Two BIMs and a bureaucrat

As I noted last week, government departments’ (and agencies’) briefings to incoming ministers have mostly become a bit of a joke: mostly devoid of any substance, typically specifically tailored to the preferences of the particular incoming government (ie written/finalised after the shape of the new government is clear), and mostly not much more than process pieces.  If one is interested in the actual substantive advice –  the sort of things the Lange government intended to make available when they began publishing BIMs in the mid 1980s –  citizens need to fall back on the Official Information Act, with all its limitations.

There are exceptions –  I wrote the other day about some substance in the Reserve Bank’s BIM.   And even on the little that is released, sometimes tantalising hints sneak through.  The intelligence services, for example, left unredacted a suggestion that governments might need to be concerned about the influence activities in New Zealand of foreign governments –  something neither the current Prime Minister nor her predecessor have been willing to take seriously or address openly.

Of the other economic functions, neither the Treasury nor the Immigration BIMs say much.  But sometimes there is quite a bit even in a few words.  Take immigration for example.    It was only a few years ago that MBIE was telling Ministers of Immigration (and the public) that immigration was a “critical economic enabler” –  a potential catalyst to transform New Zealand’s dismal productivity performance.   There isn’t much in this year’s Immigration portfolio BIM –  mostly process again –  but my eye lit on this paragraph

New Zealand’s immigration system enables migrants to visit, work, study, invest, and live in New Zealand. Economically, it contributes to filling skill shortages, encouraging investment, enabling and supporting innovation and growing export markets. Immigration has contributed to New Zealand’s strong overall GDP growth in recent years largely through its contribution to population growth. However, the evidence suggests that the contribution of immigration to per capita growth and productivity is likely to be relatively modest.

The theory –  dodgy bits like “filling skill shortages” and the more plausible bits –  is there in the first half of the paragraph.  But by the end of the paragraph, even MBIE has to concede that there isn’t likely to be much boost to per capita income or productivity at all –  the effects are “likely to be relatively modest”.  It is hard to avoid that sort of conclusion –  looking specifically at the New Zealand experience –  when (to take MBIE’s list from the second sentence) “skill shortages” have been a story told in New Zealand for 150 years, business investment has been weak by OECD standards for decades, firms haven’t regarded it as particularly attractive to invest heavily in innovation (again by world standards), and the export share of GDP is now at its lowest since 1976.  Still, it is good to see reality slowing dawning on MBIE.  On my telling, they are still too optimistic, but even on their telling when such a large scale policy intervention seems to produce such modest economic results it might be time for a rethink.

And what about the BIMs prepared by Treasury?   There isn’t much in the main Finance document (lots of process stuff, and plenty of talk of diversity and wellbeing and none on productivity).  There is an appendix specifically aimed to address what Treasury understand to be the new Minister’s priorities, but not much about Treasury’s own view of what needs to be done, or the pressing problems.    If anything, reading Gabs Makhlouf’s covering letter to Grant Robertson one might conclude that Treasury didn’t think there was much to worry about at all.

You are taking up your role at a time when New Zealand’s economy is in a relatively strong position.  There is solid forecast growth, complemented by fiscal surpluses and a strong debt position.  And while international markets still present a number of risks and uncertainties, overall the global economy –  as reflected in the IMF’s recent outlook –  presents opportunities for New Zealand to seize, in particular with Asia’s ongoing growth.

Presumably the Secretary didn’t think it worth emphasising five years of no productivity growth, seventy years of pretty weak productivity growth, shrinking exports as a share of GDP, sky-high house/land prices, pretty weak business investment and so on.  Or even the fact that notwithstanding “Asia’s ongoing growth” –  a story now for more than forty years –  nothing has looked like turning around New Zealand’s continuing gradual economic decline.    And perhaps when you are a temporary immigrant yourself –  as Makhlouf presumably is –  the cumulative (net) loss of a million New Zealanders isn’t something that concerns you?

In their BIM Treasury proudly asserts that “We are the Government’s lead economic and financial adviser”.  Perhaps they hold that formal office, but it is hard to be optimistic about the content of what they might be offering the government.

But Treasury also had some other BIMs for other portfolios they have responsibilities for.  The one I noticed was the Infrastructure one.    Buried in the middle of that document was this observation

Auckland’s ability to absorb growth has been reached. Environmental, housing and transport indicators all reflect a city under increasing pressure. Traditionally, Auckland has been more productive than other regions of New Zealand but, on a per capita basis, this productivity premium has been shrinking over time. Auckland is not performing as well as expected for its size and in comparison to other primary cities around the world.  There are opportunities to increase this productivity but only if supply constraints, especially transport and housing, are resolved.

That key middle sentence –  no hint of which appears in the main Treasury BIM –  could easily have been lifted from one of my various posts on similar lines.    They could have illustrated the point with a chart like this.

akld failure

 

Appearing in the standalone Infrastructure BIM, Treasury appear to want to blame these poor outcomes largely on infrastructure gaps –  a conclusion which I think is flawed –  but I’m encouraged to see a recognition of the problem in official advice to the Minister of Finance.   It is all a far cry from the rather lightweight celebratory speech Gabs Makhlouf was giving about Auckland’s economy only 18 months ago, which I summed up this way

[it] might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

  • New Zealand’s continuing relative economic decline, despite the rapid growth in our largest city,
  • Auckland’s 15 year long relative decline (in GDP per capita), relative to the rest of New Zealand,
  • The contrast between that experience, and the typical experience abroad in which big city GDP per capita has been rising relative to that in the rest of the respective countries,
  • The failure of exports to increase as a share of GDP for 25 years,
  • The fact that few or any major export industries I’m aware of our centred in Auckland (the exception is probably the subsidized export education sector) –  and by “centred” I don’t mean where the corporate head office is, but where the centre of relevant economic activity is.

There is nothing of economic substance on immigration in the main Treasury BIM this year, but perhaps over the next few years Treasury could start thinking harder about whether it really makes sense to be using policy to bring ever more people to one of the most remote corners on earth, even as personal connections and supply chains seem to be becoming ever more important, at least in industries that aren’t simply based on natural resources.

The one other thing that did catch my eye in the Treasury BIM was this paragraph

The Treasury Board. This external advisory group supports the Treasury’s Secretary and ELT to ensure that its organisational strategy, capability and performance make the best possible contribution to the achievement of its goals. Current members of the Board are the Secretary to the Treasury (Gabriel Makhlouf), the Chief Operating Officer (Fiona Ross), Sir Ralph Norris, Whaimutu Dewes, Cathy Quinn, Mark Verbiest, Harlene Hayne and John Fraser (Secretary to the Australian Treasury).

Now, to be fair, the “Treasury Board” has no statutory existence, and no statutory powers.  It isn’t even clear why it exists at all –  Boards are typically supposed to represent shareholders, and as regards Treasury, the Minister of Finance, Parliament, and the SSC are supposed to do that on our behalf.  But given that there is an advisory Board, what is a senior public servant from another country  –  the Secretary to the Australian federal Treasury –  doing on it?      New Zealand and Australia might be two of the closer countries in the world, but we don’t always have the same interests, and at times those interests –  and perspectives – clash rather sharply.    I gather John Fraser is quite highly regarded, but who does he owe allegiance to, and whose interests is he advancing in his work on the New Zealand “Treasury Board”?  I might not worry if he were a retired former Treasury Secretary from Australia, but he is a serving official of the Australian government.  It seems extraordinary, and quite inappropriate.   Did he, for example, have any involvement in the recent, superficially questionable, appointment of a former senior Queensland public servant to a top position in our Treasury?    Again, close working relationships between the two Treasurys –  each as servants of their own governments –  might be reasonably expected, and perhaps mutually beneficial.   But providing a senior official of another government with inside access to the senior-level workings of one of our premier government departments seems questionable at best.  GIven Makhlouf’s past enthusiasm for China, perhaps the appeasers at the New Zealand China Council will soon be suggesting he appoint someone from China’s Ministry of Finance could join Fraser on the “Board”?

And finally, some kudos for a bureaucrat.  As various people have noted, Graeme Wheeler went for five years as Governor –  as the most powerful unelected person in New Zealand –  without ever exposing himself to a searching interview, or making himself available for an interview on either main TV channel’s weekend current affairs shows.  His appointment might be highly legally questionable, he might be only minding the store for a few months, but yesterday Grant Spencer went one better than Wheeler and sat down for interview on Q&A with Corin Dann.    I thought he did well, but what really counted was just showing up, and being open to questions.

Since much of the interview was about Spencer’s speech last week, which I’ve already written about, there was much in it that I disagreed with.  But I’m not going over that ground again.  Perhaps the one new thing that caught my attention was when Spencer claimed that the Bank is independent for monetary policy, but not around things like LVRs.   That is simply factually untrue.  The Act makes it very clear that any decisions to impose or lift LVR restrictions are solely a matter for the Governor (also a point that the Prime Minister, the Minister of Finance and their predecessors have recognised).   Spencer went on to say that if the then government had not wanted the Bank to impose LVR restrictions they wouldn’t have done so.     That might be fine, but I hope they never apply that standard to monetary policy decisions.  And if LVR decisions really are more political and redistributive in nature, perhaps as part of the forthcoming review, the Reserve Bank Act should be changed so that the Reserve Bank offers technical professional advice, but the Minister of Finance makes the decision?.  We can, after all, toss out elected governments.

 

 

 

Westpac’s plan to lower productivity

You may have seen the story in various media a few days ago about new work commissioned by Westpac suggesting that

New Zealand’s economy has a nearly $900 million annual economic hole because of low numbers of women in management roles, new research suggests.

But if there was an even split of men and women in management there would potentially be an $881m boost to the economy and a positive impact on businesses themselves.

I didn’t pay much attention to it, beyond noting to myself that $881 million is about 0.3 per cent of GDP –  not much of a “hole” in other words, even on Westpac’s (and the consultancy company they paid to do the research) own claims.

