Year: 2016

The OCR leak: again/still

Michael Reddell OCR leak, Reserve Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

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

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

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

John

A couple of minutes later I responded

8:04am

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

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

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

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

And I responded at 10:37

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

Michael

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

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

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

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

Nick

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

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

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

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

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

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

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

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

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

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

 

The OCR leak

Michael Reddell OCR leak, Reserve Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Charles I?

Michael Reddell Monetary policy, OIA, Uncategorized

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

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

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

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

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

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

(d) Everything was all right.

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

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

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

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

Decision

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

Reasons

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hamish Rutherford has covered the story here.

 

 

Tourism & services exports: more underperformance

Michael Reddell New Zealand economic performance

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

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

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

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

international visitor arrivals

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

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

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

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

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

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

services X change since 2005

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

 

 

 

 

 

Can the terms of trade explain Auckland’s apparent underperformance?

Michael Reddell Auckland, Immigration, New Zealand economic performance

My post follow-up post yesterday on Auckland’s surprising weak performance in the regional nominal GDP data over the last 15 years prompted a reader to get in touch suggesting that changes in the terms of trade over the period were sufficient to explain why the provincial areas generally seemed to have done well, and Auckland and Wellington had not.

I had been conscious of the possible role for terms of trade changes in explaining the patterns –  these, after all, were nominal GDP data, and ideally we would have liked real series – but hadn’t gone much beyond that.

To see the issue, I’ve set up a very simple stylized version of New Zealand.  This New Zealand has just two, highly stylized, regions.  One produces all the foreign exports of the country (Region A), and the other (Region B) generates lots of domestic services, many of which are supplied to Region A.  You could think of these services as being banking, electricity generation, advertising or whatever.  And each region produces lots of stuff that is consumed within its own region, and each also assumes the same amount of foreign imports.  Both regions have GDP of 500, and Consumption of 500.  (For this little illustrative exercise, I’m just assuming away investment, and any current account deficits/surpluses.)

Region A Region B NZ
Consumption 500 500 1000
Exports 200 0 200
Services trade within country -100 100 0
Imports -100 -100 -200
Nominal GDP 500 500 1000

Now what happens if the terms of trade double?

It depends greatly on whether import or export prices change.

Export prices double:  Region A  Region B  NZ
Nominal GDP 700 500 1200

If foreign export prices double, then the value of region A’s exports will jump from 200 to 400, and the value of nominal GDP in region A will increase to 700.   Region B’s nominal GDP is unaffected (it doesn’t export anything internationally).  Over time, if the higher prices are sustained, it is likely that there will be other consequential changes: consumption in A will tend to rise, and with it both foreign imports and purchases from region B.  But the shock has clearly favoured region A, raising its nominal GDP relative to that of region B.

But what if the terms of trade double through a halving of import prices?

Import prices halve  Region A  Region B  NZ
GDP –  zero pass-through 550 550 1100
GDP – full pass-through 500 500 1200

The immediate impact depends in part on what happens to domestic prices.  If import prices halve, and none of that is passed through to consumers, nominal GDP in both regions will rise by 50 (the size of the reduction in the import spend).  If the lower import prices are fully passed through to consumers, nominal GDP won’t change at all  in either region (lower consumption prices will offset the lower import spend).  Again, over time the gain in the terms of trade will affect behavior (presumably there would be more consumption, and perhaps a higher volume of imports), but for these purposes all that matters is that the shock has hit the two regions equally.

This is all deliberately highly stylized, and says nothing about actual New Zealand (although you might be thinking that somewhere like Auckland might resemble region B and Southland or Taranaki might resemble region A: in the most recent year for which we have detailed industry breakdowns, 13 per cent of Auckland’s GDP was from primary sectors and manufacturing, while 56 per cent of Taranaki’s was).

The terms of trade increased very substantially in New Zealand from 2000 to 2015 (March years), the period covered by the regional GDP data.  The increase over that period was 31.7 per cent.

But most of the gain has been realised in the form of lower import prices.  Export prices have increased, in New Zealand dollar terms (and the nominal GDP series are NZD series), by only about as much as the consumption and investment deflators.  What stands out is that import prices have fallen by 4 per cent over 15 years.  What has been going on?

national acs deflators

First, the real international prices of a lot of imports have been falling –  a beneficial effect of the rise of China and other emerging manufacturing centres.   And, second, the exchange rate has risen very substantially over that period (up 33 per cent on the Reserve Bank’s TWI measure).  Global prices of many of New Zealand’s exports certainly rose over that period, and New Zealand as a whole was better off as a result, but the higher exchange rate meant that, on average, export-focused regions didn’t get the gains of the higher terms of trade (nominal GDP in those regions wouldn’t have risen systematically faster than that in less export-oriented regions).  If we take the six components of the ANZ Commodity Price Index over the 2000 to 2015 period, meat and dairy prices rose modestly in real NZD terms, while the other components (horticulture, seafood, aluminium and forestry) saw falls in their real NZD prices over the full 2000 to 2015 period.    Much of this process is discussed at greater length in an Analytical Note published by the Reserve Bank a couple of years ago.

Instead, the terms of trade gains came mostly in the form of cheaper real import prices, benefiting people in all regions (including Auckland).

Ideally, we would still like to have region-specific GDP deflators.  In some regions with a heavy weight on dairy exports, the rise in the terms of trade may help explain with that particular region’s nominal GDP per capita has done quite so well relative to Auckland’s over this particular 15 year period but (a) the rises in real NZD dairy prices over the full period weren’t that large (around 15 per cent, if deflating with the private consumption deflator), and (b) even in the Waikato total agriculture is only around 10 per cent of GDP).  The differences in GDP per capita growth rates across regions (illustrated in yesterday’s post) swamp anything that can be explained largely by terms of trade effects.

Wellington-boosters (such as the dreadful Wellington City Council, its “economic development” agency, and the myriad of “booster” mayoral candidates) probably take some consolation from the fact that, according to the regional GDP data, if Wellington hasn’t been doing overly well, at least it hasn’t done much worse than Auckland.  I’m not sure they should take such comfort.  Over this 15 year period, the private consumption deflator has increased by 31 per cent, but the government consumption deflator has increased by 51 per cent.  The production of government consumption goods makes up a great deal of economic activity in Wellington  (“public administration, defence and safety”  is around 11 per cent of Wellington’s GDP and 3 per cent of Auckland’s).  If we had real per capita GDP data for the regions, Wellington might be lagging even more  –  and specifically further behind Auckland –  than the nominal data suggest.

On the other hand, I wondered if there was at least one factor overstating Auckland’s performance.  In the national accounts deflators, the deflator for residential investment increased by 85 per cent over the 15 year period, while the private consumption deflator had increased by only 31 per cent.  And it isn’t just residential construction activity that has seen large price increases: here are the construction-related components from the Capital Goods Price Index for the same period.

cgpi

Surely, I thought, Auckland’s rapid population growth over this period (see earlier posts) would have meant a larger share of Auckland’s GDP was in construction-related activities.  If so, the higher inflation rates for these sectors would tend to boost nominal GDP.

