me a copy.  This is the text

Mark Weldon, Group CEO, MediaWorks said:

“MediaWorks unreservedly apologises to the Reserve Bank for this incident. Once MediaWorks was aware a leak had taken place, it conducted its own investigation to determine whether the leak had come from within MediaWorks and self-reported that to the Reserve Bank.”

Regarding the specifics of the matter, Richard Sutherland, Acting Chief News Officer, said:

“The leak was caused by a failure within News to follow proper process and changes have already been made as a result. We are addressing the breach with those concerned and new policies and training will be implemented moving forward.”

I also compared the Deloitte report with what the Bank’s legal counsel, Nick McBride, told me about the scope of the enquiry – which they had already commissioned by then – when they asked for my assistance.  I included the whole email in yesterday’s post, but this was the bit I had in mind today

The Bank has appointed investigators from Deloitte to try and find out whether there was a breach in security and, if so, how it occurred. They will also review the process for transmitting the Governor’s OCR decision to see if any improvements are needed.

A number of things struck me:

  • We have not seen the terms of reference for the Deloitte inquiry.  They are referred to in passing in the report, but are not attached.  That seems strange.
  • The substance of the report is less than three pages of text.  A full page of that is devoted to me.  I don’t have too many problems with it, but I understood it was normal public sector practice when inquiries are done to give those affected by the inquiry an opportunity to see, and comment on, the report in draft before it was published.  That didn’t happen for me (but there must have been coordination with MediaWorks –  did they see the report before it was released?).  Had the draft report been shown to me, I would have requested some wording changes.
  • Despite the comment in McBride’s email that the investigation would “review the process for transmitting the Governor’s OCR decision to see if any improvements are needed”, there is nothing at all on that topic in the published report.  I had offered some comments, in passing, on that matter when I met with the investigation team.  Were the terms of reference changed at a later date?  If so, why?
  • The MediaWorks statement says that “once MediaWorks was aware a leak had taken place, it conducted its own investigation to determine whether the leak had come from within MediaWorks and self-reported that to the Reserve Bank”.  But that seems inconsistent with the Deloitte report, which says that the source was identified only after “communication that we initiated with the journalists”.  The inquiry report says it only focused on the media after my meeting with the inquiry on 18 March, and I wrote about the leak possibility for the second time that day (and I know various MediaWorks employees read my blog), and the mainstream media gave a lot of coverage to the story on 21 March.  So news of the possible leak was widespread by then at the latest.  And yet MediaWorks only self-reported the information about the leaker “to RBNZ and to us [Deloittes] on 5 April 2016”, more than two weeks later.  It doesn’t take two weeks for an organization to track something like this down internally – MediaWorks knew which of its employees had been in the lockup.   It seems more probable that MediaWorks acted only after the inquiry team requested a meeting with the staff who had been in the lockup.
  • It is striking that the Deloitte report makes no attempt to assess whether what the MediaWorks person in the lock-up did on 10 March (file a draft story back to their office well before the embargo lifted) had been done before.  And the MediaWorks statement also does not address that issue.  There are various stories on the media grapevine that it was, in fact, established practice.  And while I have no way of knowing whether that is so, it is not inconsistent with the fact that the person who sent me the information presumably didn’t see anything extraordinary about doing so.   There is no suggestion in the report or statement(s) that the transmission from the lock-up was somehow accidental (inadvertently hit the wrong button, or somesuch), and if it wasn’t accidental perhaps it was customary.    It is unfortunate that the Reserve Bank’s inquiry does not appear to have attempted to assess whether that was the case, or even just note the possibility.
  • The Reserve Bank’s own statement seems very supportive of the MediaWorks hierarchy, even though (a) people in that organization knew what had happened from the start, (b) must have known it was against the rules, even before I started to draw attention to the issue, and (c) the timing suggests that the management action (and formal internal investigation) was all rather belated, occurring when their people realise they would be interviewed by the inquiry and would have to provide an accurate factual account of what happened.

There seem to be quite a few more questions that should be asked of both the Reserve Bank and the MediaWorks management.

In passing, I would note that I have read and heard many dismissive comments in the last few days from other media people about MediaWorks, and their coverage of economics and monetary policy issues.  I don’t watch their TV channel, and am not a commercial radio listener.  Nonetheless, I had actually been quite impressed that Radio Live had been keen to run interviews with some one like me on such diverse topics as the OCR, US monetary policy, Kiwibank, the real exchange rate and economic performance, immigration policy and so on.  As I say, I don’t listen to commercial radio (my wife kept saying “but no one I know listens to Radio Live”), so I’m not sure how representative those sorts of interviews are. But my experience had been a wholly positive one –  intelligent interviewers, aiming at popular market no doubt, asking sensible well-researched questions, and not obviously pursuing “gotcha” moments (but then why would they with a middle-aged rather serious economist, talking mostly about rather geeky issues?).

Someone has, however, drawn to my attention an NBR story in which Rob Hosking reports  that

“Mr Reddell did not at the time ask how they knew of the decision an hour before it was announced-  an omission which has apparently caused some resentment within Mediaworks who feel he should have warned them about this”.

