A mis-step by the new Governor

Seventeen years ago, in August 2001, then Reserve Bank Governor, Don Brash gave a speech to something called the Knowledge Wave conference, sponsored by Auckland university.  The speech had the title Faster growth? If we want it (at the link  for some reason it says the speech was given by Alan Bollard, who was Secretary to the Treasury at the time, but it was certainly a Brash effort –  here is the link to the version on his website ).   The speech drew a great deal of flak.  It was two years into the term of the Labour-Alliance government, and it had nothing much to do with monetary policy or financial stability (the Bank’s responsibilities), and instead offered the Governor’s views on what could or should be done to lift New Zealand’s economic performance.

According to the Governor, our culture was a big part of the problem

we seem to have some deeply-engrained cultural characteristics which are not conducive to rapid growth – surprisingly widespread disdain for commercial success, no strong passion for education, and a tendency to look for immediate gratification (as reflected in our very low savings rate and strong interest in leisure) – and it usually takes years, and perhaps generations, to change such cultural characteristics.

and the welfare system

does the present welfare system – with largely unrestricted access to benefits of indefinite duration, and with a very high effective marginal tax rate for those moving from dependence on such benefits into paid employment – provide appropriate incentives to acquire education and skills and to find employment?

we will not achieve a radical improvement in our economic growth rate while we have to provide income support to more than 350,000 people of working age – 60,000 more than when unemployment reached its post-World-War-II peak in the early nineties – to say nothing of the 450,000 people who derive most of their income from New Zealand Superannuation.


Could we, for example, drop all benefits to the able-bodied and scrap the statutory minimum wage, so that pay rates could fall to the point where the labour market fully clears, but simultaneously introduce a form of negative income tax to sustain total incomes at a socially-acceptable level? Could we introduce some kind of life-time limit on the period during which an able-bodied individual could claim benefits from the state? Could we, perhaps, gradually raise the age at which people become eligible for New Zealand Superannuation, reflecting the gradual increase in life expectancy and improved health among the elderly? One of my colleagues has suggested the idea of abolishing the unemployment benefit but introducing some kind of “employer of last resort” system, perhaps run by local authorities with support from central government, under which every local authority would be required to offer daily employment to anybody and everybody who asked for it.

and our schools

It must be a source of grave concern that so many of the people coming out of our high schools have only the most rudimentary idea of how to write grammatical English; and that while Singapore, South Korea, Taiwan, and Hong Kong occupied the top four places for mathematics in the Third International Maths and Science Study, New Zealand ranked only 21st (out of the 38 countries in the study). It can not be good for our economic growth, or for the employment prospects of many of our young people, that, according to an OECD report released in April 1998, nearly half of the workforce in New Zealand can not read well enough to work effectively in the modern economy. It must be a matter for particular concern that 70 per cent of Maori New Zealanders, and about three-quarters of Pacific Island New Zealanders, are functioning “below the level of competence in literacy required to effectively meet the demands of everyday life”.

and excessive regulation

Businesses saw the biggest single problem as the way in which the Resource Management Act was being implemented, and described dealing with that legislation as being “cumbersome, costly and complex”. It should not require two years to get all the approvals needed to set up an early child-care facility catering for only 30 children, or ministerial intervention to cut through the red-tape involved in setting up a boat-building yard. Most of us know similar horror stories.

and our tax system

Another matter relevant to how we might encourage more investment in physical capital is the tax regime. Do we need a substantial change in the tax structure to encourage investment in New Zealand by New Zealanders, by immigrants, and by foreign companies? And if so, what might that change look like? This isn’t the place to go into detail, but it would probably involve a significant reduction in the corporate tax rate (it is disturbing that New Zealand’s corporate tax rate is now the highest in the Asian region). The rate of company tax is rarely the only factor determining the location of a new investment, and indeed it is not often even the dominant factor. But it is a relevant factor, and is one of the issues to look at if we are serious about encouraging more investment in New Zealand.

There were some interesting ideas in the speech. I probably agreed with quite a few of them (I was one of those who gave comments on the draft text, which was even more radical and provocative).  It brought to mind comments about ‘save it for your  retirement”, or “stand for Parliament and make your case” –  which of course Don did a few months later.  But whether you agreed with him or not, whether the government of the day agreed with him or not, it just wasn’t appropriate for an incumbent Reserve Bank Governor.