We only have detailed industry breakdowns by region to 2013, but I was a little surprised that when I calculated the average share of construction in each region’s GDP over 2000 to 2013 this is what I came up with.

construction share of gdp

Auckland has certainly had a lot more construction activity (share of GDP) than Wellington, but beyond that I have no idea what to make of the results.  They don’t seem very plausible numbers,  but then SNZ collects the data.

There is no point putting too much weight on regional nominal GDP data.  But they do throw up some results that were unexpected (at least by me), and the apparent underperformance of Auckland over this particular 15 year period doesn’t seem easily able to be explained away simply by the effects of terms of trade changes. (Even if it could, it might be troubling that so many people were gravitating to a region that  – the market was signalling –  relative price changes were not favouring.)

And, to repeat a point I made yesterday, there is no necessary reason why simply putting more people in Auckland would raise the productivity of the city.  To those who assure me that agglomeration economies are real, I respond, well, yes, of course.  The question is not, and has never been, whether many (although not all –  see natural resource extraction) high value functions/industries/activities function most productively in big cities.  The economics of agglomeration helps describe why big cities exist.  But the question –  an analytical one, but one New Zealand practical policymakers need to think seriously about –  is whether Auckland is one of the places where firms undertaking many increasingly high value activities will increasingly choose to cluster.    There is no necessary reason why it should be.  Most places aren’t.  There are reasons why there aren’t half a million people in Invercargill or Launceston –  or Helena, Montana or Kearney, Nebraska .  Wishing it were otherwise does not make it so.

There seems to be a strong element of wishful thinking (or “build it and they will come”) about the policymakers’ (and their advisers’) Auckland story.  One could mount an argument –  not necessarily a fully compelling one, but one with substantial elements of truth to it –  that Auckland’s current relative size is largely a function of two big policy interventions.  The first was the high level of manufacturing protectionism that prevailed from the 1930s to the 1980s. Manufacturing firms all over the country benefited, but if one was producing things just for the local market, being in the biggest city made a lot of sense.  The South Auckland manufacturing base grew up during that period.  And the large scale immigration programmes ended up with the same effect, boosting Auckland’s population dramatically (particularly as immigration became increasingly non-Anglo), and generating a deal of economic activity in non-tradables sectors simply to support the infrastructural needs (broadly defined) of a rising population.  But there has never been any sign that Auckland is a location that has the economic opportunities that encourage the growth of new high –productivity industries successfully taking on world markets.  New Zealand’s export base remains overwhelmingly natural resource based –  dairy, wool, meat, fish, oil and gas, gold, wine, forestry, and tourism (most of the appeal is the landscape not the great art or glorious cathedrals).

I’d really like to be wrong, but where is the evidence that incredibly strong population growth in our major city, fuelled largely by immigration policy (New Zealanders, net, have tended to be leaving Auckland, not drawn to its great opportunities), is generating the national benefits the advocates would claim for it?  At present, it looks as though this Think Big strategy is perhaps even more flawed than the 1980s energy version (fortunately called to a halt quite quickly) was.

 

Big agglomeration gains in a growing Auckland? Or not.

Michael Reddell New Zealand economic performance

A few weeks ago, when the annual regional GDP data were released, I used them as the basis for a post casting some doubt on whether we were seeing the widely-touted economic gains from the large and rapidly growing population in Auckland.

The data aren’t ideal by any means.  Among the other issues, they are only nominal, they only go back to 2000, and there are no regional hours worked data.  But they are what we have.  Since 2000, Auckland’s population –  already far and away the largest in New Zealand –  had grown rapidly, up 30 per cent, while the population in the rest of the country had increased by 13 per cent.

And yet, allowing for all the limitations of the data, GDP growth per capita in Auckland over that period had been among the lowest in any of the regional council areas in New Zealand.  Average GDP per capita in Auckland was still higher than in much of the rest of the country, but the gap had been narrowing.

nom gdp pc by region

On the face of it, it wasn’t a great advert for the success of immigration and other domestic policies centred on the belief that the growth of Auckland was the foundation of our future prosperity.

In the last few days, Peter Nunns, an Auckland transport economist, writing on the widely-read, and often stimulating, centre-left Transportblog, also used the regional GDP data, but in a post, “The contribution of agglomeration to economic growth in Auckland”, that drew quite the opposite conclusion.  His focus is on job density which, on the measure he uses, had also increased by 30 per cent since 2000.  Applying some estimates developed previously by Dave Mare and Daniel Graham (references in the Nunns post), he estimates that just over a tenth of all the (real) productivity growth in Auckland since 2000 is down to increased job density.

Nunns derives that share by estimating a real GDP per employee series for Auckland.  As he notes, the precise numbers are purely illustrative, since we don’t have regional GDP deflators.  And we also don’t regional hours worked data, and GDP per hour worked is typically a better measure of productivity.

Nunns doesn’t give any attention to how Auckland has done relative to the rest of the country of the period since 2000.  The chart above shows that nominal GDP per capita has grown less rapidly in Auckland than in most places.  Nunns focuses on GDP per employee.  Unfortunately, the HLFS employment data groupings are slightly different from those used for the regional GDP data, leaving us a smaller number of regions to compare with.

nominal gdp per employee growth

The hard to read label is Nelson/Tasman/Marlborough/West Coast combined.

Once again, Auckland has been among the more poorly-performing regions.  There may have been real and material gains from greater job density in Auckland –  as Nunns suggests –  but, if so, they must have had to offset really really weak other influences on economic performance in Auckland.

One of the commenters on Nunns’s article asked him how he responded to my earlier post, including the chart above.  This was his response (omitting the gratuitous slur on my motives etc)

Reddell’s confusing the signal with the noise. The signal is that agglomeration economies do enhance productivity. That’s an empirical fact, backed by lots of research from many places.

However, the “noise” is everything else that’s going on in the economy. That can make it hard to read the signal by looking at statistical aggregates like regional GDP. As I point out in the post, agglomeration economies account for perhaps 11-12% of Auckland’s recent economic growth – roughly one-tenth of a percentage point a year. While small gains compounded over long time periods add up to large numbers, they are often difficult to observe in the short term.

Finally, Reddell knows very well that productivity gains happen at the margin. Enabling agglomeration economies is one such “margin”, but there are a myriad of other “margins” that we should pursue. For example, New Zealand’s poor management practices inhibit productivity, as do its weak international connections and low investment in knowledge-based capital and R&D.