But I wondered quite how they’d come up with these estimates so last night –  while the resident woman in management was off at her office party –  I downloaded the document.

It begins with lots of puffery around the alleged economic and financial benefits of diversity –  our banks now apparently see themselves as “social justice warriors”.   I don’t claim any expertise in that particular literature, but I’d refer you to some of Eric Crampton’s reads or, indeed, to a paper I wrote about here a while ago, that leaves me pretty sceptical that there is anything much in the sorts of claims Westpac makes.

The bank is horrified that “60 per cent of businesses do not have a gender parity policy or strategy in place” –  as if picking the best person for the job, male, female, black, white or whatever –  isn’t any sort of legitimate approach to employment these days.   And seems to think that the mere existence of gaps between median earnings of mean and median earnings of women is somehow proof that employers are breaching laws “mandating equal pay for equal work”.  Perhaps Westpac’s crusading CEO could spend some time reading Claudia Goldin, for example.    In the Westpac world, there is apparently no recognition that more mothers than fathers prefer to take time out –  or work in less demanding roles –  to be actively involved in raising children (note the word “more” –  in this household, I’m the “primary caregiver”).  There are implausible claims (without proper documentation in the report) that raising the share of female managers raises rates of return on assets –  in New Zealand’s case they argue that reaching parity could raise returns on assets by 1.5 percentage points.     Not only are these huge numbers, but what sort of metric is return on assets anyway?  Some businesses require lots of fixed assets and other require not many at all.

But what I was really curious about was this alleged $881 million per annum that Westpac reckoned was being left on the table, simply because the share of female managers was less than the share of male managers.  How on earth, I wondered, did they get these estimates?

Fortunately, there is appendix to the report on the modelling.  They’ve attempted to come up with estimates of two separate effects:

  • a “role model” effect in which a higher share of female managers encourages more women into the labour force, and
  • an effect in which the availability of more (by number) flexible employment policies increases the number of women in the labour force.

Taking the “role model” effect first, the OECD has apparently been collecting data recently on the share of employed workers who are managers, by gender, for various countries (unfortunately for this study, there is no data for New Zealand).    But there is only data for four years (2011 to 2014), which even the authors concede make the subsequent model they estimate “statistically challenging”.    They model the labour force participation rate as a function of various things, including the share of women in managerial roles, and they find a statistically significant result.  Statistically significant, but very small.  On the assumption that the gap between the share of male employees who are managers and the share of female is the same in New Zealand as in Australia, if that gap was not there then, on this model, overall labour supply in New Zealand would rise by 0.15 per cent and –  according to a separate Deloittes model –  that would raise New Zealand GDP by 0.07 per cent.   Knocking off an hour earlier/later on Christmas Eve is probably worth about the same amount.

Even then, the results don’t really hold up to much scrutiny.  There is no underlying model of what determines the share of women in management roles (whether here –  for which they have no data –  or abroad), nothing that is robust across time (remember four years of data) and no insight as to what might be involved in achieving the sort of “parity” Westpac wants to see: closing the gap is treated (or so it seems) as something one can simply wave a wand and deliver.

If those estimates are both small and shaky, what follows is worse.   They attempt to estimate an effect on a company changing the number of flexible work policies of the proportion of women in management, and then translate that into an increase in overall labour supply.   Unfortunately all their data are Australian –  include a survey result on the number of working age people not in the labour force who claim that flexible working policies are very important consideration for them, and a count on the number of flexible working policies surveyed companies have in place.   In a simple model, they find that the number of flexible working policies (there is no sense of the empirical size/significance of any of them) is explained (statistically significantly) by the number of women in management in those companies, and thus conclude that if the proportion of women in management was raised to the same as men, there would be (in Australia) a 13 per cent increase in the number of flexible working policies.

The authors then take that 13 per cent increase, the 23 per cent of people not in the workforce who said flexible working practices mattered to them to get an estimate of how many more people would join the labour force through this channel if only the proportion of women in management was raised to parity with men.    They then adjust the result for the fact that many of the new entrants would only be part-time, and estimate that the overall labour supply in New Zealand would rise by 0.55 per cent.   Using the same Deloitte model as earlier this, it is estimated, would raise GDP by 0.26 per cent.

This is all incredibly ropey.  There is no attempt, for example, to assess how robust those answers to the survey were (probably many more people will say flexible working conditions really matter than actually mean it –  it is a socially desirable response).  There is no attempt to look at what the trade-offs for more –  by number –  flexible working policies might be: is there, for example, an offset in lower wages?  And there is no attempt to look for common third factors: maybe it isn’t women in management who  (causally) lead companies to offer more (by number) flexible working policies, but (say) a particular ethos among the owner and top managers of the particular business that drives both outcomes.  And there is no attempt to look at whether the presence of those flexible policies affects more strongly which firm a person (especially a woman) joins, rather than the choice to join the labour market at all.   And there is also no evidence for whether there are threshold effects –  eg perhaps having a lot of women managers lead to more –  by number – flexible work policies,  but the effects might be much smaller if the share of female managers moves from  say 35 per cent to 50 per cent, than if the share moves from 5 per cent to 20 per cent.

I’m not suggesting there is no effect, just that the case is not even remotely compellingly made on these numbers.  It might be fine for David McLean –  Westpac’s CEO –  to lead his firm’s “social justice warrior” campaign, but he really should be rather embarrassed to rely on numbers as shaky as these in support.  I do hope he does banking itself a bit better (then again, there were all those unapproved models where he found himself falling afoul of the Reserve Bank).

But to revert to my headline, did you notice the bottom line numbers for those two effects?  Here is my summary, just replicating their own numbers:

westpac lab supply

In each case, the increase in the labour supply (a cost to the individual concerned) exceeds the estimated increase in GDP.  In other words, on their own numbers nationwide productivity falls as a result (of increasing the proportion of female managers to that of males).

Do I believe the number?  No, I don’t.  I’m sure they are just an artefact of the CGE model of the New Zealand economy they assume –  perhaps something like adding labour, but with no change in productive capital or somesuch.  But Westpac published the numbers, and Westpac claimed the headlines, even though their own numbers suggest our nationwide would fall in the magic wand could be waved and their goal of parity achieved just like that.   It is a case of ropey inputs, ropey outputs, and not much more in the end than a left-liberal feel-good crusade.  Perhaps bankers should stick to banking.

 

Reserve Bank BIM: resisting reform

Once upon a time, post-election briefings to an incoming minister actually contained some free and frank official advice on major policy issues.  I have sitting on my desk the 1987 Treasury briefing  –  almost 800 pages of analysis and advice (good and bad).   But as the briefings started being  routinely published, it seemed to start an inexorable trend towards documents of astonishing banality, often containing little more than lists of the official ministerial responsibilities and/or the activities of agencies (I just flicked through the BIM of one major ministry, released yesterday, and it was a startlingly content-free zone).  If there still is free and frank advice offered by the public service, you won’t often find it in these documents.  It isn’t helped by the growing practice of writing (or finalising) the BIMs only after the composition of the new government is known, rather than in advance of the election.

Reserve Bank BIMs over the years have tended to go in the same banal descriptive direction.  So I didn’t expect to find anything interesting when I opened up the document released yesterday.  But I was wrong.    The (unlawfully appointed) “acting Governor” Grant Spencer had used the opportunity to make his case for minimal change to the governance and decisionmaking provisions of the Reserve Bank Act, including an eleven page appendix on that specific issue.

At the time of last month’s Monetary Policy Statement, Spencer –  and his deputy, Geoff Bascand –  went public on their opposition to any substantial change.  But they did that just in response to press conference questions.   I summed up their position –  “just cement in the status quo, and if we really have to have externals make sure they are silenced and that there is no greater transparency” –  this way

[their] approach is that of “the priesthood of the temple” –  we will tell you, the great unwashed, only what it suits us to tell you, in the form we want to present it.  It is simply out of step with notions of open government, or with a serious recognition that monetary policy is an area of great uncertainty and understanding is most likely to be advanced by the open challenge and contest of ideas.

In the BIM, they go further and stress how keen they are that any external appointments should be made by the Governor rather than –  as is the case in most other advanced democracies –  the Minister.   They were keen to keep any review of the Act very narrow, and to control the process themselves as far as possible

we would be happy to prepare a draft terms of reference, in consultation with the Treasury

Fortunately, they lost that one and the review is being led by The Treasury, supposedly supported by an (as yet unnamed – or unannounced – Independent Expert Advisory Panel).

But it was that eleven page appendix I really wanted to write about this morning.  They describe even it as a “brief summary” and refer to a more detailed version of the paper being available. I have lodged a request for it, without any great expectation of it ever seeing the light of day (it might, for example, have been logical to have released it when the Minister of Finance announced his review –  logical, that is, if the government or Bank were interested in open government).

The Bank’s first claim is that the current system –  a single unelected decisionmaker, appointed by other unelected people –  “works well” at least for monetary policy, and that the Reserve Bank’s monetary policy “is highly regarded internationally”.    In principle, those are two separate points.  It is hard to imagine the Reserve Bank being held in “high regard” internationally for its monetary policy over the last decade –  whatever sentimental respect there still is for the Bank as pioneer of inflation targeting almost 30 years ago.    Our central bank remains the only advanced country central bank to have launched into two tightening cycles since the 2008/09 recession, only to have to fully unwind both of them.   Perhaps it is the sort of mistake anyone might have made, but our Reserve Bank did.    And the Bank has no more successful than anyone else in keeping inflation close to target –  even though, with interest rates still well above zero, it faced fewer obstacles than most.

The one recent report the Bank attempts to use in its defence is a brief one written earlier this year by an old friend of the then Governor.  I wrote about it at the time.