Yeah right.  The MediaWorks people knew very well that the information was not supposed to be outside the lock-up.  What was I supposed to do –  assuming I had believed it was the fruit of a real leak which, as I noted yesterday, I had no particular basis for doing (25 years of MPSs having gone by without one) ? I genuinely didn’t know what to make of it.   I suppose I could have said “you do know you aren’t supposed to have that information, assuming it is true, don’t you?”  But the sender, and the people that person apparently overheard, already knew that. The 9am release time is no secret.  It was no worse sending it on to me than it was for them to have had the information, in breach of their express commitments to the Reserve Bank, in the first place.  I had no ongoing or formal relationship with MediaWorks (I generally talk to any media –  or anyone else –  who asks), and I reported the matter to the Reserve Bank because if there had in fact been a leak, it was their information and systems that had been compromised.  The guilty people were hardly likely to own-up unprompted.

The OCR leak: again/still

Michael Reddell OCR leak, Reserve Bank

I’m heartily sick of the Reserve Bank leak story and hope that this is the last occasion I write about it.  But there were a few further points I wanted to make, partly in response to the coverage in the last 24 hours.

I would also add that despite several commenters on various stories having correctly noted that the longstanding system vulnerabilities mean that there may have been previous leaks over the years from people in the Reserve Bank’s media or analyst lock-ups, I’m not sure it would a wise use of time or resources now (or perhaps even possible) to attempt to prove it one way or the other.  But that is a matter for the Reserve Bank.

Much of the media commentary has been about the abolition of the Reserve Bank’s lock-ups.  The many good trustworthy people pay the price of one peripheral player cheating.  Worse, it will apparently be harder to get good reporting and consumers of news will suffer.  And, from some of the economists, a concern that financial markets might be more volatile for the “first few minutes” after the release while economists and traders try to digest what the Bank is saying.   I plead for some perspective.

All of this commentary loses sight of the simple point which I have made previously, and which the Reserve Bank statement yesterday also makes.  Other countries don’t do it the way we were.  No country that I’m aware of had provided advance lock-ups for economists and analysts for official interest rate announcements.  And the handful that do provide some tightly-controlled advance notice for a select group of journalists give them only a few minutes advance notification, not two hours.  Other countries’ central banks don’t provide their staff to provide private briefings to media or analysts in advance of release, in doing so providing different information to those inside those lock-ups than is available to those outside.     What the Reserve Bank wants to say  in its releases should be carefully drafted and refined, and then put in the official documents, and left to speak for itself.  Sometimes press conferences can be useful, but they should be viewable (as the Reserve Bank’s are) by everyone, not only by the select few.  If anything, under the new arrangements, the press conferences may even allow better scrutiny and more searching questioning of the Governor, since future press conferences will occur an hour after the release (rather than a few minutes after as has been the case until now).  That will allow journalists to talk to economists, politicians, sector group leaders etc before they pose their questions to the Governor.

It is worth remembering, again as I’ve pointed out previously, that half of each year’s OCR announcements have always taken place without benefit of lengthy explanatory lock-ups (or press conference).  The full scale lock-ups have been used for Monetary Policy Statements, but not for the other intervening OCR reviews.  I’m not sure there is any evidence that the market reaction to those one page statements has been any more difficult or volatile than for the MPS releases.

Nonetheless, I think there are still some aspects of the new regime that will require some bedding down, and perhaps later refinement.    I’ve long thought it was a mistake to release OCR announcements at exactly the same time as MPSs. A better model, in my view, would be to release the OCR decision as soon as it is made (further reducing another aspect of risk in the system) and then to release an MPS a few days later, as background analysis (looking forward, and providing ex post assessments).  In such a model, the MPS would be much less market sensitive (the main market-moving news is in the OCR announcement itself). For such a background document, there might be less harm (but less interest) in a lock-up to explore the technical detail of the forecasts.

More immediately, the Reserve Bank should consider adopting the idea proposed by former Czech central bank head of communications Marek Petrus (discussed on his Lombard Rates blog, and here on mine) that the Bank should host an analysts briefing later in the day of the MPS release.  In such a briefing,  analysts could ask questions of the Bank (in person or by phone –  akin to conference calls investment banks run), and the Bank  might also be able to use the occasion to resolve  openly any misinterpretations that had arisen over the day.  But the critical aspect of the arrangement is that the briefing would be webcast (as the press conferences are) so that everyone has the same information, whether in Wellington, Auckland, Singapore, or New York, whether economist or not.  A concern about the new system the Bank announced yesterday is that it will resolve one problem and open another.  The analysts lock-up (and the later economists’ lunch) has always had problems in that they sometimes provided information to attendees that wasn’t available to everyone else.  In the new world there is a risk that there will be high rewards for those – especially the Wellington-based – who, searching for nuance, secure coffee discussions with the Chief Economist or the Manager, Forecasting.

Somewhat surprisingly, even the Prime Minister has weighed in, calling for the Reserve Bank to reconsider, noting that Budget lock-ups had worked well.  I’m not sure whether The Treasury uses more robust systems to reduce the risk of leaks (perhaps they will be reviewing them in light of the Bank’s experience?), but even if they aren’t the case for a lock-up for Budget material is much stronger than for MPS.  First, there is typically a wide range of material across huge number of portfolio areas.  Second, often new initiatives are being announced, with technically complex details.  And third, not much about the Budget is typically very market-sensitive, especially as the Beehive typically provides strong hints (or more) on the juicy stuff in advance of Budget day.  By contrast, OCR announcements and MPS releases are really just the same old stuff over again (new data, new rate, but the same basic framework), but the bottom line is highly market sensitive, and there is no pre-briefing of selected journalists.

