Splashing the cash at the Reserve Bank?

When the Reserve Bank’s Annual Report turns up in my in-box, the table on remuneration isn’t the first place I turn.  In fact, executive pay more generally isn’t one of those issues I can get terribly excited about.  I thought Jim Rose’s column in the Herald the other day made some good points, although (a) I’m not sure that whether the share price goes up or down when the CEO leaves is really a good indicator of whether the individual was appropriately remunerated or not, (b) none of the defences he deploys really apply with any great force to senior public sector positions.  And there is no market discipline on top public sector salaries, so critical scrutiny  and open questioning actually matters.

But someone emailed me suggesting that the Reserve Bank Annual Report implied that the (now former) Governor, Graeme Wheeler had had a big pay rise.  And that did interest me, because outside the halls of the Reserve Bank Board it isn’t clear who would have thought that Wheeler had done something even approaching a stellar job as Governor.

Wheeler started at the Bank in September 2012, so we can’t get a read on his initial salary in the (June year) 2012/13 accounts.   But there are four years of annual reports when he will clearly have been the top earner in the Bank.    The relevant tables show the top earner received as follows during these financial years:

2013/14 620000 to 629999
2014/15 640000 to 649999
2015/16 660000 to 669999
2016/17 850000 to 859999

That is some jump.  But there is a footnote on this year’s numbers, stating that “the highest remuneration band includes a payment of $101000 for accrued annual leave, which was paid out in cash rather than taking leave”.  (That must be about two months of unused leave, for someone in the job  – at a time of no crises – less than five years, which itself doesn’t suggest particularly good management.)

But even if we subtract the $101000, we are left with figures suggesting that Graeme Wheeler got a payrise of around $90000 between 2015/2016 and 2016/17.  In fact, it was quite possibly more than that, because he personally may well have been reviewed on the anniversary of his appointment, in September (and if so the 2016/17 numbers may include only around three-quarters of his big annual increase).

So how do his cumulative pay increases compare against either CPI inflation or general wage inflation (I use the analytical unadjusted series, which is materially higher than the QES recently)?  There has, of course, been no productivity growth in New Zealand over the term Wheeler was in office.

wheeler salaries

It is a pretty astonishing boost.  Perhaps not a great problem for somone doing a stellar job but this was someone who:

  • had consistently seen inflation undershoot the target midpoint, that he’d specifically agreed to focus on, for five years,
  • who never, ever, admitted a mistake (surely not his advice to his own young managers?)
  • had repeated communications problems with financial markets,
  • whose speeches rarely offered much in-depth insight, and whose defences of successive waves of new regulatory interventions never seemed robustly grounded.
  • whose embattled relationship with the media was epitomised in his refusal to ever expose himself to a serious  and searching one-on-one interview (or indeed any interviews with outlets not already supportive of the Governor).

Oh, and then late in the 2015/16 year, there was the OCR leak debacle which among other serious failings, involved the Governor publicly tarring as irresponsible the person (yes that was me) who drew to the Bank’s attention evidence of the apparent leak.

This year, of course, (but no doubt well after Wheeler got his last pay rise) there was the still-more-shameful episode, in which Wheeler sought personally (and used his senior managers to reinforce his efforts) to silence a pesky critic, who happened to work for an organisation the Reserve Bank regulates.  And on that note his tenure ended badly, and largely unlamented.

So what were they thinking when they gave such a big pay rise to someone with such a mediocre (at best) track record, who was hardly like to walk out on them if he didn’t get the increase?  And who was “they”?

Well, on this occasion, it wasn’t the Bank’s Board.  The Reserve Bank Act is quite clear that

The conditions of employment of the Governor, including remuneration, shall be determined by agreement between the Minister and the Governor after consultation with the Board

In practice, the Board may well have put a recommendation to the Minister.   But however this idea first got traction –  whether Wheeler pushed for a pay rise, or the Board really did initiate it –  the Minister approved it. That was last year’s Minister of Finance, Bill English.   This was the same minister who went on record pushing back against a big pay rise for another public sector chief executive, Adrian Orr –  but couldn’t actually stop the New Zealand Superannuation Fund’s board putting through the pay rise.    Sceptical as I am of the NZSF, and of its long-term performance, Orr’s case for a big pay rise looks to have been considerably stronger than Wheeler’s.

I can’t imagine why the Minister of Finance approved such an increase, especially against the backdrop of his own evident discontent with the Bank.   I guess he isn’t too busy governing this week, so perhaps some journalist could ask him?