I don’t find that remotely persuasive.    This isn’t a single year’s data we are both looking at, but 15 years of data.  It would be great if we had a longer run of data but we don’t.  The more recent years data will no doubt be revised, but again for now this is what we have.  Over that period, in some years Auckland has done better than other places in New Zealand, and in others worse, but over 15 years there has been a non-trivial worsening in Auckland’s relative position (whether GDP per capita or per employee), despite that rapid growth in population and job density.    Frankly, his response seems (perhaps unfairly?) to amount to “agglomeration effects are real and important,  so it doesn’t really matter what the bottom line is, or how the top-down data look, I believe my model”.

And, of course, I agree with him that wealthier places tend to be denser  (but equally, as cities get wealthier they have tended to become less dense).  The issue isn’t whether the phenomenon of agglomeration economies is real, but whether those economic gains have existed in the specific instance of Auckland over the last 15 years.  There is simply no necessary reason why they should.  Density is typically an outcome of market processes (people finding it worthwhile to bunch together), but that doesn’t mean that simply pulling more people into an area by policy (which is effectively what our immigration policy does) , and then regulatorily constraining its physical footprint, will make the people in that area more productive.  If the longer-term economic opportunities in Auckland aren’t particularly good –  if, say, New Zealand impaired by distance can really only hope to compete strongly on natural resource based exports –  simply attracting more people into the confined space of Auckland could quite easily result in underperformance.  A couple of observations over 15 years isn’t remotely enough to prove the case one way or the other, but given Auckland’s underperformance over that period I think there is some responsibility on the champions of actively pursuing fast population growth and higher job density (central governments, MBIE officials, local councils, economists) to offer a good explanation for Auckland’s underperformance, not simply assert that “my model says the agglomeration effects matter in general, and hence they must have mattered here specifically”.  Perhaps there is such a good alternative story.  I would be very interested to look at it.

And, of course, there is no dispute that lots of good policies (or, typically, avoiding lots of bad policies) go into making a successful prosperous economy.  I wouldn’t agree with the Nunns list, but that is a debate for another day.

NB:  The rise in the terms of trade over the previous 15 years will explain part of the regional GDP differences, with more heavily export-oriented regions having benefited at the expense of the other regions, although much of the trend improvement in the terms of trade has been a result of falling world import prices, the effects of which should have been fairly evenly spread across the country.  Whether differential terms of trade effects are enough to reverse the rankings is another question.

 

 

Advisory “votes” on OCR decisions

Michael Reddell Monetary policy, OIA

Four weeks ago, commenting on his March OCR decision, the Governor of the Reserve Bank, Graeme Wheeler, was quoted telling the Herald

“I don’t think it’s a mystery that the Reserve Bank cut interest rates. In fact, we have 13 people who give advice to the governing committee who make these decisions and the advice from the 13 was unanimous.”

It was striking disclosure.  Not the fact that his advisers had been unanimous –  historically that isn’t uncommon – but the fact that the balance of advice, in numerical terms, was revealed at all, and only days after the OCR decision to which that advice related.  Neither Graeme Wheeler nor Alan Bollard or Don Brash prior to him had ever released that sort of specific information previously.  In fact, in the past the Bank has been almost obsessive about keeping secret almost anything to do with the OCR decision or the associated Monetary Policy Statement (there is a case being looked at by the Ombudsman now on just one recent example of that).  The Bank’s attitude tends to be that it is highly open and transparent about what it wants us to know –  eg the finished product, the Monetary Policy Statement –  and for the rest (“internal stuff”) it is really none of our business.  Fortunately that isn’t the law.

Following the Governor’s disclosure, I lodged this request with the Bank on 14 March

As the Governor has disclosed in the Herald this morning (page B3) the summary results of the OCR advice from members of the MPC for the most recent OCR decisions, I am requesting the same information (no names, just aggregate numbers favouring each rate option) for each OCR decision since mid 2013.

The statutory deadline for responding to that request is tomorrow (20 working days from the day they received the request).

I think it is safe to assume that the Bank is most reluctant to release this information.  It would have taken no more than a couple of hours to compile and check the information I asked for, and the Act requires (not suggests, requires) that agencies respond “as soon as reasonably practicable”.  Had the Governor’s remark to the Herald foreshadowed a new era of openness, I would have had the requested information weeks ago.  By law, I should have anyway.

We’ll see shortly whether they have decided to release some or all of the information, or to withhold it completely.  Regardless, I suspect there is some gnashing of teeth going on, and muttering beneath the breath that the Governor should never have told the Herald the voting numbers, leaving himself open to a request of the sort I have lodged.

But it is worth being clear what I am, and am not, asking for.  The request is simply for the numbers favouring each OCR option on each occasion in the previous 2.5 years.  Most of these advisory “votes” relate to decisions that occurred more than a year ago, and even the most recent request relates to the January 2016 OCR review, itself superseded by the March MPS, the results of which (and the advisory vote numbers) we already know.  All those participating are fairly senior people –  second and third tier managers, and external advisers.

I am not asking for:

  • the names of participants in the advisory group,
  • the “vote” of each participant to be identified by name,
  • copies of the one page analysis and advice each participant provides in support of his or her OCR recommendation.

All of that is official information, and could be subject to separate requests, but it isn’t what I asked for on this occasion.

Why might the Bank want to keep the information secret?  We can distinguish between their preferences and the law.

As I noted earlier, the Bank has long taken the view that the finished product is all that should be disclosed.  Anything else will only be “noise” to markets, confusing the messages, and so on.  And as it is a single decision maker model, only the Governor’s vote really counts anyway.  From within I repeatedly argued for more openness, and these were the standard lines used in response.  There is also likely to be some worry that disclosing even just the numbers favouring each OCR option, even with a lag (and recall that some of the dates I asked about are almost three years ago),  might undermine the willingness of some of the Governor’s advisors to offer advice different to the Governor’s own preference. A Governor who really didn’t want it known that a significant minority of his senior staff disagreed with him has plenty of leverage to discourage people from putting that disagreement on paper (including, but not limited to, simply tossing the person concerned off the advisory committee).

I don’t think these arguments have much merit.

First, it is now pretty common in countries with voting committees making monetary p0licy decisions for dissents/votes to be recorded, and to be disclosed pretty promptly (always with the names identified and sometimes with the reasons disclosed).  The Bank of England, the Federal Reserve, and the Swedish Riksbank are just three prominent examples.  It isn’t a universal practice by any means, but given the statutory presumption in favour of release of official information, it certainly isn’t obvious that great damage has been done to the effectiveness of policy (of policy formation/debate) in those countries where there is much fuller disclosure.

Second, it is not as if, in the nature of human affairs and especially those involving forecasts, there are many occasions when anyone is 100 per cent confident of the right thing to do.  An agency can try to present a monolithic front if it chooses, but everyone knows that behind any decision there is a weighing of pros and cons and the likelihood that some advisors will be more strongly convinced of the merits of a particular action than others.  Citizens –  and markets –  aren’t children.

