Grant Robertson made my day

In an address at Victoria University at lunchtime, Labour’s finance spokesperson Grant Robertson launched his party’s monetary policy reform programme.   In an interesting move, the incoming Acting Governor, Grant Spencer, who would have to manage (for the Bank) the early stages of Robertson’s reform process if Labour leads the new government, attended, sitting very visibly in the front row.

The two main aspects of Labour’s proposal are:

  • broadening the objective from just price stability “to also include a commitment to full employment”
  • changing the decision-making structure for monetary policy, so that a committee would have legislated responsibility.  That committee would comprise four internals (including the Governor) and three external experts who would be appointed by the Governor (but in consultation with the Minister of Finance).

Labour would also require the Bank to release the minutes of the Monetary Policy Committee, including the results of any votes, within three weeks of the relevant OCR decision being announced.

I was interested to note a press release from the Greens in which they state

Labour plans to change the way we do monetary policy in New Zealand and the Green Party supports them fully. We’re now of a single mind on this.

The Greens have previously favoured the Reserve Bank Board –  whose members are mostly non-experts –  making OCR decisions, so I’m not clear if the “single mind” James Shaw refers to extends to that level of detail, or just to a shared commitment to (a) reform, and (b) a decision-making committee that would involve non-executive outsiders.

Bill Rosenberg of the CTU and I were discussants following Robertson’s address.   I wrote this morning a fuller version than I could use of my thoughts on the Labour proposal.

Reflections on Grant Robertson on the RB VUW 10 April 2017

I opened observing that when I got an outline late last week of what Robertson was going to say, I had blurted out that “Grant Robertson has just made my day”.  I’ve been arguing for governance reform for at least 15 years, and between the report the Minister of Finance has commissioned, and the shared commitment to reform of the Greens and now Labour, it looks as though change might finally happen.   There was a certain logic to the current single decision-maker system in 1989, but if it had a logic then –  in how we understood monetary policy, and the nature of the Bank’s functions –  it simply looks wrong today.  Other countries don’t do things that way.  We don’t either in other areas of public life.

What I’m most encouraged by is the commitment to involve outsiders, not just to cement-in a position for insiders.  Having said that,  I raised two main areas of concern:

  • the first is the Robertson proposal that the Governor should continue to be (in effect) appointed by the Board (in turn appointed by the current government), and that all the other voting members (inside and out) would be appointed by the Governor.  He qualifies this by noting that these appointments would be made in consultation with the Minister of Finance.    But that is a recipe that risks the Governor surrounding him or herself, deliberately or unconsciously, with people who think like the Governor, and will be reluctant to challenge the Governor too much.   The Minister might raise a few questions about a proposed appointee, but will be reluctant to second guess the Governor, and cannnot overrule him in this model.   Frankly, it is a model with a yawning democratic chasm and not a model I’m aware of being used in any other country.  It is one thing to delegate operational decisions to independent boards, but the members of those Boards should be appointed by those whom we elect –  ministers –  and whom we can toss out.
  • the second concern is that under the proposed model there would be four insiders and three outsiders.  That is the wrong way round, and most likely would be a recipe for the marginalisation of the outsiders (since the insiders have no independent status, and all work for, and have their pay etc set by the Governor, they can easily caucus and out-vote the externals).   I’d prefer two internals and three externals, all directly appointed by the Minister of Finance.

In response, Robertson noted that he was open to looking again at the ministerial appointment option.  He noted that it was awkward as putative Minister to be talking of giving himself such extensive appointment powers.  Perhaps, but that is the way most public sector boards work.  If he wants Labour precedent, Gordon Brown introduced the Bank of England statutory Monetary Policy Committee, to which the Chancellor appoints most of the members directly, and has to be consulted on the remaining two.

Robertson explained that he preferred to keep a majority of insiders because one of his priorities was to preserve the operational independence of the Bank. I was, and am, puzzled by that response. I noted to him that the RBA has a substantial majority of outsiders on its decision-making Board, and that they had operational independence.  The same goes for Sweden’s Riksbank.  I’m less optimistic about a re-think there, as Robertson also stated that he did not envisage allowing MPC members to make speeches or comments on monetary policy without the explicit prior consent of the Governor.  It seems he still has in mind an excessively Governor-dominated institution, and one in which it would be hard to ensure transparecny and the regular injection of fresh perspectives and alternative views.  If so, that would be unfortunate.

