Day: September 28, 2017

A first unlawful act?

Michael Reddell Governance, Reserve Bank

Earlier in the week, Graeme Wheeler completed his term as Governor and left office.  Even in a week with little real news to report, his departure didn’t seem to receive any notice in the media.  Not even the Herald managed an enconium.   Surely his departure must go unlamented almost everywhere, even if, no doubt, the Bank’s Board –  supposedly guardians of the public interest, but in fact guardians of the Governor –  gave him a good dinner on the occasion of their meeting last week?

And now Grant Spencer – erstwhile deputy chief executive – purports to be in charge, as “acting Governor” until a permanent appointment can be made by the incoming Minister of Finance.  I like Grant.  He was my boss in two separate stints spread over many years, and –  in the late 80s –  was a voice of reason and moderation in an age when young hotheads didn’t always welcome such perspectives.   Now that he purports to wield so much untrammelled power –  not just monetary policy, but all the Bank’s regulatory functions –  I’m sure his management skills must also have improved further.  I like to tell the story of the two years, very early in my management career, without any structured performance feedback from him: the only way I could really be confident I must have been doing ok was through the annual pay round, but when he came to deliver that news I was on the phone, so Grant scribbled the number on a piece of paper, dropped it on my desk, and left.  But I’m sure he would be a safe pair of hands, minding the store.

Unfortunately, his purported appointment –  probably sensible in intention if Graeme Wheeler couldn’t have been persuaded to take a temporary extension – is, as I’ve been pointing out for months, probably unlawful.  (If, as a new reader, you are puzzled by that claim, you can read for yourself my thoughts on the summary of Crown Law’s legal advice on the issue.  I still have with the Ombudsman a request for (a summary of) the Reserve Bank’s own lawyer’s advice.)

And if his appointment is unlawful then so, presumably, are all the acts the Bank takes –  or purports to undertake –  under his authority over the next few months.  Including setting the OCR.

Again, that proposition might puzzle you.  Surely even if there was some question over the lawfulness of the appointment of an acting Governor in these circumstances, there would be no question of the lawfulness of the Bank’s actions?  I had a look at the legislation a few months ago.

Does it all matter?    Sometimes laws contain provisions stating that any problems in the appointment of an officeholder, or doubts about the validity of the appointment, don’t affect the validity of enforceability of the actions/decisions taken by that person.

In fact, the Reserve Bank Act has one of those provisions.    For the Board.  Under section 54(4)

The validity of any act of the Board is not affected by—

(a) any vacancy in its membership; or
(b) any defect in the appointment of a director; or
(c) the fact that any non-executive director is disqualified from appointment under section 58. 

But there is simply nothing comparable for the Governor.    Curiously, there is protection for the Deputy Chief Executive when exercising delegated authority from the Governor.   Under section 51 

The fact that the Deputy Chief Executive exercises any powers or functions of the Governor shall be conclusive proof of the authority to do so, and no person shall be concerned to inquire whether the occasion for doing so has arisen or has ceased.

But there is nothing like it for the Governor, or any acting Governor.  There is simply a requirement on the Board and the Minister to make a proper appointment, and to have that person in place once the previous Governor’s term ends (and presumably an expectation that Governor appointments are sufficiently high profile, and as all powers of the Bank rest with the Governor, no questions should ever arise about the authority of the Governor him or her self to make decisions.

(Again, it is perhaps worth noting that there are also no such protections in the 1964 Act – the one in place when the 1989 Act was being drafted.  The drafters presumably made conscious choices about what to add and what not to.)

If the appointment of Spencer as acting Governor is unlawful, it looks as though any actions taken by him –  or under his (purported) delegations during his term –  would also be unlawful.

Perhaps it won’t matter very much.  Few people expect the OCR to be changed in the next six months, and if so perhaps they could argue that successive OCR decisions aren’t actions but inactions –  just leaving things as Wheeler left them.

But the Reserve Bank does lots of other stuff.   They commit to commercial contracts, they deal in New Zealand in international markets.  They take enforcement actions against financial institutions that fall foul of the law, or of the Bank’s rules.  And so on.  In a crises, they (the Governor) has substantial regulatory powers.

The situation should never have been allowed to arise.  As I’ve noted for months, it was easily avoidable, with a simple temporary change to the Reserve Bank Act (which there is no obvious reason for the Opposition parties to have opposed –  either on the substance, or as regards Spencer personally, whom everyone regards as a decent and honourable person).   But now we have an unlawful appointment, and Spencer purporting to exercise the powers of (acting) Governor.

But what of the OCR press release –  which, as pure commentary, I suppose Spencer is free to issue?  It probably isn’t that sensible to make much of minor differences in wording: in some areas Spencer may just use slightly different hobbyhorse phrasing than Wheeler would have.  But no one sees it as a material departure from last Wheeler statement, even if (perhaps) the confidence in the growth outlook might be fading.  As for what it might mean for actual (or purported) OCR setting, not much.  After all, it is quite plausible that a new Minister of Finance and coalition could mean modifications to the Policy Targets Agreement almost straightaway (happened in 1993, 1996, and 1999).  And even if that doesn’t happen, Spencer won’t be there to offer his opinion by the end of March, and no one knows who the new Governor will be, or what mandate he or she will be working towards.