Thirdly, all this information and more is already disclosed to the Reserve Bank Board, typically within days of it being offered. The Board receives all the background papers for each MPS, copies (without names) of the one page OCR advice provided by each member of the advisory group.  Board members, I’m told, can at times, and with experience, work out who provided which advice.    The Board gets copies of that material partly to assure themselves that the Governor really is being exposed to (a) good quality advice/analysis and (b) a range of views and perspectives.  If a Governor were really uneasy about it being known that some of his advisers at times disagreed with him (a) he is the wrong person for the job (in general we should be much more worried if no one ever openly disagreed with a Governor), but (b) he and his predecessors have long faced that incentive (since the Board is, after all, the group paid to monitor his performance, and able to recommend his dismissal or non-reappointment).

Monetary policy decisions have an important influence on the short to medium term path of the economy.  And they are decisions made under conditions of considerable uncertainty.  Parliament has given the power to make those decisions to a single individual, but part (a small part perhaps) of how we satisfy ourselves that he is exercising that power prudently is to be able to see, after the event, the balance of the internal advice he is receiving from his highly paid expert staff (and external advisers ).

Of course, nothing in law requires the Governor to seek formal or written advice from identified staff on where to set the OCR.  It is possible that the Bank could argue that if it is forced to reveal the advisory votes, even with a lag, the Governor would simply discontinue the practice of seeking such advisory “votes”.     But (a) the Governor has already revealed the votes on one particular occasion, with next to no lag, and (b) to do so would presumably not impress the Board, who would also lose one of their windows into the processes the Governor uses in making his OCR decisions.

But what about the law?  My request has to be decided not according to the Reserve Bank’s preferences, but under the provisions of the Official Information Act.

What are some of the relevant provisions?

First, the purpose of the Act

The purposes of this Act are, consistently with the principle of the Executive Government’s responsibility to Parliament,—

(a) to increase progressively the availability of official information to the people of New Zealand in order—

(i) to enable their more effective participation in the making and administration of laws and policies; and

(ii) to promote the accountability of Ministers of the Crown and officials, –

and thereby to enhance respect for the law and to promote the good government of New Zealand

And the statutory principle of availability.

The question whether any official information is to be made available, where that question arises under this Act, shall be determined, except where this Act otherwise expressly requires, in accordance with the purposes of this Act and the principle that the information shall be made available unless there is good reason for withholding it.

Are there any such good reasons?

The Act provides for both “conclusive reasons” for withholding information, and “other reasons”.

Take the conclusive reasons first.  Here they are

Good reason for withholding official information exists, for the purpose of section 5, if the making available of that information would be likely—

(a) to prejudice the security or defence of New Zealand or the international relations of the Government of New Zealand; or
(b) to prejudice the entrusting of information to the Government of New Zealand on a basis of confidence by—
  • (i) the Government of any other country or any agency of such a Government; or
  • (ii) any international organisation; or
(c) to prejudice the maintenance of the law, including the prevention, investigation, and detection of offences, and the right to a fair trial; or
(d) to endanger the safety of any person; or
e) to damage seriously the economy of New Zealand by disclosing prematurely decisions to change or continue government economic or financial policies relating to—
  • (i) exchange rates or the control of overseas exchange transactions:
  • (ii) the regulation of banking or credit:
  • (iii) taxation:
  • (iv) the stability, control, and adjustment of prices of goods and services, rents, and other costs, and rates of wages, salaries, and other incomes:
  • (v) the borrowing of money by the Government of New Zealand:
  • (vi) the entering into of overseas trade agreements.

I doubt the Bank would seek to invoke most of these.  Items (a) to (d) are clearly not relevant.

The Bank might seek to argue for the items under (e), since monetary policy decisions affect the exchange rate.  However, they would be on very weak ground to attempt to do so, because (e) refers to damage arising from prematurely disclosing decisions to change policy.  In other words, if I had asked for the Governor’s OCR decision after it was made but before it was released, he would have conclusive (and quite reasonable) grounds to refuse on these grounds – the decision would be disclosed prematurely.    But my request is not for information on a decision (only advice from non decision making advisers), and the request relates to advice on decisions which have already been released (in some case, several years ago).    One line of argument they might try is that the pattern of advisory “votes” might contain information about the future path of the OCR, but (a) they would have show that, not just assert it, and (b) since the decision is always the Governor’s, it doesn’t seem terribly persuasive, especially as the Bank already releases information about its own (the Governor’s) expected future path.

The Official Information Act also has a long list of other reasons for withholding, many of which I’ve repeated here.  In these cases, even if there is an argument made for withholding, that case has to be balanced against the wider public interest in disclosure.

(1) Where this section applies, good reason for withholding official information exists, for the purpose of section 5, unless, in the circumstances of the particular case, the withholding of that information is outweighed by other considerations which render it desirable, in the public interest, to make that information available.

(2) Subject to sections 6, 7, 10, and 18, this section applies if, and only if, the withholding of the information is necessary to—

………

  • (ii) would be likely otherwise to damage the public interest;

(d) avoid prejudice to the substantial economic interests of New Zealand; or

(f) maintain the constitutional conventions for the time being which protect—

  • (i) the confidentiality of communications by or with the Sovereign or her representative:
  • (ii) collective and individual ministerial responsibility:
  • (iii) the political neutrality of officials:
  • (iv) the confidentiality of advice tendered by Ministers of the Crown and officials; or

(g) maintain the effective conduct of public affairs through—

  • (i) the free and frank expression of opinions by or between or to Ministers of the Crown or members of an organisation or officers and employees of any department or organisation in the course of their duty; or
  • (ii) the protection of such Ministers, members of organisations, officers, and employees from improper pressure or harassment; or

(h) maintain legal professional privilege; or

(i) enable a Minister of the Crown or any department or organisation holding the information to carry out, without prejudice or disadvantage, commercial activities; or

(j) enable a Minister of the Crown or any department or organisation holding the information to carry on, without prejudice or disadvantage, negotiations (including commercial and industrial negotiations); or

(k) prevent the disclosure or use of official information for improper gain or improper advantage.

 Would disclosing the advisory “votes” on the OCR, with some lag, after release of the relevant OCR decision prejudice the “substantial economic interests of New Zealand”?  Hard to envisage, especially when there is already much greater disclosure in a variety of other advanced democratic countries.

