Subsidy city…airport, airlines and the Council

Earlier this week it emerged that the Wellington City Council’s decision to subsidise flights between Wellington and Canberra (and on to Singapore), details of which are still unknown to ratepayers, had been made on the basis of almost no supporting documentation.   There were, so the Ombudsman found, no emails, no cost-benefit analyses, in fact almost nothing at all.    As Stuff reported it:

Documents released by the Wellington City Council show that apart from a presentation made to councillors after the decision was made, the council generated a single two page document, which refers to the subsidy only in passing.

This subsidy could be as much as $8 million over 10 years.

Outrageous as the lack of documentation is, in a way it isn’t really surprising.  This is the Wellington City Council –  and the cabal at the top of the organization –  we are dealing with.  They aren’t exactly known for rigorous and robust policy and analysis processes.

In any half-decent public sector agency, proposing to use public money,  there would have been a proper substantive piece of policy analysis, reviewing the arguments and evidence,  critiquing the reasoning and evidence advanced by the private parties pursuing such a subsidy and, typically, an attempt at a properly quantified cost-benefit analysis.  Not all cost-benefit analyses are very robust, but if officials are forced to write down their reasoning and assumptions at least it opens things up to subsequent scrutiny and questions, based on numbers, not just the hunches or preferences of councillors.

But Wellington City Council doesn’t do things that way.

After refusing comment for several days, the Council’s CEO –  a temporary blow-in from the UK with no obvious expertise in evaluating industry subsidies or airlines – dug his own hole deeper today.

Lavery initially claimed that he had received a six-page report on the funding request written by “my staff”, before acknowledging that the report was actually written by Wellington Airport which had “different interests” to the council.

That looks a lot like a deliberate attempt by the Council to mislead the public.

The council commissioned no work of its own to review the airport’s claims, but could have, Lavery said.

“We could have done that, if we’d felt uncomfortable with it. But we didn’t, so we didn’t. And that’s not uncommon.”

So  he acknowledges that analysis done by the airport company will have been done primarily serving the interests of the airport company  (as it should) but nonetheless saw no reason to commission any analysis of its own, as regards the interests of the Council and the citizens and ratepayers of Wellington.  He didn’t feel “uncomfortable” with the airport company’s short paper.  And why would he?  I’m sure it was written persuasively and Lavery has no known background in aviation matters.  But that is precisely why he (and his bosses) should have commissioned some independent analysis.  Not to have done so might serve his “can do” mentality, but it looks and feels much more closer to dereliction of duty to the citizens of Wellington.

Lavery goes further

“The “paper trail” is the contract itself,” Lavery said.

Later he claimed government agencies often signed contracts without other documentation.

“That’s the way any contract goes. You get in rooms and have discussions. Then you write it up, that’s the way it works.”

Yes, I’m sure all the contractural terms are in the contract itself –  a contract so secret that not even councillors have access to its terms – but that simply isn’t the point.  What matters here is the disciplined process and analysis leading up to the decision to negotiate the contract at all.  And on that, in Lavery’s own words, there was all but nothing.

Of course, it is easy to focus on Lavery.  No doubt he likes the power the leading cabal of Council have entrusted to him .  He even argues that

The amount at issue was a “relatively modest delegation” Lavery said, adding that he had the power to allocate much larger amounts on sewerage schemes.

One is a core ongoing operational function of the Council, the other is a new industry subsidy, in a sector where councils don’t have a great track record.

But in fact the real responsibility here surely rests with the Council itself, and even more so on this particular occasion with the leading cabal –  the outgoing Greens mayor Celia Wade-Brown, the Labour Party Deputy Mayor Justin Lester, and councillor Jo Coughlan.  Lester was apparently a key figure in the discussion over this new subsidy, and Coughlan has chaired the Economic Growth and Arts Committee which seems to deal with such matters.

I suspect that what actually happened is that the airport company –  always keen to attract new flights – was negotiating with Singapore Airlines, who wouldn’t fly to Wellington (making a normal return on capital) without some sort of subsidy. So the airport company approached the senior “booster” councillors, and Lavery, with the idea of a subsidy scheme, all backed up (we are told)  by a six page paper from the airport company.  Lavery won’t really have been acting alone here –  even if he signed the contract –  but giving effect, with no supporting documentation, to the preferences of these key councillors, perhaps especially Justin Lester who will have been looking to the new flights starting around local body election time.

A lot of people attack this subsidy as corporate welfare.  I’m less sure about that. I doubt Singapore Airlines is benefiting much – the deal probably just makes it barely economic for them to trial this odd route.  Probably Wellington Airport, and its shareholders, are directly benefiting, since they make their money from people and planes passing through Wellington Airport.  But the biggest intended gainers really look like the Mayor (then still toying with re-election) and councillors Lester and Coughlan, wanting to be able to sell voters a line that “Wellington was prospering, new connections were growing etc”, all with ratepayers’ money as secret subsidies.   It was certainly convenient timing that the flights started almost to the week when the voting papers went out.

Justin Lester in particular seems to now be feeling some heat.

Lester believed the decision to subsidise the route was a good one, but called on Lavery to release further information.

“I haven’t seen enough information yet” to be satisfied the process had been robust. “I think there should have been more paperwork.”

Easy to say now as people are filling in their postal votes having read the Dominion-Post’s coverage.   But there is no evidence that the Deputy Mayor sought that sort of documentation and scrutiny back when he, and the rest of the cabal, were doing the deal.  Lavery has already told us about the documentation: there wasn’t any, and it is hard to believe that Lester was not aware of that all along.  As I say, Lavery won’t have been acting without political cover.

It is disgraceful all round.  And good reason to be very uneasy about how the Wellington Council will go about evaluating a proposal to contribute to the runway extension (on top of the considerable money already spent).  No doubt they will assure us that for a much bigger commitment there would be much more scrutiny, and much more transparency.  But how much confidence should voters have in such assurances?  Very lirtle, I’d suggest.

A couple of weeks ago, Treasury put out a link to a rather good few pages on a Policy Quality Framework, developed I gather in the Department of Prime Minister and Cabinet.  I can only commend it to the incoming Wellington City Council, and their employee Mr Lavery, as a starting point for evaluating policy proposals.  It is easy to read and digest, but would involve a sea change at the Council.  Evidence, rigour, and documentation have a great deal to commend them.  It is, after all, public money not that of Mr Lester or Mr Lavery..

To end, I’m reproducing a mock Council discussion sent to me the other day by an irate reader, and reproduced with his permission:

Today’s Dom Post on SQ flights left me more than outraged – quite ruined my breakfast
I can imagine the discussion at the Council table:
Councillor A: “ I have an idea – why don’t we increase the rates on struggling widows in Tawa and use the funds to subsidise shareholders in Singapore Airlines”
Councillor B: “Shouldn’t we call for tenders first as other airlines might be interested. After all Air NZ will lose traffic from Auckland?”
Councillor C: “ No we can’t do that – it is commercially sensitive?”
Councillor D: “ Hang on a minute – since when is a subsidy a commercial activity?”
Councillor E: “ Good point – perhaps we should rename it as market development and then the CEO can authorise it without bothering us”
Councillor A: “The taxpayers’ money will bring added business to Wellington – drawn from Christchurch and Auckland. And what is more, these flights will save Wellington business people 40 minutes compared to going via CHC to get the SQ flight from there. That is a big saving”
Councillor B: (the lone slightly more rational member): “ If business folks and others are enjoying a benefit that must be worth something to them – so why don’t we recoup the costs of the subsidy by a surcharge on the tickets for SQ flights?. Actually, come to think of it, the ratepayers are already subsidising all other flights out of Wellington through our involvement in the WIA so we could charge an extra fee on those too”

Councillor A: “ You all seem to be overlooking the multiplier effect; our own analysis (based on data supplied by the WIA and Singapore Airlines) shows a significant net economic benefit to Wellington”

Councillor B: “ But perhaps we should get a slightly more independent, disinterested party to review the business plan?