The Governor is entrusted with a great deal of discretionary power in a limited number of areas.  Citizens need to be confident that the Governor is operating in the public interest, and not to come to suspect the Governor or the Bank of using a very powerful position –  and the pulpit it provides –  to advance personal agendas for policy in other areas.  Same goes for all sorts of key officeholders –  the Commissioner of Police, the Chief Justice or whoever.

That isn’t a novel perspective.  A few years ago Willem Buiter –  chief economist of Citibank and formerly an academic and external member of the Bank of England Monetary Policy Committee –  wrote a useful paper in which(from p286) he urged central bankers to “stick to their knitting”.

The notion that central banks should focus exclusively on their mandates and not be active participants in wider public policy debates, let alone be active players in the negotiations and bargaining processes that produce the political compromises that will help shape the economic, social and political evolution of our societies is, I believe, sound. Alan Blinder described this need for modesty and restraint for central bankers as sticking to their knitting.

As Buiter notes, central banks have often not followed that advice, but

Although always inappropriate, central banks straying into policy debates on
matters outside their mandates and competence is less of a concern when there is little central bank independence and the central bank functions mainly as the liquid arm of the Treasury. It becomes a matter of grave concern when central banks have a material degree of operational independence (and sometimes of target independence also).

Of one example of such straying he writes

Chairman Bernanke may be right or wrong about the usefulness of this kind of fiscal policy package at the time (for what it is worth, I believe he was largely right), but it is an indictment of the American political system that we have the head of the central bank telling members of Congress how they ought to conduct fiscal policy. Fiscal policy is not part of the Fed’s mandate. Nor is it part of the core competencies of the Chairman of the Federal Reserve Board to make fiscal policy recommendations for the US federal government.

And of another

Draghi’s recent address at the Jackson Hole Conference organised by the Federal Reserve Bank of Kansas demonstrates how broad the range of economic issues is on which the President of the ECB feels comfortable to lecture, some might say badger, the political leadership of the EA (Draghi (2014)). Regardless of the economic merits of Draghinomics, there is something worrying, from a constitutional/legal/political/legitimacy perspective, if unelected central bank technocrats become key movers and shakers in the design and implementation of reforms and policies in areas well beyond their mandate and competence.

All of which came to mind when I listened this morning to the interview with new Reserve Bank Governor, Adrian Orr, undertaken yesterday by Radio New Zealand’s Kathryn Ryan.   The interview went for half an hour, and had all of Orr’s accustomed fluency (and not terribly searching questions), but probably half of it was on matters that had really no connection at all to the statutory responsibilities of the Reserve Bank.

He talked at length about climate change and what governments and firms did or didn’t (in his view) have to do.  Some of this no doubt built off his former role with the New Zealand Superannuation Fund –  including the (untransparent) shift in the portfolio away from carbon-intensive assets –  but he is now the Governor of the Reserve Bank, which  has no responsibility for, and isn’t particularly affected by, such matters.  And these are all highly politicised issues.  “The transition needs to start today” he insisted: many people might agree, while others will reasonably take a quite different view, valuing the option of waiting.   The developed world had “gorged on fossil fuel” for 300 years, and now we needed to offer resources to the emerging world.  Probably conventional wisdom at a Green Party rally, but this is from the Governor of the Reserve Bank.

The Governor urged everyone – firms, societies, banks and (presumably) governments to “think and act longer-term”, lamenting the failure of society to take heed of his strictures (and offering no evidence to support his case).   When was the Governor gifted foresight beyond that available to mere mortals? Most humans find the future uncertain, and the far future very much so –  just check out prognostications and concerns from 50 years ago –  and have to plan accordingly.

He seemed to lament the fact that Western societies were growing older –  surely one of the great successes of economic development –  and then declared that it was “fair enough” that the “have-nots” should want structural change now.  How can this possibly be appropriate for the Governor of the Reserve Bank?  (Even if the government of the day happened to agree with him, he is (a) an independent actor, and (b) may well still be in office when the other side of politics once again takes over.)

