Month: September 2018

What is the Reserve Bank’s monetary policy?

Michael Reddell Adrian Orr, Monetary policy, Uncategorized

I’ve been banging on a bit about how the new(ish) Reserve Bank Governor has been enthusiastically talking about everything under the sun (mostly modish left-wing causes) in speeches and interviews, but six months into his term of office we still haven’t had a considered speech from him on any of the things he is, by law, exclusively responsible for, notably monetary policy and banking and insurance prudential regulation.  It is quite an extraordinary omission.  It is almost as if he isn’t overly interested in monetary policy and financial stability, which can be pretty dry but need to be done well and accounted for rigorously, preferring to use the pulpit his office provides to pursue personal political and policy agendas.   The appearance of that is bad enough, let alone the reality.  And then, of course, there are his meanders after the forest gods.

I stumbled yesterday on an example of what is lacking around monetary policy when a reader in the financial markets pointed out this line in a Bloomberg interview done by one of Orr’s senior managers, chief economist John McDermott, just after the last Monetary Policy Statement in August.

In current circumstances, the bank would need to see core inflation above 2 percent before it considered raising rates, he said.

I’d seen the interview when it was first published, but somehow overlooked this line.  As far as I’m aware, it didn’t get much –  or any –  attention anywhere else either, although who knows whether in the private briefings the Bank provides to select market economists they may have explained themselves.

As it stands, it looks like –  but perhaps isn’t – quite a change in the way the Bank thinks about monetary policy, but with no explanation and no elaboration.

Under the previous Governor –  on whose watch, and in agreement with the Minister, the 2 per cent target midpoint was explicitly made the focus of monetary policy –  the Bank’s approach would have been described as something like the following: adjust the OCR so that, allowing for the lags, a couple of years ahead (core) inflation would be around 2 per cent.

It was a forecast-based approach, and of course forecasts are often wrong.  Over the last decades, forecast errors were mostly one-sided, so that core inflation ended up consistently undershooting the target midpoint. The approach recognised that the midpoint could never be achieved with 100 per cent certainty, but envisaged departures from it arising only by (less or more) inevitable accident.

The approach the chief economist is reported as articulating in that interview seems quite different on two counts:

  • it isn’t forecast-based (they would need to actually see core inflation above 2 per cent before moving –  bearing in mind that the lags from policy to core inflation outcomes are probably 18-24 months), and
  • they would be relaxed about seeing inflation settle above the target midpoint, and not just by accident.

If that is the Bank’s new approach to policy, I would have considerable sympathy with it  (although many probably wouldn’t).   I’ve argued for some time that, given the limited scope to cut the OCR in the next recession, it would have been desirable to get inflation up, perhaps even a bit beyond 2 per cent, and with it inflation expectations.  That, in turn, would have supported higher nominal interest rates, and provided more room to move in the next serious downturn.   Given the evident difficulties of forecasting, I’ve also argued that for the time being the Bank should put relatively greater weight on what they can see now –  actual core inflation outcomes –  not on quite distant forecasts.  Doing so would seem a rational response to the evident uncertainty about the model (how the economy and inflation process are working).

(I’d have “considerable sympathy” if this were the new policy reaction function, but would have even more sympathy if such an approach had been reflected in the Policy Targets Agreement, ie with explicit ministerial support.)

But is this really the Bank’s policy approach?  We don’t know.  McDermott seems set to become a member of the new statutory Monetary Policy Committee next year, but for now he is just an adviser to the Governor, and only the Governor’s view finally matters.   There was no hint of such a policy approach in the last Monetary Policy Statement, or in the OCR announcement this week.  And, of course, the Governor talks about everything under the sun, but has provided no sustained analysis of how he thinks about the monetary policy process.

We don’t know, and that knowledge gap matters to anyone trying to make sense of how the Reserve Bank might respond to incoming information.    If core inflation now is at, say, 1.7 per cent rising gradually on current policy to 2 per cent over the next 18 to 24 months,  any upside economic surprise should be expected to take the Bank close to tightening, on the old forecast-based approach focused on the 2 per cent midpoint.   But if it takes actual core inflation to be above 2 per cent before they think about moving, near-term surprises would have to be very large –  with direct and immediate core inflation implications –  to make much difference at all to policy judgements.

If the new Governor has made such a change of approach, he’d have my full support – for the little that matters.   But whatever his actual approach, we are well overdue receiving a proper explanation from him as to how he –  in whom so much power is vested by law –  is thinking about monetary policy and the appropriate reaction function.

As part of that, we are overdue a good sustained explanation about how he is thinking about handling, and preparing for, the next serious downturn (beyond rather complacent, even glib, answers about there being lots of tools at his disposal).