I noted some unease about his proposal that all the external appointees would be “expert”, and perhaps had that concern somewhat allayed when he stressed that in this context he did not intend “expert” to mean simply a narrow expert in specific aspects of monetary economics or the like.

My other main observation in this area is that the Labour proposal (deliberately and consciously) does not yet address the governance and decisionmaking for the Bank’s extensive financial regulatory functions.

But the most important omission seems to me to be the governance provisions for the Reserve Bank’s extensive financial stability and regulatory functions, under various different pieces of legislation.   There is no precedent anywhere for so much regulatory power to be in one person’s hands.  It wasn’t even an outcome that was consciously deliberated on by Parliament –  rather it grew up with a succession of amendments to the Act, and changes in regulatory philosophy over the years. And whereas a regulating Cabinet minister can be reshuffled or dumped whenever the Prime Minister chooses, a Governor of the Reserve Bank is secure for five years.

If individuals matter in monetary policy, even with something like the PTA, they are likely to matter hugely in the financial regulatory area, where there is nothing like the PTA to constrain or guide the Bank/Governor.  The economic impact of regulatory choices can be as large –  if less visible –  than those around monetary policy.  I really hope that Labour will be thinking hard about how to extend their governance reform ideas into the financial regulatory field.  Personally I think there should be three strands to that:

  • Removing some of the high level policy-setting power back to the Minister of Finance (so that the RB applies the rules etc and mostly doesn’t make the high level rules),
  • Move responsibility for the various pieces of legislation out of the Reserve Bank, probably to Treasury. This matter is already being touched in the Rennie review commissioned by the current Minister of Finance, and
  • Establishing a Financial Policy Committee, paralleling the Monetary Policy Committee, as the entity empowered to exercise whatever policymaking powers reside with the Reserve Bank. Again, a five-person committee (Governor, Deputy Governor, and three externals seems like a feasible solution).  The FPC would also be responsible for Financial Stability Reports.

Robertson acknowledged the deliberate omission and talked of it being “part of the conversation” moving forward.  I hope so.    This is the opportunity for a full overhaul of the governance model, not just tacking on an MPC to a model that doesn’t work that well in other areas either.

The other half of the address was about the idea of adding full employment to the goals for monetary policy.  I was (and am) much more sceptical, and nothing that was said in response to questions really clarified things much.    I get that full employment is an historical aspiration of the labour movement, and one that the Labour Party wants to make quite a lot of this year.  In many respects I applaud that.  I’m often surprised by how little outrage there is that one in 20 of our labour force, ready to start work straight away, is unemployed.  That is about two years per person over a 45 year working life.  Two years……     How many readers of this blog envisage anything like that for themselves or their kids?

But still the question is one of what the role of monetary policy is in all this, over and above what is already implied by inflation targeting (ie when core inflation is persistently  below target then even on its own current terms monetary policy hasn’t been well run, and a looser monetary policy would have brought the unemployment rate closer to the NAIRU (probably now not much above 4 per cent)).

I noted that I’m sceptical that the wording of section 8 of the RB Act is much to blame.  After all, for several years prior to the recession, our unemployment rate was not just one of the lowest in the OECD, it was also below any NAIRU estimates.  And when I checked this morning, I found that our unemployment rate this century has averaged lower than those of Australia, Canada, the US and the UK, and our legislation hasn’t changed in that times.  Robertson often cites Australia and the US.

The last few years haven’t been so good relatively speaking.  But if the legislation hasn’t changed and the (relative) outcomes have, that suggests it is the people in the institution who made a mistake –  they used the wrong mental model and were slow to recognise their error and respond to it.  Getting the right people, and a well-functioning organisation, is probably more important than tweaking section 8.

Robertson disputed my past characterisation (as “virtue signalling”) of his talk of adding a full employment objective.  But I still don’t see in what way I am wrong in that description.  It would send a single to key constituencies that Labour “feels the pain” and has an integrated commitment to advancing full employment, but what difference would it make to the Governor and his committee?  There wouldn’t be a numerical definition of full employment in the PTA, and since Robertson remains committed to the accountability framework of the Act, it is very hard to see how or why any given Governor would react much differently given a specific inflation target and a vague injunction to promote “full employment”.  A different Governor might make a difference –  hence, choose carefully –  but that sort of wording is unlikely to.

