Debating the Reserve Bank bill

The first reading debate yesterday on the Reserve Bank amendment bill wasn’t exactly Parliament at its finest.    There was plenty of courtesy on display (with one exception, which I’ll come to below) but not much rigour, and not much regard for the importance of building strong and robust, open and transparent, institutions.

The National Party voted against the first reading.  According to the party’s finance spokesperson, Amy Adams, they support the move to establish a statutory Monetary Policy Committee

I want to deal reasonably briefly with the monetary policy committee, because that is an area where we see a lot of merit in what has been proposed. Of course we want to go to select committee and see what comes in, and we may well find issues that need exploring, but, at this stage, I think the monetary policy committee makes good sense.

but they oppose the change to the statutory goal of monetary policy.  It isn’t entirely clear from her speech read together with those of her colleagues whether they oppose the change because it will make no difference, simply reflecting what the Bank already does, or because they think it will make a difference, and they don’t like the difference it might make.    The former seems a very weak ground on which to oppose legislation: it is a good thing, not a bad thing, to ensure that legislation and practice are kept in line (arguably, for example, the Reserve Bank of Australia’s and the Federal Reserve’s legislation should have been updated long ago).

As I noted in yesterday’s post, I don’t much like the formulation of the statutory objective for monetary policy contained in the bill.  That isn’t because I think it will be deeply damaging, just that the government and their advisers haven’t done a very good job in capturing what it is that we should expect from an active discretionary monetary policy.  National Party members were at pains to point out that there is no long-term tradeoff between price stability on the one hand and employment/unemployment on the other hand.  And, of course, that is quite right.  It has been well-known for decades.   But equally well-known –  and for even more decades –  is that there is a relationship in the shorter-term.  It is why we have an active monetary policy.     But there is no sense of that distinction in the drafting the government has brought before Parliament.

Thus, I repeat the suggested wording I included in yesterday’s post

“Monetary policy should aim to keep the rate of unemployment as low as possible, consistent with maintaining stability in the general level of prices over the medium-term.”

or the sort of wording I proposed last year when I was a discussant at the seminar where Labour launched its policy.

To promote and safeguard price stability and the highest degree of employment [or lowest degree of unemployment] that can be achieved by monetary policy

That drew heavily on the language used in the Reserve Bank Act in the 1950s, introduced by a National Party finance minister.

One wants the Reserve Bank to do all it can to keep unemployment low, but only to the point where that is not in conflict with medium-term price stability.  In severe recessions –  mostly what we worry about, since these are human lives that are scarred –  “all it can” is quite a lot.  I don’t think the government has the wording right, and the National Party is right to push back, but if they are as serious as they say about working constructively in the select committee, it should be possible to find better wording which reflects the signicant short-run potential of monetary policy, and the very limited medium to long-term potential to do anything other than maintain price stability (or some similar nominal goal).

The complacency of the National Party probably shouldn’t have surprised me, just coming off nine years in government, but it did.    There were ludicrous claims –  from one backbencher old enough to know better – that for 30 years “the economy has gone incredibly well”, odd suggestions that the inflation target and price stability were themselves in conflict, and more specific ones about about the excellence of the Reserve Bank’s stewardship, even the suggestion that the new Governor will do a “superb job”.  Perhaps they have forgotten already that it is only a few weeks since the Opposition leader had a press statement out criticising the Governor?   Perhaps they are unbothered by past debacles like the MCI, or more recent episodes where the single decisionmaking Governor started lashing out at his critics, while refusing to ever substantively engage on issues?