When an old uncle or family friend is in town and comes for dinner, the visitor will usually compliment the cook, praise the kids’ efforts on the piano, the sportsfield, or in dinner table conversation, and pass over in silence any tensions or problems –  even burnt meals –  he or she happens to observe.    Mostly, it is the way society works.  No one takes the specific words too seriously –  they are social conventions as much as anything.  One certainly wouldn’t want to cite them as evidence of anything much else than an ongoing, mutually beneficial relationship.

It is a shame the Reserve Bank is reduced to publishing, and touting, a report like this in its own defence.  When good old Uncle Philip, a fan of yours for years, swings by, it must be mutally affirming to chat and exchange warm reassuring thoughts.  But as evidence for the defence his rather thin thoughts, reflecting the favourable prejudices of years gone by, and institutional biases against doing much about inflation deviating from target, isn’t exactly compelling evidence for the defence.    Sadly, getting too close to Graeme Wheeler as Governor seems to diminish anyone’s reputation.  It is a shame Turner has allowed himself to join that exclusive club.

In a way, what strikes me most about the Bank’s appendix is the near-complete absence of (a) any critical self-scrutiny, and (b) any sense of operating in a society that expects scrutiny and accountability of powerful public agencies, and not just on terms set by those agencies.

For example, they organise their thoughts around the notion that “the objective of decision-making design is to create a system that leads to rigorous decision making”.  I’m not sure which management textbook they got that from, but it doesn’t sound a lot like the way we should organise things  for making public decisions in a democratic society (internal management decisions in a private company might be another matter).  “Rigour” in decisionmaking is certainly important, but when those decision are outward-facing and have pervasive effects across a country, with no rights of review or appeal, it is far from being the only relevant criterion.   “Legitimacy” for example –  an ongoing sense of public confidence that the agency is being well run, in the interests of the public not just of officialdom – matters a lot.  So should openness.  For many year now our statute books have contained this provision (part of the purpose clause in the Official Information Act).

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:

Around their centrepiece –  the goal of “rigorous decisionmaking” –  they circle “four key components”

  • institutional design,
  • high quality inputs,
  • genuine deliberation, and
  • accountable for decisions

There is nothing of interest under their heading of “institutional design”.  As they note, the Governor is legally responsible for all Reserve Bank decisions, and although all Governors since 1989 have operated with advisory committees (the form and names have changed over time), in a single decisionmaker model there is only one Reserve Bank view.   However, it is worth noting that the Reserve Bank remains intensely secretive about the range of internal views or advice ever becoming known, in ways that do nothing to support good decisionmaking, let alone robust scrutiny, challenge, and accountability.

On ‘high quality inputs’, the Bank claims that its decisionmaking “is supported by a broad range of high quality inputs”.  Perhaps, but (a) despite the inputs they’ve still made some bad policy mistakes, which should at least raise questions about the inputs (recognising that in a field like monetary policy, riddled with uncertainty, some mistakes are inevitable), and (b) we don’t know, because they hold all the inputs very closely, and refuse to release any, even years later.   Just yesterday, we had the refusal to release their background analysis on the aspects of the new government’s policy they’ve incorporated in their latest projections.  I once wrote a paper with Grant Spencer to the then Minister of Finance in which we referred rather scathingly to one particular proposal as involving “trust us, we know what we are doing”.  These days, unfortunately, Grant seems to treat it as a practical guide to running a central bank (whether on most regulatory matters or monetary policy).

They claim, only briefly, that their current system produces “genuine deliberation”.  Again, how would we know?   They refuse to release the minutes of the Monetary Policy Committee, or of the Governing Committee, they refuse to release a summary of the individual recommendations on the OCR, and they refuse to release the background papers.  Not just in the weeks after a decision, but even years later. I know, I’ve asked.   How robust, for example, were the deliberations around the ill-judged tightening cycle than began in 2014?  In my observation –  I was still involved at the time –  not very.

Then there is “accountability”, which sounds good, but isn’t really.  Of course, they cite the role of the Reserve Bank Board, and its reports to the public and to the Minister. But this is the same Board that will have appointed the Governor and which, in history, has never openly said a remotely critical word about any Reserve Bank decision.   Perhaps in private they do a really good job  –  in my experience, at times some of them (usually the more awkward ones) asked some useful questions –  but that isn’t serious public accountability.  The Board seems to see their role primarily as having the back of the Governor –  how else, for example, did they stay silent in the face of Graeme Wheeler’s deployment of his entire senior management to try to silence Stephen Toplis?   The Bank goes on to claim (correctly) that the Board is given the materials used to lead up to OCR decisions, but then (outrageously) claims that “a subset of this information is made available to the general public”.  In fact, none is at all.    All we get is what the Governor chooses to allow us to see scrubbed up and sanitised in his Monetary Policy Statement, even though all the background material is public information, produced with public money.    They have a very strange definition of accountability at the Reserve Bank.

(As they do every few months, they roll out an academic paper from a few years ago suggesting that on that particular measure, the Reserve Bank is one of the most transparent central banks in the world.  As I’ve noted previously, there is a big difference between telling us a lot about what they know (almost) nothing about –  eg where the OCR might be in 2020 –  and telling us stuff they do know about (their own advice, analysis, range of views etc). They do the former well, and the latter is almost non-existent.)

The Bank then turns to potential modifications to the Act.   The (unlawfully appointed)
“acting Governor’s” preference is simply to codify the current committee (the Governing Committee, consisting at present of the “acting Governor”, the Deputy Governor and the chief economist).

In earlier incarnations of this idea, the proposal was that the members of such a statutory committee would all have formal voting rights.  But even that –  weak advance –  has now gone out the window and the Bank is now arguing to protect the single decisionmaker model, while putting into statute simply a requirement that the Governor have an advisory committee.  Under their proposal the Governor “would be responsible for the manner in which the Governing Committee conducts itself”.

Frankly, this is a worse than useless suggestion.  The Bank claims it would increase transparency around the decisionmaking process. In fact, the effect would be quite the reverse.  For a good Governor it might make no effective difference.  For a bad Governor, it would allow him or her the fig-leaf of being able to claim that decisions were made in (statutory) committee even though (a) the other members had no formal vote, and (b) all members would be appointed by, remunerated by, and accountable to, the Governor.  The Bank simply shows no sign of recognising the institutions need to built to be robust to bad appointees (because, in every human institution, they will happen from time to time).

Interestingly, they are open to the idea of separate committees for monetary and financial policy.  I’ve strongly favoured that, but recall that the sort of committees they propose are advisory only.  In fact, there is nothing to have stopped them putting such committees in place already.  Arguably, it was actually the way things worked before the Governing Committee was established: the Governor made OCR decisions in the OCR Advisory Group, and financial regulatory decisions in the Financial System Oversight Committee.  Those specialist committees still exist (OCRAG renamed as the – formal –  MPC).

We get to the real concerns –  they know they’ve lost the fight over keeping the single decisionmaker model –  when they come to the question of external members, the decisionmaking approach, and the communications.

On externals, they argue

The extent to which policy committees benefit from external members depends on the nature and objectives of the committee and the conditions associated with the external members’ appointment. Policy committees which have to interpret political objectives or indeed establish goals to be achieved should benefit from having external members. In New Zealand, the objectives of monetary policy are clear in the Act, and through the PTA. For prudential policy, the objectives of soundness and efficiency are clear, but their interpretation requires complex judgement.

To which my reaction is “yeah right”.  No one thinks the prudential policy objectives are clear –  in the sense of easily operationalisable.  There are big choices to be made about goals and instruments (eg around use of LVR restrictions). But actually it isn’t much different with monetary policy.  No one seriously regards the PTA as a document that avoids trade-offs, or involves no judgements –  indeed, wasn’t the “acting Governor” only the other day arguing for more flexibility in interpreting the goals?   More generally, they offer no support –  none –  for their claim that there is a special case for external members where goals are relatively more fuzzy.  External members can matter for a range of reasons, including minimising the risk of external groupthink, and helping ensure that a full range of models/perspectives are brought to the table.

They go on.

Policy making in monetary and financial policy often involves complex considerations based on multiple indicators, analytic models and competing economic theories. Full-time members with experience and expertise are likely to be better suited to this task than part-time external participants.

So you say.  But there are two separate issues here.  The first is about expertise (do we need subject experts only, or a range of perspectives) and the second is about whether the job is fulltime or part-time.   In Sweden, for example, most of the monetary policy committees members are outsiders (often academics or former market economists), but they are appointed to non-executive fulltime roles while they are on the committee (weirdly, this leads the Reserve Bank to claim they are insiders).  As for expertise, the Bank still seems to have made no effort to show that the issues it deals with an inherently more complex, or in more need of specialist expertise at the decisionmaking phase (as distinct from technical advice and supporting analysis) than many other agencies of the New Zealand government (which are typically run by part-time boards, appointed by ministers, with a range of backgrounds).  Even among executives, I don’t imagine the chief economist actually spends much time on financial regulatory matters on which he helps the Governor make decisions in the Governing Committee (at best, he is a part-timer non-expert in that area).

I’ve covered previously the Bank’s preference to avoid voting in committees, and (especially) to avoid any public revelation of differences of perspective.  They claim that

Research into decision-making practices finds that consensus is the preferred decision approach as it allows for more in-depth discussions, the frank exchange of views, more accurate judgement on average, and higher committee morale.

But they neither provide any references, nor engage with the practical experiences of various other advanced central banks that seem to have found a voting plus openness model works well –  I’ve noted previously the cases of the UK, the US, and Sweden.    And, as I’ve noted previously, you have to wonder how local councils, Parliaments, and higher courts manage?  The Supreme Court –  rather more important on the whole than the Reserve Bank –  seems to manage with both voting and disclosure of individual views.  The public –  a priority, if not for the Bank –  seems to be better for it.

Perhaps most extraordinary is the Reserve Bank’s assertion around the appointment process.

In New Zealand, the Governing Committee is a “technical” committee created to carry out the purpose and objectives set out in the Act, the PTA and the MoU. The Reserve Bank is the government’s agent in carrying out its monetary, prudential and macro-prudential policy objectives, and we consider it critical that policy committee appointments be made by the Reserve Bank for their policy competence and not through a political body.