If they form a government later in the year, Labour (and the Greens) clearly will need to add some words to the PTA.  I drew the attention of those present to the 1950 amendment to the Reserve Bank Act, under which

[The Bank] shall do all such things within the limits of its powers as it deems necessary or desirable to promote and safeguard a stable internal price level and the highest degree of production, trade, and employment that can be achieved by monetary action.

I quite like it (and not just because a relative of mine was the responsible Minister of Finance).  It recognises that monetary policy doesn’t exist in a vacuum, and that people (voters and politicians) care about other stuff.  In fact we don’t pursue price stability simply for its own sake, but for a better life for New Zealanders. But note the key phrase  “the highest degree of…employment that can be achieved by monetary action”.  That might not be much, at least once the unemployment rate is back near the NAIRU.

As today’s chair –  economic historian Gary Hawke –  noted the 1950 change was largely about signalling too, and it isn’t obvous it made an awfully large difference to actual monetary policy.  But that was my point.  If you want words –  or signals – it is easy enough to craft elegant formulations that express those aspirations, and even articulate a place for monetary policy in overall economic management. It is a quite different thing to expect a central bank, however governed, with a single instrument capable only of affecting nominal variables in the longer-run, to make much material difference over time in achieving the wider –  and laudable –  government goal of full employment.

Politically, it doesn’t help at all to make that distinction.  But analytically it looks pretty clear.  Well-crafted words –  a modern version of that 1950 formulation –  would do no harm, and I’d have no real problem  with them, but they won’t make much substantive difference either. But sometimes, I guess, symbols matter quite a lot.

A leading academic weighs in on immigration

When the head of the economics department of New Zealand’s leading university takes to the op-ed pages of New Zealand’s most widely-circulated newspaper, readers might reasonably suppose that what the author has to say will be authoritative and well-worth reading for anyone interested in the issues upon which the author is opining.

Last Thursday, Professor Ananish Chaudhuri, head of the economics department at the University of Auckland, had a piece in the Herald headed Immigrants are a gain, not a drain .

Chaudhuri’s own background isn’t in the economics of immigration, nor is he an expert in issues around productivity, economic geography, or New Zealand’s economic history of sustained underperformance.   He is, as the article notes, professor of experimental economics.  I’ve only heard him speak once, and found his work fascinating.  You can check out his list of publications here.  He seems to be highly-regarded in his own specialist areas, and as an immigrant himself one might safely conclude he has been a net (economic) gain to New Zealand.

I’m not holding against him the fact that he isn’t an academic specialist in the economics of immigration and in New Zealand’s economic history and performance.  Few people (arguably none) are.  Ideas should stand on their merits, not on the CVs of those holding them.   But lay readers, attracted by the title “head of economics department, University of Auckland”, might have assumed a degree of specialist expertise that doesn’t seem to be there.

Chaudhuri’s op-ed has three main strands, before concluding with an astonishing assertion.

He begins with a bit of a rant against Donald Trump and somehow manages to wrap in, as part of a single phenomenon, the recent decision to deport some Indian students whose applications for student visas –  many no doubt hoping to use that as a stepping stone to residence –  were based on demonstrably, and admitted, false information.  They (signed statements which) lied.    One might, or might not, have some sympathy with them as individuals, but whatever one thinks about the appropriate levels of immigration to New Zealand (a) people are more likely to have confidence in it when the rules, whatever they are, are enforced, and (b) there are few defenders of the rort the student visa system had become over the last few years, often aided and encouraged by a government keen to maintain a story about the success of the export education industry.    We could sell more of almost anything if there were points towards a residence offered as well.  That is how export subsidies work.  They were a bad idea in the 1970s, and they are a bad idea now.

But what of the substance?

His first question is “are immigrants a drain on the economy”.     His answer to that question is no, and to do so he relies exclusively on the BERL estimate of the differential impact on (a portion of) government finances of natives and immigrants.    Nigel Latta made a TV documentary on immigration last year that relied wholly on the same study –  and if that was questionable (and I questioned it here) at least he wasn’t an economist.

As even the authors of the BERL study noted

2. The study concentrates on fiscal rather than economic impacts. Due to this the study is limited to estimating the direct monetary impacts on the government’s operating budget.

Fiscal impacts can be interesting, if done well, but they don’t tell us –  can’t tell us, aren’t designed to tell us –  whether natives are made better off, worse off, or left largely unchanged –  by the sort of level/composition of non-citizen immigration we’ve had.