The only argument I can see them trying to rely on is 2(g)(i), that to release the information I’m seeking would jeopardise  the “effective conduct of public affairs” by threatening the “free and frank expression of opinions” by staff of the Reserve Bank.   But, as the Bank’s own legal adviser used to tell us, officials (and especially senior ones) are expected to offer free and frank advice, and the mere fact that free and frank advice is offered is not in itself a reason to withhold the information requested.    More specifically, if I was asking for the advice of, say, Dean Ford, or Roger Perry, Willy Chetwin or Geoff Bascand individually it might be a different matter, but this request is simply for the number of votes on each side of an OCR decision.  Officials who would be feel constrained from offering free and frank advice on the appropriate level of OCR by the fact that the numbers favouring each option (jno names) would be published are in the wrong job.  Senior officials are paid to offer expert advice, and that advice is official information.  Aggregate information on the numbers in favour of each option should not be able to be kept secret, after the event, with the protection of the law.

We’ll see shortly if the Bank realizes that this is simply not the sort of information the Act is designed to protect, and makes a virtue of necessity, setting up a new protocol for the regular release of this information with a modest lag.  In fact I suspect they will decide to fight the issue anyway, relying on the delay (apparently shortening) in the Ombudsman’s processes to try to fend off disclosure for a while longer.  If so, it will reinforce a line I’ve used previously: we have a central bank quite happy to be open and transparent about stuff they know almost nothing about (what the OCR might be a couple of years hence) and not at all happy about being open (despite the law) about things they do know about, such as the policy processes they use in coming to decisions.

I will  write about the response when I receive it.  You might wonder about why I devoted so much space to the issue today.  The answer, at least in part, is to try to look at the issue in a relatively detached way, against both the statutory provisions and a former insider’s sense of what might, or might not, be strong arguments.  Sometimes the Bank’s responses to OIA requests simply annoy me, and my initial comments might be flavoured by a tinge of emotion/irritation.  In this post, I’ve tried to look for the arguments they might use, all the time half hoping that, albeit somewhat belatedly, they might finally choose to (follow up on the Governor’s one-off openness) and take some structural steps towards greater transparency.

And why does it matter?  The request was partly a matter of principle. I believe that this information should be a matter of public record, once the relevant OCR decision has been released.  But I also chose my dates carefully.  From the middle of 2013 (a time when I was still part of the advisory group) the Bank was preparing the ground for its ill-fated 2014 tightening cycle, which was only belatedly reversed over the period since June 2015.  I think we have a right to understand whether the Governor was acting alone, whether he has unanimous support from his advisers, and when any material divergences of view began to open up.  The last few years have been a somewhat inglorious episode in New Zealand’s monetary policy (and for the Reserve Bank), and the Board has done little to provide effective transparent accountability.  Fortunately, the Official Information Act is there to allow citizens to pose their own questions, with a presumptive right to access to official information to enable them to evaluate the performance of powerful officials and their agencies.

 

 

 

Deposit insurance

Michael Reddell Banking, deposit insurance, Financial stability

Late on Friday afternoon, Stuff posted an op-ed piece calling for the introduction of a (funded) deposit insurance scheme in New Zealand.  It was written by Geof Mortlock, a former colleague of mine at the Reserve Bank, who has spent most of his career on banking risk issues, including having been heavily involved in the handling of the failure, and resulting statutory management, of DFC.

As the IMF recently reported, all European countries (advanced or emerging) and all advanced economies have deposit insurance, with the exception of San Marino, Israel and New Zealand.   An increasing number of people have been calling for our politicians to rethink New Zealand’s stance in opposition to deposit insurance.   I wrote about the issue myself just a couple of months ago, in response to some new material from the Reserve Bank which continues to oppose deposit insurance.

Different people emphasise different arguments in making the case for New Zealand to adopt a deposit insurance scheme.  Geof lists four arguments in his article

  • providing small depositors with certainty that they are protected from losses up to a clearly defined amount;
  • providing depositors with prompt access to their protected deposits in a bank failure;
  • reducing the risk of depositor runs and resultant instability in the banking system;
  • reducing the political pressure on government to bail-out banks in distress – deposit insurance would actually make Open Bank Resolution more politically realistic.

Of these, I emphasise the fourth.  I’m not convinced that there is a compelling public policy interest in protecting depositors, small or otherwise (many schemes cover deposits of $250000, sometimes per depositor per bank).   There are plenty of other bad things in life that we don’t protect people from (the economic consequences of) –  job losses, fluctuating house values, road accidents, bad marriages and so on.  The ultimate state safety net is the welfare system, which provides baseline levels of income support.  Should “deposits” or “money” be different?  I’m not sure I can see good economic arguments why (although there are good reasons why in the market debt and equity instruments co-exist, and debt instruments generally require less day-to-day monitoring by the holders of those instruments).

And there is a  variety of ways of providing depositors with prompt access to funds following a bank failure.  A bailout is one of them.  OBR is another.  And deposit insurance, in and of itself, doesn’t ensure prompt access to funds; it just ensures that the insured amount is fully protected (minus any co-payment, or deductible).

I’m also not persuaded that deposit insurance reduces instability in the banking system.  International historical evidence has been that in many or most cases,  depositors can distinguish, broadly speaking, the weaker banks from the stronger banks in deciding whether to run (I would argue that the UK experience with Northern Rock is one recent observation in support of that proposition).  And anything that weakens, albeit marginally, market discipline (in this case, by reducing the incentive on deposits to monitor risk and respond accordingly) can’t be likely to contribute to greater stability in banking systems.  Deposit guarantees for South Canterbury Finance only postponed, and probably worsened, the eventual day of reckoning.

But I find the political economy arguments for deposit insurance (at least in respect of large banks) compelling.  I outlined the case more fully in my earlier post.  If we don’t want governments bailing out all the creditors of a failing bank (large and small, domestic and foreign), we need to build institutions that recognize the pressures that drive bailouts and take account of that political economy.  It is futile –  and probably costly in the long run  –  to simply pretend that those pressures don’t exist.  In its recent published material, the Reserve Bank again just ignores these arguments, but they know them.  In fact, I found a quote from Toby Fiennes, their head of banking supervision, who correctly observed a few years ago that

some form of depositor protection arrangement may make it easier for the government of the day to impose a resolution such as OBR that does not involve taxpayer support – in effect the political “noise” from depositor voters is dealt with,” said Fiennes

As I’ve noted previously, in the last thirty years:

  • The BNZ was bailed out by the government
  • Finance company (and bank) deposits were guaranteed by the government
  • AMI was bailed out by the government
And each of those bailouts/protections was done on the advice of the Reserve Bank and Treasury.  Two were put in place by National governments and the other (the 2008 deposit guarantee scheme) was done with the support of the then National Opposition.
We have let other institutions fail, and creditors lose their money.  Wholesale creditors of DFC lost material amounts of money in that failure (the few retail creditors were protected, mostly for convenience in dealing with the main creditors), various finance companies failed before the guarantees were put in place, and one other insurance company failed after the Christchurch earthquakes and was not bailed out.   So our governments have a track record of being willing to allow people to lose their money when financial institutions fail, if the number of people involved is quite small, or the creditors are foreign. But they have no track record of being willing to allow large numbers of domestic depositors/policyholders to lose money in the event of a financial institution failing –  and it is not as if these examples are all ancient history; two were resolved under the current government.