But perhaps the most disconcerting claim was that there had never been an issue around unemployment and monetary policy in New Zealand.   On the Reserve Bank’s own numbers New Zealand went through seven years of a negative output gap (2008 to 2015), core inflation has been below the target focal point for eight years now, and the unemployment rate was above the Bank’s own estimate of a NAIRU for eight years (only dropping down to around that level in the last year or so).    Now clearly that was a failure in terms of the objectives set for the Bank, even without any sort of explicit employment/unemployment objective; on average monetary policy should have been run with lower real interest rates over much of that period.  But it seems to me that there is a reasonable argument to be made that had the Bank been obliged to, say, use monetary policy to keep the unemployment rate as low as possible, consistent with medium-term price stability, we might have had slightly better outcomes –  notably for those people who were involuntary unemployed, a scarring experience, during that period.

Oddly, the Minister of Finance never makes this argument –  consistent with his refusal ever to disagree with, or criticise, the Governor when he himself was in Opposition.  He should.   The experience of the last decade isn’t greatly to the credit of the Reserve Bank.  Perhaps they mostly had the best of intentions.  But they did poorly, and real people suffered as a result.    A reorientation of the target, focusing a bit more on the short-term stabilisation aspects, without sacrificing medium-term nominal stability, with strong reporting requirements –  and the right people –  could have made some useful difference.   (And, to stress that I’m not going to be tarred as some inflationista, in my ideal world the inflation target itself would be lower than it is.)

I wanted to pick up comments from two other speeches.  The first was from Chloe Swarbrick of the Green Party.  Whatever my differences with the Green Party, they deserve considerable credit for being the first party to call for a statutory Monetary Policy Committee, and historically they have also put a lot of emphasis on securing greater openness and transparency from the Reserve Bank (and used to greatly annoy the Bank by regularly requesting copies of Reserve Bank Board minutes, inadequate as they are).

In the course of her speech yesterday she made this comment

I think this piece of legislation, this bill, is a fantastic starting point for providing greater transparency and accountability for one of our most fundamental institutions.  This is, ultimately, about democracy.

If only that were so.   At very best, in respect of the Monetary Policy Committee, it is a baby-step in the right direction.  More realistically, it is a step away from accountability, and towards more power for unelected people (not even technocrats) with no visibility, no public accountability, and a majority of whom will have been appointed by the previous government.

For all its weaknesses, one feature of the current system is that it is very clear who should be accountable when the Reserve Bank gets it wrong, or even makes a controversial call that reasonable people differ over.  It is the Governor.  Effective accountability isn’t very strong, since the Board is supine, Ministers typically afraid of openly disagreeing with Governors, and market economists often cowed (either by threats from the Governor –  as in the Toplis case –  or more generally by the need to maintain relationships, access, and so on to an entity that regulates their employer).  But responsibility –  credit and blame –  is clear.      The same goes for good monetary policy committee systems, such as those in the UK, the United States, or Sweden  (actually, the same goes for Parliament itself, or even your dysfunctional local council –  there is individual responsibility).   But recall that the Minister of Finance has already said that he wants decisionmaking to be by consensus, no public record of who is dissenting and why, no opportunity for MPC members to articulate their views publicly, and so on.  We’ll have published minutes, which looks on paper like a small step forward, but with the amount gagging the Minister seems to envisage, it is unlikely to be a material win for transparency.    It looks a lot like a fig-leaf.        Not only will accountability be diffused and weakened –  in a quite unnecessary way – but these closed systems weaken any incentive for anyone appointed as an external member to invest heavily in the process. Free-riding, going along with the Governor as much as possible, will offer the best risk-return strategy (after all, challenge the Governor and you could be sacked, or not reappointed, and there is no opportunity for your views –  in an area of huge uncertainty –  to get a public airing.

And what of democracy?   The Governor was appointed by the Board –  oh, the Minister took the name to Cabinet, but he could only take the name proposed by the Board (or tell them to go away and come back with another name of their choosing.   The Board –  when the Orr appointment was made –  had all been appointed by the previous government (clearly out of sympathy with any sort of employment focus).  The current Deputy Governor was appointed by the previous Governor –  him of silencing critics, undershooting inflation etc –  and his supine board.  Both these appointees will be members of the new MPC.   The one or two new internal appointees will be appointed by the Minister, but only on the recommendation of the Board, who in turn will be guided by the Governor.    As I noted yesterday, the external appointees will also be chosen by the Board and the Governor (and recall that the Governor is on the Board), subject to an effective gubernatorial veto.  These appointments won’t be made until next year, but even by early next year, a majority of the Board members –  shocking track record, no expertise in the field, no accountability or scrutiny at all – will have been appointed by the previous government.