Changing tack, I have been a little surprised at how little of the media coverage has focused on the Reserve Bank’s weak systems.  Perhaps that is understandable: the media has the strongest interest in the story as it affects them (changes in lock-up arrangements), and the Reserve Bank is a powerful institution and most of them want to remain on good terms with the Bank (even while complaining quietly).  But what happened in this episode involved two things:

  • A MediaWorks staffer who breached his own express or implied commitments to the Reserve Bank (not to communicate the information before the embargo lifted)
  • A central bank that ran lock-ups that, it turns out, used no technological protections, and relied totally on trust to protect extremely sensitive information.

I was trying to explain the story to my children last night.  I told them that I had no reason to distrust the people who live on my street, but that nonetheless I would irresponsible if we went out and left the doors wide open, simply relying on trust that nothing bad would happen.   Most of the time, nothing bad would happen.  But if and when it did, people (including the insurance company) might reasonably talk of contributory negligence.

Managing highly sensitive information is not incidental to what the Reserve Bank does, but integral.  And yet they unnecessarily sit on the OCR decisions for six days, running risks of (inadvertent) release by someone inside the institution.  And they tell the Minister of Finance –  when he and his advisers will have their own agendas –  more than hour before the announcement.  And –  the focus of this episode –  they have dozens of people from the financial media and financial institution economists in lock-ups which were secured by no more than trust.    I don’t think I had realized until last night quite how bad the situation was.  On entering the lock-ups participants have to hand in their phones, but all continue to have access to their laptops with active internet connections throughout the lock-ups.  There was, apparently, no effort ever made to secure either individual laptops or the rooms where the lock-ups were held (to physically prevent transmission until the embargo is lifted).    In an earlier post, I touched on hypothetical risks –  the analysts lock-up used to be held in a room easily overseen from neighbouring apartments – but all the time anyone in the lock-ups could simply have emailed the news to anyone they chose.  It is staggeringly lax.  Mike Hannah, Head of Communications was quoted in yesterday’s press release on the new arrangements, but these previous lock-ups were his responsibility.  What were he, and his boss Deputy Governor, Geoff Bascand, doing in allowing such incredibly lax security?  They left the door wide open, and eventually (at least) one person walked through it.

As I noted yesterday, it is surprising that the Governor’s press release took no responsibility for any of this, and offered no apology for it.   I hope the Bank’s Board (and its audit or risk committee) is asking some hard questions.

Finally, I remain irked at being accused by the Governor of being “irresponsible”, for not passing on to the Bank the email I received (from someone not in the lock up) as soon as I received it.   As I have already noted, I had no relationship of trust with the Bank, owed them nothing, and in passing on the information at all –  acting with a sense of public responsibility, and a concern for the best interests of an organization I had worked for for decades –  I have probably jeopardised my future relationship with MediaWorks.  I am also irked that yesterday was the first time I had heard the Bank suggest that I was somehow to blame.  It has the feel of a line made up after the event, to distract attention from the real story: the Bank’s weak systems, and a security breach by a journalist who the Bank had allowed to participate in its lock-up.

 

Let me explain.  And if the detail is painstaking, feel free to stop here. This is for the record as much as anything.

 

As I have said previously, I received an email from a MediaWorks employee at 8:04am on the morning of 10 March.  It is reproduced in the Deloitte report.  It read.

We have just heard that the Reserve Bank is cutting by 25 basis points
I didn’t see the email straightaway  –  it is the sort of time my kids are getting ready to leave for school.  I saw it about 10 minutes after it arrived, and emailed back to the sender at 8:14
if true, that is very encouraging –  at last.  I  have thought it a bit more likely than the market pricing, but…one never quite knows
As I have noted all along, I had no way of knowing (until yesterday) if this was real information, or just the sender talking things up.     The tone of this email is not one suggesting I instantly believed there had been a genuine leak.
Various people have asked why the person sent the email to me in particular.  It had already been arranged that I was going to provide some on-air commentary on Radio Live later that morning on the OCR announcement.
I’ve gone through this stuff before, but in the following minutes various things went through my head.  I flicked onto the ANZ and Westpac exchange rate chart pages, half expecting, half fearing, to see a sudden movement in the exchange rate.  If there had been a genuine leak it seemed unlikely that I was going to be the only one to know, and in all my years at the Reserve Bank –  including running the Financial Markets Department –  our greatest fear had been market participants being able to profit from early access to such information.
At some point I thought about contacting the Reserve Bank.  That wouldn’t have been as easy as it sounds.  I’m not exactly persona grata at the Reserve Bank, I knew that key people would most likely actually be in the lockups, and I didn’t have their cellphone numbers.  Graeme Wheeler wasn’t in lock-ups, but he was hardly going to take my call.   I could have sent an email, but who was likely to be rushing to open emails from me in that dead half hour when their attentions were on the media and market lock-ups.   And, as I have noted previously, I didn’t know if the information was the result of a real leak.  If I’d passed it on to the Bank before 9am, and it turned out they weren’t cutting, what I could expect from them was not a “hey, thanks Michael, even though there clearly wasn’t a leak on this occasion, but we really appreciate you pro-actively coming forward” but more like “there he goes again, always willing to believe the worst, constantly undermining us”.   And so, since the market hadn’t moved, I kept the email myself for the remaining few minutes and as soon as I’d read and digested the key bits of the statement (my own priority), I sent this email through to John McDermott (Assistant Governor, and my former boss) and Mike Hannah, Head of Communications at 9:08am
Mike, John
For what it is worth, I received an email an hour ago from someone telling me that they had just heard that the Bank was going to cut by 25bps this morning.  I have no idea whether it was a well-sourced “leak” or just speculation, but I have no reason to doubt the person who told me, who in turn (as far as I’m aware) has no reason to pass on simple speculation.
Regards
Michael
As I’ve noted previously, there are no allegations in this email, simply information  –  information which I didn’t know what to make of, but which now at least seemed to warrant investigation.
I didn’t hear from them for a while (both were at the press conference).  Reflecting on it a bit further, at 9:47 I sent this follow-up
Just for the avoidance of doubt, the email did not come from anyone inside the Bank (or inside govt).
At 10:03 am I had this email from John McDermott, cc’ed to Mike Hannah