Councillor C: “No, no  – we can’t do that– remember all this is highly commercial sensitive

But, as I noted sadly to my correspondent, it was, of course, even worse than that. There was no such discussion around the Council table before the deal was signed –  just the inner cabal and Mr Lavery.  Even after the deal was done, councillors –  elected members –  are only allowed access to the terms if they pledge subsequent secrecy.  It is no way to run a government, but sadly it seems all too common in local government.  Wellington might well be no worse than most, but its failings are quite egregious enough.

UPDATE: When I wrote this post I hadn’t read the Herald story, from which this comes

“I think the current debacle in the press illustrates perfectly why it’s not appropriate to have it in the political domain. It gets politicised, and I think a lot of organisations wouldn’t touch us with a barge pole if that happened.”

The Dominion Post has reported the 10-year subsidy is worth up to $800,000 a year, but Lavery would not reveal the agreement, citing commercial sensitivity.

“We don’t want to lose out to competitor cities that would love to have the deal we have with Singapore Airlines,” he told Radio New Zealand.

Two thoughts:

  1.  “politicized” = voters/citizens concerned about how the city council they elect spends their money?    It simply isn’t the business of Councils to be subsidizing flights…..or election campaigns.
  2. “competitor cities”.  Those would be…..?  SQ already fly to Auckland and Christchurch, so was Lavery (and Lester) concerned about somehow “losing out” to flights from, say, Palmerston North to Canberra?

 

 

A boardroom coup?

The Reserve Bank’s Annual Report should be due out later this week.  With it, no doubt, will be the separate report by the Bank’s Board of Directors.  The Board has few/no executive responsibilities, and its prime responsibility is to (a) recommend the appointment of a Governor, and (b) to monitor the performance of the Governor.

The Bank’s own Annual Report is usually an anodyne affair, as no doubt it should be.  The Governor has plenty of other vehicles to comment on policy etc.  But the Board’s Annual Report should be different.  After all, it is the one time in the year when the Board makes a public statement.   But the operative word is “should”.  I wrote about last year’s Board report here –  that report said almost nothing, and seemed consistent with a Board view of itself primarily focused on “having the Governor’s back”, at least in public.  We’ll see soon if this year’s report is any better.

But then this morning, in a statement no doubt timed deliberately in advance of the Board Annual Report, came news that the Board had acted to replace both its chair, Rod Carr, and its Deputy Chair Keith Taylor.    In one of the odd and unsatisfactory features of the Reserve Bank Act, the Minister of Finance appoints Board members, but the Board members themselves appoint the chair and deputy chair from among their number.

And one of the practical problems of how the Act has worked since the new structure was put in place in late 2003 is that Board members have repeatedly (each year, since chair is an annual appointment) chosen former Reserve Bank staff as chair.  First Arthur Grimes (who had previously been Chief Economist and Head of Financial Markets) and since 2013 Rod Carr, former Deputy Governor (and Acting Governor for a time after Don Brash resigned).  I presume the Board liked the idea that the chair had some subject-specific expertise and experience, but the downside was that those chairs were all too ready to bring a management perspective to the Board.  When they ask questions, they might be the geeky questions that get asked on the internal Bank committees, it is too easy to get too close to management,  and externally they seem to have wanted to make sure they “have the Governor’s back”.   We saw a particularly egregious example of those sorts of faults in the way Rod Carr was egging on Graeme Wheeler, and backing him up, over Wheeler’s misjudgements in the OCR leak debacle.

But now Carr is gone, and with him his deputy Keith Taylor, replaced by the two economists on the Board: Neil Quigley (Vice-Chancellor of Waikato University) takes on the role of chair, and Kerrin Vautier becomes Deputy Chair.

In my experience, Quigley was always willing to ask hard questions, and look for alternative perspectives, even if that meant upsetting first Alan Bollard and then Graeme Wheeler.  Combined with a background that doesn’t include a stint in RB management, it looks like a step forward.

But it also looks as though the Board itself really wanted some things to be different. We are told:

Dr Carr said that he had advised the Board some months ago that he would not be seeking a further term as a Director of the Reserve Bank when his present term ends in July 2017. In light of that decision he had decided to step down as Chair.

But one might reasonably wonder if perhaps the causation was not the other way round?  Carr was in his first term as Board member, and could surely have expected reappointment to the Board by the current government.  Sure, he has a busy day job, but not necessarily any busier than it was when he first became Chair three years ago.   There might be a sense in which Board members had become discontented with Carr’s chairmanship, quietly foreshadowed the prospect of a “coup” at the next annual election, allowing Carr to go quietly, suggesting it was all his own decision.

The timing is also interesting given that Graeme Wheeler’s term expires a year (almost to the day) from now.  An experienced chair, in whom the Board had confidence, would have been a natural to oversee the process of identifying the person to serve as the next Governor.  That would have been so even if Carr had genuinely not wanted another term –  oversee the selection process, which would be over before Carr’s term expired, and then leave it to another chair to work with whoever is the new Governor.  By contrast, while Quigley has been on the Board for several years, he only becomes chair now, and has (as far as I’m aware) no experience in the leading a process to fill such a powerful role.  In itself, that shouldn’t be disqualifying –  and as I noted earlier, I think his appointment is a modest step forward –  but it does suggest something more in the nature of a board room coup has gone on.

If anything, Graeme Wheeler’s press release could be seen in the same light. I’m sure there was a nice laudatory press release from the then Governor when, in 2003, Rod Carr left the Bank staff.  And yet we get this today

When Dr Carr’s term ends as a Director, this will end a 10-year relationship with the Bank. Between July 1998 and July 2003, he was Deputy Governor and then Acting Governor of the Bank. In these positions he also served as a Director of the Bank until September 2002, since when Deputy Governors have no longer been Directors of the Bank. Dr Carr was appointed to the Board in 2012, and was first appointed Chair in September 2013.

Governor Graeme Wheeler paid tribute to Dr Carr’s contribution. “Rod has provided over a decade of invaluable service to the Bank, spanning key management and governance roles. He has been an outstanding Chairman and the Bank has benefited greatly from his intellectual rigour and sound advice and judgment.”

It is all a bit strange really.  Being a Board member is (supposed to be) quite different from being a senior manager, especially in the Bank legislative model.  And isn’t it a bit icky to have the person whose performance the Board, and Chair, are primarily responsible for monitoring lauding the excellence of the outgoing chair just a few days before the Annual Report –  the performance assessment on the Governor – is due?  I suspect Wheeler probably was rather keen on Carr’s unquestioning defence of the Governor.  But that might have been part of the problem –  just helping to reinforce that bunker mentality which characterizes the late-Wheeler Reserve Bank.

Today’s news really does start the process leading to the appointment of the new Governor.  I remain convinced that the Board –  all members unaccountable and barely known –  has far too much power in that process.  But better at least to start the current unsatisfactory model with something of a clean slate at Board chair level, and a perspective that isn’t shaped by a term as Reserve Bank senior manager.

PS: The Bank should probably be aware of the factual error in the press release.  Contrary to the statement in the blocked text above, Carr had served as a Board member throughout his term as Deputy (and Acting Governor).  He didn’t leave until the second half of 1993, and the provisions removing Deputy Governors from the Board weren’t in effect until after his departure.    It is all there on page 6 of the 2003 Annual Report.