And it is not as if governments in other advanced countries have been any more willing to allow retail depositors to lose money.  Most of our major banks are Australian-owned, and Australia has relatively recently adopted a deposit insurance scheme, reinforcing the longstanding statutory preferential claim Australian depositors have over the assets of Australian banks.  In the event of the failure of an Australian-owned banking group, why should we suppose voters here will tolerate losing large proportions of their deposits when they see their counterparts in Australia –  in the same banking group –  protected?    The Australian government  –  in the lead in resolving such a failure – is unlikely to be receptive to such a stance either, and if they can’t force us to protect our depositors, there are lots of strands to the trans-Tasman relationship, and ways of exerting pressure if our government did choose to make a stand.

A deposit insurance scheme heightens the chances of being able to use OBR, and thus to impose losses on wholesale creditors, many of whom will be foreign.

But it doesn’t guarantee it.   I noticed that Geof’s article included this paragraph

Since the global financial crisis, many countries, including New Zealand, have developed policies that enable even large bank failures to be handled in ways that minimise the prospect of a taxpayer bail-out, by forcing shareholders, then creditors (including depositors), to absorb losses.

I am less optimistic than Geof here.  Countries have been moving in the right direction, of trying to establish resolution mechanisms that would enable bank failures to occur without taxpayer bailouts, and in which large and wholesale creditors would face direct losses.  But none of these mechanisms has really been tested yet.  I’m yet to be convinced that the authorities in Britain or the US would be any more ready to let one of their major banks fail, with creditors bearing losses, than they were in 2008.

I’m reminded of a story Alan Bollard once told us about his time as Secretary to the Treasury. Faced with the prospect of Air New Zealand failing, the Prime Minister of the time asked if Treasury could guarantee that if Air New Zealand failed the koru would be still be flying the following week.  Unable to offer any such assurance, the government decided on a bailout.  Faced with the prospect of the failure of one of our larger banks, the Prime Minister might reasonably ask the Reserve Bank and Treasury whether they could assure him that, if he went ahead and allowed OBR to be imposed, other New Zealand banks and borrowers would still be able to tap the international markets the next week.  At best, officials could surely only offer an equivocal answer.  Bailouts remain likely for any major institution (especially as, in our case, resolution of any major bank involves two governments).

I hope I am too pessimistic in respect of wholesale creditors.  And we shouldn’t simply give up because there is a risk that governments might blanch and bail out the entire institution.  But the best chance of governments being willing to impose losses on larger creditors in the event of failure, is to recognize that the pressures to bailout retail depositors will be overwhelming, and to establish institutions that internalize the cost of that (overwhelmingly probable) choice.  A moderately well-run deposit insurance scheme does that, by imposing a levy on banks for the insurance offered to their depositors.

As Geof notes, he has changed his stance on deposit insurance.   Looking around the web, I stumbled on  “Deposit insurance: Should New Zealand adopt it and what role does it play in a bank failure” a 2005 paper, by Geof and one of his colleagues (now a senior manager at TSB) on deposit insurance, which has been released under the OIA.   It is a useful summary of some of the counter-arguments.

One of the issues it covers is the question  of whether, instead of adopting deposit insurance, we could achieve much the same outcome by using the de minimis provisions in the OBR scheme.  Under those provisions (built into the prepositioned software) deposits up to a certain designated amount can be fully protected, and not subject to the haircut.

As I’ve noted previously, this provision might be useful if it was only a few hundred dollars –  effectively, say, protecting the modest bank balance of a very low income earner or superannuitant, who needed each dollar of a week’s income to survive.  It might be tidier to have all these small balances protected than to have all these people turning to food banks. It might also keep down the ongoing administrative costs of the statutory management, by keeping many very small depositors out of the net   But the de minimis provisions are not a serious substitute for deposit insurance, on the sort of scale that it is typically offered at.  Any preference for very small depositors comes at the expense of the rest of the creditors.  That might be tolerable for small balances in a large institutions with lots of funding streams.    It is much less so in a bank that is largely retail funded, and quickly becomes impossible in such banks once the level of protection rises above basic weekly subsistence levels.  And, of course, no one knows what the de minimis level is, so the risk (facing other creditors) cannot be properly priced.  By contrast, a deposit insurance scheme can be set, at priced, at pre-specified credible levels.

If we were to establish a deposit insurance scheme in New Zealand, there are many operational details to work through.  One, of course, is the pricing regime.   In his article, Geof notes that

‘the cost is small –  no more than a small fraction of a percentage point per annum on each dollar of bank deposit”

I’m less convinced that that is the correct answer.  There is a market price for insuring against the risk of bank failure, and associated losses on debt instrument.  That is what credit default swaps are for.  Historically, in the decade or so prior to the crisis, premia on Australian bank CDSs were very low.  We used them in setting the price for the deposit guarantee scheme in 2008, and from memory they had averaged under 10 basis points.  That isn’t so any longer,  and for the last few years the average premium has been more like 100 basis points (fluctuating with global risk sentiment) –  nicely illustrated here. Bank supervisors would, no doubt, tell us that these premia far overstate the risk of loss –  and I would probably agree with them (and certainly did in 2008, when we used historical pricing) –  but it is the market price of insurance.  Is there a good reason why government deposit insurance funds should charge less?

It is time to adopt a deposit insurance scheme in New Zealand –  not, in my view, because people necessarily should be insulated against losses, but because governments will do so anyway.  In the face of such overwhelming pressures (and track record here and abroad) we are best to build institutions that help limit and manage that risk, and which charge people for the protection that governments are offering them, while making it clearer and more credible that others –  outside that net –  will be expected to bear losses in the event of a bank failure.

A question for Steven Joyce

Michael Reddell Immigration, New Zealand economic performance

A reader pointed me to an article on the NBR website in which Science and Innovation Minister [isn’t there something wrong when we even have a government “innovation minister?]  was quoted as telling a business audience yesterday that:

more migration is the only way to bridge the current skills gap for ICT companies in New Zealand.

and

“That’s one of the reasons I’m leery of calls to halt immigration – apart from the fact there’s not much reason to because of the economic gains,” he said.

In the last fifteen years, we have had huge waves of immigration,  under both governments, and yet there is not the slightest evidence of economic gains accruing to the New Zealand population as a whole.  Tradables sector production per capita has gone nowhere in fifteen years, productivity growth has been lousy, and there is no sign of any progress at all towards meeting Mr Joyce’s own government’s (well-intentioned but flawed) exports target.

And yet the Minister’s answer is even more immigration.

My simple question to Mr Joyce would be along the lines of “what evidence can the Minister point to suggesting that the very high rates of immigration to New Zealand in recent decades have done anything to lift productivity in New Zealand, or lift the average per capita incomes of New Zealanders?”.