Hmm. Serious but this is very little information to go on. What time exactly did you get the email?

John

A couple of minutes later I responded

8:04am

And at 10:08 I sent this to Mike and John

and i’d be checking the media lock-up
At 10:29am I had this response from  McDermott

Thank you for letting me know. I am disappointed that somebody knew and thought it a good idea to spread the leak. Somebody with a decent character would have instead informed the Bank. You should let them know that for them to tell you puts you in a difficult place.

I had not noticed until now that McDermott even then apparently assumed there was a leak (“I am disappointed that somebody knew”).

And I responded at 10:37

No difficulty for me –  not as if I trade fx markets (or would ever use such information if I did). I did check the exch rate charts at the time, and had I seen any sudden move would have passed on the information before 9am.   I may mention the issue in my post on the MPS later in the day.
Regards
Michael
I did make mention of the issue some hours later in the my post on the MPS.   I noted, somewhat agnostically
And finally, as I have noted to them, the Reserve Bank might want look to the security of its systems.  I had an email out of the blue at around 8 this morning-  most definitely not from someone in the Bank –  telling me that the sender had just heard that the OCR was to be cut by 25 basis points.  I have no way of knowing if it was the fruit of a leak, or just inspired speculation, and was relieved to see the foreign exchange markets weren’t moving, but it wasn’t a good look.
And left it at that.
The next I heard was an email from Nick McBride, the Bank’s in-house lawyer, on 15 March

Michael

I think I saw you in Thorndon New World today when I was buying my lunch. Anyway, I am emailing you following your email to John McDermott and Mike Hannah at 9:08am Thursday 10 March alerting them to the possibility of a leak of the OCR decision. The Bank has appointed investigators from Deloitte to try and find out whether there was a breach in security and, if so, how it occurred. They will also review the process for transmitting the Governor’s OCR decision to see if any improvements are needed. I’m sure we both agree that it is the public interest to ensure the integrity of the process and tighten it as necessary.

As you are the person who has information that may indicate vulnerability in the process we would be grateful if the Deloitte investigators could talk to you about your email to John and Mike. We would suggest the meeting to discuss this take place at a convenient time for you at the Deloittes office here in Wellington (Level 16, 10 Brandon Street), ideally this week. If you could let me know the days and times you are available that would be appreciated. Deloitte should be able to fit in with you.

The lead from Deloitte is Ian Tuke and I have copied him on this email.

Thank you very much in advance for your cooperation. Feel free to contact me if you have any queries.

Nick

I thought this was a thoroughly professional approach, was relieved to hear about the inquiry, and we set up a time to meet.  There was no suggestion in Nick’s email, or in any of the earlier comments from McDermott, that I had done anything inappropriate.

A couple of days later I had a meeting with the Deloittes people conducting the inquiry.  I don’t have word for word what the senior guy said, but it was along the lines that the Bank had been very appreciative of me coming forward.  We had a good discussion, I gave them the original MediaWorks email (sender redacted) and I came away pretty content with how the Bank seemed to be handling the issue.

On 21 March, the following Monday, the media appeared to finally take some interest in the possibility of the leak.  Hamish Rutherford wrote a story on Stuff, in which he had sought comment from the Reserve Bank.   This is where I started to get a little annoyed with the Bank

The Reserve Bank has confirmed that following an allegation, it had launched an investigation.

“We are aware of an allegation that information may have been leaked ahead of the OCR announcement on 10 March,” a spokesman of the bank said.

While we have no evidence at this stage that any information was leaked, we take the integrity and security of market-sensitive information very seriously and have initiated an external investigation into the allegation.”

Note the repeated use of the word “allegation” –  a word, or idea, which had not appeared at all in Nick McBride’s email above (which simply talked of investigating the “possibility of a leak”).  As I have said repeatedly, I made no allegation: I passed on information, which appeared to raise some questions, and left it to the Reserve Bank to make what, if anything, it could of that information.

And then I heard nothing more of the matter until yesterday afternoon’s release.