(But it was fortunate for Grant Spencer that Bill English did approve that pay increase.  When the (unlawful) “acting Governor” appointment was announced we were told that Spencer would be paid to mind the store on the same terms and conditions as Wheeler had been receiving.)

PS.  Someone who attended a post-election lunchtime seminar at Victoria University today informs me that Colin James (usually well-connected) stated there that he understood that The Treasury is undertaking a “root and branch” review of the Reserve Bank Act.  If so, that would be most welcome.


Immigration policy and emissions targets

I’ve written a few posts in recent months about the connections between our immigration policy – materially boosting our population growth rate – and New Zealand greenhouse gas emissions (eg here and here).  New Zealand is unusual because, as the Ministry for the Environment (MfE) has highlighted:

• we have a fairly high rate of trend population growth,
• a large chunk of our emissions are from animals, and
• much of our power has long been generated from renewable sources.

I’ve also written here about Official Information Act requests to MfE (responsible for climate change policy advice) and MBIE (responsible for immigration policy advice). It turned out that neither ministry had given any thought at all, or done any work on, possible connections between immigration policy and the economic challenges of emissions reductions target (the MfE response is discussed here).  Perhaps one wouldn’t really expect MBIE to have thought so much about emissions issues, but in MfE the omission looks less excusable, and probably deliberate.

A few months ago, the government asked the Productivity Commission to hold an inquiry into making the transition to a low-emissions economy. In August the Commission published an issues paper, trying to frame the inquiry. That document was notable for almost completely ignoring the possible population/immigration dimension. But they were inviting submissions, and so this morning I lodged mine.

Rather than attempt to excerpt, or summarise, the relatively short submission I’ve reproduced the whole thing below. It does have the feel of the sort of issue where there should be some common ground discoverable between New Zealand First (with concerns about immigration) and Labour and the Greens (proposing more ambitious emissions targets). But, equally, for the National Party it should also be something they take seriously. After all, as I note in the submission, in pursuing an emissions reduction target the goal should not be to don a hair-shirt and deliberately “feel the pain”, but to make the adjustment in a way that has as little cost to the future material living standards of New Zealanders as possible.

Submission to the Productivity Commission inquiry on a possible transition to a low emissions economy

Michael Reddell

29 September 2017 

1.      This submission is in response to the Commission’s issues paper on a possible transition to a low emissions economy, released on 9 August 2017.  

2.      My concern is that the issues paper does not touch on at all the role that immigration policy has played in driving up total emissions in New Zealand nor, relatedly, on the role that potential changes in immigration policy could play in offering a lower cost (to New Zealanders, the appropriate standard against which to measure these things) transition to the proposed low emissions economy. 

3.      As the Ministry for the Environment has noted in its most recent annual document on New Zealand’s Greenhouse Gas Inventory, a growing population represents a significant challenge for New Zealand in meeting the emissions targets the government has set (let alone those proposed in the recent election campaign by other political parties).  In fact, the Ministry included population as the first in its list of challenges. 

4.      New Zealand’s population growth has been well above that of the typical advanced country, even though for some decades now our birth rate has been below replacement level, and even though for some decades the net emigration outflow of New Zealanders (at around 0.5 per cent of the population per annum on average) has been very high by international standards.  The difference is accounted for by immigration policy.   Because of our distance from other countries we have near-complete control over who comes to New Zealand and stays.   And we have chosen to bring in numbers of non-citizens each year that, as a proportion of the existing population, are far in excess of what happens in typical advanced economies. 

5.      As is also widely recognised, the marginal abatement costs for reducing emissions are generally quite high in New Zealand.  First, unlike most advanced countries, animal emissions make up almost half our total emissions and, as yet and as I understand it, science does not offer methods to reduce substantially the emissions while keeping the animals (which, in turn, generate much of the export earnings of New Zealand).  In addition, as I understand it, other countries do not yet include agricultural emissions in their regimes to charge for or tax emissions.  And, secondly, much of our power generation already uses renewable (mostly hydro) sources.  

6.      An increasing population has resulted in additional emissions, all else equal, through at least two channels: 

a.      The direct effects of more people needing more transport, more heating, more energy in their workplaces etc, and

b.      The indirect effects, in which a rapidly growing population and a generally lagging export sector has accentuated pressures for increased intensification in agriculture, with associated pushback against attempts to internalise the effects of environmental externalities (whether water pollution or methane emissions).  With fewer people, it seems quite plausible that we’d have had fewer cows. 