MBIE officials and Ministers of Immigration talk of immigration as a “critical economic enabler”, but in the papers they released last year, there was nothing remotely akin to evidence that the programme has enabled anything very much –  we have a bigger New Zealand as a result, but no evidence that it is a richer or more economically successful one.  Mr Joyce and the other MBIE ministers have huge resources, staff and budgets, at their disposal.  Surely they should be able to point to clear demonstrated economic gains for New Zealanders as a whole from such a large government intervention.  Our non-citizen immigration programme is already one of the largest (per capita) in the world.  Citizens might reasonably ask for evidence that such an outlier programme has benefited them before considering calls from Ministers for “even more immigration”.

In the last 100 years of New Zealand economic policy history there has been a weird disinclination to trust New Zealanders and their ability to take on the world and succeed themselves.  The Labour Party from 1938 put in place huge protective barriers, as if we could only prosper by turning inwards and producing everything from tennis racquets, TVs, and cars here just for the domestic market.  It took decades to unwind that policy.  And for the last 25 years, National and Labour governments have seemed discontented with the New Zealand population, and the skills, energies and expertise of our own people, turning instead to large scale immigration programmes as some sort of enabler/transformer.  25 years on, there is no more evidence that this unfortunate experiment has been much more beneficial to New Zealand than the protective barriers of earlier decades (or for that matter the Think Big programme of an earlier rather-too-interventionist National government).

But perhaps Mr Joyce can point us to the evidence that guides his interventions?

The Reserve Bank on immigration and the labour market

Michael Reddell Immigration, Uncategorized

Four months ago, in the December Monetary Policy Statement the Reserve Bank indicated that they believed that the surge in immigration over the last few years had eased capacity pressures and contributed to a reduction in inflation.  That was a view quite contrary to their own past research, or to the historical consensus of New Zealand economists that – whatever the long-term economic effects of immigration –  in the short-term the demand effects outweighed the supply effects.

The Bank might be right, but they provided no analysis or background material in support of their change of view.  So I asked for the background material. Almost two months ago they refused to release any of that material.  I have appealed that decision to the Ombudsman, and was pleased have an indication from the Ombudsman’s office yesterday that they are about to investigate it (less than two months after the complaint was lodged, suggesting that the new Ombudsman really is making progress).   At the time, the Bank indicated that it had other material that might shed light on the Bank’s view on immigration that was being worked on with a view to later publication.

Two such papers were released finally yesterday, accompanying an on-the-record speech by the Bank’s Deputy Governor, Geoff Bascand, “Inflation pressures through the lens of the labour market”.  It was a little curious to have a speech on such a major economic topic given by someone who is, in effect, the Bank’s chief operating officer.  Bascand has responsibility for things like notes and coins, property and security, HR, IT,  and NZ Clear (and chairs the Bank’s ill-governed and troubled superannuation scheme).  But, of course, he does have a background in economics and, having taken a step downwards in becoming Deputy Governor, is generally assumed to see himself in the running to be the next Governor, perhaps as early as next September.

It was a curious speech. The accompanying press release –  designed no doubt to highlight the key messages – begins with the claim that “rapid growth in the workforce…has helped create strong economic growth over the past four years”.   GDP growth in the last four year has averaged 2.85 per cent per annum.  I know it is an age of diminished expectations, but if that is “strong”, I think my dictionary needs updating.

strong growth

Despite the (alleged) biggest immigration surge in 100 years, neither average nor peak growth got anywhere near the levels reached in the previous couple of cycles.

Between the speech, press release, and the Analytical Notes, the Bank is clearly going to great efforts to stress the line that this is “the largest recorded surge in migration in 100 years”.  In particular, they want to have us believe that this event is bigger than the surge of immigration over 2002/03.  But they know that is simply not true.  In some places they are more careful, and only claim that it is the largest net inflow of (self-recorded) permanent and long-term migrants, but even then they know that those numbers do not always represent very well the actual net inflow of people (total, or even just those who stay for more than a year –  the PLT vs visitor threshold).

Why do I make this point so strongly? Because when I was at the Bank, and with the full knowledge of senior Bank managers, in 2014 I prompted Statistics New Zealand to produce Alternative methods for measuring permanent and long-term migration.  The issue arose from something like this chart

movements-migration

It illustrates that over 2002 and 2003 in particular there had been a huge divergence between the self-reported PLT numbers and the (accurate) count of the overall net flow of people into New Zealand.  Many more people (net) came in –  all needing a roof over their head –  than had said they were intending to stay for a year or more.

Statistics New Zealand had done nice work, using several different methods, to estimate what actually happened  (eg did the person actually leave the country again, or come back, within 12 months, even though they said they were PLT).  And they produced this chart.

plt-methods

Net PLT inflows in  2002 and 2003 proved, using these techniques, to be 50 per cent higher than the initial monthly data had suggested.  New Zealand’s population was around 4 million in 2003, and is around 4.6 million now.  Even just focusing on PLT numbers, the population surge resulting from immigration was just as large then as it has been over the last year or two.

And yet there is not a single mention of this work, or this issue, in any of the material that the Reserve Bank put out yesterday.  It is unfortunate that (a) the estimates go back only to 2000, (b) they are only annual (c) that SNZ has no money to do this work on an ongoing basis, and (d) that inevitably these better estimates have a 12 month lag on them.  But it is simply materially better information about immigration over the last 15 years, produced by our national statistical agency, than is in the monthly data the Bank makes so much of.

The total (net) arrivals data are noisy –  eg changing timing of school holidays, and/or major events such as Lions tours or the Rugby World Cup can add a lot of noise –  but here are the PLT and total net arrivals series (rolling annual totals) for the last 20 years or so.

plt vs total

There isn’t a lot of noise around 2002/03, or in fact around the current period.  And the  patterns over time are not necessarily typically different.  But there were simply somewhat more people coming into New Zealand (net) in 2002/03 than there have been in the last couple of years, and as percentage of the population the difference is even larger.  The immigration surge in the last couple of years has been big, but 2002/03 was simply a bigger event.    Here is the same chart shown as percentages of the population.

plt vs total per cent of popn

The Reserve Bank knows all about this. It is strange, almost inexcusable, that it is not even mentioned.  Not explicitly recognizing the issue undermines the confidence we might have in the rest of their analysis and interpretation.

What of their two Analytical Notes?  The first, by Tugrul Vehbi, a recent recruit from Treasury (his bio says he joined in Dec 2015, so clearly this wasn’t analysis that fed into the December MPS view) tries to look at “The macroeconomic impact of the age composition of migration”.  Using data for only the period since 1994 (so in effect only about 2.5 cycles) he constructs a small model to look at how several key economic variables respond to net migration by, on the one hand, those aged 17 to 29, and on the other hand those aged 30 to 49.  It isn’t entirely clear why he divides the groups where he does (or, hence, whether any results are sensitive to slightly different classifications). Loosely, I suppose he is distinguishing between the “young” (but independent) and the “not young”.  For the same sized shock, he produces results which –  with wide error bounds – suggest that the net demand effects of increase in immigration of 17 to 29 year olds are less than those for the 30 to 49 year olds.  In the current cycle, there has been a disproportionately large increase in the net inflow of 17 to 29 year olds.