I could understand if they thought that “on balance, we think it would be better” to have appointments made by the Bank itself.  But “critical”……….really?

You have to wonder what makes New Zealand so different from most other advanced countries.    In Australia, the Governor and the Deputy Governor are both appointed by the Treasurer.  In the UK, the Governor and the (various) Deputy Governors are appointed by the Chancellor.  In the UK, the members of Fed Board of Governors are all appointed by the President (confirmed by the Senate). In Sweden, the key appointments are made by the parliamentary committee that oversees the Riksbank.

It is a good practice that major policy decisions should be made only by elected people –  and the Reserve Bank can’t surely pretend their decisions aren’t “major”, including having significant redistributive consequences –  and that where any such powers are delegated they should be made by people appointed directly by elected officials.  Typically, such decisions –  like those of the Cabinet –  will actually be made (legally) collectively.  But for some reason –  that they refuse to state –  the Reserve Bank thinks it should be different.  It shouldn’t.   There are plenty of different models of how Reserve Bank goverance should be done, but a system that keeps single decisionmaking, or which has all decisionmakers appointed by the Reserve Bank itself, should simply be ruled out from the start.

As a final point, the Bank includes a table which they use to support a claim that “about two thirds of the monetary policy committees of inflation targeting central banks have external members”.  It is a pretty shonky table.  For example, they class Sweden as having no external members, when (as noted earlier) most members are non-executive (but fulltime) externals.  They seem to make the same mistake for the Czech Republic, which appears to have several fulltime non-executives.  Weirdly, they claim that the ECB has a majority of outsiders –  but they appear just to mean the Governors of the constituent central banks, who are insiders if ever there were.  But perhaps as importantly, I’m not sure that Armenia, Peru, Hungary, South Africa, Thailand, Guatemala –  none beacons of good governance –  are the sorts of places I’d be looking to for guidance in structuring a robust and accountable decisionmaking system for the central bank.    Not all of the more advanced countries do have externals on their monetary policy decisionmaking committees, but Australia, Norway, Sweden, the US, the UK, Israel, Iceland, Japan, and Korea do.  And of all those advanced countries, only New Zealand and Canada have the sort of single decisionmaker system that the Reserve Bank wants to maintain.

South Africa –  an embattled central bank, facing the increasing prospect of political interference –  doesn’t have externals, but I did find this nice quote on their website

In monetary policy decision-making processes, committees are preferred above individuals. Not one central bank has replaced a committee with a single decision-maker, a fact that has both theoretical and empirical support; the ability to draw diverse viewpoints from constituent members in committees ensures that there is likely to be some moderation of extreme positions and policies and more even policymaking.

Indeed.  We shouldn’t let the Reserve Bank keep such a flawed system, even gussied up with a statutory advisory committee appointed by the Governor himself.   Other countries don’t do it that way –  and our Reserve Bank has far more power than most central banks because of its regulatory functions –  and hardly any other government functions in New Zealand are run that way.

It was good that the Bank included this material in its BIM, rather than just quietly slipping it to the Minister of Finance in a document we didn’t know existed.  It would be better still if they now released the full version of the document making their case. At present, that case is looking pretty threadbare, not informed by either good comparisons or a strong recognition of what open government should look like, and –  if anything –  designed to serve the interests of career bureaucrats rather than of the public.  That’s not too surprising: bureaucrats typically do what they can to protect their bureau.  But it doesn’t make it a good basis for public policy.

As for the Minister of Finance, perhaps he could take a stronger lead by (a) encouraging the Bank to release the fuller paper, (b) ensuring that Treasury releases the Renne report on similar issues (and associated supporting documents) and (c) actually named the Independent Expert Advisory Panel supposedly playing a key role in the current Treasury-led review of the relevant provisions of the Reserve Bank Act.

As non-transparent, and obstructive, as ever

Just when you think there are the occasional promising signs that the Reserve Bank might, perhaps, be becoming a little more open…….they come along and confirm that they are just as secretive as ever.

At the last Monetary Policy Statement, the Reserve Bank indicated that it had made allowance for four (and only four) specific pieces of the new government’s policy programme.   They provided no details, beyond the barest descriptions, even though these assumptions fed directly into their projections and to the “acting Governor’s” OCR decision.  In one specific example, they indicated that they had assumed that half the planned Kiwibuild houses would displace private sector housebuilding activity that would otherwise have taken place.   That assumption directly feeds into their forecasts of resource pressures, but is also quite politically sensitive.  You might suppose that in an open democracy, a public agency that came up with such estimates would publish their workings, at least when a formal request was made.

You’d be quite wrong.  I lodged a request a few weeks ago, asking for “copies of any analysis or other background papers prepared by Bank staff that were used in the formulation of the assumptions”.  I wasn’t asking for emails back and forth between staff, and I wasn’t even asking for the minutes of meetings where these papers were discussed.  I certainly wasn’t asking for copies any other government department or minister might have supplied them.  Just the analysis and related background papers the Bank’s own staff had done.

In response –  having taken several weeks of delay –  they didn’t redact particularly sensitive items, they simply withheld everything (down to an including the names of the papers concerned).   This is, it is claimed, to “protect the substantial economic interests of New Zealand”, a claim which is simply laughable.  Protecting senior officials of the Reserve Bank from scrutiny is not, even approximately, the same thing as protecting the “substantial economic interests of New Zealand”.  It might even be less intolerable conduct if they had laid out the gist of their reasoning in the MPS itself.  But they didn’t.

Of course, it is par for the course from the Reserve Bank.  They consistently refuse to release any background papers related to the MPS, no matter how technical they might be, or how high the degree of legitimate public interest (I did once get them to release such papers from 10 years ago).  They simply have no conception of the sort of open government the Official Information Act envisages.

Reform –  including opening up the institution –  is long overdue.  I do hope that the Minister’s review of the Act is going to address these issues seriously.

And in the meantime you and I –  citizens, taxpayers, who paid for this analysis –  are left none the wiser as to why, say, the Bank thinks a 50 per cent offset is the right assumption for Kiwibuild.  Perhaps it is, perhaps it isn’t, but the debate –  including around monetary policy –  would be better for having the workings in the public domain.

I was tempted to reuse my “shameless and shameful” description from yesterday, but that might a) overstate slightly the true importance of this particular issue, and (b) is a description better kept today for the Prime Minister and her willed blindness to the issues around China’s interference in the domestic affairs of New Zealand.  Anything for an FTA extension, nothing for protecting the democratic institutions and values of New Zealanders.

Full letter from the Bank below.

Dear Mr Reddell

On 16 November you made an Official Information request seeking:

copies of any analysis or other background papers prepared by Bank staff that were used in the formulation of the assumptions about the impact of four specific policies of the new government (minimum wages, fiscal policy, immigration, and Kiwibuild), as published in last week’s Monetary Policy Statement.

The Reserve Bank is withholding the information for the following reasons, and under the following provisions, of the Official Information Act (the OIA):

  • section 9(2)(d) – to avoid prejudice to the substantial economic interests of New Zealand;
  • section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between officers and employees of the Reserve Bank in the course of their duty; and
  • section 9(2)(f)(iv) –  to maintain the constitutional convention for the time being which protects the confidentiality of advice provided by officials.

You have the right to seek a review of the Bank’s decision under section 28 of the OIA.

Yours sincerely

Roger Marwick

External Communications Adviser | Reserve Bank of New Zealand | Te Pūtea Matua

2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140

  1. + 64 4 471 3694

Email: roger.marwick@rbnz.govt.nz  | www.rbnz.govt.nz

 

More excuses for a job not well done

It is another glorious day in Wellington –  I always reckoned a 2 degrees warmer Wellington would be a good thing – and there is Christmas shopping to do, but I couldn’t let the latest speech from the Reserve Bank go by without comment.

It is presented as a speech by “Reserve Bank Governor Grant Spencer”.   Fortunately, most of the media haven’t fallen for that line –  which they’ve tried on in a number of recent documents.   If Spencer is anything, he is “acting Governor”, and no more.

How do I know?  Because Parliament was quite clear that

The Governor shall be appointed for a term of 5 years

And when he appointed Spencer, Steven Joyce was quite clear that the appointment was for six months only.   He only ever claimed to be appointing an “acting Governor”  –  who can, under certain conditions, be appointed for only up to six months.

As it happens, even that appointment is almost certainly unlawful.  The Act is also pretty clear that an acting Governor can only be appointed when a Governor leaves office before his or her term has expired.   That wasn’t the case here.  In other circumstances, the Minister and the Board are simply expected to get on and make a permanent appointment, so that a new permanent appointee can take office when the previous appointee’s term expires (a date known, in this case, for the previous five years).  It might not be ideal phrasing, but it is the law, and if there was a problem –  as there was in the case, around the election –  either the law needs to be worked within, or to be changed by Parliament.

But we now have the strange situation where the Minister who appointed him thought Spencer was acting Governor, while Spencer himself now seems to purport to be –  not just have the powers of  – Governor.  As I’ve been doing for the last couple of months, I will continue to describe him only as “acting Governor”, or “the economist purporting to be acting Governor”.

Whatever his label, there is a bit of sense of relief that Graeme Wheeler is gone and that Spencer –  someone well-liked and generally more open –  is minding the store.   But his speech earlier this week, on monetary policy and the challenges of low inflation, still left a great deal to be desired.  I suspect it wasn’t intended this way, but in practice it amounts to not much more than excuses for not keeping inflation near target for the last five years, partly by attempting to obscure a New Zealand debate with the (somewhat different) issues some other advanced countries face.  And, of course, whatever the merits of Spencer’s views, he’ll be gone in little over three months and as yet we have no idea who the new single decisionmaker will be (let alone who will eventually serve on the new statutory monetary policy committee to be put in place next year).