That isn’t democracy.  You couldn’t even call it rule by technocrats or philosopher kings, since the Board members are themselves just a bunch of company directors, academics etc, with no expertise, no legitimacy, no mandate.  And yet the Labour Party thinks –  apparently with support from both National and the Greens –  that these people should decide who makes monetary policy, the principal lever of short-term stabilisation policy.  I believe in the importance of democracy.   This isn’t it.

It is simply normal practice to have major appointments made directly by the relevant minister (or Cabinet, or on advice by the Governor-General).  It is strikingly abnormal to have appointments to major discretionary roles –  in central banks, or elsewhere in government –  so much out of the hands of elected politicians.  It would be a material step backwards, especially given the weakened accountability the government is proposing.  The National Party spokesperson is apparently worried that external members might be political hacks or under political pressure.  On the one hand, the Governor (at present) is probably much more susceptible to pressure, since he has lots of other battles to fight, including around his financial stability responsibilities. But perhaps more importantly, the dominance of politically-appointed decisionmakers is the norm in central banks abroad.  Those countries manage macroeconomic stability just fine.  It is also the norm in New Zealand –  I devoted a whole post to go through other roles.  Politicians appoint the Police Commissioner, members of the Commerce Commission, the Parole Board, the Governor-General herself, and all individual judges.    There is no good reason why appointments to key, powerful, Reserve Bank roles should be different: ministers should appoint directly, and thus be fully accountable for, people who wield such power on our behalf.

The final contribution to the debate that I wanted to comment on was that of the ACT Party, David Seymour.   Whenever I’m tempted to consider supporting ACT, all I need do is listen to one of Seymour’s speeches.  Here are some lines from his speech yesterday.

Thank you, Madam Assistant Speaker. I rise, on behalf of the ACT Party, in opposition to this bill—this piece of ministerial vanity and economic vandalism.


Could it be that this is not just dumb policy; this is actually evil policy. This is an erosion of the independence of the central bank. This is the current Government attempting to take control of the printing presses—not quite Venezuelan style; just in a sort of smaller capacity than they’re used to. It is a way that this Government will be able to influence the supply of money, and I bet this House that, when this is place, and when their committee is making the decisions, we will no longer have independent monetary policy; we will have a pattern that will be detectable in a few electoral cycles, which will tell us that the money supplied goes up and inflation goes up and the economic sugar hit comes out right before an election, and then, once the election is gone, they take the punchbowl away and the New Zealanders get the economic instability that the Reserve Bank Act was designed to take away.

This is a black letter day in New Zealand lawmaking. The Minister either has no idea what he’s doing or he has every idea what he’s doing.

Reasonable people can debate the merits of altering the statutory objective.  Reasonable people can debate the design of a committee system.  Perhaps reasonable people can even debate whether a committee is a good idea, although we use them in almost every other aspect of public (and private –  company boards, tennis club committees, church synods etc) life.  But a contribution like this says more about the speaker than it does about the issues.    And, rightly or wrongly, there is just no sign in market pricing (eg gaps between conventional and indexed bonds) that the market shares Mr Seymour’s fears.

One hopes that Finance and Expenditure Committee deliberations will prove constructive, and that the government will be open to amendments.  Given that the chair and deputy chair of the committee are both part of the government (both holding Under-Secretary positions), I’m not that optimistic, but we’ll see.  I did notice one National Party speaker yesterday praising the committee chair (Michael Wood), and Wood’s speech in the debate was probably the best of them, so time will tell.

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