I have several problems with the analysis.

The first point relates to the earlier discussion, and the apparent material underestimation of the PLT inflow (in the monthly data the Bank uses) over 2002/03.  It is generally recognized that much of that issue related to students (typically in Vehbi’s younger age group).  As this chart shows, drawing from MBIE visa approvals data, there was a huge increase in the student visa numbers granted over that period.  Since his estimation effectively uses only a fairly short run of data, only 2.5 of so cycles, mis-measurement in the biggest of those cycles is a potentially severe problem.

student visas

Related to the small sample problem, the (one standard deviation) error bounds on his estimates are sufficiently large (see Figure 3 in the paper) that we can’t say with any confidence that the effects are different between the two age groups, even if all the immigration data are correctly measured.   Moreover, Vehbi runs an useful alternative estimation leaving out the last couple of years data, and although he describes the effects as “qualitatively similar” in the two runs (and no error bounds are shown for the alternative), for at least some of his series (residential investment and consumption) the quantitative effects are quite materially different.

But perhaps a more important effect still is that he simply looks at the two ages ranges 17 to 29, and 30 to 49.  In most cases, we can probably think of the actions of 17-29 year olds as being independent of other age groups (eg they won’t be coming with children –  or parents for that matter).  The same can’t be said of people in the 30 to 49 age group, many of whom will be bringing children with them.   You can see that in this chart, going all the way back to the 1970s, and simply using the PLT data (with all its weaknesses, as discussed above)

net plt by age

All the main age range groups cycle together to some extent, but the 17-29 year old group behaves materially different from the 0 to 16 and 30 to 49 age group in particular. In the early decades, most of the net migration outflow was young people, and right now much of the net inflow is.   But the key point is that when the 30-40 age group numbers increases there is almost always a very similar sort of increase in the inflow of 0 to 16 year olds (as one would expect, children mostly come with parents).  But if you test how the economy responded when 17-29 year old inflows increases and compare that with a same sized shock to the 30 to 49 age group, of course you should see large net pressures on resources from the older age group, because you are ignoring the fact that these people bring with them a lot more people (the kids).  Kids don’t add anything much to labour supply, but they need housing, schooling and the other basic necessities of life.  The model might be better rerun comparing, say, the impact of a shock in the 17 to 29 year old inflows with the impact of a shock to the other age groups taken together (or even just the 0 to 16, and 30 to 49 age groups together.

It is (always) good to have the Analytical Note out.  But the measurement problems around PLT numbers (which SNZ themselves recognize), the short sample, and the failure to allow for kids who accompany the older people means we can’t really have much confidence in the results at all.

Is it credible that the young (17 to 29, say) migrants could have a materially different impact on net capacity pressures than other age groups?  In principle, it is possible.  Take a scenario in which all the young were working 60 hours a work, living in extremely cramped conditions, and remitting most of their earnings home. In that scenario one would certainly expect quite weak pressures (perhaps even negative) on inflation. Perhaps that describes illegal Latin Americans in the US, or even the stereotyped Polish plumber in the UK?

But about as many of our young PLT migrants arrive as students, as come on work or residence visas (and many more shorter-term arrivals, all consuming and not able to work legally, are students).    The Reserve Bank makes quite a bit of the change in policy allowing students limited work rights in New Zealand, but even under that policy most students only have a legal right to work 20 hours a week, and then only under certain conditions.   But even if all the students could work, it is still only 20 hours week –  roughly half what a typical full-time worker will do (or the same as a couple raising kids, in which one parent works fulltime and another is at home).  And the students still have to live, pay tuition etc, all of which puts pressure on New Zealand resources (export earnings, so generally welcome, but demand nonetheless).

Perhaps the fact that our current migrants are disproportionately quite young does result in less net demand pressure per migrant. (And it is quite plausible that students put a bit less pressure on resources than they once did.)   But on the information presented so far, at best it is “case not proven”.

The other new  Analytical Note is “Why drivers of migration matter for the labour market”. One of the authors is Chris McDonald, author of a 2013 piece illustrating the way the net migration inflows to New Zealand have typically added materially to inflation pressure.

In the new paper, the authors set up a very small model in which they try to distinguish between net migration flows that result from fluctuations in the strength of the Australian labour market from those arising from other factors (eg changes in New Zealand immigration policy).  In their model, the latter sorts of flows have the conventional expected effect on domestic demand and inflation pressures – higher migration inflows, for example, lower the unemployment rate.  But

a higher Australian unemployment rate that generates positive net immigration [to New Zealand] typically coincides with a higher New Zealand unemployment rate.

But –  as the authors acknowledge as a possibility in their final paragraph –  mostly what this is telling us is that New Zealand and Australian economic cycles have tended to be quite correlated and that Australia affects New Zealand through a variety of channels.  Australia is our largest trading partner (and largest source of FDI) so that when the Australian economy is weak (proxied in this model by an “unemployment gap”) economic activity here is also, to some extent, adversely affected.   As I’ve noted here previously, it has never been clear what the net effects of an Australian slowdown on New Zealand are: we face some losses of demand in our direct trade (and probably investment, if Australian firms rein in their investment spending), but on the other hand when Australia slows we get fewer New Zealanders (net) going to Australia.  That adds to demand here.  The net effect is clearly different from, say, the net effect of an exogenous immigration policy change (say targeting 20000 more permanent residents from other countries), but it isn’t necessarily that the effects of the migrants themselves is any different. When they get here, they still need houses, schools, shops, roads, factories, and they can supply some labour. Capital stock requirements are typically more than a year’s labour, so generally short-term demand effects  from the migration choice typically exceed supply effects.  It isn’t clear to me that McDonald and Armstrong have really (even attempted) to show that those effects are different across the two classes of migrants.  Of course, if all they are saying is that there are offsetting shocks –  weakness in Australia’s economy offsets the demand effects of the resulting migration choices, then I can happily agree.

In the end there is little reason still to depart from the longstanding consensus of New Zealand economists, going back many decades, and of the Reserve Bank’s own past analysis (formal and otherwise) over more recent decades, that net migration inflows put more pressure on demand than on supply in the short-term.    But if major trading partners are weak at the same time, an upsurge in net immigration won’t typically be a basis for tightening monetary policy and worrying about inflation.

There is a more material on other topics in Bascand’s speech, and another whole Analytical Note on other labour market issues which I haven’t read yet. I might come back to them next week.