 

 

Subsidy city…Wellington airport

At about 3pm, the first Singapore Airlines flight to Wellington, via Canberra of all places, lands at Wellington Airport.  Wellington-boosters, well represented on the Council and the Chamber of Commerce, talk up the first “long-haul” flight to and from Wellington.  All of which would be more impressive if it were not for the ratepayers’ money being (secretly – no information on the amounts or terms of these sweetheart deals, no robust cost-benefit analysis etc) used to make it all possible.    Were the flights financially self-supporting that would be the best evidence of them being “a good thing”.  But they aren’t.  That means (a) a presumption against them being “a good thing”, and (b) a likelihood that they won’t survive for long, at least without some permanent subsidy from the long-suffering ratepayers of Wellington. It probably isn’t a subsidy to the giant Singapore Airlines –  they’ll probably just manage a normal return on capital –  but by quite which canons of social justice ratepayers should be subsidizing government departments (probably the main purchasers of tickets on the Wellington-Canberra leg, and one of the larger sources of international passengers from Wellington) is beyond me.

But at least these sorts of subsidy deals can usually be terminated with not too much notice.  Other cities have tried this sort of thing, and the arrangements have typically fallen over before too long.  There isn’t much irreversibility about them.  The same can’t be said for the proposed Wellington Airport runway extension.  If it goes ahead, very large amounts of money will be irreversibly lost.

There was a very nice, accessible, article out a few weeks ago in City Journal by leading US economist Ed Glaeser.  In “If you build it…..” Glaeser tackles some of the “myths and realities about America’s infrastructure spending”.  There is a lot enthusiasm around, especially in centre-left circles, for more – much more –  infrastructure spending, to “take advantage” of the current very low global interest rates.  Enthusiasts, of course, rarely stop to ask why interest rates are so low, and expected to remain low, but set that caveat to one side for now.   Glaeser reports on a variety of studies on just how underwhelming most government-led infrastructure actually is: too often in regions that are declining rather than ones that are growing, all too often with low payoffs (and massive cost over-runs) at the best of times, and so on.  There are plenty of specific differences between the US situation and our own – we don’t have the Senate, steering funds to lightly-populated states, but then we have by-election promises to build bridges to anywhere –  but I don’t think we have anything to be complacent about.  His penultimate paragraph is relevant pretty much anywhere

Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. Large-scale federal involvement in transportation means that the people who benefit aren’t the people who pay the costs. The result is too many white-elephant projects and too little innovation and maintenance.

Just last week we heard of the latest large cost-escalation in the hugely-expensive questionable Auckland inner-city rail loop.  “Who cares” seems to be the reaction of central (National) and local government (Labour) politicians –  ratepayers and taxpayers will pay.   In Wellington the largest regional roading projects for generations (probably ever) is underway at Transmission Gully.  The economics of the project are simply shocking, but that doesn’t seem to bother our National or Labour politicians.

And then there is the airport extension proposal.  Now, on paper, it might look like a project that might pass some of Glaeser’s tests.  After all, Wellington Airport isn’t owned by central or local government –  although Wellington City has a minority stake –  but by a company majority-owned by some fairly hard-headed infrastructure investors/operators, Infratil.

There are plenty of people around –  including commenters here on previous airport posts –  who will attack Infratil.  I’m not one of them.  Infratil is a private sector business, no doubt pursuing (as it should) the best interests of its shareholders.  And Infratil has been quite unambiguiously clear that the airport extension project simply does not stack up on commercial grounds.  In a comment on this blog six months ago, the chairman of the airport company Tim Brown put it this way:

The Airport extension is forecast to cost $300m. If airport users who get no value from it (people on smaller aircraft, people buying coffee, parking cars, etc) don’t pay anything towards it, then the estimated present value to the airport company from those who do benefit from the extension and do help pay for it may be about $100m. So on purely commercial grounds and avoiding cross subsidies the shareholders are expected to contribute that sum.
Clearly that makes it a dead duck on a purely commercial basis. Who would hand over $300m for something “worth” $100m?

Since Infratil owns 66 per cent of the airport company (WIAL) that would involve them putting up around $66m and the minority shareholder putting up $34 million.

So when people attack the idea of council or government handing over (lots of) additional money to get the project going (in addition to the millions the Council has already spent) as “corporate welfare”, they are simply wrong, at least as regards Infratil.   This project seems to be driven by the Council “boosters”, presumably why they’ve been so ready to spending large amounts of ratepayers’ money on it already.  If some branch(es) of government in fact do stump up hundreds of millions of dollars beyond what is commercially justifiable, some of it will certainly benefit some local businesses, but most of it will simply be money down the drain; spent on real resources to build an extension that simply has almost no economic value.  Other than the exercise commissioned by the airport company itself –  funded by the Council –  no one who has taken a hard look at the numbers regards the claims of large scale economic benefits as stacking up.  Of course, there are plenty of “boosters”, and others who think of (real) long-haul flights from Wellington as a nice idea, but the numbers simply don’t stack up.

Fortunately, it is local body election time.  If it weren’t, I fear the project might be rammed through with as little serious scrutiny as the cosy subsidy deal to fund a movie museum/convention centre in Wellington recently was.  (The movie industry, of course, surviving on large scale taxpayer subsidies).  At present, WIAL has a resource consent application underway.  (Of course, if the project can’t get a resource consent, the economics is irrelevant.)  Somewhat curiously, WIAL recently temporarily put the resource application on ice. This was, ostensibly, to allow them to take account of points raised in the numerous public submissions. I’m a bit skeptical of that story –  surely the submissions can’t have been much of a surprise –  and wonder if it isn’t a convenient way to minimize coverage of the issue during the local body election season.  Perhaps not, but the timing is certainly convenient.

A year ago, I assumed that the Wellington City Council – which hardly ever turns down an opportunity to waste money, and which is in the thrall of an “economic development” mindset –  would simply write the cheque, shifting large amount of ratepayers’ money into a project which  –  while fundamentally uneconomic –  it would not even secure a much-increased ownership interest in.

But as the election season has gone on, I’ve begun to be a little more hopeful that perhaps hard-headed analysis might actually play some role in the eventual decision on Council funding (or indeed, central government funding, where there is little sign of much greater discipline around capital spending).   Our mayoral race is hotly contested, and so there have been plenty of surveys asking candidates for their views on the airport extension.  Here I’m drawing mostly from a survey done by my local residents’ association.

Somewhat encouragingly, of the eight mayoral candidates not one is now unambiguously in support of spending lots of ratepayers’ money on the runway extension.

One of the mainstream candidates –  centre-right councillor Nicola Young –  is outright opposed

 Opposed. Initially I thought it should funded in line with its ownership (Infratil 66%, WCC 34%) but now I believe it would be a $300million folly. Subsidising international airlines is very costly, as Christchurch Airport discovered when it paid Air Asia X millions to get direct flights to Asia; the flights were cancelled after nine months

Another sitting councillor, this time from the left, Helene Ritchie, is also opposed

I have repeatedly opposed it and any funding towards it-including Council using rates to support an application by the Company for a  resource consent.

She further offends the elites by suggesting that voters should get to make the final decision on such an expensive proposal

The Environment Court should throw it out. If it is not thrown out, then as mayor I will call for a referendum/poll of the people, on this proposed rates funded $350 million (probably likely $500million) Airport Extension, asking residents, “Do you want to pay for the proposed airport extension? Should rates be spent on “corporate welfare”-an unnecessary airport extension?”

Another candidate –  left-wing economist Keith Johnson, campaigning (I suspect) against waste rather than to be elected –  is also clearly opposed

I am opposed to the project and have submitted a substantial paper detailing my objections to the Environment Court, covering safety, environmental, budgetary and business-case concerns.
I am absolutely opposed to the allocation of $90 million from Wellington City Council to the project, as the proposal essentially constitutes corporate welfare funded from the pockets of ratepayers.

A final minor candidate is also clearly opposed.

Unfortunately, most of the more likely candidates are somewhat more positive.

Sitting councilor Andy Foster probably isn’t going to be mayor, but despite being a typical “booster” most times when it comes to council spending, on this one he has clearly been having second thoughts.