The Bank has also taken to running the line that if only I had told them earlier, they would have avoided risks by bringing forward the release of the MPS (perhaps from 9am to 8:45am).  I’ve already touched yesterday on the implausibility of the idea that this would have solved their problems.  Graeme Wheeler should engage it a bit of introspection and ask himself just what his reaction would have been if somehow I had got hold of him or his advisers by 8:30 and told them what I in fact told them just after 9am.   After all, what I was passing was only hearsay (a solid report of what someone else had heard) at that point –  I didn’t know there had been a real leak, and so the Bank couldn’t be sure either.  And, frankly, the messenger would have mattered –  and I daresay Graeme would have been less inclined to react positively to hearing it from me, than from one of his admirers.  In reality, they would have debated the matter among themselves –  after it had taken perhaps five minutes to get the key people in the same room –  been not sure what to make of it, especially after checking the exchange rate screens.  Probably they would have waited it out til 9am.  Partly because if they hadn’t, and had released at 8:45, it would have created mayhem –  the markets moving suddenly with people still away from desks and screens, and the Bank could only have said something like “we received information, from a source we aren’t sure we trust, which suggested that there might have been a leak”.  I’m not sure how that would have made their position, then or now, any better.   Those who lost money would have been even more vociferous than usual (and understandably so).

In  conclusion to what has been a long post, I am sufficiently riled by the gratuitous attack that I am considering raising the matter with the Reserve Bank Board.  Are such ad hominem attacks on someone public-spiritedly providing (possibly at some cost to myself) information that enabled the Reserve Bank to (a) identify an actual leak, and (b) identify serious weaknesses in their systems, the sort of behaviour they expect or tolerate from their employee the Governor? I sincerely hope not.

 

The OCR leak

Michael Reddell OCR leak, Reserve Bank

The Reserve Bank has this afternoon released the Deloitte report into the possible leak of the OCR on 10 March, and a press statement from the Governor.

I have given comments to various media outlets, but thought I should set down my assessment for the record.

It is extremely disappointing that it has now been confirmed that there was a leak.  One MediaWorks employee in the media lock-up apparently emailed several of his colleagues outside the lock-up.  My involvement in this unfortunate episode arose because a MediaWorks employee sent me the email that is reproduced in the Deloitte report.

It is unfortunate that the Deloitte report does not (and probably was not asked to) look into how it was that the Reserve Bank’s systems for managing lock-ups for incredibly sensitive information were as insecure as they proved to be.  From the Deloitte report it seems that no underhand technology or secret signaling was involved; simply someone emailing from their laptop.  I’m no technology expert, but I’m staggered that such an easy breach could have occurred.  When systems are weak, sooner or later they will result in a breach, by accident or deliberately.   It is also unfortunate that the Governor’s press release does not address this issue.

The Reserve Bank’s overall response to the confirmation of the leak is the right one.  Ending media and analyst lock-ups is a step I recommended in a post several weeks ago, reflecting the vulnerability of such events (especially as technology has advanced), the fact that few or no other central banks provide any advance information in lock-ups, and the fact that such lock-ups have at times meant people inside the lock-ups have better information on the Bank’s interpretation of the documents than people who do not attend such events.    The new model will bring the Reserve Bank into line with standard international practice.  It is a model that would, I hope, have been adopted even if it had been confirmed that on this particular occasion no leak had occurred.

There are further steps that should still be adopted to minimize the risks of inadvertent early releases of the OCR.  For example, the lengthy lag between taking the OCR decision and releasing it should be shortened.  I was also surprised to learn from the Deloitte report that the Minister of Finance had been aware of the decision before 8:04am on the morning of the release.  When the OCR system was established in 1999, the practice was to advise the Minister only 10 minutes or so before the announcement.  If the Minister needs to know at all (and it isn’t clear why), 10 minutes notice should be an ample courtesy.

The Governor’s press release was disappointing on several counts.

First, it took no responsibility at all for the Bank having run systems and procedures that allowed this leak to have happened.  Of course, the leaker should not have leaked, but the Reserve Bank should have managed its procedures in a much more robust way to ensure that the leak could simply not have happened (especially in the easy way it appears to have).

Second, I was struck by the grudging gracelessness of the statement.  This inquiry, the associated discovery, and the subsequent change of procedures, would not have happened if I had not, at my own voluntary initiative, informed the Bank of the information I received.  It is as simple as that.  Unlike those in the lock-up and their employers, I am in no relationship of trust with the Bank, owe nothing in particular to them, and had actually valued the outlet that MediaWorks from time to time had provided for my commentaries and views.  And yet the statement offers not a word of appreciation or thanks to me; instead it criticizes me for not telling them about the information earlier.

“The fact that several people outside the Bank, who had access to the information improperly, failed to alert the Bank immediately, was irresponsible and left open a significant risk that the Bank could have closed down quickly with an immediate official release.”

As I have been clear all along, I never knew (until today) whether there had been a leak, or whether someone was just engaging in some big talk.   And the fact that there had been no market movement made me reluctant to believe there was a real leak –  as did the fact that I had worked at senior levels at the Bank for many years, and been under the impression that security at the lock-ups was fairly water-tight.

Moreover, as readers know, the Bank’s attitude towards me over the last year has not exactly been positive and cooperative.  Perhaps I could have gone to them at 8:20 and said “someone just told me you are cutting this morning”.  In fact, the thought didn’t cross my mind initially.  But when it did, my reaction was “what if they aren’t cutting.  They will simply scoff, and say “there goes Michael again””.  And so I kept the email to myself –  still not sure whether it was real news or not –  until I knew the Bank had cut, whereupon I passed the information on to the Assistant Governor and the Head of Communications.