It might all interest the Governor less than climate change, the (alleged) failures of capitalism, or idly lecturing people on the insufficiently long-term perspective they take to this, that or the other issues.   But it is the job he has taken on, and the Bank has liked to boast (not very credibly or convincingly) about how transparent it is.  A clear statement about how he thinks about monetary policy, not just as this or that particular OCR review, but in general, and in the context of the longer-term risks around the next downturn, would actually rather nicely fit with his emphasis on more long-term thinking.  Or is that lecture just for other people?

Fiscal councils and state-funding of parties

Michael Reddell Fiscal policy

I’ve been engrossed in the Kavanaugh hearings, so just something short today.

A few weeks ago the government released a consultative document prepared by The Treasury on the possibility of establishing an independent fiscal institution.   There is quite a lot of useful background information in the document, although what is lacking at this stage is a clear specific proposal.

The creation of such an institution was part of the Labour-Greens budget responsibility pact announced before the election.  Broadly speaking, I thought it had the makings of a step in the right direction, but whether it would be so or not would depend greatly on the specifics of how the institution was set up, what it was made responsible for, and (to a considerable extent) the early key appointees.

I was generally in favour of a small institution that could provide some independent analysis and commentary on fiscal policy, fiscal rules, and so on.  Many OECD countries have such institutions.  I’d go a little further and suggest that in a New Zealand context such a body could be made more useful, and with a bit more critical mass, if the responsibilities were broadened to include independent analysis and commentary on other aspects of macroeconomic policy, notably monetary policy and financial system regulation.

My unease was the about the push, initiated by the Green Party, for the independent fiscal institution to take on a taxpayer-funded role of costing political parties’ proposed policies and promises.    That aspect appears quite prominently in the consultative document.  I remain unconvinced that there is a gap in the market.   I’m also unconvinced that a small body would be able to maintain a critical mass of the sort of detailed expertise required to credibly cost and evaluate policies proposed by political parties, across the entire spectrum of policy, on the off chance that one particular party might want some, perhaps quite detailed, policy evaluated.  And I’m also uneasy about the policy and political (not necessarily partisan ones) biases of the sort of bureaucrats who would inhabit such agencies (check out past Treasury advice around capital gains taxes for example), and the creation of any sort of expectation that these people should be charged with costing and evaluating party promises.

But there is also an issue of mindsets.  Technocrats put a great deal of focus on precise costings and details, but elections are rarely about those details, and it isn’t obvious that they should be.  Elections are contests of ideology, personality, competence or otherwise, and only at the margins are precise numbers likely to be particularly important.  That is even more so in an MMP environment, where campaign promises and policies are no more than opening bids, and governments typically have to be cobbled together –  and policy details haggled over –  after the votes are in.    Sometimes parties find it in their interests to hire expert advisers to evaluate or cost their policies, and the political and commentary process evaluates and challenges what they produce in response.  Other times parties don’t.  People make their choices, and it isn’t clear they put that much weight on specific costings, no matter who they are done by.  Politics is a competitive and adversarial process, and I’m not sure there is much role for taxpayer-funded technocrats.

The idea of a policy costings unit looks like some mix of (a) trying to intrude technocrats into the process, and more concerningly (b), a backdoor route to have the state fund political parties.   Resources that would be spent by the costings unit, at the request of an individual political party, would be resources that party would not have to find for itself.  if that isn’t backdoor partial state funding of political parties –  potentially on quite a large scale –  I’m not sure what is.

Among the interesting charts in the report is this one, drawing on OECD databases.

fisc council chart

It is a very useful chart, outlining what various independent fiscal agencies do. But what I found most interesting was the eight countries to the right of the chart where the fiscal institution does policy costings, and the countries that aren’t in that grouping.

Every one of the countries where the fiscal entity does policy costing of some sort (in the US case, not for political parties in the run-up to a campaign, but the US system is very different overall) is that all of them are large by our standards.  Even the Netherlands has more than three times our population and Australia has five times our population (and more than that multiple of our GDP).  Some of those countries have quite large staffs for their fiscal institutions –  and they can afford it.

By contrast, not one of the small OECD countries with an independent fiscal institution is described by The Treasury as doing policy costings for political parties.  That seems pretty telling, and is unlikely –  across a variety of different political systems –  to be just a matter of chance.

The consultative document doesn’t give us a sense of resource requirements, but there aren’t likely to be big economies of scale in this game.  A Council of, say, 3 and perhaps 10 staff could do the fiscal (and macro) monitoring.  That looks to be the sort of scale quite common in the rest of the OECD.  Making a serious job of policy costing looks as though it could take multiples of that level of resources.   For what?