And, putting a stake in the ground in a hugely contentious issue he declared himself a “huge believer that the country has underinvested in infrastructure”, claimed that our mindset around infrastructure finance was 30 years out of date, and lamented our reluctance to embrace PPPs (while addressing none of the risks of downsides of such structures).

Returning to the Green Party type of narrative, the Governor declared that in his travels he found that the world was looking to New Zealand to show leadership in transitioning to “sustainable agriculture”, declaring how “fantastic” it was when individual farmers had made such a shift.

You might agree with him or some, all, or none of that (I’m in the “none” category myself) but that really isn’t the point.   It would have been quite as inappropriate if he’d been making the opposite points, or repeating the sorts of lines Don Brash was running in 2001 –  championing large company tax cuts, or vocally opposing R&D tax credits.   He has simply gone miles off reservation, nailing his colours to political masts that will make it very hard for him to gain respect as someone operating as an non-political powerful regulator (for now, until the Act changes, the single most powerful unelected official in New Zealand). Perhaps it was a rookie error, and recognising his mistake he can pull his head in, and concentrate on the tasks Parliament has given him, and the need –  acknowledged in his Stuff interview yesterday –  to markedly lift the Bank’s own game.  If not –  if it was conscious and deliberate –  it was a dangerous lurch in the direction of politicising one of the more important offices in our system of government.

I’m not suggesting central banks should never comment on other areas of policy, but they need to be very modest and self-effacing in doing so, and need to tie their comments, and the issues, chosen, very carefully to the Bank’s own areas of responsibilities.  It isn’t, for example in my view the Bank’s place to advocate land use liberalisation, but it is quite appropriate for them to highlight the way that policy choices in that area affect house and land prices, and thus influence the risks on bank balance sheets.  It generally isn’t appropriate for the Bank to take a view on the merits, or otherwise, of particular fiscal or structural policies. But at times the Bank will need to point out the implications of such choices for, say, the mix of monetary conditions.   We should value a good independent central bank, but the legitimacy of the institution –  and its ability to withstand threats to that independence –  will be compromised if Governors play politicians or independent policy and economic commentators.

(Of the bits of the interview dealing with Reserve Bank issues, I didn’t have much to disagree with –  although he seemed far too complacent about the ability of monetary policy globally to cope with the next recession.  There was one proposal that sounded eminently sensible, if challenging to operationalise.  Remarkably the interviewer asked him almost nothing about lifting the Bank’s own game, or the results of that New Zealand Initiative survey on the Bank’s conduct as regulator and supervisor.)

21 thoughts on “A mis-step by the new Governor

  1. Michael – just as an aside

    My influencer for many years was Glenn Stevens of the RBA who believed Monetary Policy (central bank) and Fiscal Policy (government) are two opposing forces that should strive to be in equilibrium

    I interpret that to mean the RB governor has to across all the moving parts of fiscal policy

    And Glenn wasn’t backward in coming forward about it publicly, sometimes threatening with what he would do if the government was profligate


    • Glenn was a great deal more restrained around structural policy than either Don Brash or Adrian Orr in my two examples. In fact, only this morning, someone else was citing him to me as an example of how to achieve appropriate balance. Re fiscal policy if a govt proposes to have a big increase in deficit (reduction in surplus) then all else equal that will lead a central bank to advise/counsel that a tighter monetary policy will follow. But, in all but the most exceptional circumstances, it isn’t for the central bank Governor to take a view on the appropriate stance of fiscal policy (let alone the components – at the RB our line was always that, for example, we never took a view on the apropriate level of tax or spending).


  2. Don Brash could not help himself. Rightly or wrongly he had strong opinions on all matters economic and political and made them known. While I agree with your theory on sticking to the knitting I don’t think Don did too much harm while at the bank – in fact he helped keep steel in several spines when there was evidence of rubberiness setting in.


    • Where Don did do damage was in his departure – leaving as Governor mid-term to go straight into politics was inappropriate (in my view) and enraged the then PM. it also reinforced the govt’s suspicions about the entire Bank (senior mgmt). Beyond that it is hard to assess any damage: perhaps NZF and the Alliance wouldn’t have supported the monetary policty framework anyway, but it might have been a bit easier to command some confidence if there wasn’t a sense that the Governor was from one particular – objectionable to them – part of the political spectrum, and continuing to use the office to advocate on such issues.


