It is now June, which means it is only 15 months or so until Graeme Wheeler’s ill-starred term as Governor of the Reserve Bank ends. Conversations begin to turn to the question of what happens next.
I’ve probably left many people unconvinced, but I still reckon there is a plausible case that the Governor of the Reserve Bank is the most powerful individual in New Zealand. He exercises a lot of discretion with few checks and balances (perhaps especially in areas other than monetary policy) and there are no established appeal or review rights. Many Cabinet ministers have lots of power, but they can be dismissed whenever the Prime Minister chooses. The Prime Minister can be toppled by his or her own caucus with no notice or appeal (see Kevin Rudd, Julia Gillard and Tony Abbott – or Jim Bolger and Geoffrey Palmer for that matter). Judges make crucial, life-changing, decisions, but all lower court decisions are subject to appeal, and all higher courts sit as a panel of judges. Of course, the Governor has power in only a specific range of areas, but as those areas include monetary policy and financial regulation, the effects of the Governor’s choices can be felt very widely.
A month or so ago, I wrote a couple of posts (here and here) about the curious democratic-deficit in the way in which the position of Governor is filled. It is a choice Parliament made, but it is a very unusual one, whether considered against the models used for central banks/financial regulators abroad, or for other senior positions in the New Zealand government. Even though the Governor wields so much power, the choice of who serves as Governor is not made by an (elected) Minister of Finance, but by the faceless, largely unaccountable, group of people who constitute the Board of the Reserve Bank. The Minister technically makes the appointment, but he can only appoint someone recommended by the Board. That makes the Board members the key players in the process. Perhaps equally weirdly, the Minister gets to determine the Governor’s terms and conditions (he only has to consult the Board). In a more reasonable assignment of roles and responsibilities, one might have thought the Minister should be able to appoint an appropriate person as Governor (as happens in most countries, including Australia), perhaps consulting the Board, and perhaps leave the Board to set the terms and conditions, perhaps in consultation with the Minister.
There are no confirmation hearings for either people appointed to the Board, or for a Governor-designate, even though between them these people will have considerable influence on the economy and financial system for years to come. One might reasonably ask what expertise, let alone public mandate, Rod Carr, Keith Taylor, and the rest of them, have to make those sorts of selections, or why they are better placed to do so than an elected Minister. Recall that appointing a Governor is not just akin to appointing a CEO of a government department – who typically has little or no effective policy discretion – or the CEO of a private company. It is about appointing a key policy (one might almost say “political”, albeit not in a partisan sense) player whose discretionary choices – and they involve real and substantial discretion – are probably at least as significant as those of most Cabinet ministers, with the associated need to be at least as open and accountable as Cabinet ministers. It seems like the sort of role that senior elected ministers, not faceless former finance sector executives and academic administrators, should be filling.
But unsatisfactory as the law is, it seems almost certain that it will be the law governing the next appointment of a Governor.
Someone who has paid closer attention to some of the details of those provisions than I have pointed out to me recently clause 46(1)(c) of the Reserve Bank Act. Under the provision, no one can serve as Governor, or Deputy Governor, once they are aged 70 or over.
This provision is quite old. The legislation was passed in 1989, and life expectancy has increased by perhaps five years since then. In addition, New Zealand legislation passed since then has prohibited compulsory retirement ages, unless they are specifically provided for in statute (as this one is). There is a similar statutory age limit for judges.
In a year when the race of the job of President of the United States seems set to be fought between one candidate who will turn 70 this month, and another who will turn 70 next year (who is in turn still being challenged by a sitting senator who is 74) it is a surprisingly low age limit. Life expectancy has increased, but in fact it is almost 60 years since Walter Nash became our Prime Minister at age 75, and then left office at 78.
I’m not opposed on principle to having an age limit for the Governor. If anything, as our law is currently written, the case might be stronger than that for judges. In respect of judges, the contrast is striking between our situation and that of the US Supreme Court, where judges often seem to hang on until death (as much as anything to manage succession risk), and where three of the current sitting judges are aged 77 and over.