There is some interesting stuff in the speech though.  Most notable perhaps was the number of references to unemployment.  Often enough Reserve Bank monetary policy documents mention it barely at all –  the Bank even tried to displace it with a new (but sadly ill-fated) labour market capacity indicator of its own devising.  For decades, the capacity variable in the Bank’s inflation models was (its estimate of) the output gap, and there were typically lots of references to it in speeches or Monetary Policy Statements.  

But in Spencer’s speech –  his first as “acting Governor”, and the first under the new government – there is but one reference to the output gap (and then only in abstract terms) and 17 references to “unemployment”.    And to think that some people reckon it doesn’t make much difference who is appointed Governor.

But the odd thing is that much of the speech is devoted to making the case that the unemployment rate (itself) hasn’t been much help in explaining inflation in recent years.  Which might be true, to some extent, but so what (at least when considering events of the last decade)?  After all, for years the Bank told us they didn’t put much weight on the unemployment rate, didn’t think they could fix on a NAIRU etc etc, and that we really should be focusing –  as they did –  on the output gap and a broader suite of high-tech capacity indicators.    It might even –  if valid –  be an argument for not putting too much specific focus on a specific or precise unemployment rate in the new monetary policy regime the government envisages –  but that isn’t the case Spencer makes, and weirdly he suggests that the Bank is already (since when?) putting more weight than previously on employment indicators.  It isn’t very coherent, in a New Zealand context.

This chart ran in the recent Monetary Policy Statement (when I didn’t get round to commenting on it) and it appears again in Spencer’s speech.

GS speech 1

It is the sort of chart the word “chutzpah” might have been invented for.  They use it to try to suggest that much of the advanced world is “stuck” in a situation in which the unemployment rate is below the sustainable rate (a NAIRU) and yet inflation is also below target.

There are a number of odd things about the chart.  For example, they include three separate observations for Germany, the Netherlands, and France, even though all three are in a common currency (and thus common monetary policy) area.  And surely it would have been more enlightening to include the other advanced countries with independent monetary policies (eg Norway, South Korea, Israel, Iceland?  There is also no place at all for inflation expectations in the story the Bank is trying to tell in the chart.

But the biggest, most obvious, omission is New Zealand.  And where would New Zealand fit on the chart?  Well, core inflation is about half a per cent below target and on most estimates –  even on the most recently quarterly unemployment observation (4.6 per cent) –  the unemployment rate is still above an estimate of the NAIRU.    If these relationships hold at all, there are lags, and the average unemployment rate for the last four quarters was 4.9 per cent.  By contrast, before the major revision downwards to the HLFS unemployment rate last year, the Reserve Bank had a NAIRU estimate of 4.5 per cent in its models (a part of that model that had no implications for the inflation forecasts), and after those revisions, Treasury published estimates suggesting they thought the NAIRU was now nearer 4 per cent.   In other words, for now at least, New Zealand still belongs in the bottom right quadrant of the Reserve Bank chart, the one in which there isn’t much of a mystery or puzzle at all: with inflation below target and unemployment above a NAIRU, a typical response  –  in an inflation-targeting framework –  would be to cut the OCR.    Switzerland and France can’t do that –  Swiss interest rates are already negative, and France can’t control interest rates  –  but New Zealand could.  It is just that the Reserve Bank chose not to.

In the chart the Bank uses OECD estimates of the NAIRU.  That is understandable –  they are the only consistent cross-country estimates I’m aware of –  but not one without its problems.  For example, somewhat unusually, the OECD thinks the New Zealand NAIRU this year is still in excess of 5 per cent.   Then again, if you believe the OECD’s estimates, unemployment in New Zealand has been below the NAIRU for almost the entire 21st century so far (rising just very slightly above only in 2009, 2010, and 2012).  It simply doesn’t ring true.

nairu less U

The Reserve Bank’s next chart in this area is this one

GS speech 2

The suggestion is that there was a relationship between unemployment and inflation in the 2000s (when they also didn’t use the relationship), but that it has disappeared (for now at least) in the last few years.

Given that the relationship (even in the previous decade) wasn’t tight by any means, and many of the higher inflation numbers related to things –  eg oil shocks and short-term exchange rate movements –  that didn’t have much to do with New Zealand unemployment rates, I didn’t find the chart overly persuasive.   Moreover, since everyone recognises that the NAIRU changes over time –  with things like demographics, labour market regulation, some hysteresis etc –  even the theoretical relationship shouldn’t be with the unemployment rate itself, but with the gap between the NAIRU and unemployment rate.    I suspect the Bank is currently feverishly working on a suite of time-varying NAIRU estimates –  to reflect the new government’s interest –  but there is no hint of those in this speech.

Ideally, one might want to look at something more like an unemployment gap estimate against deviations of core inflation  from target (what the Bank was trying to do, in a snapshot) for other countries in the first chart).  As I’ve already said, I don’t have any confidence in the OECD’s levels estimates of the New Zealand NAIRU, although the changes in the associated gap from year to year might not be too bad.    For now, it is all I have.

So in this chart, using annual data (all we have for the unemployment gap) I’ve shown the deviations  of sectoral core factor model inflation from the midpoint of the inflation target and the OECD estimate of the unemployment gap from 1993 (when the core inflation data start) to 2016 (each dot is one year’s data).

GS speech 3

Even including the most recent years (the furthest left observations) there is still a relationship there, albeit not a very tight one.    Then again, it wasn’t very tight –  although a bit more upward sloping –  when I deleted those most recent years.  No doubt the Bank could –  and perhaps is doing so privately –  do this sort of analysis in a more sophisticated way.

I’m not suggesting there are no puzzles about New Zealand’s inflation performance in the last few years.    But simply plotting the raw unemployment rate (and not even looking at, say, the underutilisation rate or the gap) against headline inflation isn’t going to tell you much –  we aren’t in 1958 now (when Phillips wrote)  and, apart from anything else, inflation expectations matter.

For the last couple of years, the Bank has consistently tried to tell a story of how inflation expectations are firmly anchored at the 2 per cent midpoint of the inflation target.   That has always been a questionable proposition, especially as regards the sorts of expectations that might affect wage and price setting behaviour.     Their favoured two-year ahead measure of inflation expectations is now around 2 per cent, but a decade ago it was averaging almost 3 per cent.  Household inflation expectations are also lower than they were.  Again, that isn’t very surprising because a decade ago the Reserve Bank wasn’t seriously aiming to deliver inflation at 2 per cent (the target midpoint): we might have been happy enough to take it if inflation had got there of its own accord, but our projections (the Governor’s choice) rarely showed inflation dropping below 2.5 per cent any time soon.  Actual core inflation was up around 3 per cent.

And these days?  Well, core inflation hasn’t been anywhere near 2 per cent for years now –  persistently below.  And although the Bank consistently talks of getting inflation back to 2 per cent, it hasn’t done so, and for several years consistently erred on the hawkish side, with constant talk of wanting to “normalise” interest rates, and actually following through on an unnecessary and ill-judged tightening cycle.   Even now, “normalisation” got a lot of attention in last week’s FSR (although mercifully absent from the speech), and the Bank constantly talks about not wanting to act aggressively to get inflation back to target.  Any rational observer would not only assume inflation will be materially lower than it was, but that the Bank is quite relaxed about that (it more or less says so).  The practical target isn’t really 2 per cent –  any more than it was, on the other side, 10 years ago – but something a bit lower.

The Bank must hate data from the inflation-indexed bond market (because it never engages with it in any of its publications), but the gap between indexed and conventional bonds is not inconsistent with my story.     Interpreting that data in fine detail isn’t easy. For a long time, we had only a single indexed bond (matured in Feb 2016), and by late in its life headline inflation (eg the GST change in 2010) mattered much more than the medium to long-term outlook).  These days there are several indexed bonds, but they have fixed maturity dates while the Reserve Bank’s published “10 year bond rate” has, in effect, a maturity date that moves through time.

But consider this chart, showing the gap between yields on successive indexed bonds and the conventional 10 year bond rate.

IIB expecs to dec 17

In the years prior to 2008 (when the indexed bond still had 10 years to run), the implied inflation expectation was around 2.5 per cent.   As noted earlier, that wasn’t too far from how we were running things in practice.   What of now?  It is late 2017, so 10 years from now is roughly half way between 2025 and 2030, the two indexed bond maturity dates either side of 2027.   In November, the average gap between orange and grey lines was 1.3 per cent, and for the year to date the average gap has been 1.2 per cent.

No doubt, there are all sorts of idiosnycratic things going on, so these breakeven inflation rates may not be “true” inflation expectations (as, for example, they weren’t in the midst of the crisis in 2008).  There are, for example, a lot of inflation bonds on the market, and it is possible that Treasury has somewhat glutted the market.    My point simply is that if one wants to make sense of relationships between unemployment (or other capacity measures) and core inflation over the Wheeler years, it is wilfully blind to simply ignore a story about changing inflation norms.

The next chart is just a rough and ready thought experiment.  What if, when Graeme Wheeler took office in September 2012, inflation expectations were genuinely about 2 per cent, and people really thought that was what the Reserve Bank was serious about.  The indexed bond yields –  rough and ready as they are –  suggest that isn’t wildly implausible.  And, say, now people really think the target (for sectoral core inflation) is more like 1.3 per cent –  the most recent actuals are 1.4 per cent.  Then the chart just shows the relationship (using quarterly data) between the unemployment rate and the gap between actual core inflation and an implied target taken by interpolating from 2 per cent in 2012 to 1.3 per cent now.

GS speech 4

I”m not suggesting that is the “true” relationship, but it looks like an idea worth taking more seriously than the Bank has thus far been willing to do in public. After all, expectations adjust gradually in most circumstances.  It seems negligent, or deliberately obtuse, not even to engage with the possibility.