      • The damage to thr NZ economy was mainly in setting a hawkish philosophy within the RBNZ which has kept our interest rates uncompetitive. Without the depth of our capital markets having burnt our investing public and sending our top entrepreneurs broke. Nz capital markets remain rather shallow making borrowing the only source of serious funding.


  3. “The developed world had “gorged on fossil fuel” for 300 years …..”

    That oil is a fossil fuel is merely a very clever construct of John D. Rockefeller, founder of Standard Oil (since morphed into Exxon Mobil) in one of his many attempts to convince the public that his product was so scarce, and would eventually run out, that it should command very high prices.

    Oil is not a ‘fossil fuel’. Rather, it is a naturally-occurring product of our planet (and most likely other planets as well), of the reaction among calcium carbonate, ferrous oxide (two of the most abundant compounds of our planet) and superheated steam, occurring at a pressure of 5 MPa and a temperature of 1500 degrees Celsius (the conditions naturally occurring about 100 km below us as I write).

    As such, oil will not ‘run out’ until our planet is near death when it becomes, in millions of years’ time, a cold rock.

    Further, there is not one piece of hard physical evidence that the physically measured levels of increasing concentrations of carbon dioxide in our planet’s atmosphere have had any statistically significant effect on global temperatures. So much so, that the ‘BS’ artists (for indeed they cannot truthfully claim to be scientists — as most people understand the word — do practise an art form) have needed to change the name of the so-called phenomenon from Anthropogenic Global Warming to ‘Climate Change”. They have no hard physical evidence – all they have is their own man-made computer models — and you, Michael, know as well as I do the old adage of “garbage in, garbage out”!

    Two of my mantras as a professional forensic engineer are that “The world runs on bullshit” and that “Incompetence is everywhere one looks”!

    Don Brash’s major failing as a macro-economist, let alone as governor of the RBNZ, is that he believed, and still does, despite my many attempts to educate him, the ‘bullshit’ that he was taught at university, that individual banks do not create money ex nihilo, but lend out their depositors’ savings! You, Michael, know full well that this is ‘BS’, and that whenever a bank grants a loan, it creates new ‘money’, as a debt owed to it, the bank, on which it charges interest.

    On the RBNZ’s website, under “About Us”, it states:

    “The Reserve Bank of New Zealand is New Zealand’s central bank. We promote a sound and dynamic monetary and financial system. We work towards our purpose, vision and values by

    Operating monetary policy to achieve and maintain price stability
    Assisting the functioning of a sound and efficient financial system
    Meeting the currency needs of the public
    Overseeing and operating effective payments systems
    Providing effective support services to the Bank”

    With regard to price stability, the RBNZ has been, IMHO, an abject failure, in that the CPI has increased since its founding in 1934 or thereabouts by a factor of approximately 70 — that is, what cost one pound (two dollars) in 1934 now costs approximately 140 dollars.

    Michael, you also know, I suspect, that the RBNZ has never in its entire existence, since 1934 or thereabouts, conducted any research to determine whether or not the present system of bank-created ‘debt-money’ is more ‘efficient’ than its most viable alternative — a Sovereign Money banking and monetary system, which the above excerpt shows that it is required to do under its mandate from the government.

    To the best of my knowledge, neither the RBNZ nor the government has EVER DEFINED how the NUMBERS (and I write this as a professional engineer, members of whose profession would NEVER attempt to measure the EFFICIENCY of ANYTHING unless it could be determined by MEASURABLE and CERTIFIABLE NUMBERS) were to be determined.

    With the greatest of respect, Michael, I look forward to reading your considered response, and of course, those of my fellow followers of your excellent blog, Croaking Cassandra!

    Keep up your good work – I’m absolutely sure that I’m not alone in valuing your efforts highly, and appreciating them greatly!


    • Three issues.

      1. Whether oil and gas are created by is produced a reaction between calcium carbonate and ferrous oxide or from decaying fossil vegetation is irrelevant. Are we using it dramatically faster than it is being replenished?

