After a spate of posts in the last few days about the Reserve Bank reforms, I’d intended to change topics for a while.   But then I noticed that the new Opposition spokesperson on Finance, Amy Adams, had weighed in, expressing concerns about a couple of aspects of what the Minister of Finance had announced on Monday.

This is how interest.co.nz reported Adams’ concerns

Under the new Policy Targets Agreement (PTA), [actually, under the amended Act] a seven-member Board – with four internal Reserve Bank members and three external appointees, selected by the Minister on the recommendation from the RBNZ board – will be established.

There will be a Treasury representative who will sit on the committee as well but will not have voting rights.

Adams says the fact that Robertson is able to appoint almost half of the board “creates a live question about the degree to which that allows him to exert political influence.”

Although National supports the introduction of the MPC, she says the Reserve Bank already operates with an informal decision-making committee within the bank and that process was working well.

Adams has also taken a swipe at the fact a Treasury representative will sit on the MPC.

“They are the senior Government official, their job is to deliver on the Government’s objective,” she says.

“So, you’re effectively going to have a senior Government official that reports to the Minister and three people who are appointed by and able to be removed by the Minister, sitting in and influencing those decisions and those discussions.”

I don’t want to spend much time on the issue of having a non-voting Treasury representative as part of the new Monetary Policy Committee (MPC).  Reasonable people can differ on the merits of that, and whether there are any real benefits.  On balance, I favour the model the Minister of Finance has adopted.   But in terms of the concerns Adams raises, it is worth remembering that in Australia the Secretary to the Treasury (in a more politicised public service) is a voting member of the RBA Board, and no one questions the operational independence of the RBA.  And in a more direct parallel to the model proposed here, in the UK –  under a modern governance system established only 20 years ago  –  there is a non-voting Treasury representative at MPC meetings, and that seems to have been generally accepted to have worked well, and not to have undermined the independence of the Bank of England (although the individualist approach –  where MPC members can speak out –  probably provides an added safeguard).    It will be important to look at the specifics of the legislation on this point, and for there to be good protocols in place, but I don’t think that what has been announced to date poses particular problems.   If the Minister wants to put pressure on the Governor (now) or the Committee later on specific OCR decisions, he doesn’t need mid-senior level Treasury officials to do so.

In that interest.co.nz article, I’m quoted as suggesting that Amy Adams is “completely wrong” in her point about the appointment process.  That is for two, quite different, reasons:

• first, Amy Adams’ comments suggest she hasn’t understood that the Minister will only be able to appoint people nominated by the Board (as is the case for the Governor now).  The Minister can reject nominees, but can never replace those names with his own people.   The Minister has no discretion.
• second, direct and largely unfettered ministerial appointment is the way we typically do things in the New Zealand system of government, including for very sensitive positions for which the integrity and independence of the individuals is paramount.   It is also the way most key decisionmakers on monetary policy in other countries like our own are appointed.

Here is how appointments are made to various key public sector roles in New Zealand

And, of course, the Governor-General is appointed by the Queen on the advice of the Prime Minister.

Every single one of these really important positions  –  with the potential to do considerable mischief as well as good –  is appointed directly by elected politicians.  It is how we get accountability –  we can toss out politicians, they are forced to take questions in Parliament etc etc.   In some cases, there might be statutory qualifications appointees have to meet –  eg lawyer of seven years standing –  but I’m not aware that in any of these key public roles the relevant Minister, or Parliament itself, is constrained to only appoint someone other people have given them as nominations.

There is no obvious reason why the key decisionmaking roles at the Reserve Bank should be any different  (and the key roles at the Bank aren’t the Board itself –  which is really just a nominating (and cheerleading) committee –  but the Governor and the members of the future Monetary Policy Committee).  These people have a great deal of effective discretion and, if they get things wrong, can cause, or materially exacerbate, recessions or booms.  The standard approach anywhere else in the New Zealand public sector would be for such appointments to be made by the Governor-General on the advice of the Minister of Finance.   We can hold the Minister accountable, but have no way of holding the Board accountable (indeed, when the new MPC is appointed most of the Board members themselves will have been appointed by the previous government).

Direct and unfettered appointment by an elected politicians is also the way for most monetary policy decisionmakers in other countries like ours.     There is a nice summary table in this Reserve Bank Bulletin article from few years back.     As just a few examples:

• in Australia, all members of the Reserve Bank Board (the monetary policy decisionmaking body), including the Governor and Deputy Governor are appointed directly by politicians,
• the same is true in Norway,
• in the UK, seven of the nine MPC members are directly appointed by the Chancellor of the Exchequer (two are senior staff, appointed by the Governor),
• ECB Governing Board members are all directly appointed by politicians
• All members of the US Federal Reserve Board of Governors are appointed by the President, subject to Senate confirmation.  (Heads of the regional Feds –  who sit, by rotation, on the FOMC – are not, and there is some question about the constitutionality of those arrangements.)
• All members of the Swedish monetary policy board are appointed by a parliamentary committee,
• Bank of Japan monetary policy members are appointed by the Cabinet
• In Israel, five of the six MPC members are appointed by the government (one by the Governor).