I gather this “Michael was at fault” line is now part of their stock response (someone this afternoon told me that John McDermott had run that line to him previously).

MediaWorks people were at fault, and the Bank had weak systems that allowed a serious leak to occur.  Had I been less professional and more opportunistic, I could have put the text of the email on my blog as soon as I found it. After all, I was in no relationship of trust with the Reserve Bank.  Unsure whether it was for real or not, I reckon I still have enough credibility that doing so would have created a lot of damage.  But I didn’t do that: I kept it to myself and instead I told the Bank about it as soon as I was sure I was not going to look stupid.  I was simply caught in the middle of this – and have spent several weeks with people suggesting or implying that I had made it all up, was making allegations etc

The Governor is also misleading to suggest that even if I had alerted them earlier they could have avoided problems by immediately releasing the information themselves.  That might have been their reaction –  although they would surely have had to ask how seriously to take my information –  but it wouldn’t saved chaos, and might only have made things worse.  The hour before the OCR is released is a dead zone in New Zealand markets.  Many people abroad focus on New Zealand again just a few minutes before the scheduled time of the release.  To have released at 8:35. generating huge market movements, when they couldn’t even be sure that a leak had occurred (a week later they were still just talking of me making “allegations”) would have made life a lot harder for them, with plenty of aggrieved and vocal offshore people.

I guess I wouldn’t really have expected gratitude, but the graceless (and blame-shifting)  tone of the Governor’s statement is really something that should have been beneath the dignity of someone so senior.

 

 

Charles I?

Michael Reddell Monetary policy, OIA, Uncategorized

Charles I was a good man, but (was generally reckoned) a bad king.  His reign ended. following the Civil War, with his beheading on 30 January 1649.

In their amusing take on English history 1066 And All That, Sellar and Yeatman offer this caricature of Charles’s views:

Charles explained that there was a doctrine called the Divine Right of Kings, which said that:

(a) He was King, and that was right.

(b) Kings were divine, and that was right.

(c) Kings were right, and that was right.

(d) Everything was all right.

Sometimes I wonder if Graeme Wheeler sees himself, and the Reserve Bank, in much the same light.

I wrote the other day about my request to the Reserve Bank to provide summary information on the OCR recommendations made by the Governor’s designated advisers for each of the OCR reviews since mid 2013.  The Governor himself had disclosed that information for the March Monetary Policy Statement review in an interview conducted only a day or two after the release of that particular OCR decision.

As I noted the other day, I didn’t expect them to respond positively to my request.

I finally got the response late yesterday afternoon, just before the end of the maximum allowed time of 20 working days.  I wasn’t surprised by the decision to withhold all the information, but was more than a little surprised at the argument they sought to rely on.  Here is what they had to say:

Decision

The Reserve Bank is withholding the information under the grounds provided by section 9(2)(d) of the OIA, to protect the substantial economic interests of New Zealand.

Reasons

Official Cash Rate (OCR) decisions clearly relate to the substantial economic interests of New Zealand and it is clearly in the public interest that the Governor is able to decide the OCR as the Reserve Bank of New Zealand Act intends and requires.

The Governor has a statutory position as the sole decision-maker on the OCR. While the Governor chooses to take advice from the Monetary Policy Committee (MPC) and others prior to making decisions, the advice does not bind or compel the Governor to any particular decision. MPC policy recommendations are simply advice that the Governor is free to accept or not. What matters under the law is the Governor’s decision.

Given the Governor’s sole responsibility for determining monetary policy settings and the limited objective value of the information, the Bank considers the public interest in knowing this selective aspect of the advice of the MPC is not strong.

Moreover, there are serious risks that mis-informed commentary on this partial aspect of advice could detract from the Governor’s ability to implement monetary policy.  This could adversely impact on the effectiveness of monetary policy, likely damaging the substantial economic interests of New Zealand.

As noted in responses to two previous OIAs requests from you (24 and 25 September 2015), the underlying analysis and advice for OCR decisions are published in summary form in a programme of carefully drafted media statements, Monetary Policy Statements, news media press conferences and media interviews.  The Bank considers that the public interest in understanding OCR decisions made by the Governor is sufficiently met by these existing information disclosures.

The Governor may choose, on occasion, to publicly state that his decision on monetary policy settings accords with the views of the MPC or anyone else that he receives advice from or wants to refer to.

For those not familiar with the details of the Official Information Act, the relevant provision allows for information to be withheld if to do so is

“necessary [emphasis added] to avoid prejudice to the substantial economic interests of New Zealand”

“unless in the circumstances of the particular case, the withholding of that information is outweighed by other considerations which render it desirable, in the public interest, to make that information available”

The operative word there is “necessary”.  There being some remote possibility that some harm could be done is not sufficient.   Nor is a higher likelihood that some minimal inconvenience or discomfort to officials might ensue.  No, it must be ‘necessary” to withhold that specific information to avoid prejudicing the substantial economic interests of New Zealand.  And even then the wider public interest needs to be considered, in the context of an Act designed to make information available to public, to assist public understanding and to strengthen the accountability of ministers, officials, and official agencies.

The Governor’s case is already severely undermined by the fact that he chose to disclose this information, about the most recent OCR decision.  Could he be sure that that information would not be misinterpreted, and lead to commentary that might make his life difficult?    But he took the (surely very modest) risk anyway, and made the information available, presumably concluding that there was no material risk of prejudice to the substantial economic interests of New Zealand.