      2. I agree with your lack of faith in computer models. Whether climate change is caused by a greenhouse effect resulting from human activity or a random event that would occur anyway is irrelevant to the deep ocean getting warmer and sea levels rising. It does seem reasonable to suspect the measured melting of ice caps and glaciers will continue. It is a reasonable deduction given our knowledge of how climate change has occurred quickly in the past and our knowledge of various feedback mechanisms (sunlight reflected from sea ice, methane released from melting permafrost, etc) to be concerned that things might be about to get worse very fast. So our government ought to be planning for a dramatic sea rise just on the basis of probability.
      I assume your point is that since climate change to date has caused little trouble and that you believe it is not caused by burning oil then the government should not have stopped exploration. Surely our government should be taking the opinion of our scientists; no to do so would be equivalent to replacing our trained doctors with homeopaths in all hospitals. So since politicians have to respond to the scientific consensus then it is a moral issue as to whether we do nothing and just leave it to the rest of the world. That is an interesting debate.
      I strongly recommend Jim Flynn’s “No Place to Hide: Climate Change – A short introduction for New Zealanders”. He gives you every opportunity for readers to disagree and he doesn’t flinch from the politics. Best of all you can read it in a couple of hours.
      Also just started reading William Rosen’s ‘The third Horseman’ which describes how ‘natural’ climate change caused the great famine of the 14th century. Very well written.

      3. What is money? Despite reading this blogsite and others for the last year it remains a concept I can’t grasp. Just a universal con trick? Hopefully the supermarket will continue to exchange food for green paper.


      • The direction of money as a medium of exchange appear to be headed in the direction of block chain technology. Bitcoin being the first publicly traded and that has been followed up with a whole bunch of others. Banks or governments in the future may not be the middleman of these transactions.

        Money is just very simply a medium of exchange. It’s value is based on trust between users. PJM’s narrow focus on the 2 types of currency is pretty much out of date with the future direction of money.

        Liked by 1 person

      • I have been participating in the launch of a new community currency called Empowr Coins. It launched yesterday. This currency ties itself to Ethereum coins to establish a exchange value through a third party Token Exchange store called Token Store.

        Initially started as a community dollars exchanged 1 to 1 with the USD through PayPal with currently 800,000 members. There was a lot of fanfare that the values would launch and the value soar. It did just that yesterday with a 145% increase in value against the USD. But this morning the value has dropped to 58% of the USD. The reserve currency continues to be the USD even for all these new blockchain currency.


    • Peter

      I won’t attempt a substantive response today, but just recall that Don Brash was Governor when I (then one of his senior managers) did this speech
      https://www.rbnz.govt.nz/research-and-publications/speeches/2001/speech2001-08-27 in which I observed

      “But to turn to the substance of the matter. It is suggested that there is something very wrong about the fact that most of our money supply is bank-created. Clearly, I disagree.
      Note that I’m not disagreeing that “money” is bank-created: a bank loan does typically leads to a new bank deposit, and those bank deposits do make up the bulk of our statistical measures of the “money supply”. It isn’t always so – if I buy your house, my mortgage will probably go up and yours will presumably go down, but in aggregate it is of course true. If there was less borrowing from banks, our measures of the money supply would be lower.
      But my sense is that monetary reformers attach far too much importance to money and measures of it – they certainly put far more weight on it than we central bankers do. ”

      My sense is that your differences with Don on how the current system works are more terminological/semantic than substantive (altho recognising a real difference in that you would prefer a different system altogether)


      • …hmmm; with hindsight, might have been a good idea for the central banks to have focused more on quantities pre crisis: that bank credit/inside money grew rapidly indicated the marginal borrower was likely of declining quality..


  4. Reblogged this on The Inquiring Mind and commented:
    Excellent post. I was so pleased you commented on the interview. It is of concern that we maybe/are witnessing the overt politicisation of the Governor’s role.


  5. Great post Michael!

    Re the oil/climate change debate whatever ones view, perhaps the focus should be on the costs and effectiveness of the the solutions proposed – and on whom those costs fall. For instance Auckland cars produce 3% of NZ’s GHG emissions – about the same as 2000 dairy farms. So policies to reduce car use (urban containment, fuel taxes, Central Rail Loop, bus lanes etc) by half, could be met instead by buying 1000 farms and replanting with forest.

    But policies these days are not about results – or even caring about who is effected (mostly the poor) – but about what sounds right – and the Governors interview seems to fall into the latter category sadly.