The growth outlook was one of the issues I touched on in my comments on the last Monetary Policy Statement.  Those comments still seem largely valid now –  the June quarter GDP numbers were flattered by big one-off boosts to services exports from the World Masters Games and the Lions tour, and yet still showed growth of only 0.8 per cent.

But perhaps my biggest puzzle is where all the forecast growth is coming from.

Over the next six quarters, the Bank projects that quarterly GDP growth will average just over 0.9 per cent. This chart shows six-quarter moving average of GDP growth (in turn, averaging the production and expenditure measures).

GDP growth qtrly

The orange dot shows the forecast for the next six quarters.  Their projections suggest that the economy will grow more rapidly over the next 18 months than it has managed on a sustained basis at any time in the current recovery.   You might not think that the difference looks large, but:

  • the Bank already recognises that monetary conditions are tighter than they were last year,
  • the Bank is forecasting a substantial reduction in the net migration inflow, and no one seriously doubts that unexpectedly rapid population growth has been the biggest single driver of headline GDP growth in recent years.  However much immigration adds to supply, it adds a lot to demand.

So why are we to expect a sustained growth acceleration from here?   Although it isn’t stated in the document, I hear that the Bank is invoking the expected fiscal stimulus (from promised measures announced in the Budget).  In isolation that might make some sense, but against the projected halving in the net migration inflow and the actual tightening in monetary conditions, it doesn’t really ring true.     If anything, the risk now has to be that over the next 18 months, headline GDP growth averages lower than we’ve seen in the last couple of years.

Whichever parties form the next government, and as I noted last week, it seems likely that government expenditure will be higher than projected.  But it is still difficult to see a growth outlook as relatively buoyant as the Bank projected –  and requires if inflation is to get back to target –  as the most likely outcome.

And the Bank –  and government –  still seem grossly underprepared for the next recession, whenever it comes.

 

Things busy bureaucrats do all day

Michael Reddell Regional development, Treasury

When I was very young one of the picture books I enjoyed –  favourably reviewed, so I see now, even by the New Yorker – was Richard Scarry’s What do people do all day?  Set in Busytown, there was a pervasive sense of activity and, well, busyness.  I don’t think the book had a separate entry for government policy advisers, but the book came to mind as I reflected on a Treasury guest lecture I went to yesterday.

A recently-retired MBIE official had been invited by Treasury to share her experiences of 10 years in the regional economic development wing of MBIE (or its predecessor the Ministry of Economic Development (MED)), and the title of the lecture was “The Great Cat Muster”.     At the start of the lecture she asked us to observe Chatham House rules, by which she meant that anything she said could be reported, but that she shouldn’t be identified.  I’m not sure why, when the flyer for the presentation is easily accessible on Treasury’s website, but for my purposes the presenter’s name probably isn’t very important.  The worry is that her content epitomised a cast of mind that can too easily pervade official bureaucracies.   As I summed it up last night to another attendee “all that energy and good intention, with so little of an analytical framework and even less evidence”.

We weren’t off to a good start when she briefly ran through her various roles in regional development.  In the first of them she had, apparently, been responsible for the West Coast timber settlement. But, as she noted –  and full marks for candour I suppose –  when the NZIER later rated the policy paper on this issue (as they do for a bunch of participating ministries), it scored the worst rating MED had ever achieved.

But most of her time had been spent on more pro-active government initiatives.  There was something called the Food Innovation Network, work on Maori economic development, and then for the last few years work as part of the flagship Regional Growth Programme.  The presenter was clearly pretty passionate about what she’d been doing and the relationships she’d been building.  There was no shortage of energy or ambition.  And no shortage of central Wellington perspectives either.  There were countless working groups, and charts to illustrate complex networks across central government and between arms of central and regional governments.  Meetings abounded, briefing papers multiplied, Air New Zealand profited from frequent flights, relationships were built, and sometimes the recalcitrant were called into line, or simply bypassed.   At one point, she even celebrated the “fact” that regional governments had mostly simply chosen to ignore an act of Parliament –  for the greater good no doubt.  And as for the private sector, well……..the government had simply had to be involved in the Food Innovation Network because we had to develop our food industries, and add value to our exports, and they had found that the private sector was “terribly unsophisticated”.

We learned about the regional studies that have been conducted in several areas under the auspices of the Regional Growth Programme, itself initially sponsored by three ministers (and their agencies).  Now there are “action plans” sponsored by even more minister and agencies.   One mayor had apparently finally been convinced by wise officials that one particular product did not represent his district’s economic future.

It was all remarkably busy.   I had to sympathise with the senior manager who, she recounted, had asked her of one programme “can you be sure we can contain this?”.  To which her response had been along the lines of “well, no, I can’t.  You’ll just have to trust me”.