It will depend on whether it can get over some very tough hurdles: consent, demonstrated airline commitment, robust economic case and obtain funding.  If it can, I will support it. If it doesn’t I won’t.  I suspect it won’t.

The election seems set to come down to a race between the current Labour Deputy Mayor (endorsed by the Greens) Justin Lester, the current Labour mayor of Porirua Nick Leggett, and the centrist councillor Jo Coughlan.  All three have a track record of supporting spending (lots of) public money on “economic development” projects, but I am mildly encouraged by how cautious they now seem to have become.

Here is Coughlan

I support the runway extension subject to it getting a resource consent, a business case that stacks up and appropriate funding. If the city does contribute, it should be reflected in our ownership skate. It should not be a donation

On that basis, the Council would end up owning a very large share of WIAL.  It is a middle of the road line, but it is important for Wellington voters to remember that the project is fundamentally uneconomic, and whether any money was contributed as an equity stake or as a “donation” doesn’t change that.  Central government had lots of equity stakes in Think Big projects in the 1980s.  They were all financial and economic disasters.

Here is Leggett, current mayor of Porirua

I support the idea of the runway extension. Wellington has to open itself outwards and create better connections internationally to grow jobs and investment.   I don’t support the council funding the extension beyond its 33% shareholding and if the Resource Consent is not successful – or the Government refuses to offer funding – then the project won’t proceed.

Ah yes, the “idea” sounds good.  But if it were such a good idea, users would pay for it.  That is the market test, usually a pretty sound one.  One gets the impression he doesn’t actually think the project will pass a proper cost-benefit analysis for the Council –  and $200m is a lot of money.  Leggett seems to be looking to central government –  and as he must drive past the Transmission Gully works each day on the way to the office, perhaps that is no wonder.  Wasteful capex is just par for the course –  especially when it could be dressed up in current fashionable rhetoric about advancing (with subsidies) export education and tourism.

And what of the Labour (and Greens –  even though as a party they ostensibly oppose the runway extension) candidate, Justin Lester?  He has been a strong advocate of the project, and was apparently the key figure in securing subsidies for the Singapore Airlines flights to Canberra. But now….

I have committed to seeking the resource consent for the airport extension project. It’s too early to say whether the project will proceed because the following three caveats will need to be satisfied before it proceeds: 1. Resource consent approval 2. Financial support from Central Government 3. Commitment from airlines to fly direct routes to Asia.
This is a 50 year project and needs careful consideration before any decision is made.

So even for Lester this is too big for the Council.  It can only proceed with central government funding.

Perhaps the most encouraging bit is his final sentence.  It is a long-lived project, and the option to delay must be a real one.  Perhaps in five or ten years time we will have a more secure feel for, for example, the viability of the new Singapore flights.  And –  for those more environmentally inclined than I am –  there is always the question of sea-level rise to consider, for a very low-lying airport.  Perhaps we could have another look in 20 years time?  Who knows, by then the benefits might be so overwhelming the users might even pay for the project?

In our council system, even mayors have only one vote.  Whichever of these candidates gets elected the project might still get significant additional council funding, or not.  And as central government has a terrible record of pouring money down sinkholes –  Transmission Gully, KiwiRail, probably the Auckland CRL etc – it might get funding from there even if the Council isn’t willing to stump up much.  But it is at least slightly encouraging that the mayoral candidates, reading the tea leaves of voter attitudes, have all either come out opposed to the Council paying for the project, or hedging support around with some tests that will be very hard to pass.

I’m not usually a single issue voter –  and the debacle of the Island Bay cycleway still concentrates the mind in other directions at times –  but this time I am.  There is simply too much money at stake, to allow boosters with the public cheque book to pursue their field of dreams vision for Wellington airport.

(For those wondering, I have  not run out of ideas or enthusiasm, just energy. I hope to be back to normal soon.)

UPDATE: From page 35 onwards of this Chamber of Commerce survey there are fuller statements of each candidate’s approach to the runway extension issue.   There isn’t anything very different than in the quotes I’ve included above, but for those interested the more detailed responses are worth consulting.  I strongly agreed with this line from Andy Foster

As much as possible all information pertinent to the decision should be made available to the Wellington community so that it can be scrutinised by everyone.

 

 

$100000 of coerced child labour

Late last year I ran a post on the shockingly bad economics of school fairs. At least in my observation of our local school, it would be more efficient all round for most people to simply write a cheque.  But at least school fairs are largely an optional involvement –  even if there is a bit of social pressure.  Parents can simply write a cheque instead, and children themselves don’t need to be involved much if at all.

My daughter’s intermediate school (as left-leaning as they come) practises a much more inherently exploitative and costly fund-raising model.  Fairs are mostly run by adults, happen at weekends, and are –  at bottom –  voluntary.  But at South Wellington Intermediate today is “market day”, the culmination of weeks of preparation in which for two hours this afternoon the kids will attempt to sell the fruit of their labours (typically food of various sorts) to parents, each other, and anyone else they can lure onto the grounds.

I’m not sure how much this exercise typically raises – I couldn’t find the relevant newsletter from last year –  but I’d be very surprised if they managed to raise as much as $20000 [UPDATE: The Principal has confirmed that it raises much less than that.]

But how is this money raised?

By the compulsory conscription of the children.  The kids have no choice about being involved: more-structured teaching is simply set aside to make space for all the time “market day” involves.  Kids are encouraged to beg for money (“seek sponsorship”) from local businesses.   Now some of the kids seem to quite enjoy what they are doing, but that isn’t really the point.  And outside North Korea, it isn’t how real businesses operate either.

Kids are sent to school to learn.  Despite what it often feels like to a child, the school years aren’t really that long –  perhaps 12 years of schooling, and 192 days of school per year.  Make allowances for teacher stop-work meetings –  why does the government as employer agree to these occurring during class-contact hours? – and the little that seems to get taught in the last day or two of each term, or the inevitable days when relieving teachers do little more than entertain kids, and the actual time available for teaching core content gets slimmed down quite quickly.

And then comes market day.  It is difficult to tell quite how much time this affair involves, but from listening to my kids’ accounts I’d be very surprised if it was much less than a week per child. Even tomorrow, when the school is closed in the morning for some reason, the message to my daughter was along the lines of “anyone coming to school tomorrow afternoon will just be tidying up after market day”.

Coerced child labour doesn’t have a direct price –  so probably the teachers and the Board think of it as free –  but it certainly has an opportunity cost.  One way of getting a fix on that is to look at how much parents pay for schooling in the private market.  There is a nearby private school, which some parents who are particularly frustrated by the inadequacies of the state intermediate do send their kids to.  It seems like a fair representation of a price of schooling.  From that school’s website, New Zealand residents pay around $16000 per annum at intermediate level, and international students (for whom there is no NZ taxpayer support) pay around $22000 per annum.    The private school probably has fancier facilities etc, so lets call the market price of a basic intermediate education $20000 per annum.

Since intermediate schools are only required to be open for 192 days a year, or just over 38 weeks, it seems reasonable to put shadow price on the education of around $500 per week per child.  So how much are the inputs to this fundraising exercise –  Market Day – actually costing?   Let’s assume that the kids don’t actually spend a full week on the thing –  or, alternatively, that there is some slight educational value in the thing –  but only four days each.  That would be $400 per child.  There are around 250 kids at the school, suggesting that $100000 of school time –  lost learning – is being taken to raise, at most, $20000.  And in addition to the $100000 of lost (well “stolen” would be more accurate) time there are all the donations of ingredients from parents –  again something over which we had little effective choice –  and the donations from local businesses.  It is just staggeringly uneconomic –  and has me looking less unfavourably on old-fashioned school fairs.