But then how can he seriously argue that the release of the same information for, say, the July 2013 OCR review has such serious risks that it is “necessary” to withhold it to avoid prejudicing those “substantial economic interests of New Zealand”?  Or the July 2014 review? Or the July 2015 review –  now eight months in the past.  There is no sign in the Bank’s response that they have considered each piece of information separately, and evaluated the risks (which might well be different for information six weeks old than for information almost three years old).  That sort of blanket refusal is inconsistent with the Act.

The substance of the Governor’s claim is that there are

serious risks that mis-informed commentary on this partial aspect of advice could detract from the Governor’s ability to implement monetary policy.  This could adversely impact on the effectiveness of monetary policy, likely damaging the substantial economic interests of New Zealand.

Quite how  a summary of the non-binding opinions of his own chosen advisers, relating to events already some time in the past, could detract from the Governor’s ability to implement monetary policy is really beyond me.  Ultimately, the Governor makes the OCR decisions, and communicates his final stance by both the announced OCR itself and his press statement around it.  It is entirely lawful, and reasonable, for the Governor to adopt an OCR that a minority or even, on rare occasion, a majority of his advisers disagree with.  He is appointed Governor, and he signed the PTA, not them.

Of course, markets and commentators might be interested in which way the balance of advice went but this is lagged information (the most recent event I requested information for was the January OCR review, and my request was lodged after the next OCR decision was already known).    If I had asked for named views of each individual adviser it might perhaps have been a little different –  people could have fun with evidence that, say, the Deputy Governors disagreed with the Governor. But (a) that isn’t the information I asked for, and (b) in other countries, evidence of such a range of views within a central bank doesn’t seem to impair the ability of the central bank concerned to conduct monetary policy effectively.  On several occasions, the former Governor of the Bank of England chose to be in a minority in the vote of the binding MPC, again without impairing either confidence in the individual or the effectiveness of UK monetary policy.

Frankly, the suggestion that the effectiveness of monetary policy could be thus impaired, particularly to extent that could “prejudice the substantial economic interests of New Zealand”, is preposterous.

I’ve highlighted previously the contrast between the pro-active approach adopted by the Minister of Finance and Treasury to the release of advice and papers relating to each year’s government Budget. The Minister of Finance is, in this context, the sole decision-maker, and the Treasury are the advisers to the Minister.  The Treasury provides analysis, and advice, and recommendations.  Sometimes those views are accepted by Ministers, sometimes regretfully not accepted, and sometimes just dismissed out of hand.  That is the nature of good advice, in a world characterized by uncertainty and a range of perspectives on any one issue.

And yet most of that advice is routinely published.  Occasionally perhaps it embarrasses either Treasury or the Minister (but embarrassment isn’t grounds for withholding) but no one questions the ability of the Minister to make fiscal policy decisions effectively. It isn’t impaired by knowing that at times the advisers – and that is all they are –  disagree with the decisionmaker.  What makes monetary policy different?

At times, commentary on official agencies and officials will be annoying, uncomfortable, perhaps lightweight, and perhaps even (the Bank’s concern) “misinformed”.  Democracy is messy. We leave the alternative approach to places like Singapore.  (And, of course, the usual remedy when there is “misinformation” or misinterpretation abroad, is to make more information available.)

In the end much of this comes down to what I wrote about the other day.  The Bank has long considered that the final products that it chooses to publish should be enough –  whether for financial markets, the public, or members of Parliament.  The only people they are comfortable with providing more information to, apparently, are the members of the Reserve Bank Board.  It was the mindset that used to prevail across the whole public sector, here and abroad.

But that isn’t law in New Zealand.  Of course it would be tidier for official agencies and Ministers if only the approved “carefully drafted” final documents were ever made public –  press releases, Budget speeches, Monetary Policy Statements and so on.  But the Official Information Act was not passed in the interests of tidiness, or the convenience of powerful institutions and individuals. It was –  and is –  about allowing greater light to be shed on government processes, and the background analysis and advice that underpins decisions. That is what an open society is about.  It is a big part of how we hold the powerful to account.  As the Reserve Bank well knows, much though it may not like, it, the Official Information Act covers drafts as well as final documents –  it might be interesting for someone, say, to ask for the various drafts of a particular OCR press release (perhaps one from a few quarters ago, the disclosure of which could not possibly impair current monetary policy).

I experienced this line of argument repeatedly in my time in the Bank.  The Bank tends to operate as if it is a world apart.  Many of its people think of the Bank –  subconsciously I’m sure –  more as one of international circle of likeminded central banks, interacting mostly with banks and financial markets, rather than as agency of executive government in New Zealand, accountable to the public (including through the Official Information Act) just as other agencies are.