    • Auckland’s fuel tax is more than likely to drive motorists into the use of electric cars and public transportation as the cost of petrol rises which means that Auckland’s contribution to GHG will decrease over time.


      • GGS – statistically insignificant still since the total contribution is only 3%. And at what cost to poorer people in Auckland?
        Make the chardonnay socialists in their million dollar houses feel better about themselves though – so I suppose it has some positive effect


  6. Maybe I have to listen to the interview again, but I thought it was rather a good one – compared with many of the media beat-ups about this and that with which we seem to be currently afflicted. And refreshing to hear interesting perspectives about the need for coherent approaches to our strategic directions, and the risks associated with longer term structural adjustments in several dimensions. I think those things are very relevant to the kind of central banking art that I think has been rather lost with our current “management by objectives” approach. And we don’t hear much, if at all, on these matters from our Ministers or their economic advisers or other reputable local commentators.

    No, there was not much about the knitting. But I find things like the role and composition of an MPC a good deal less interesting. The reforms on the table are about to increase the cost of monetary policy decisionmaking – already arguably too high – for no likely benefit (pace DJA, I haven’t read your piece)

    The knitting with regard to regulation is a bit trickier, and I won’t go there now

    But I think the real point of this post is that the Governor should actually be encouraged to engage with the big picture issues provided he does so in a way that is not in conflict with the knitting or seriously trespasses on the turf of others. There is a very serious need for us as a nation to upgrade our analysis of our choices and options for the future across all our activities – tourism, agriculture, environment, welfare etc – and put all of these into a coherent package and into the intergenerational framework stressed by Adrian. I hope that he doesn’t entirely stick to his knitting, because there is a big void to fill….

    And I still remember the days when the Reserve Bank annual report made the front pages because it was almost the only credible public economic commentary available…


    • Thanks for the comments Peter.

      When you say that you thought the interview was “rather a good one”, I’d agree entirely if Adrian were
      (a) a private citizen
      (b) head of a think tank,
      (c) an academic,
      (d) an independent commentator,
      (e) a member of Parliament, or even
      (f) a retired central bank Governor or Secretary to the Treasury

      But instead he holds an office in which he exercises enormous power, and where general public confidence that he isn’t pursuing a whole bunch of personal agendas, and perhaps engaging in “implicit dealmaking” with the government matters quite a lot. Comments of the sort he made in that interview – and to a lesser extent on Q&A yesterday – risk severely eroding that confidence. In a way it is even more worrying when a Governor is touting lines favoured by the govt of the day (as Don did in the late 80s and 90s, altho not by 2001) than when is he running lines the govt doesn’t like. In the current context, there are lots of turf battes for the Governor to fight this year, and it is hard to avoid a suspicion that the Governor thinks his chances of winning those are enhanced by appearing to this particular govt as “one of us”. I’m not suggesting he is saying anything other than what he believes, but it is inappropriate for the Governor to be saying them – even if his remarks were incredibly insightful – as it would for the Police COmmissioner, the Chief Justice, the Ombudsman, the Parliamentary Commisioner for the Environment.

      On your final point, as Willem Buiter notes explicitly, central banks ranging widely matters much less when they don’t have operational independence than when they do.

      (And I agree that details of institutional redesign wouldn’t command much public interest – they are far less important than many/most other economic issues. But those issues aren’t the responsibility of the RB (and as it happens the RB hasn’t done its knitting that well in recent years – whether on mon pol, regulatiom/supervision, or communications/accountability.)


  7. Isn’t this just the new Gov, being asked to do an interview, with the inability to discuss a forecasting round before it’s published, and not being at the helm long enough to know the details of some of the data (having been away for many years from economics directly)?


    • I guess that is the charitable interpretation. Many of these issues aren’t ones the Governor should be commenting at all, and if you aren’t sure if your numbers you should talk more generally.

      There were also plenty of things he could have talked about, including lift the Bank’s performance, esp in the regulatory/supervisory area.

      He deserves credit for fronting up – it is very refreshing change – but it would be better to start authoritatively, and “sticking to the knitting”. Plenty of time to spreads wings a little more – if one must – when home territory is humming along excellently.


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