Is this any way to fund public services?   Perhaps the Air Force could plough up all that land at Ohakea and send their staff out to work each day growing turnips, grazing sheep or whatever to supplement their budget  (but at least staff are free to resign)?     Perhaps Treasury could run cake stalls on The Terrace each lunchtime to help cover their costs?  But even that would be less bad than compulsory stealing the scarce learning time of our children to, extremely inefficiently, raise funds to keep schools going.

My inclinations are to the right in matters of education. In my ideal world, schooling would be purchased on-market (as food is), with income support available for those society assesses to be in real need.  But that isn’t the model New Zealand has chosen.  I’m also not a parent with a taste for extravagant facilities: mostly I think schools spend too much on IT, and have smaller class sizes than they could sensibly (evidence-based) have.  So my practical preference would be for all state schools to be adequately funded from the centre, and for schools to be banned (statutorily prohibited) from using coerced child labour to fund raise.  If parents really really want something better for the kids in their school, parents can either write a cheque (compulsory but tightly capped fees) or do their own fundraising out of school time.

Sadly, this use of coerced child labour isn’t restricted to fundraising.  At my son’s otherwise rather good high school, a Year 9 boy is apparently rostered on each day to act as messenger boy for the office –  the child concerned spends no time in class, but just runs messages as required.  In this day of emails and cellphones it is a little hard to imagine quite how many physical messages need to be run.  But lets assume they still do need to be run.  The alternative approach would be to pay an adult the minimum wage to do the job.  Over a six hour school day that would be $91.50 a day.  And the value of schooling?  Well, remember those estimates I calculated from private school fees –  around $100 a day.  In other words, the school is simply cutting costs by coercing child labour.

Perhaps these issues don’t bother many people.  I think they should.  In the far-distant days of my youth, the only school fair (or equivalent) I recall in twelve years was one to raise funds for the 1974 Commonwealth Games.  I have no objection to voluntary activities to fundraise for worthy causes –  mufti days for charity etc –  but having schools force our kids to run cake stalls to keep their school going isn’t, to my mind, what an advanced country should look like. Apart from anything else, it is just so wildly –  almost unbelievably –  economically inefficient.

And I’m still not sure how the teachers (and Board) reconcile this coercion with their own left-wing approaches more generally.

UPDATE: Stuff covered this post here together with some responses from the intermediate school Principal.  To be clear, despite her comment that she deals with me fairly regularly, we’ve never actually met, and I think we might have exchanged two emails in the course of this year (I did raise some other concerns with her and the Board last year).  I mentioned my concerns about the forced labour behind the fundraising in an email to her earlier in the week, and had no response.

The fact remains that this is the prime fundraising exercise the school undertakes in the year, and it is all done on the basis of coerced child labour, including encouraging 11 or 12 year old children to “beg” to help fund the school.  State schools shouldn’t be run that way.  (And, as I say that, I have a modicum of sympathy with those running schools on current, generally inadequate, funding levels.  Such fundraising activities, let alone the use of coerced labour, didn’t happen 30 or 40 years ago.)

Hard Stuff or MBIE puff piece?

According to TVNZ,  “The Hard Stuff sees Nigel Latta tackling the key issues facing NZers”, funded with taxpayers’ money through NZ On Air.

I don’t think I’d watched any of Latta’s programmes previously, but when I heard a couple of years ago that he was planning to tackle immigration I suppose I welcomed the notion that a mainstream broadcaster would give serious coverage to a major instrument of economic (and social) policy.

Shortly after Latta’s new series got underway, I’d heard underwhelming things about the immigration episode from people who’d watched it on the website.  But I only got round to watching it this weekend, after it was broadcast last Tuesday.

Frankly, even with the warnings I’d had, I was staggered at how much of a puff piece it was.  In many respects MBIE and the Minister of Immigration must have been delighted. But if that is the strongest case that can be made for New Zealand’s large-scale non-citizen immigration policy, we should be pretty worried.  Being a bit of a naïve optimist at times, I keep expecting someone –  MBIE, Treasury, the Minister, supportive academics, whoever –  to come up with some pretty compelling evidence or argumentation to seek to demonstrate how New Zealanders have benefited (economically) from one of the largest actively managed immigration programmes in the world.  But they don’t.  It must leave thoughtful supporters of the policy at least a little uncomfortable.

Latta’s programme had three main interviewees:

  • Nigel Bickle, the senior bureaucrat who heads the Immigration New Zealand arm of MBIE and who –  being a public servant –  is simply the mouthpiece for government policy.  The MBIE website describes his background as  follows:  “the majority of his experience is in front-line service delivery, in a number of operational and support leadership roles specifically within complex organisations undertaking change”.  Those are really valuable skills in some public sector roles, perhaps even in Immigration New Zealand, but I’m not sure they suggest he has much to offer on the costs and benefits to New Zealand of a large scale immigration programme.
  • An immigration consultant, and
  • Professor Paul Spoonley, an academic sociologist, one of the key academic advocates of New Zealand’s immigration policy, and one of the key figures in the MBIE-funded research programme CADDANZ, a programme that simply assumes the benefits of large-scale immigration.  I dealt with some of his overblown economic claims here.

There was some brief snippets from several  other pro-immigration people –  including one who claimed, incorrectly, that there had been a net influx of New Zealanders to Auckland (thus to downplay the role of non-citizen immigration on house prices) when the data suggest quite the opposite over recent decades.   And there were several heartwarming snippets from immigrant families, and from the Principal of Rangitoto College and that was about it.

The intended message seemed to be “there’s really nothing to worry your silly little heads about”.  And while I suspect (hope) he didn’t really mean to tar everyone with any doubts about the programme in this way, the only reference to alternative perspectives  that I spotted in the entire programme was to “racist idiots”.  Take that….

We were told (reasonably enough) that some past mistakes in the immigration programme  had now been fixed.  For example, there really had been an influx of highly-qualified people in the 1990s whose qualifications were not recognized here (while now the programme puts a strong emphasis on applicants having a job offer).  I was a little surprised to learn that in the 2013 census data, 62 per cent of taxi-drivers really were overseas-born.  Some of the least satisfactory features of the family stream of the immigration programme have been fixed –  one such featured (sibling) arrival seemed to be working extremely hard, but as his two jobs were at Pak N Save and as a cleaner it didn’t seem likely that the spillover benefits to the rest of the economy were large.  And, of course, we still allow around 4000 a year in under “parent visas”.

Bickle  –  that “front-line service delivery expert” –  argues that we need lots of immigration because a country “can’t get wealthy trading with ourselves”.  There seemed to be quite a bit of confusion there.  Of course, small countries (in particular) need to trade internationally, but that tells one simply nothing about the case for (or against) large scale immigration.  As it happens, and as I’ve pointed out before, most countries –  and especially most countries of our sort of size population –  export and import a much larger per cent of their GDP than New Zealand does.  And that is true whether or not those countries have had lots of immigration.  Even the academic advocates of immigration accept that the evidence that immigration does much to boost the export share of GDP is pretty slender.  I’d argue that there is a good case that in New Zealand (specifically) rapid population growth has, if anything, crowded out growth in exporting.

Towards the end of the show, Latta was burbling on about how “the economic gains are a no-brainer”.  And – in his view –  there are no other plausible risks/downsides of a large scale immigration programme,  So, he concludes, “immigrants are doing us a favour” and we should really be grateful to them for choosing to settle here –  rather than, he implied rather than directly stated, complaining or indulging those “racist idiots”.

You might wonder how Latta concluded  that the economic gains to New Zealand were a ‘no-brainer’.  I did.  I guess that is what comes of approaching the issue with what appears to have been a pre-conceived answer in mind, talking only to advocates of the immigration programme, and misinterpreting (or misapplying) a consultant’s report.