It would be a much more normal approach, and one that provides ongoing democratic legitimacy, for the Governor and Deputy Governor and all external members of the MPC to be appointed directly by (the Governor-General on the advice of) the Minister of Finance.  Those choices shouldn’t be restricted to those on a list delivered by faceless company directors, with no subject expertise and no democratic legitimacy or accountability (and who may well have been mostly appointed by the previous government).  If the MPC is to have more than two internals –  as the Minister proposed in his announcement on Monday – perhaps it would be reasonable for one additional internal to be appointed by the Governor, in consultation with the Minister (the Bank of England approach).     There is no obvious role –  or likely added value –  from involving the Board in the process at all.  Arguably, involving them in appointments not only lacks democratic legitimacy, but also detracts from their primary role of (on behalf of the public and the Minister) holding appointees to account.

As I’ve suggested previously, if there was still unease about the Minister appointing cronies –  though see the long list above of important positions that ministers do directly appoint to –  I’ve suggested there might be merit in requiring non-binding confirmation hearings before Parliament’s Finance and Expenditure Committee before the Minister’s appointees take up their roles.   This approach has been adopted in the UK.

As I hope I’ve shown, the model I’ve argued for –  and will continue to advocate –  is not some radical politicisation of monetary policymaking, nor even some idiosyncratic Reddell scheme.  It is the normal way we do things in New Zealand.  It is the way most democracies appoint most of their monetary policy decisionmakers. (It was also much the model advocated by one other submitter to the review.)  One might have hoped that the Opposition spokesperson on Finance, herself a former senior minister, would know that.

Then again, one might have hoped that The Treasury and the Independent Expert Advisory Panel (appointed by the Minister to assist with the review of the Reserve Bank Act) might have recognised that.

As part of Monday’s announcement, a variety of papers were (commendably) pro-actively released.  One of those papers was the report of the Independent Expert Advisory Panel.   This is their discussion of appointment processes

The Panel recommends that all MPC members are appointed by the Minister of Finance on the recommendation of the Board. This is the current process for appointing the Governor. As each committee member will hold considerable decision-making powers that impact on the wider public, the Panel considers Ministerial appointments necessary to ensure members have democratic legitimacy. Ministerial appointments are consistent with typical international practice, and the arrangement whereby the Minister appoints on the recommendation of the Board should be retained to ensure merit-based selection of external MPC members, and to limit the risk that policy decisions of the MPC are politically influenced.

They don’t seem to have recognised at all the distinction between the Minister being free to appoint whoever he or she wishes – the typical model abroad, or for other government agencies here –  and a situation where the Minister can appoint only those someone else has nominated.  The former has democratic legitimacy (even if it has other risks), while the latter provides little more than a figleaf.  And, frankly, if I were worried about political influence on decisions, I’d probably be more concerned about the Police Commissioner and judges –  see table above –  but the Panel doesn’t even engage with these parallels.  They appear to have been signed-up members (perhaps only implicitly) to the “central banks are different” school of thought, beloved of central bankers.  Central banks are just one of many important official agencies and, without compelling arguments to the contrary, should be subject to much the same appointment, governance and transparency provisions as those other agencies.  The Panel makes no effort to identify the compelling argument for such a different approach.

Then again, it appears that The Treasury was no better, and their failure is even less excusable, given their role as one of the public sector central agencies.       Treasury’s advice to the Minister of Finance on Stage 1 of the Reserve Bank Act review was released, as was the Regulatory Impact Statement that accompanied the Minister’s Cabinet paper.

In the Treasury advice there is only this

the Treasury does not support the Reserve Bank’s recommendation to have internal MPC members appointed by the Reserve Bank Board on the recommendation of the Governor. This is because it would mean decision-makers are not directly appointed by a democratically elected Minister, as is the typical practice internationally, and also because it would introduce a hierarchy into the committee, with the Governor having an explicit power over other committee members.

Treasury shows no sign at all of having recognised the distinction between the fig-leaf approach (Minister can appoint only people others have nominated) and genuine appointment by a democratically elected Minister.  The latter is the typical practice internationally.  The former is the  –  highly unusual –  model for the Reserve Bank.

Perhaps even more astonishingly –  given that the advice document no doubt had length constraints and was highlighting only points where there was disagreement with the Panel –  the Regulatory Impact Statement also shows no sign of recognising the standard New Zealand model for key appointments, or the typical central banking practice, as a serious option for consideration here.    They claim to have restricted the options they evaluate to those “the Treasury considers most appropriate”, and yet they include no discussion at all of what should really have been a default option –  appointment as most key public sector appointments are done in New Zealand, by the Governor-General on the (unfettered) advice of the Minister of Finance.  There might prove to be compelling reasons to depart in some respects from that model, but not to include it at all seems to border on the negligent.