It is, rightly, difficult to remove a sitting higher court judge even if that person’s physical and mental capabilities are evidently in serious decline. In our system, it takes a vote of Parliament, in an address to the Governor-General. Age limits help to protect against the indignity and awkwardness of such difficult and very public removals. Then again, between the assignment of cases, appeal provisions, and the fact that appellate courts sit with a bench of judges, the damage a declining individual judge can do can be mitigated.
It is technically easier to remove a Governor of the Reserve Bank whose capacities were failing. It requires only an Order-in-Council. But in practice it would be no easier, and potentially much harder to manage in the interim. A Governor in office has full powers to set monetary policy as he judges appropriate, and to make and vary a wide range of financial regulatory policy measures. There is no one who can temporarily assign some of those powers to other officials, and there are no appeal rights. And the Reserve Bank operates in the full glare of scrutiny by domestic and international markets.
But an age limit of 70 simply doesn’t seem to strike quite the right balance. Ideally, the entire governance structure of the Reserve Bank will be revised, and if the Governor had just one vote (among say 5 or 7) on each of a Monetary Policy Committee and Financial Regulatory Committee then no age limit might be needed at all (there is none in Australia, or the United States – Greenspan was 79 when he left office). For now, serious consideration should be given to raising the age limit to at least 75.
As it happens, the age limit is unlikely to have been a binding consideration since the Act was passed. Don Brash left office at 61, and Alan Bollard was a similar age when he finished as Governor. But Graeme Wheeler will, apparently, be 66 late next year. That means he could not serve another five year term, even if he wanted one, or if the Board wanted to reappoint him. He could, however, serve – say – a four year term, which might parallel the typical arrangements for government department chief executives (who typically get an initial five year appointment, and then often get a three year extension).
I hear on the grapevine that the Governor has already indicated to staff that he will not be seeking a second term. If so, the issue is moot as it affects him.
But with more people staying longer in the workforce it might still be relevant to some of the people the Board could consider to fill the office of Governor.
For example, although it has now been 35 years since the position was filled by someone with a Reserve Bank background – an extraordinary statistic that the Board might want to reflect on – former senior officials would no doubt be among those who might be thought of as candidates for Governor. The Act not only requires that no one can be Governor or Deputy Governor once they turn 70, but it also requires that first terms as Governor must be for five years.
There are, for example, two current and four former Deputy Governors who are still professionally active.
Peter Nicholl was Deputy Governor in the 1990s, before going on to serve as Governor of the central bank of Bosnia. He is still apparently professionally active on the international central banking consulting circuit. But he is 72, and so barred from serving as Governor here.
Murray Sherwin succeeded Nicholl as Deputy Governor. He is now chair of the Productivity Commission, and in many ways could be a very good Governor if he was interested. But it appears that he is turning 65, probably next year, and so the age-70 limit could be a constraint.
Grant Spencer is a current Deputy Governor, and will have served in that role for a decade by the time Wheeler’s term expires. Spencer has considerable experience inside the Bank, as well as decade in relatively senior roles at ANZ, but also appears to turn 65 shortly (the first academic publication I could find dated back to 1974).
Three other current or former Deputy Governors don’t face the same issue. Rod Carr, Adrian Orr, and Geoff Bascand are all in their 50s, and each has chief executive experience.
Where else might the Board look? There are other senior ex Reserve Bankers, such as David Archer, former Assistant Governor and Chief Economist now in a senior role at the BIS, or Arthur Grimes. Or if they were interested in plucking someone from an international agency, my first boss Andrew Tweedie is now the Director of Finance (not just a bean-counting job) at the International Monetary Fund.
There isn’t a strong tradition of academics moving directly into policy roles in New Zealand, and nor are there many academics working in policy-oriented research on monetary policy or financial regulation. Then again, there are two academic administrators on the Board, either of whom might themselves be interested.