For some time, MBIE (and its predecessors) have been paying consultancy firm BERL to produce a report every few years, drawing heavily on Census data as well as other material from government agencies, to produce an estimate of the fiscal impact of immigration.  The latest such report was released, MBIE tell me, a couple of weeks ago.  But, as it suited MBIE’s agenda, it had been provided to Latta well in advance of that (the programme was the website before the BERL report was available to the public).  On this particular methodology, BERL estimates that the average non New Zealand born person (“immigrant”) contributed a net $2653 to central government finances, compared with only a net $172 per New Zealand born person.

The Minister of Immigration and MBIE are obviously keen on this report,  Only a week or so ago, Michael Woodhouse, Minister of Immigration, appeared on TVNZ’s Q&A programme and was asked, near the end of his interview, if there was in fact any evidence that, over the longer-term, our immigration programme lifts exports, productivity etc.  Not in the least abashed, Woodhouse responded that there most certainly was such evidence, citing a report BERL “put out just last month” which demonstrated a very strong positive contribution.  I looked around for such a report and eventually had to ask MBIE what the Minister was referring to.  I was told it was the BERL fiscal paper linked to in the previous paragraph.

I hope the Minister had simply misunderstood that report.  It is an interesting exercise in its own way, but it has very considerable limitations.  Let’s start with those the BERL authors themselves list:

This study focuses on a subset of relevant issues and is subject to a number of limitations
1. The study concerns the impacts of gross immigration, not of net migration flows.
2. The study concentrates on fiscal rather than economic impacts. Due to this the study is limited to estimating the direct monetary impacts on the government’s operating budget.
3. The study does not cover all components of the government accounts.
4. This study captures a number of influences on differences in the fiscal impacts between population groups. Data limitations restrict the degree to which within group differences can be used to estimate overall impacts.

To be clear, the fiscal exercise does not even purport to look at the overall economic impact of immigration (good or ill).  It sheds no light at all on that issue.

But even in what it does look at, there are some quite severe limitations:

  • recall that the report estimates that both NZ born and immigrants made a net positive fiscal contribution to the government’s accounts.  Perhaps, but recall that in 2013 (the year studied) the government was still running quite a large fiscal deficit.  In other words, even if the study is roughly accurately capturing the relative contributions of immigrants and the native-born, it isn’t remotely accurately capturing the absolute contribution.
  • The BERL exercise does not appear to recognize at all that much of the demand for increased government capital spending now arises from the immigration programme itself (as it notes, between 2001 and 2013, the New Zealand born population aged 25 to 64 actually fell slightly while the foreign born population of that age increased by 222000 people).  Over those 12 years, 80 per cent of the total population growth has been among the foreign-born.   Assign much of the (above-depreciation) government capex to the immigration programme and suddenly even the fiscal numbers will look quite different.
  • These are snapshot effects rather than inter-generational ones.  It is hardly surprising that an immigration programme that brings in relatively young people involves less government operating spending (per capita) than for natives –  people that age are typically young and fit –  but if we want to think about even the fiscal impact of the immigration programme as a whole it would be important to look at the impact not just of the immigrants in the couple of decades post-arrival, but (for example) at the impact as those people age, and the impact of their own children (many of whom will be New Zealand citizens, but still a consequence of the immigration programme).
  • perhaps most importantly, any sort of exercise like this is only meaningful if it deals with very small changes (when one can keep the rest of the economy held constant).  By contrast, the potential for a large scale immigration programme to affect real interest rates, the real exchange rate, and the underlying structure of the economy, means these fiscal exercises offer no insight at all on the overall impact of immigration even on the fiscal accounts, let alone the wider economy.

I’ve never made much of the fiscal issues around immigration.  By international standards our residence programme , if large, isn’t bad  –  if it doesn’t attract many very skilled people, at least it does successfully focus on getting people quickly into the labour market.  But precisely because in the end we are largely bringing lots of people quite like us –  who can readily get jobs –  it is very unlikely that in the long-run there will be much net difference in the fiscal effects between the contributions of those whose ancestors have been here for generations and more recent arrivals.

But to revert to Latta’s –  and the Minister’s –  overblown claims, not even BERL would argue that their report sheds any light on whether New Zealanders are gaining economically from our large scale non-citizen immigration programme, that has now been in place (albeit with constant tweaks) for 25 years.  Perhaps there are such gains, but to demonstrate them one would surely need to grapple with such disconcerting statistics as:

  • New Zealand having had among the lowest (lower quartile) rates of productivity growth among OECD countries for the last 25 years (and perhaps the only OECD country with materially higher immigration – Israel –  is one of the few countries to have had even less productivity growth than New Zealand),
  • the failure of exports as a share of GDP to increase for 30 years

exports small countries

  • the failure of per capita tradables sector real GDP to have increased at all for the last 15 years (recall, this isn’t just a share of GDP – there has simply been no real per capita growth in our outward-oriented sectors in that time).
  • the fact that after all these years, our exports remain very heavily natural-resource based, sectors that would seem unlikely to have much need of a rapidly growing population.
  • the continuing relative decline of Auckland’s GDP per capita, despite the concentration of the immigrant population in Auckland.

Perhaps I shouldn’t really expect words like “productivity” to appear in prime-time mainstream TV, even when taxpayer-funded, but it was as if Latta had never heard of the concept, and those he interviewed just didn’t care.  There was an (immigration) programme to defend after all.  Who cares if New Zealand has been in gradual economic decline for 60 years or more? The elites apparently simply know that the economic gains of an extraordinarily large immigration programme are a ‘no-brainer’.

Actually, I suspect a few of them will have cringed, and squirmed rather uncomfortably, when they heard Latta make that claim.  But the defenders of the programme –  Ministers, officials, and academics –  really need to start coming up with something much persuasive if we are really to be confident (and few things are ever certain) that New Zealanders are benefiting from this large scale intervention.

LVR controls, regulatory philosophy (and the OIA)

I’ve had a bit of a relapse in my recovery and seem set to spend much of this week doing little more than lying on the sofa reading something not too taxing.  There are plenty of things I’d like to comment on substantively, but for now it won’t happen.

The Reserve Bank released its (latest –  third in three years) final LVR decision on Monday.  To no one’s surprise, after a sham consultation, they confirmed the Governor’s original plans, albeit with some curious refinements to the exemptions –  curious, that is, if one thinks that decisions on such things should be based on considerations – the statutory ones – around the soundness and efficiency of the financial system.

And although the lawgiver has now descended from the mountain and issued his unilateral decrees, which have the force of law, there is still no sign of a regulatory impact assessment.  There is talk in the summary of submissions that one is forthcoming, but really……when the regulatory impact assessment is published only some time after all the decisions have been made, it reveals quite how little weight the Governor seems to put on good processes.  And it is not as if the initial consultation document was sufficiently extensive and robust to cover the ground –  recall the “cost-benefit” analysis that consisted of a questionable list of pros and cons with no attempts to quantify any of them.

One of the other things I had hoped to comment on in more depth was a speech given last week by Toby Fiennes, the Reserve Bank’s Head of Prudential Supervision. on the Bank’s regulatory philosophy and supervisory practices.    It included this nice chart, outlining various aspects of financial institutions’ operations and how much, in the Bank’s judgement, they mattered to the “RBNZ and society” (as if these were the same thing) and how much they mattered to the institutions themselves.

Figure 1: Selected interests of the RBNZ, society and financial institutions

fiennes

Fiennes went on to note that the blue areas aren’t of much interest to the Bank (and don’t therefore attract much regulatory interest), while the red area are typically quite heavily and directly regulated.

But in this context, it was the comments on the green areas that caught my eye

Some things – like risk management and underwriting standards (in green) – are of strong interest to both the Reserve Bank and firms. Here we tend to use market and self-discipline. Examples of some of our supervisory practices in this area are:

  • Disclosure of credit risks;
  • Mandatory credit ratings;
  • Governance requirements; and
  • Publicly disclosed attestations by the board that key risks are being managed.