I might come back to the document if/when I make a submission next month, but in the meantime I’d urge a rethink, and encourage opposition parties not to fall for the siren song of more resources potentially becoming available to them.

More on Orr

Michael Reddell Adrian Orr, Reserve Bank, Uncategorized

It is six months today since Adrian Orr took office as Governor of the Reserve Bank, the latest (and last, given forthcoming legislative reforms) in a line of people who over the last 30 years have held office as the single most powerful unelected person in New Zealand (more powerful individually than most elected people).

When it comes to monetary policy, I’ve had no particular problem with the Governor’s bottom-lines.  In fact, if he’d stuck to those, the contents of this blog in recent months would have been quite different.

Here was the bottom line in May (the Governor’s first OCR decision)

The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down. Only time and events will tell.

in June

The Official Cash Rate (OCR) will remain at 1.75 percent for now. However, we are well positioned to manage change in either direction – up or down – as necessary.

in August

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down.

and here is the Governor today

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020. The direction of our next OCR move could be up or down.

As one of the only (perhaps the only) commentators who has been consistently on record in thinking a lower OCR would have been a good idea, and who has argued that if there is a move in the next 12 months it will be a cut, I’ve welcomed the fact that –  unlike most market economists –  the Bank’s focus doesn’t appear to have been on when the next OCR increase happens.  Too much focus in that direction misled both the Bank and the market economists for much of the last decade.

Thus far, well done Governor.

The bit in those “bottom line” statements that has left me a little uneasy is the apparently confident statements about the future: in March, the OCR would stay at 1.75 per cent “for some time to come”, and in the last two releases it has been even more specific about dates if less dogmatic in tone (“we expect to keep the OCR at this level through 2019 and into 2020”).       But none of us knows the future.  Macro forecasting is pretty futile more than perhaps a quarter or two ahead, and yet the Governor spends resources and puts his reputation somewhat on the line as if he were some sort of oracle, granted insight into the far –  by monetary policy standards –  far future.    It is bizarre and unnecessary.

But perhaps equally surprising is the way the market economists play the game.  Their commentaries are full of discussions around whether the next adjustment is more likely (say) 12 months out or 15 months out, as if they too are oracles, blessed with some particular insight.  I suppose they have clients who want this sort of stuff, but you might think that at least some of the better clients would appreciate being told the truth: there is almost no chance of the OCR changing in the next three months, and beyond it is really anyone’s guess, almost inherently unknowable.  Words like those in the Governor’s first statement: only time and events will tell.  Crisp and honest.

And yet I’m conscious that much of my experience was in periods when interest rates moved round a great deal.  And these days they seem not to.

The OCR system itself is almost 20 years old.   The first OCR was set in March 1999.  In this chart, I’ve shown the first 10 years of data (to February 2009) and the subsequent 9.5 years to now.

OCR 10 years

In the first 10 years, the range from low to high was almost 500 basis points.  In the rest of the 1990s, the amplitude of fluctuations in the 90 day bank bill rate was similarly large.

And the last 9.5 years?   The total range within which the OCR has fluctuated is only 175 basis points, and it was only even that wide because of the msisguided enthusiasm for tightening in 2014.

That is quite a difference.

But the difference is even more stark if we look at retail interest rates.   Here is the Reserve Bank’s floating first mortgage rate series for the same two periods.

floating 10 yr

Over the last 9.5 years, this mortgage interest rate has moved within a total range of only about 110 basis points.

And here is the same chart for the Bank’s six-month term deposit rate series.

TD rate 10 years

The range from high to low is about 170 basis points (similar to that for the OCR), but the peaks were a very long time ago now (back in 2010/11).  For years now, term deposit rates (on this indicator) have fluctuated little, between just over 4 per cent and just over 3 per cent.

I don’t have a good hypothesis for why we have seen such a dramatic change in the variability of interest rates.  It doesn’t surprise when one sees such patterns in countries that hit the effective lower bound on nominal interest rates –  unable to cut further, inflation lingers low and there is little reason then to raise rates. But that isn’t the New Zealand story at all  –  the lowest the OCR has got is the current 1.75 per cent and everyone recognises it could be cut further if necessary.

Has the economy really got so much more stable than it was in the previous couple of decades?  It seems unlikely, perhaps especially in New Zealand (with, for example, record swings in population, big earthquakes, and big terms of trade changes).  Perhaps, to some extent, the Reserve Bank has simulated the sort of behaviour seen in the lower bound countries: always reluctant to cut (even though they always could have), inflation has stayed too low, and the economic upswings have, partly as a result, been pretty muted by historical standards and not very inflationary.  I’m genuinely puzzled.  Who knows, perhaps the Governor could offer the benefits of Bank research and analysis on this point whenever he finally gets round to deigning to give a substantive speech on his primary (according to the Act) responsibility, monetary policy?