But, since this presentation was being held at The Treasury, and MBIE is purportedly an economic agency, a few simple things struck me as missing.    There was little or no sense of any of the myriad ways in which governments and official agencies fail, and sometimes leave things even worse than when they started.  There was nothing at all, even in passing, on what the market failures might have been to justify all this busyness in pursuit of regional economic development.     Hadn’t we been this way before, numerous times (one of my earliest political memories is of Matai)?   And, for all the busyness, what difference had all this regional development promotion activity actually made.   After all, there had been no national productivity growth for the last five years, and although she several times highlighted the idea of boosting export industries, exports as a share of GDP have been falling.

So when question time came I stuck up my hand and asked what the market failures were, and how different things would have been if none of this activity had gone on.

Her response was that the market failure was “information asymmetries”.  It wasn’t at all clear what she thought she meant by that phrase, but she seemed to have in mind some sense that central government knew stuff people in the regions (private sector or government) didn’t.  Public servants had needed to “explain to regions where they fit in the system”.    That just isn’t what any economist means by the sort of information asymmetry that might –  just possibly, under some circumstances –  warrant government intervention.  But then it got even worse.  She declared that she’d come from a family that didn’t rank public servants very highly, but “I’ve come to realise that public servants see things no one else sees”, and can offer a “strategic perspective”.

She overlooked answering the second part of my question, so when other people had asked their questions, I asked again what difference all this regional development promotion activity had actually made.  And there was a brief moment of dawning unease: “I sometimes ask myself that”.  She went on to claim that the effects can’t necessarily be quantified by statistics, and that the gains might take more than a few years to realise, but that if we didn’t “do something” we’d see the eventual effects of that.

What stunned me, in someone invited to give such a public lecture at Treasury, was the lack of any rigour, the lack of any robust framework, around all this effort.  Not that many years ago, we’d have counted on The Treasury to be particular intolerant of such, apparently, woolly enthusiasm (at the taxpayer’s expense).  But no longer?  I’d like to think that somewhere in MBIE or Treasury there is a somewhat more hard-headed assessment and evaluation going on, but….it wasn’t on display yesterday.

(And, as one other sceptical attendee described it to me, most of the other attendees –  I suspect mostly public servants –  appeared to be “lapping it up”. I really hope that assessment is wrong, but there were no other sceptical questions from the floor.)

In a way, perhaps, one of the MBIE staff in the audience summed up, unwittingly, the problem with much of this.  He noted that they have “been focused on the levers we can pull easily”, while ignoring others.  And with, it seems, no hard-headed analysis as to whether levers MBIE can’t pull might be considerably more important than those they can –  I think, most notably, of the real exchange rate.

And what of the regional economies?  How have they been doing?  To have listened to the presentation one might have supposed they were wastelands of poverty and economic failure, remarkably different from the urban centres of Auckland, Wellington and Christchurch.

But the data don’t really seem to back up that sort of story.  Take the unemployment rate for example.  Here is a chart showing the median unemployment rate for the regional council areas other than Auckland, Wellington and Christchurch against the unemployment rate for Auckland.

regional U

For most of the last decade, Auckland’s unemployment rate has been a bit above that in the median non-urban region (even though theory typically predicts that a big urban area will typically have a slightly lower unemployment rate –  skill matching is a bit easier in a deeper market).

Or the same chart for the employment rate.

employment rate regions

For the last 15 years, the employment rate in the median region has typically been a touch higher than that in Auckland.

What about regional GDP? In earlier posts, I’ve pointed out that Auckland has been seriously underperforming relative to the rest of New Zealand: not only is GDP per capita relative to the rest of the country low compared to what we see for big cities in typical advanced countries, but that margin has been shrinking since 2000.    The flipside of that, of course, is that the non-Auckland bits of the country have been doing okay on this measure (not absolutely –  New Zealand’s overall productivity record is poor –  but better than Auckland).

This chart shows the GDP per capita of the median non-urban region relative to GDP per capita in Auckland (I could have used the median of the three big urban areas, but in every single year Auckland was the median).

regional GDP regions vs akld.png

In the last couple of years –  for which SNZ still label the data provisional –  the median region has lost a bit of ground relative to Auckland (big building booms to accommodate population surges tend to do that), but (a) over the last decade the regions have lost no ground, and (b) over the full period since 2000 they’ve made quite a bit of ground on Auckland.

There just doesn’t seem to be much in the data to warrant government regional economic development programmes, even if one believed –  as I don’t – that such programmes might make any material useful difference to economic outcomes.   Markets work when governments let them, and governments are better advised to focus on getting the overall parameters of economic policy set right –  tax rates, regulation, even immigration policy –  and let activity then occur where it will.  The private sector won’t typically or consistently be slow to seize opportunities, and when they get things wrong mostly they are the ones who live with the consequences.  When officials and ministers spend lots of our money on busy programmes signifying much and accomplishing little, then not so much.

Looking through the glossy document MBIE put out (they do those really well), under the auspices of three ministers, it was hard not to conclude that the whole programme had probably been more about being seen to be busy, and shoring up the National vote in the provinces, than about making a material difference to economic performance.