The Reserve Bank now has a major and active role as regulator and supervisor of financial institutions, and so some banking background might be a consideration the Board looks for. There are few senior New Zealand bankers, and especially not ones with the capability to be, and to credibly front as, the single decision-maker on monetary policy. Some of us used to worry that Mark Weldon’s friendship with the Prime Minister might have seen him succeed Alan Bollard, but perhaps the OCR leak debacle further reduces that risk.
What of public servants? Iain Rennie, the outgoing State Services Commissioner, has a strong background in macro, and was for a time the Deputy Secretary of that part of Treasury.
Finding the right person should be quite challenging. It is a big job, and also an unusual one. The Bank itself isn’t a large organization, but it has quite a range of functions, where the Governor personally has a great deal of discretionary policy power. And the Bank operates in an area where there is a huge amount of uncertainty. Filling the role well needs management capability, it needs intellectual capacity, it needs good judgement, and it needs the self-confidence on the one hand, and the humility on the other, to recognize the uncertainties, to be willing and able to engage openly with alternative perspectives, and to acknowledge that – being human – from time to time the Governor will make mistakes. Precisely because the power is so concentrated in one individual, inevitably the questioning and challenging will often focus on that individual. The ability to embrace sustained scrutiny and work effectively in that spotlight isn’t a talent everyone has – and nor is it needed for most roles.
From time to time, people talk about the possibility of appointing a non New Zealander as Governor. I don’t think it is a viable or sensible option. Think of how much political mileage there still is in New Zealand from bashing Australian banks. How would people take to having an Australian setting our interest rates, and regulating those Australian (and other banks)? I don’t think it is politically tenable, and neither – given the extent of the discretion the Governor wields – would it be desirable. I wrote about this issue a while ago and concluded:
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.
The appointment of the next Governor is further complicated by the timing. The Governor’s term expires almost three years to the day since the last election. In times past it wouldn’t have been a great problem – there was a broad bipartisan consensus around the Reserve Bank. Similarly, when the appointment of Phil Lowe was announced just a few days prior to the Australian election being called it wasn’t a problem: Labor and the Coalition don’t seem to have any material differences on the RBA. But here all the Opposition parties are campaigning on a different approach to monetary policy. We don’t know quite how different – in 2014, Labour’s policy was marketed as quite different, but on closer examination it appeared pretty similar to the status quo – and part of that would depend on the respective vote shares in a coalition that made up an alternative government. If the government were to change, it would seem pretty unsatisfactory that an incoming government could find themselves lumbered with a Governor taking office on virtually the same day they did, for a term of five years, appointed by a Board appointed entirely by the outgoing government. It shouldn’t matter that much, but such is the extent of the policy discretion the Governor has under current legislation, that it does. Frankly, it should probably bother someone taking the job – appointed, but not knowing what framework he or she will operate under.
People push back against this argument, noting that changes of government can happen in the middle of a Governor’s term. And that is, of course, true. But it is particularly stark when the new term would begin at virtually the same time a new government would be taking office, and when there are – it appears – more differences between major parties on the Reserve Bank Act than would have been the case in earlier decades. There are no easy or comfortable ways to resolve this issue. An early appointment keeps any announcement clear of the election campaign, but that isn’t really the issue. Any new Governor has to be appointed for an initial term of five years. The Acting Governor provisions of the Act can be used only to complete a Governor’s unfinished term. I noted a while ago that one option might be to offer Graeme Wheeler a brief extension, allowing the longer-term appointment to be resolved once the make-up of the next government was clear. Perhaps if there were a self-evidently outstanding single candidate for Governor, commanding respect on all sides of politics, it might also be less of an issue.
Under our current legislation these issues are inescapable from time to time. A five year term will expire in an election year every 15 years, on normal cycles. One could give the Governor a six year term, which would reduce the chance of the coincidence, but even then a snap election could bring the two dates into synch again. Much better would be to move to a system that put much less weight on any one individual. No other advanced country central bank/regulatory agency gives so much discretionary power to a single unelected individual. We shouldn’t.