Changing tack, in yesterday’s post I had a bit of fun taking the Governor to task over his attempt to articulate the story of the Reserve Bank as if it were some obscure mythical tree god, Tane Mahuta.   Late in that post, I noted that they had adopted some imagery of an island, as what the Bank was working towards.  In their own words

“We have visualised ‘our island’ that we are moving towards on the horizon, one that all New Zealanders can be proud of and that Tane Mahuta –  our Bank – can stand tall on.”

And this was the page with the picture I showed.

our island.png

I noted yesterday

It appears to be the island where the imaginary tree god dwells.  But, here’s the thing, it doesn’t look a bit like anywhere in New Zealand.  And the Reserve Bank of New Zealand is supposed to be primarily about New Zealand and New Zealanders.   Has the tree god flown the coop (so to speak) and fled to some poor Pacific Island where –  perhaps –  well paid senior central bankers take their winter holidays and commune with the deity?   I’d prefer a central bank –  even one deluded that it is a tree god –  to think New Zealand, New Zealand people, New Zealand places.

A diligent reader took the photo and did a little digging with the help of Mr Google.  Turns out that the Governor’s island is Bora Bora, a very expensive resort location in French Polynesia.  I guess it is the sort of place the Governor and his chums flit off too –  although I’d been under the impression the Governor’s destination of preference was the Cook Islands –  but the weird thing is that it is in a quite different country.  Even more oddly, given his distaste for the colonial experience –  suffusing his official document –  it is a territory of an old European empire.   Don’t we have any islands in New Zealand?

But we do, of course.  The Governor can probably see Somes Island out his office window. I live in a suburb named for its island.  And all of us live on these islands, the myriad of them that make up New Zealand.

I guess it was just a silly slip –  though you wonder how no one picked it up –  but it does seem all too consistent with the Governor’s style: once over lightly, and  more focused on the issues he isn’t responsible for (recall not long ago he told us we were lucky as a country not to export fossil fuels) than on the narrow range of things he is responsible for.  Perhaps he could put aside the tree god stuff and get back to (what a commenter this morning urged me to) the “dry old world of money”.   There is more interesting and important stuff in the world, but “money” is the Governor’s job, and it needs to be done well, and in a way that commands respect.

And, finally, regular readers might recall a post from a month or so ago, in which a reader had passed on a report of the Governor’s address (off the record –  and thus only the favoured few had access) to an INFINZ financial markets function in Wellington in late August.    It was reported that the Governor has been typically loquacious, but offering up potentially quite highly market-sensitive information to his favoured audience.

Typically loquacious but, so the report suggests, perhaps going rather beyond the Bank’s public lines on monetary policy as articulated in the August Monetary Policy Statement, in a very dovish direction.     And weighing in on what sort of person he wanted (and did not want –  economists apparently not wanted) on the new Monetary Policy Committee –  the one where the Minister supposedly makes the appointment, the one where the legislation has not yet been dealt with by the relevant select committee.

It seemed rather undisciplined and inappropriate, and I reminded readers again of the contrast with the Reserve Bank of Australia where speeches by the Governor and senior staff are typically on-the-record, usually with a published record of the subsequent Q&A session as well.  The difference doesn’t matter much when off the record speeches are totally anodyne, and people answer questions in a similar unrevealing way, but that certainly isn’t Orr’s style.

On this occasion, so the report I received suggested, it wasn’t just monetary policy things the Governor was free and frank about.    There was, for example, reportedly stuff about how if banks didn’t change their ways he’d change them for them, by setting up a Royal Commission here  [something the government would surely not be keen on given their difficult relationship with the business community, and plethora of reviews/inquiries], and a totally dismissive approach to the recent failure –  on the Bank’s watch – of CBL Insurance.

I put in an Official Information Act request to the Bank about this speech.  I didn’t expect much –  it seemed unlikely the Governor was working from a text, but (given his style) it was at least possible (it would be prudent more generally) there might have been a recording.  There wasn’t apparently.

But I also asked for copies for briefing notes or emails related to the content of the speech.  And there was some material there in the response I got back this morning.   The full response will apparently be put on their website before long (now here).   What was interesting was a request sent out on behalf of the Governor to several Bank staff who had been at the function inviting any feedback  (the request was for anything, good or bad, but perhaps not surprisingly none of the staff offered anything sceptical or critical, to a Governor not known for welcoming challenge).   In those comments we learn from one

My impression from the crowd was that they also enjoyed the speech and are really starting appreciate that having a longer-term vision and focus is important. I like that you gave the audience practical examples such as the United Nations Sustainable Development Goals, Carbon Disclosure Project, and Principles of Responsible Investing that they can start using/working toward now – they have no excuses for inaction!