After all, the “acting Governor” –  I almost slipped there and initially typed it as Governor – ends his speech with the suggestion that

To the extent that the leverage of monetary policy over domestic inflation may have reduced, this suggests a cautious approach when responding to inflation deviations from target and careful attention to our assessment of economic slack. It may be appropriate for monetary policy to put relatively more weight on output, employment and financial stability relative to inflation.

Why wouldn’t a reasonable observer conclude that the Bank isn’t really targeting 2 per cent (although it might be happy enough to get there by accident) and continue to adjust their expectations and behaviour accordingly.

With a new government planning to revise the Bank’s mandate to increase the Bank’s focus on employment/unemployment, Spencer’s line would almost be some sort of sick joke if it weren’t so serious.    When the unemployment rate has been above New Zealand estimates of a NAIRU for nine years, and when the economic recovery (average growth in real per capita GDP) has been so muted, you might reasonably suppose that the government would have been expecting the Bank to do its job more energetically –  which would involve getting inflation back to target, and in the process finally delivering an unemployment rate around the (unobservable NAIRU) and even a bit faster real GDP growth.  But Spencer –  with no mandate whatever, but presumably with the support of his colleagues, Bascand and McDermott –  wants to tell us that their idea of putting more focus on “employment and output” than in the past has been to deliberately deliver such weak cyclical outcomes –  ie deliberately accept higher unemployment/lower employment than is strictly necessary.  And the implicit promise is more of the same to come, at least if people like them are left in charge.  I hope the Minister of Finance is paying attention, and that his recent talk of possibly removing the midpoint reference from the PTA wasn’t a sign that he has begun to buy into this Wheelerish mentality (even if given a glossed up public face by his colleagues now that they are minding the store).

 

 

 

Shameless and shameful

On Monday, just across the road from Parliament, Victoria University’s Institute for Governance and Policy Studies hosted a lunchtime lecture from Professor Anne-Marie Brady.  The lecture was built around her Magic Weapons paper on the extent of Chinese government/Party influence activities in New Zealand (and elsewhere), and her shorter policy brief with some specific proposals for the new government on how to deal with the issue (I wrote about that latter piece recently here).     (Radio New Zealand also had a good interview with Brady this morning, prompted by the new legislation announced yesterday by the Australian government, as part of its efforts to deal with this official Chinese interference.)

New Zealanders owe Professor Brady a considerable debt of gratitude for, first, writing her detailed paper, and secondly for deciding to put it in the public domain (it was done as part of an international project on Chinese influence-seeking activities globally, and the papers by other scholars have not yet been made public).    Her paper has found a receptive audience internationally (and she mentioned that Francis Fukayama has underway work for a similar paper on Chinese influence-seeking in the US).

Listening to her, one gets the sense that she isn’t that comfortable in the public spotlight.  Many academics aren’t.   In her lecture the other day she felt the need to include a photo of her Chinese husband and her three half-Chinese children –  no doubt a push back against the sort of despicable pre-election attempt to discredit her and her research tried by the then Attorney-General.  It can be a lonely position for an academic when her expert and well-documented research runs head-on into a wall of political indifference (or worse), vested interests, and a media which seems not quite sure whether or not this is a “proper” issue even to be talking about.    It is not as if (I’m aware that ) anyone has seriously sought to question the factual basis of her paper, or has demonstrated major flaws in her analysis and reasoning.   It seems as if there is just a desperate desire that she, and the issue, would go away.    Absent that, the political and business elites simply want to pretend it doesn’t exist.   I hope she doesn’t just retreat to her study.

Her Victoria lecture the other day covered pretty familiar ground (although many of the attendees indicated that they hadn’t read either of her papers so much will have been new for them).     There was:

  • the active efforts (largely successful) of the Communist Party to get effective control of almost all Chinese language media in New Zealand (similar story in Australia) –  and thus the story of the issues she is raising goes unreported in that media,
  • the efforts of suborn former senior politicians, with roles that align their personal economic interests with those of the Chinese authorites,
  • concerns about political donations, especially from individuals/entities with close ties to the CCP, and the associated close ties between political party leaders and China,
  • Chinese government interests in influencing New Zealand, both to stay quiet on issues of concern to China, and to detach New Zealand from its historical defence and intelligence relationships,
  • China’s interests in Antartica,
  • Confucius Institutes, funded and controlled by China, as part of New Zealand universities, complete with restrictions on what can be talked about,
  • efforts to promote ethnic Chinese New Zealand citizens, with those ties to the Embassy/CCP, into electoral politics –  in New Zealand’s case, both Jian Yang and Raymond Huo.

Huo is now chair of Parliament’s Justice Committee – the same Huo who, as she pointed out, is responsible for Labour campaigning for the Chinese vote under a Xi Jinping slogan, and who – Professor Brady reports –  was present at a meeting in Auckland earlier this year in which Communist Party propaganda chiefs (“propaganda” is apparently a literal translation of the role/office) met with local Chinese language media to offer “guidance” on how issues of interest to China should be reported.   A serving member of New Zealand’s Parliament…….

Brady noted that the Communist Party’s United Front work has always been an integral element in how the Party works, but that the efforts are now being undertaken with an intensity and importance that is greater than at any time since 1949, when the CCP took power.  It is a China that has thrown off Deng Xiaoping’s injunction (post Tiananmen) that China should mask its growing power and bide its time.

When it came to the New Zealand government, in some respects I thought Professor Brady pulled her punches (although she was happy to note that she couldn’t understand how it was that National Party MP Jian Yang – self-confessed Communist Party member, former member of the Chinese intelligence services, and someone who has acknowledged misrepresenting his past on residency/citizenship application papers –  is still in Parliament).   I’m not sure how much of that is tactical –  giving the new government a chance, hoping to be heard by talking constructively.   I fear that any such hope is misplaced.

In just the last week we’ve had a couple of episodes that confirm that the new government is quite as craven –  indifferent, obsequious –  as its predecessor.

A month or two ago, at the time of the 19th Communist Party Congress, it came to light through the Chinese media that the presidents of both the National and Labour parties had been sending warm greetings and congratulations.   This last weekend, the Labour Party went one step worse.

The Chinese Communist Party held a congress in Beijing for representatives of such political parties from around the world (300 from 120 countries) as it could gather to its embrace.    Most of them were from developing countries.  Nigel Haworth, the President of the New Zealand Labour Party, attended.   Here is how one Chinese media outlet reported the event.

The CPC in Dialogue with World Political Parties High Level Meeting was the first major multilateral diplomacy event hosted by China after the recently concluded 19th CPC National Congress.

It was also the first time the CPC held a high-level meeting with such a wide range of political parties from around the world…..

During the closing ceremony, Chinese State Councilor Yang Jiechi stressed that the meeting was a complete success with a broad consensus reached. He also said CPC leaders elaborated on the new guiding theory introduced by the 19th CPC National Congress.

“The innovative theoretical and practical outcomes of the 19th CPC National Congress not only have milestone significance for the development of China, but also provide good examples for the development of other countries, especially developing countries,” Yang said.

The Beijing Initiative issued after the meeting states that over the past five years, China has achieved historic transformations and the country is making new and greater contributions to the world.

It also highlighted that lasting peace, universal security, and common prosperity have increasingly become the aspiration of people worldwide, and it’s the unshakable responsibility and mission of political parties to steer the world in this direction.

“The most important thing between the 18th and 19th CPC party congress was the belt and road initiative,” according to the Russian Communist Party’s Dmitry Novikov. “And the most important thing about the initiative is the economic cooperation among various countries. Such cooperation leads to the promotion of relations in culture and politics.”

And the President of the New Zealand Labour Party was party to all of this.    In fact, not just a party to it, but someone who was willing to come out openly in praise of Xi Jinping.

Here he is, talking of Xi Jinping’s opening speech  (here and here)

“I think it is a very good speech. I think it is a very challenging speech. I think he is taking a very brave step, trying to lead the world and to think about the global challenges in a cooperative manner.  Historically we have wars and we have crisis, but he is posing a possibility of a different way of moving forward, a way based on collaboration and cooperation.  Making cooperation work is difficult, but he think that’s a better way for mankind. I think we all share that view.”

It is shameful.     Probably not even Peter Goodfellow would have gone quite that far –  if only because there might have been some (understandable) rebellion in the ranks if he had gone that public.

This is the same Chinese Communist Party (and associated state) that

  • flouts international law, including with its aggressive expansionism in the South China Sea,
  • denies any political rights to its own people,
  • that is directly responsible for the deaths of tens of millions of people (and which only just pulled back from its forced abortions practices),
  • lets dissidents die in prison,
  • has no concept of the rule of law,
  • persecutes religious believers (Christian, Muslim, Falun Gong or whatever),
  • actively interferes in the domestic politics of other countries in all manner of different ways,
  • and so on.

In her lecture the other day, Professor Brady mentioned Haworth’s comments, but this was one of the places she pulled her punches.  She asked, rhetorically, if we could imagine a New Zealand political party president attending a Republican Party convention and making such public remarks.   Or even a Russian political event.    At one level it is a fair point –  Haworth’s participation in this CCP event, and his positive comments, have gone totally unremarked in the New Zealand media (or from Opposition parties), in a way that would be simply inconceivable in those other cases.    But at another, it falls into the trap beloved of China-sympathisers and people on the left (one such academic at her lecture attempted this), of drawing a moral equivalence between, say, the United States and the UK on the one hand, and Communist China on the other.    A much better comparison would be to ask if we could imagine a major New Zealand political party President attending Nazi Party congresses pre-war or Soviet Communist party congresses?  And whether, even if it had happened, we would look back now with equanimity at associating so strongly with such an evil.  Such is the CCP.   The fact that certain New Zealand firms make a lot of money trading with them –  or that our political parties appear to raise large donations –  doesn’t change that character.

Former National Party Prime Minister, Jenny Shipley, was apparently also at the meeting, speaking warmly of China’s One Belt One Road initiative (all about geopolitical influence).