Now I know that the Bank’s prudential supervisors have never been keen on LVR restrictions, and that they are devised in a different department, but……..all controls are imposed under the same legislation –  indeed the same part of the legislation –  and by the same Governor.  And when housing loans are the biggest single component of banks’ credit exposure –  and banks have most to lose if things go wrong – and yet when the Bank has imposed three sets of direct controls on housing LVRs in three years, imposing its own judgements on underwriting standards, you might have hoped that practice and “philosophy” might have been better reconciled, or the gaps smoothed over in a speech by the Head of Prudential Supervision.

As regular readers know, I’ve been pushing to get submissions on Reserve Bank regulatory proposals routinely published.  Such publication is common practice in other areas of government, including submissions to parliamentary select committees.  If you make a submission seeking to influence public policy, that submission should generally be public as matter of course –  it should be one of the hallmarks of an open society.

Some progress has been made with the Reserve Bank.  If someone asks, they will now typically release submissions made by anyone who isn’t a regulated institution.  I asked for all the submissions on the latest LVR “proposal” to be released, and  –  as expected –  the Bank has released all those not made by banks (the regulated institutions in this proposal).  Anyone interested can find those submissions here. I have three remaining areas of concern.

The first is that release of submissions should be a routine part of the process for all consultations, not just when someone makes the effort (remembers) to ask.  The second is that on this occasion they have withheld the names of four private submitters.  As I noted, if you want to influence lawmaking, you should be prepared to have your name disclosed.  How can citizens have confidence in the integrity of lawmaking processes if they don’t know who the Bank is receiving submissions from, and what interests they may represent?  (Of course, since one of the anonymous submitters appears to have views very similar to my own, we can safely assume that that person’s views will have had no influence on the Bank.)

And the third concern is that the Reserve Bank is still consistently keeping secret the views of regulated entities (the banks in this case).  When the regulated lobby the regulator it is particularly important that citizens are able to see what arguments are being made, to ensure that the process remains robust and that the regulators are not being “captured” by their closeness to the regulated –  bearing in mind that the Bank is supposed to be regulating in the public interest, not that of banks.   As I’ve noted before, the Bank justifies withholding bank submissions on the grounds of section 105 of the Reserve Bank Act –  which they argue compels them to withhold such material.  In fact, that section of the Act gives no hint of a distinction between material received from banks and that from other parties,  If section 105 applies to submissions on proposed regulatory changes, the Bank is obliged to keep secret all submissions, not just those from banks.  As I’ve noted before, there is a good case for a small amendment to the Reserve Bank Act to make it clear that the section 105 protections do not apply to submissions on regulatory proposals and hence that banks should expect their submissions to the Reserve Bank on regulatory initiatives to be published, in just the same way that bank submissions to parliamentary select committees will generally be published.

I have appealed to the Ombudsman the Bank’s decision to withhold the bank submissions, in effect seeking greater legal clarity on what the section 105 restrictions actually apply to.  In the meantime, of course, if the banks have nothing to hide –  and I don’t imagine they really do –  they could chose to publish their submissions.  According to the Summary of Submissions “a few respondents urged tighter LVR restrictions on investors than proposed”, so perhaps the ANZ really did follow up on their CEO’s newspaper op-ed and advocate more far-reaching restrictions.  If so, citizens should have the right to know (customers might be interested to, but that is their affair).

Raising the inflation target….in 2002

There is a bit of discussion around (internationally more so than in New Zealand) about the possible merits of raising inflation targets, to something centred on 4 or 5 per cent annual inflation, rather than the 2 per cent focal point of most countries’ targets today.  The main argument for doing so is to raise nominal interest rates in more normal times, in turn creating scope to cut policy interest rates further in real terms in future serious downturns.

I doubt it is a viable option at present for most inflation targeting countries, simply because most have largely exhausted conventional monetary policy capacity –  policy interest rates are already near or below zero –  and many are struggling to achieve their current inflation targets.  It is, probably, still an option for New Zealand (with the OCR still at 2 per cent), although in my view raising the target is less attractive an option than taking action to reduce the impact of physical cash in creating a near-zero lower bound on nominal interest rates.  The costs of positive inflation rates may not be that large, but they increase as the target inflation rate increases –  and perhaps especially so in a country like New Zealand where income on financial savings (eg interest, which includes compensation for inflation) is taxed just the same as labour income.

Unlike most inflation targeting countries, New Zealand does have a history of having raised its inflation target.  We started out aiming for 0 to 2 per cent annual inflation rates, and then raised that target to 0 t0 3 per cent at the end of 1996, as one aspect of the National/New Zealand First coalition deal.  The Bank acceded to the change, but had not sought it.

Yesterday I was asked a question about the background to the second increase in the target.  In September 2002 the inflation target was raised from 0 to 3 per cent per annum, to the current 1 to 3 per cent per annum.  Why?   My short answer was “politics”, and this is my fuller answer.  I was quite closely involved –  at the time I was one of the Governor’s three direct reports –  but others will no doubt have slightly different memories/perspectives.

The opportunity for a change in the Policy Targets Agreement (PTA) opened up when in late April 2002 the long-serving Governor, Don Brash, unexpectedly announced his resignation from the Bank, effective immediately, so that he could contest the forthcoming general election as a National Party candidate.  Key figures in the governing Labour Party – in particular the Prime Minister, Helen Clark – were furious, including with the Reserve Bank’s Board which had agreed terms and conditions with Brash that had not required any stand-down periods when he left office.  I can’t speak for all my then colleagues of course, but my impression was that many people at the Bank, while perhaps wishing Don well personally, thought that resigning as Governor to go straight into party politics wasn’t quite the done thing, and risked undermining (albeit at the margin) the reputation of the Bank.

The Bank’s (and Brash’s in particular –  as single decisionmaker) stewardship of monetary policy had been contentious in some circles for a long time.  Both National and Labour stood solidly behind the Reserve Bank Act, and especially its monetary policy arrangements, but the Minister of Finance, Michael Cullen, had been uneasy for a long time as to whether the target framework was too restrictive.  Back in the mid 1990s, as Opposition Finance spokesman, he had actually campaigned to widen the target band to -1 to 3 per cent per annum, and when he had become Minister in 1999 he added to the PTA the explicit requirement to  “seek to avoid unnecessary instability in output, interest rates and the exchange rate”.   No one ever –  in fact, still –  knew quite what it meant, but it was a response to the continuing unease, including that around the monetary conditions index debacle of 1997 to 1998.

The Labour-Alliance government which came to power at the end of 1999 commissioned, as had been promised, an international review of New Zealand’s monetary policy arrangements and the conduct of monetary policy.  Michael Cullen wasn’t looking for radical change –  or he would not have appointed Lars Svensson, one of the academic experts on inflation targeting, as the reviewer –  although there was a sense that he would not have been averse to a recommendation to shift to a committee or Board system for making monetary policy decisions.  In the end, the review was pretty tame –  I was part of the secretariat, at the same time as being a Bank senior manager, and we went to some lengths to encourage Svensson not to be too effusive about the Brash stewardship, fearing that otherwise the report would lack credibility.    Svensson did recommend a move to a committee system, but his proposal –  for a committee of internal senior managers, somewhat akin to Graeme Wheeler’s Governing Committee  – got no political traction.    There was no political mileage in legislating to shift from one technocratic economist making the decision to four or five technocrats making the decisions.