7.      Because the marginal abatement costs of conventional approaches are generally accepted to be particularly high in New Zealand, it is even more important that in undertaking its inquiry, the Commission should be willing to examine the role of immigration policy.  As Official Information Act requests to MfE (responsible for climate change policy advice) MBIE (responsible for immigration policy advice) have shown, core government departments appear to have done nothing at all to look at the possible connections.  There may have been ministerial political constraints on the freedom of either ministry to do so.   Those sensitivities should not hold back the Commission –  a more independent agency – from seriously considering the connection. (In that light, I found it disconcerting that there was no material reference to the topic in your issues paper). 

8.       The argument for using immigration policy as a potential instrument in meeting emissions reduction objectives would not be strong if there were clear and material economic benefits to New Zealanders from the high target rate of non-citizen immigration (the centrepiece of which is the 45000 per annum residence approvals “target”).    But those possible gains –  most notably perhaps a lift in labour or multi-factor productivity – cannot simply be taken for granted in New Zealand.     Despite claims from various lobby groups that the economic gains (to natives) of immigration are clear in the economics literature, little empirical research specific to New Zealand has been undertaken, and there is good reason –  notably our remoteness –  to leave open the possibility that any gains from immigration may be much smaller here than they might be in, say, a country closer to the global centres of economic activity, whether in Europe, Asia, or North America.    Even many of those who are broadly supportive of New Zealand’s past approach to immigration policy will now acknowledge (a) that the New Zealand specific literature is quite limited, and (b) that any gains to New Zealanders may be quite small.  Your staff are, I know, well aware of my alternative approach which interprets modern New Zealand economic history as suggesting that high rates of non-citizen immigration have held back our productivity performance (i.e. come at a net economic cost to New Zealanders).  I would be happy to discuss those issues with you further. 

9.      The overlay of an official emissions reduction target –  a new factor –  adds a new dimension to how best to think about immigration policy.  Even if immigration policy, on its own, was slightly beneficial, in economic terms, to New Zealanders, those assessments need to be redone in the light of the constraints posed by the emissions reduction targets.  In an economy with low marginal abatement costs through conventional price/tax instruments, the effect of any such reconsideration might be small. But in New Zealand, where all informed observers recognise that the marginal abatement costs are large through conventional means, it might well be that a lower immigration target would represent one of the most cost-effective ways to reduce total New Zealand emissions.  And as our emissions reduction target is quite similar to those of a number of other countries that have much lower population growth rates, there would be no serious basis for others to suggest that pulling back our immigration targets, to something more conventional among advanced countries, was in some sense free-riding or engaging in a “beggar thy neighbour” approach to the emissions issue.  New Zealand simply isn’t a cost-effective location to reduce emissions, but having taken on the commitment to a reduction, it doesn’t make much sense to create a rod for our own back by continuing to use policy to drive up the population, thus forcing reliance on even more costly alternative abatement instruments.   

10.   All else equal, lowering expected annual population growth rates by, say, half a percentage point (by, for example, lowering the residence approvals target from 45000 to around 15000 per annum –  in per capita terms, still about as liberal as the current US approach) would make a material difference to the projected path of greenhouse gas emissions.  Over 20 years, all else equal, the population would be 10.5 per cent lower than otherwise.  Direct emissions would, accordingly be considerably lower than otherwise projected, and the inevitable pressures to do little or nothing about agricultural emissions would be eased.   The national benefit/cost ratios look likely to be considerable higher if a lower immigration target was added into the mix of instrument used to meet the commitments the government has made.  At very least, I would urge you to think hard about, and undertake modelling as appropriate, to evaluate that possibility.  Doing so might not be easy.  There probably won’t be off-the-shelf modelling exercises from other countries you can simply look to. But in a sense that is the point of this submission.  The issues facing New Zealand in meeting emissions reduction objectives are different from those facing many other countries and we need analysis that takes specific accounts of the issues, options, and constraints that New Zealand itself faces. 

11.   In conclusion, I would urge the Commission to take much more seriously (than was evident in the issues paper) the role that rapid immigration policy led population growth has played in explaining the growth in New Zealand emissions since 1990, and the possible role that modifications to our immigration policy could play in facilitating a reduction in emissions, consistent with current or possible alternative official targets.   No doubt technological advances will offer options for relatively painlessly reducing emissions to some extent.  But those options will be available to all countries.  As official agencies already recognise, New Zealand faces some specific challenges that are quite different to those other advanced countries will be dealing with.  We make it much harder for ourselves to meet the emissions targets our governments have committed to if we persist with such an unusually large non-citizen immigration programme.    The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”.  The aim should be to make the adjustment with as small a net economic cost to New Zealanders – as small a drain on our future material living standards – as possible.  Lowering the immigration target looks like an instrument that needs to be seriously considered if that goal is to be successfully pursued.