Yesterday, we had yet more proof of how far gone the New Zealand authorities (and the new New Zealand government are).     As I’d noted a couple of weeks ago, Victoria University (specifically its China-funded and controlled Confucius Institute) and the New Zealand Institute for International Affairs put on a half day symposium (celebration?) of 45 years of diplomatic relations with the People’s Republic of China PRC).   Not a word of scepticism or criticism was to be expected from the programme –  there wasn’t for example an opportunity for Professor Brady to present her work, and alternative perspectives on it to be heard.

Quite late in the piece, reportedly, the new Minister of Foreign Affairs agreed to be a keynote speaker at this forum, his first major speech as Minister.  Winston Peters had, in Opposition, occasionally been heard to express some unease about the activities of the PRC in New Zealand, including the questions around National Party MP Jian Yang (recall that even Charles Finny, former senior diplomat, noted that he is always very careful about what he says in front on Yang and Raymond Huo, given their closeness to the PRC Embassy).   In office, the Rt Hon Winston Peters not just tows the MFAT line, repeating the same obsequious words as former National Party ministers, he takes it up another step.

There was the published text, which was bad enough.   In entire speech he could only manage this, that might be pointed to for a modicum of self-respect.

New Zealand supports a stable, rules-based order in the Asia-Pacific region in which free trade and connectivity can thrive.  We urge parties to resolve disputes in accordance with international law, on the basis of diplomacy and dialogue.

New Zealand and China do not always see eye to eye on every issue; we are different countries and New Zealanders are proudly independent.  However,  China and New Zealand have a close, constructive and increasingly mature relationship.  Where we do have different perspectives, we raise these with each other in ways that are cordial, constructive and clear.

“New Zealanders” might be proudly independent, but it isn’t clear that our governments are.  At a New Zealand event –  so it wasn’t even a matter of talking politely in China itself –  our Foreign Minister can’t bring himself to name any specific concerns or risks (despite rising international unease, and the material documented by Professor Brady).   And if he ever has concerns he’ll raise them in “cordial” way………”cordial” and direct interference by a foreign power in New Zealand, undermining the freedoms of hundreds of thousands of our own people (ethnic Chinese) doesn’t strike me as the sort of words that naturally belong together.  At least in a country whose government retains any self-respect.

But then it got worse, at least according to the Stuff report of how Peters departed from his written text.

“We should also remember this when we are making judgements about China – about freedom and their laws: that when you have hundreds of millions of people to be re-employed and relocated with the change of your economic structure, you have some massive, huge problems.

“Sometimes the West and commentators in the West should have a little more regard to that and the economic outcome for those people, rather than constantly harping on about the romance of ‘freedom’, or as famous singer Janis Joplin once sang in her song: ‘freedom is just another word for nothing else to lose’.

“In some ways the Chinese have a lot to teach us about uplifting everyone’s economic futures in their plans.”

It is so remarkably reminiscent of the Western fellow travellers of the Soviet Union in decades past –  tens of millions might die, but not to worry, a new Jerusalem is on the way to being built.   Basic rights and freedoms might be trampled on, or simply not exist at all, but not to worry….what is freedom after all?

Personally, I don’t think the biggest issue in the China/New Zealand official relationship should be how the Chinese party/state treats its own people –  abominable as that is.  The issues people like Professor Brady are raising are about the direct, systematic, in-depth, interference by another country  –  a hostile power, run by a regime with mostly alien values –  in the domestic affairs of other countries.  Our own most of all.  International expansionism and defiance of the rule of international law might matter too.  And none of that has any connection whatever to improvements in material living standards in China.

And what to make of the nonsense claim that “the Chinese have a lot to teach us about uplifting everyone’s economic future in their plans”.  That is about as ignorant as it is offensive.

I’ve shown this chart before

Here is a chart showing GDP per capita for China, and a range of now-advanced Asian countries/economies.  I’ve shown each country’s GDP per capita as a percentage of that for the United States for each of 1913, 1950, and 2014, using the Maddison database for the 1913 observation and the Conference Board (which built on Maddison’s work) for the more recent observations.  Data are a bit patchy in those earlier decades, but 1913 was before China descended into civil  and external wars (from the late 1920s), and 1950 was the year after the Communist Party took control of the mainland.

asia gdp pc cf US

What stands out is just how badly communist-ruled China has done economically, and especially relative to the three other ethnic-Chinese countries/territories.  Substantial re-convergence has happened in all the other countries on the chart, but that in China has been excruciatingly slow.  A few buoyant decades (the aftermath of which we have still to see) struggle to make up for the earlier decades of even worse Communist mis-rule.

Or how about this one, using Conference Board data for real GDP per person employed (they don’t have real GDP per hour worked for China, but estimates are very low)?

china GDP ppe

Even on official Chinese data, the record is pretty poor: China barely matches Sri Lanka which was torn apart by decades of civil war, and doesn’t even begin to match the performance of the better east Asian economies (none of which has anything like the waste, the massive distortions, of China).   Surely China is best seen as a (potential) wealth-destruction story?  Taiwan’s numbers might be a reasonable benchmark for what could have been.  Taiwan threatens no one.

Just to cap an egregious speech, the Opposition foreign affairs spokesman indicated that he didn’t disagree with what Winston Peters had had to say  (well, after his government’s track record of cravenness, he would, wouldn’t he).

I came home from Anne-Marie Brady’s lecture the other day and pulled off the bookshelf my copy of The Appeasers, written in the 1960s by Martin Gilbert and Richard Gott, a heavily-documented account of British appeasement of Germany from 1933 onwards.    As I started reading, lots seemed to ring true to today.

Two situations are never fully alike.  For a start, New Zealand isn’t a “great power” and China is (as Germany was becoming again).    And Germany had little real interest in interfering in domestic British politics –  and there was no large German diaspora in the UK to attempt to corral and control.    But there is a lot of the same willed blindness to the evil that the regime represented.    In the 1930s, it wasn’t the bureaucrats who were the problem –  from the very first, British Ambassadors in Berlin recognised and reported on the nature of the regime, its domestic abuses and its external threats.     There were various forces at work it seemed –  a fear of Communism (and thus Nazism as perhaps some sort of bulwark against something even worse), unease and even guilt over some of the Treaty of Versailles provisions, the fear of new conflict (only 15 years after the last war), and often some sort of admiration for the order the new German government was bringing to things (and some philo-Germanism among many of the British upper classes).  As Gilbert and Gott summarise it

“Like alcohol, pro-Germanism dulled the senses of those who over-indulged, and many English diplomats, politicians and men of influence insisted upon interpreting German developments in such a way as to suggest patterns of cooperation that did not exist.”

Britain and France could (and should) have stopped Germany earlier.  New Zealand can’t stop China, of course, but we can assert ourselves, and reassert some self-respect, for our system, our freedoms, and for the interests of like-minded countries.    We can call out, firmly (not cordially) Chinese influence-seeking etc where we see it –  as the Australian government has been much more willing to do.  We can cease to pander to such an obnoxious regime that not only abuses its own people (including failing to deliver economically) but represents a threat to its neighbours, and which persists in seeking to interfere directly in other countries, whether in its neighbourhood or not, whether with large ethnic Chinese minorities (as NZ, Australia, and Canada) or not.  Our politicians shame us by their deference to such an evil power –  and frankly, one that has little real ability to harm us (as distinct from harming a few vested interests).

In her lecture the other day, and in her policy brief, Anne-Marie Brady called for our political leaders to insist that none of their MPs will have anything further to do with entities involved in the PRC United Front efforts.   That would certainly be a start –  though the Jian Yang stain on our democracy really needs to be removed altogether –  but it is probably a rather small part of the issue: we need political leaders who will recognise  –  and openly acknowledge –  the nature of the regime, and stop fooling themselves (and attempting to fool us) about the nature of the regime they defend, and consort with.   Perhaps our leaders are no worse than, say, British Cabinet ministers in the 1930s who enjoyed hunting with Hermann Goering, but if that is the standard they are comfortable with, New Zealand is in an even worse place than I’d supposed.   In their book, Gilbert and Gott quote from the former head of the British foreign service:

“Looking back to the pre-1939 era Vansittart wrote: “I frequently said that those who ask to be deceived must not grumble if they are gratified”

Indeed.

I said that I thought Professor Brady was inclined to pull her punches a bit.  Asked what New Zealand can do,  she began her response claiming that “Australia can be more forceful”.   No doubt Australia is, and will remain, more forceful –  we’ve seen in the DFAT Secretary’s speech, in the ASIO report, in the foreign affairs White Paper, and in the new legislation details of which were announced yesterday.  But “can” isn’t the operative word.   If trade is your concern, Australia trades more heavily with China than New Zealand firms do.  If distance is your concern, Australia is physically closer to Asia –  and the waterways of the South China Sea.  Our political leaders – National, Labour, New Zealand First, Green –  could speak out, could act forcefully.  But they won’t.

Shameless and shameful.

 

UPDATE: As I pressed publish, I discovered that I’d been sent a link to some other reflections on Peters and Haworth by China expert Geremie Barme.

 

 

 

 

Whither cash?

Last week the Reserve Bank released an interesting Analytical Note on “Crypto-currencies – An introduction to not-so-funny moneys” .    If, like me, you hadn’t paid a great deal of attention to Bitcoin and the like, it is a very useful introduction to the subject, from a monetary perspective (including some of the potential policy and regulatory issues).  At least for me, it struck just the right balance of detail and perspective.

Analytical Notes are published with the standard disclaimer that the material in them represents the views of the authors rather than, necessarily, of the Bank.  (That said, I’m pretty sure nothing has ever been published in one that the Bank was unhappy with.)  They are mostly written by researchers rather than policy people.  So it was interesting, and perhaps a little surprising, to get to the second to last page of this paper and find this

Work is currently under-way to assess the future demand for New Zealand fiat currency and to consider whether it would be feasible for the Reserve Bank to replace the physical currency that currently circulates with a digital alternative. Over time, analysis associated with this project will filter through into the public domain.