There was also longstanding unease, and puzzles, as to just why New Zealand’s relative economic performance had not improved.  At the time, our exchange rate wasn’t high, but our interest rates were still high relative to those in the rest of the world, and there was no sign that the income or productivity gaps to the rest of the OECD were beginning to close.  There was questions around whether somehow something in the way monetary policy was being run, or the way the target was specified, was somehow contributing to the medium-term real economic underperformance.  Were we, for example, by holding interest rates so high unintentionally lowering potential GDP growth? In some circles there was a sense that the Bank jumped at shadows –  raising interest rates at the first hint of inflation, and never “gave growth a chance”.  As people pointed out from time to time, our inflation target was lower than Australia’s, but our interest rates typically weren’t.

Add into the mix the government’s unease with Don Brash’s views of the wider economic policy framework.  His speech at the August 2001 Knowledge Wave Conference, on how best to accelerate economic growth, didn’t go down well with the government (understandably –  I think those internally who had seen the draft were all pretty much of a view that it was material that should be saved for his retirement).  It all seemed to just add to a sense that something was wrong at the Bank, and in how monetary policy was being run.

Actually, the Bank had been quite aggressive in easing policy during 2001, probably more so that (with hindsight) was warranted.  The US recession, and the 9/11 attacks, prompted pre-emptive easings, from an institution determined not to make Asian crisis mistakes again.  But by early 2002, the talk was turning again to the prospects for OCR increases.  There had already been two 25 basis point increases by the time Don Brash resigned, and the projections and policy statements foreshadowed a lot more increases to come.

It is also worth remembering that, at the time, just over a decade into inflation targeting, the Bank had had inflation out-turns averaging well above the midpoint of the inflation target range.  That track record continued right through until the 2008/09 recession, and it made us unusual by the standards of inflation targeting central banks –  the more so, perhaps, because our rhetoric often stressed the importance of focusing on the midpoint of the target range (to maximize the chances the inflation would be within the target range).     This chart illustrate the track record –  although note that, at the time, we did not have either of these particular core inflation measures (they are just readily to hand).

target change in 2002

Inflation had been above the target midpoint throughout almost all the inflation targeting period, had never (in core/underlying terms) been in the 0 to 1 per cent part of the range, and by now (mid 2002) inflation was not only in the upper half of the range, but was rising.

Deputy Governor Rod Carr was appointed as acting Governor once Don Brash resigned, and he took the next few OCR decisions, and did the associated communications.  The OCR was raised at both of his first two OCR decisions, and in the May 2002 MPS in particular, Carr’s rhetoric was (and was widely seen as) very hawkish –  words of man who might be champing at the bit to raise the OCR.  The May projections had envisaged another 150 basis points of OCR increases over the following year or so which would, so the projections showed, bring inflation progressively back to around the middle of the inflation range.

In the Beehive, there seems to have been a sense that they definitely didn’t want the Board nominating a “Brash clone” as Governor, and a real unease about what another 150 basis points of OCR increases would do to the prospects for the sort of “economic transformation”, including the growth in the export sector, they were seeking.  What, people might have asked themselves, was the point of having really large OCR increases to get inflation to the midpoint of the target range when it had never been there for long previously?  And since (core/underlying) inflation had never been in the zero to one percent part of the target range, why not just pull the range up a bit?  To do so, it could be argued, wouldn’t change anything much.

Throughout this period, Bank staff were at work on a major series of background briefing papers to help whoever was nominated as Governor, and perhaps the Minister, in negotiating a PTA.  For the first time, since the Act had come into effect, we passed the real possibility of an outside appointee, perhaps with little or no background in monetary policy.  I can’t now see that collection of papers on the Reserve Bank’s website (but will happily link to them if they are there: UPDATE: they are here) but suffice to say that they did not advocate a change to the PTA, or to the inflation target specificially.  They were not, by any means, doctrinaire on the importance  of the current target range, but saw little prospect of any real economic gains from raising the target.

In the Beehive, there was also a bit of a sense that if Australia could do just fine –  indeed, so it was seen, to prosper – with an inflation target centred on 2.5 per  cent annual inflation, perhaps we should move to adopt the same target.  I gathered that the Prime Minister in particular was quite keen on that option.

In the end, the Secretary to the Treasury, Alan Bollard was appointed as Governor.  He agreed to change the target in two ways.

The first was eliminating the 0 to 1 per cent part of the target range, so that in future the target would be 1 to 3 per cent annual inflation.  My understanding/memory is that he did not see this as a route to higher inflation, but rather to cementing in something more like the average inflation outcomes of the previous few years.  But it ruled out the need to tighten simply to get back to a target midpoint on 1.5 per cent.  To Alan’s credit, he strongly resisted the Prime Ministerial preference for adopting the RBA’s target, centred on 2.5 per cent.  Staff advice was that a target as high as that could not really be considered consistent with the statutory requirement to pursue and maintain price stability.

The second was to introduce the concept of a medium-term horizon explicitly into the PTA, as in these extracts

For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term.

3. Inflation variations around target

a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target.

Since we had always run inflation targeting looking out at the medium-term projections, it was never entirely clear to what extent this change was substantive, and to what extent it was (as with many PTA changes) rhetorical –  making explicit what was already happening.

Shortly after he took office, Bollard gave a speech in which he tried to explain how he interpreted the new PTA.  The speech was much haggled over internally, and so what emerged was pretty carefully considered drafting. The key passage was

The key change in the agreement is that the inflation target has been explicitly defined in terms of “future inflation … on average over the medium term”. This implies that monetary policy should be forward-looking, and avoid getting distracted by transitory fluctuations in the inflation rate. In typical circumstances, we expect to give most attention to the outlook for CPI inflation over the next three or so years. If the outlook for trend inflation over that period is inconsistent with the target, we will adjust the Official Cash Rate. Our intention will be that projected inflation will be comfortably within the target range in the latter half of the three year period.

Note that the “key change” in his view was not the increase in the target –  consistent with the notion that the unused portion of the range was just being dropped off –  but the “on average over the medium-term wording”.  There are no references left to the midpoint of the target range, just a focus on being “comfortably within” the target range when we looked at projections 18 months to three years ahead.

I recall writing an internal paper, probably as part of haggling over this speech, arguing that if anything the new PTA might have given us less (or at least not more) flexibility –  a narrower target range balanced against the “on average over the medium-term” wording.

Bollard operated with the same operational autonomy over the OCR as others Governors had.  But I think those of us there at the time felt that he had much the same unease about how the Bank had been run –  and about the anti-inflation inclinations of key personnel –  as the Beehive did.  It wasn’t that long after he took office that the OCR was cut by 75 basis points.  As always, there were economic arguments that could be made for and against those cuts –  at least one seemed reasonable to me at the time –  but they proved quite ill-fated.  They had to be reversed, and more, although it took too long to do so –  and to his credit, at the end of his term, Bollard explicitly acknowledged that the cuts had been unnecessary.  The cuts, and the slow reversal of them, set the stage for core inflation increasing to above 3 per cent over the following few years.   Without the Policy Targets Agreement change, it would have been a little harder for that particular mistake to have been made.

(In discussions about raising inflation targets, a focus is often on the response of inflation expectations.  In a sense, Alan Bollard was gifted a modest “free lunch” –  he could stimulate the economy a bit more than otherwise in the short-term –  because there was no immediate increase in survey measures of inflation expectations when the target midpoint was raised, perhaps reflecting some sense that –  whatever our rhetoric –  the 0 to 1 per cent part of the old range had already become something of a dead letter.)

So, as I said, it was politics rather than solid economic analysis that drove the 2002 PTA changes.  To the extent that it reflected unease about New Zealand’s economic performance, they were good questions, but the wrong answer.  The same could, of course, be said for the desire of Labour, the Greens and New Zealand First to change the Reserve Bank Act now (rather than just the PTA).  There are real economic challenges and puzzles around New Zealand’s long-term economic underperformance, but changing purely nominal measures – like the way an inflation (or related) target is specified  –  is likely to be almost wholly irrelevant to responding to those problems,