As it is, the BERL study covered only some parts of the government’s finances, and the bits they omitted –  not through bias, but because they are hard –  would be likely to change materially even the fiscal assessment, as would a full intergenerational approach to the issue (again, BERL was not paid to do something state of the art).   For anyone who wants to look at some of the problems  with the fiscal estimates, I wrote about some of them in one of my posts responding to the New Zealand Initiative’s recent immigration paper.  As I noted, even if the average migrant is a net fiscal gain –  which is plausible –  it is very unlikely that all classes of migrants are.

In short, Chaudhuri offered readers nothing shedding light on whether New Zealanders’ living standards, or the productivity of the New Zealand economy, have been improved by our immigration programme.

Chaudhuri’s second question is “do immigrants displace native workers”.  Actually, on this point he went further than I would have, noting “yes to an extent”.     But after only a handful of words on immigration effects, he devotes the rest of that section of his article to discussing some interesting material on other forces that might (globally) be “driving blue-collar wages downwards”.  That may very well all be true, and even important, but what we were promised was an economic analysis of immigration (presumably focused on New Zealand), and it just isn’t there.

His third question is “do immigrants fail to assimilate”.  In his view “arguments about assimilation are usually a cover for aversion to ethnic diversity, so it is difficult to provide a cogent counter-argument”.  In other words, “back in your box racists”.  He seems unaware of, or uninterested in, literature on trust, national identity, social cohesion or any of the range of conflicting evidence on the implications of different types of diversity.  Perhaps he could walk down the road and have a chat with AUT academic Bart Frijns, whose work I wrote about here last year.   Issues around assimilation aren’t my focus, but there are reasonable debates to be had.

As he gets towards the end of his column, Chaudhuri offers quite a balanced perspective.

There is no doubt that while immigration increases the size of the national pie, it does create winners and losers. For workers suffering from stagnating wages, the sense of displacement and disillusionment is real.

So even on Chaudhuri’s assessment, it isn’t all a rosy story.  All else equal, some natives are being made worse off.    But apparently it doesn’t really matter, because the learned professor knows that….

…the bottom-line is clear: The net gain to society from immigration outweighs the losses and, therefore, there must be ways of providing a safety net for displaced workers in a way that makes all of us better off.

But no shred of evidence – global, let alone anything specific to New Zealand – was offered in the entire column to show that there are overall gains.  One might guess that he is relying on some general international academic pro-immigration consensus, but he shows no sign of having engaged with the specifics of the New Zealand experience, past and present, at all.    (And, for what it is worth, he also offers no specifics on these redistributive measures that might help ensure that even the “losers” actually end up made better off.  That isn’t surprising, as I’m not aware of any advanced economy where such measures have been put in place.)

Chaudhuri then wraps up with an astonishing claim

In the meantime and leaving cultural arguments aside, those who suggest immigrants are a net drain on society in economic terms are purveying “alternative facts” that should not be part of informed discussion.

Wow, so no debate should be entered into because the learned professor has decreed  –  not even argued, or demonstrated,  but just decreed –  that the economic case is closed.  Economies benefit, New Zealand’s economy benefits, and any suggest to the contrary is right up there with Trumpian claims about numbers in the Inauguration parade.   I disagree with the people at the New Zealand Initiative on immigration, but they weren’t that dogmatic –  and were pretty open about the lack of New Zealand specific empirical studies on the overall contribution of immigration policy to New Zealand’s economic and productivity performance. For them, the conclusion that New Zealanders’ benefit was a judgement –  probably held strongly, but an informed judgement nonetheless.  It wasn’t revealed truth, into which no subsequent debate could be tolerated

When the 27 prominent New Zealanders came out the other day with their open letter on free speech, I didn’t pay much attention. I was generally sympathetic, but in my observation the issue of attempts to close down debate (on all manner of topics) seem to be becoming a serious issue in the US (especially in academe) but not, at present, in New Zealand.  If one takes him at his word, Chaudhuri seems keen on having New Zealand catch up down that slippery slope.   I hope I shouldn’t take him at his word, and he is more open to debate –  specific debate, concentrated on New Zealand’s experience, and New Zealand’s programme –  than his op-ed suggested.  Perhaps the Herald could offer him another column, in which this time he could get specific about the nature of the evidence he believes –  as head of the economics department of our leading university –  makes it such an open and shut case that New Zealanders as a whole are reaping economic rewards with our huge decades-long grand immigration experiment?