And I’ve experienced this line repeatedly in responses to OIA requests over the last year or so.  Of those relevant to monetary policy:

  • after some months’ delay, the Bank grudgingly agreed to release the background papers to a Monetary Policy Statement from 10 years previously.  On that occasion I did not ask for either copies of the individual OCR advice, or the summary of the recommendations.
  • they subsequently refused to release  any of the papers provided to the Bank’s Board regarding the September 2015 MPS
  • the Bank refused to release any material background information relevant to the most recent Policy Targets Agreement.
  • the Bank refused to release any minutes of meetings of its Governing Committtee (the forum in which the Governor takes the final OCR decision)
  • the Bank refused for months to release any material information about the work they had been doing on governance reform, belatedly releasing a small amount only recently, claiming as warrant for doing so an Associate Minister’s answer to an Opposition MP’s supplementary question six months earlier.
  • the Bank has refused to release any of the background information on its analysis of the economic impact of immigration that led into its material change of view at the December MPS.  (this is a good illustration of all that is wrong with the Bank’s argument that the MPS is really quite enough for us mere mortals –  since they included no supporting analysis in that MPS to justify their change of view).

Sadly, this latest response is all too typical, even if the particular excuse they must have spent a month crafting has a degree of novelty. It speaks of an organization –  and the key individuals –  who believe that they are, or should be, above the messiness of the sort of real world scrutiny that we expect in a democracy, and for which the Official Information Act provides.  Hence, the Charles I references.

It is a shame, because I really can’t imagine what they have to hide.  It shouldn’t be surprise if from time to time advisers disagree with the Governor –  it should worry us much more if they never do.  From time to time a Governor has gone against the majority view of his advisers –  hindsight suggests that sometimes he was right to do so, and on other occasions probably not.   But we should be able to see the balance of that advice, perhaps with a modest lag.  Sometimes it will suit the Governor (as presumably in March, when he unilaterally released the information) and sometimes not.  But what suits the Governor on particular occasions is not a relevant consideration under the Act.

The Reserve Bank of New Zealand was once at the forefront of greater openness and transparency among central banks.  Sadly, that is no longer true.

I have appealed this decision to the Ombudsman, on two grounds:

  • first, taking 20 working days to issue a blanket refusal (on material that involvement no substantial compilation or review effort) is simply inconsistent with the statutory responsibility to respond “as soon as reasonably practicable”, and
  • second, that it is simply not credible that withholding all this information (including that about decisions in 2013) is “necessary” to avoid prejudice to the substantial economic interests of New Zealand.

Hamish Rutherford has covered the story here.

 

 

Tourism & services exports: more underperformance

Michael Reddell New Zealand economic performance

Somewhere the other day I noticed a job advert (no, I wasn’t looking) for a role in tourism policy at MBIE.  I guess one has to do a bit of a hard sell to get good policy analysts to work in such a minor area of government, but the rather over the top claims (‘high profile portfolio’, ‘make a difference to New Zealand’s economy’)  irked me a bit, so I dug out a bit of data.

The World Bank has collated data on international tourist arrivals for a huge range of countries and territories.   For these purposes, “tourist” includes most business visitors (anyone not visiting for a purpose directly remunerated from within the country visited).  The World Bank data comes with quite a few health warnings –  countries collect data in different ways, some only capture those staying in hotels for example, and I presume in the Schengen area there is no real way of capturing day trippers.   Being an island, and with our good international arrivals cards, New Zealand’s data are pretty comprehensive, with little risk of undercounting.  On the other hand, no one comes to New Zealand for an afternoon’s shopping.

In 2014, France had around 83 million visitors.  New Zealand was the 66th most visited country in the world with 2.8 million visitors, wedged between Qatar and Uruguay (I’ve noted previously that the beaches looked nice in Uruguay).  Remarkably, although I know almost nothing about the country, the Kyrgyz Republic comes in just ahead of Qatar.

What about the number of visitors per capita?  I only bothered looking at the places with at least one million visitors a year.  Even so, some tiny places top the list – Andorra, reportedly has 32 visitors per capita each year, and Macao (less surprisingly with all those casinos) 25.    Here is a chart (lopping off the tiny places at the top).

international visitor arrivals

We do considerably better than Australia, of course, but we are still a long way down the chart.    And that isn’t really that surprising.  After all, we are long way from almost anywhere, which means it is really expensive (time and money) to get here.    The upside is that the median visitor here probably spends more than they do in most of the other places –  having spent so much to get here, you tend to stay a bit longer –  but it doesn’t have the feel of an industry with massive growth potential (and that is setting aside the point various other commentators make, that tourism is neither a high productivity sector, nor one with huge apparent productivity growth opportunities.  Which is not to decry tourism.  Most of us like holidays.

I also dug out the data for OECD countries on exports of services.  International tourism is classified as a services export, and for New Zealand it is a very large component of our services exports.  But that isn’t so everywhere.

Here is the share of services exports in GDP last year.

services exports oecdLarge countries don’t tend to do as much international trade as small countries –  they don’t need to, there are plenty of opportunities and markets at home.  I’ve highlighted the large countries (more than 40m people) in green, and the small countries (under 11m, where there is a natural break) in red.  New Zealand has the lowest services export share of any of the small countries (and, by the look of it, the lowest real dollar value of services exports as well) .  Of course, we are much more remote than the other small countries, but it just highlights the difficulty of generating really high incomes for lots of people in a place so distant.

(I don’t purport to understand the Irish numbers, although I assume much of it has to do with tax.)

And it isn’t as if the picture has been getting better.  Here is the change in the services exports share of GDP (in percentage points) over the last decade.

services X change since 2005

If one looks at a 20 year history rather than just 10 years there are fewer countries to compare with, and New Zealand’s relative performance isn’t quite so bad.  Over that period we were only 4th worst.