Interesting, because that is quite a radical and specific suggestion: to replace physical currency with a digital alternative.   And surprising because there was no hint of this work –  on a pretty major issue affecting all New Zealanders –  in the Reserve Bank’s Statement of Intent released only a few months ago.   Statements of Intent can seem like just another bureaucratic hoop to jump through, but the requirement to prepare and publish them was put in place for a reason: it is supposed to be the vehicle through which the Minister of Finance can inject his or her views on what the Bank’s work priorities should be, and is supposed to enable stakeholders and the public more generally to get a sense of what the Bank is up to.

I’m pleased the Reserve Bank is now doing this work on the future of currency.  Over the last couple of years I have been critical of the fact that, in published documents, there was no sign of any such preparatory work going on (including, more generally, around dealing with the problems of the near-zero lower bound, which will almost certainly become binding for New Zealand in our next recession).  In this year’s Statement of Intent, for example, published as recently as the end of June, there was 1.5 pages (pp 28-29) on the Bank’s currency functions, and not a hint of any work on the possibility of replacing physical currency with digital currency.   Perhaps doing the work is an initiative of temporary “acting Governor” –  but then he was required, by law, as Deputy Governor, to sign the Statement of Intent.  Or perhaps it was just the Bank deliberately keeping things secret?

As usual with the Bank, they talk loftily about how the analysis will eventually “filter through to the public domain”.  That isn’t good enough –  this is publicly funded work on a matter of considerable potential significance – , and I have lodged an Official Information Act request for the research and analysis they have already done.

I’ve come and gone for decades on what the best approach to physical currency is.  I’ve long been troubled by the monopoly Parliament gave to the Reserve Bank over the issuance of physical notes and coin.  There is no good economic reason for it (nothing about the efficacy of monetary policy for example) –  and for half of modern New Zealand history it wasn’t the situation in New Zealand.  For decades it may well have led to inefficiently low currency holdings: in a genuinely competitive market there is a reasonable chance that (eg) serial number lotteries would have provided a (expected) return to holders of bank notes.  In the high inflation years –  and especially as interest rates were deregulated –  holding as little currency as possible was the sensible thing to do.

notes and coin

As the chart shows, the ratio of notes and coins (in the hands of the public) to GDP troughed in the year to March 1988 –  when inflation and interest rates were both high (and, of course, returns to holding currency were zero).

At one level, the partial recovery in the amount of physical currency held isn’t too surprising.  Inflation has been low for decades, and interest rates are now very low too.  Holding physical currency isn’t very costly at all.

Then again, there have been huge advances in payments technologies.   Even when I started work, the Reserve Bank still offered to pay its staff (I think perhaps only the clerical and operational staff) in cash, and that wouldn’t have been too uncommon then.  ATMs didn’t exist then –  it was the queue at the local bank branch each Friday lunchtime –  let alone EFTPOS, internet banking and so on.   These days, by contrast, a huge proportion (by value) of transactions occur electronically.  Even school fairs –  often held out previously as the sort of place one really needed cash for –  have often gone electronic to some extent at least.

And although the ratio of cash to GDP is quite low in New Zealand (by international standards –  in many advanced economies something around 5 per cent isn’t uncommon –  there is still a lot of cash around.    The numbers in the chart are equivalent to a bit more than $1000 per man, woman, and child.    For a household like mine, more than $5000.    I’m a slow adapter, and almost always do have a reasonable amount of cash on me, but I’d be surprised if on an average day our household had more than $250 in cash in total (surveys from other countries suggest that isn’t unusual).   I’m not sure I’ve ever had a $100 bill, but Reserve Bank data suggest that on average each man, woman, and child has $400 in $100 bills.

As it happens, last week I was reading (Harvard economics professor) Ken Rogoff’s book The Curse of Cash.   As he notes, in the United States, there is around $3400 per man, woman, and child outstanding in US $100 bills –  while surveys of what ordinary consumers are actually carrying suggest that no more than 1 in 20 adults has a $100 bill on them at any one time.    Rogoff makes a pretty strong case that the bulk of physical currency holdings – even allowing, in say the US case, for the use of the USD in other countries – is held to facilitate illegality.   That could be outright illegal activities –  the drugs trade for example –  or tax evasion in respect of the proceeds of lawful activities.  The likely revenue losses, on his estimates, are very substantial.    The scale of the problem is probably smaller here, but there is no point pretending that the issue is specific to the United States (and, as Rogoff documents, a number of European countries have now put limits on the maximum size of cash payments –  although such rules seem more likely to catch those who comply with the law, rather than those who knowingly break it).

Somewhat reluctantly, Rogoff’s book has shifted my perspective on the physical cash issue.    As a macroeconomist, my main interest in this area in recent years has been to do something about the near-zero lower bound on nominal interest rates.  If the Reserve Bank cut interest rates to, say, -5 per cent, it would be attractive for people to pull money out of banks and hold it in physical currency in safe deposit boxes. If that happened to any large extent it would substantially undermine the effectiveness of monetary policy.  The fear that it might happen has already constrained central banks in various countries, and no one has been willing to cut official interest rates below 0.75 per cent (which was also about how far we thought the OCR could be cut when I led some work on the issue at the Reserve Bank some years ago).

Getting rid of physical currency altogether would solve the problem.  If there is no domestic cash, clearly you can’t hold any.  Of course, you could always seek out foreign cash, but the process of doing that would lower our exchange rate –  one of the ways monetary policy works, and thus not a problem.    But one doesn’t need to get rid of cash –  or even just large denomination notes –  to limit that risk.    There are various clever options that have been developed in the literature (effectively involving an exchange rate between physical and electronic cash), and as I’ve noted here previously, one could achieve the same result by simply putting a physical limit on the amount of currency the Reserve Bank issues, and then auctioning it to the banks (if demand surged this would, in effect, introduce an exchange rate or a fee).    It is disconcerting that, as far as we can tell, no country is properly prepared to use options like these in the next recession (which, in itself, risks exacerbating the recession because smart observers will recognise that governments have fewer options than usual) –  no one has (at least openly) done the preparatory legal work, or prepared the ground with the public.  Our Reserve Bank is, as as we can tell, no exception.

I’ve resisted the idea of getting rid of physical currency on both convenience and privacy grounds.  There is, as yet, no real substitute for cash if –  say –  one wants to send a child to the local dairy to buy the newspaper when one is on holiday.   And the ability to conduct entirely innocent transactions without the state being able to know what one is spending one’s money on (or one’s bank for that matter) remains a very attractive ideal.

And yet….and yet…..I wonder if it is a real freedom now to any great extent anyway.   We might not gone all the way –  yet –  to China’s “social credit” scoring system, but you have to be pretty determined to avoid the gaze of a government determined to find out what you’ve been up to.  Some of that is voluntary –  people choose to carry phones around, for example, which locate you –  and some of it isn’t (local councils put up CCTVs, and so do all too many retailers). AML provisions, and know-your-customer rules are ever more pervasive and intrusive.   Sure, using cash enables one to keep from a spouse what one spent on a birthday present, or where it was bought from, but it is a pretty small space left.

And so perhaps it is best for us to think now about serious steps towards phasing out physical currency.  Rogoff himself doesn’t recommend complete abolition at this stage, but rather ceasing to issue, and then over time withdrawing, high denomination notes.   Our largest note isn’t very large at all (NZD100 is only around USD70) but as I noted earlier a huge share of currency in circulation is in the form of $100 bills, even in New Zealand, which few people use for day-to-day transactions that are both lawful in themselves and where there is no intention to evade lawful tax obligations.   But if we were to amend the law to prohibit the Reserve Bank from issuing notes larger than (say) $20 –  and this is a decision that should be made by Parliament or at least an elected minister, not by a single bureaucrat –  we’d still make small cash transaction easy enough (school fair, or the kid sent to buy the newspaper, while greatly increasing the difficulty of a major flight to cash in the next serious recession, and increasing the difficulty of tax evasion and other criminal transactions.

If the government were to choose to go this way, it would still make sense for active precautions to be taken now to reduce the risk of the effectiveness of monetary policy being undermined even by a flight to $20 notes –   they take up roughly five times as much space as the equivalent amount in $100 notes, but you can still fit a lot of money in a secure vault.   Whatever the mix of measures, it is really important that the authorities –  Bank, Treasury, IRD, government, FMA –  adopt a greater degree of urgency.  No one knows when the next serious recession will be, but it isn’t prudent (ever) to assume it is far away.

And what of the Reserve Bank’s own scheme: the possibility of replacing physical currency with digital Reserve Bank currency?   We need to see more of what they have in mind.  My own long-held prediction is that they are two quite different products –  only the RB can issue physical notes, while anyone can issue electronic transactions media –  and that in normal times demand for a Reserve Bank retail-level digital currency would be almost non-existent.   That doesn’t mean they shouldn’t do it: there is something about the democratisation of finance, in enabling the public to hold the same sort of secure liability banks already can (in their case electronic settlement account balances), and  –  as we saw globally in 2008 –  banks runs can still happen.   Unless society decides to completely up-end the entire monetary system (and I have readers who favour that), we need an “outside money” that people can convert their bank liabilities into if/when they lose confidence in the issuing institution or system.    For most purposes, a digital Reserve Bank retail currency should be able to do that at least as well as physical banknotes.

Most….but not necessarily all (when serious people worry about EMP attacks on/by North Korea, there is no point pretending electronics is the answer to everything).   Those are the sorts of issues that need to be carefully examined, preferably in an open way, rather than with conclusions loftily filtered out to the public when it suits the officials.

Rogoff’s book is worth reading, especially (but not only) if you are new to the issue.  He covers a little of issues I didn’t have space for, including natural disasters (where cash might be more useful than cards, but most people don’t hold much cash anyway, so it actually isn’t that much of a help.)  Like the Reserve Bank paper, he also points out that things like Bitcoin offer a lot less effective anonymity than many people realise.