The SDGs have nothing whatever to do with the Reserve Bank or its responsibilities.

And from another

For example, Adrian discussed climate change and short-term vs. long-term thinking.

Nor, of course, has climate change.  Short-term vs long-term thinking is one of his hobbyhorses, but as I’ve noted previously the Bank has done nothing substantive on this claim.

It sounds as if the speech was all over the show, and mostly (as we’ve come to expect) not on the things he is paid to be responsible for. It is undisciplined and unfortunate, and won’t help wider confidence in him or the tree god (though those who like his leftist political analysis may, shortsightedly, welcome it).  And none of it is transparent and open, more like a locker-room chat to his buddies in the financial sector.  He tells us the economy sat in darkness before the advent of the Reserve Bank.  Maybe, maybe not, but assuredly we all too often sit in darkness when it comes to the activities of the Bank itself.  That simply shouldn’t be acceptable.  Openness, and equal information for all, should be the watchwords of a modern accountable central bank and its Governor.

Shame on our MPs

Michael Reddell China

There are some things I write about here that I really don’t care that much about.

But this isn’t one of them.

Yesterday at the start of Parliament’s sitting day, the prayer was read in Chinese by Labour MP, Raymond Huo.   This was apparently in recognition of the PRC-government sponsored Chinese language week.

There are three “official” languages in New Zealand: English, Maori, and sign language.  Chinese is not one of those languages, so why is it being used as an official part of parliamentary proceeedings in this country?

There are, of course, migrants from the PRC (and other Chinese-speaking countries/territories), as there are migrants from many other countries.  But when they come to New Zealand, and participate (as they should) in our political processes, they should do so speaking one of our languages.  As a migrant you might, to some extent hold on to your birth culture, but you made a choice to come to New Zealand, and part of that choice should be to adopt New Zealand ways and laws.   We are not some PRC colony.

I noted that Chinese language week is a PRC-government sponsored event.  The patron is Her Excellency, the PRC’s ambassador in New Zealand.   Among the trustees are Raymond Huo himself, the president of the New Zealand China Friendship Society, well-known for its close associations with the regime, the chair of the Victoria University (PRC-funded) Confucius Institute (and a senior consultant to the PRC government around Confucius Institutes) and the chief executive of the local branch of one of the Chinese banks.   (On this occasion, former PRC intelligence offical Jian Yang  – who misrepresented his past to get into New Zealand – is only an honorary adviser.)   And who do we find among the “sponsors” and “partners”?  Listed first in Hanban, the PRC government agency behind that network of Confucius Institutes around the world.   In the same top-tier is one of the Chinese banks (recalling that all Chinese corporates are seen, by the Chinese government, as arms of the PRC party/state).  Just behind, are the New Zealand government propaganda arms –  the China Council (from whom never a sceptical word is heard) and the Asia New Zealand Foundation –  the individual Confucius Institutes, the Wellington City Council (wasting my rates again) and various businesses and universities that want to keep on side with Beijing.

This is, overwhelmingly, a PRC promoted and sponsored body/event.  Any serious observer would recognise that, and the propaganda win involved in allowing the parliamentary prayer to be said by Huo, in Chinese.   No wonder Huo could talk of a record number of people watching Parliament TV from abroad (assuming there is any data to support such a claim).    Could one imagine a member being invited to open the day’s session of the PRC legislature with a prayer in English?   Silly me.  Legislature, in the PRC.  Ritual rubber-stamp more like.  Prayer?  Why, it is an avowedly atheistic regime, uneasy about anything or anyone that claims a higher allegiance than the Party.

Being a fairly open-minded place, where our leaders are largely heedless –  and careless –  of our heritage, it might have been one thing if Chinese language week had had as joint patrons (evil as her regime is) the PRC Ambassador and the Taiwanese government’s representative in New Zealand.    Or if the key figures were not political at all.  Or if the ethnic Chinese MP reading the prayer had a track record of standing up, and speaking out, against the evils of the totalitarian regime that brutally rules the land of his birth.  Or had originally from another Chinese-speaking country.

But, of course, none of these things held.    What do we know of Raymond Huo, senior Labour backbencher (presumably hoping for higher office before too long) who – remarkably (or perhaps not given the carelessness of our MPs) – chairs the Justice select committee in Parliament.  A man who has never once that I’m aware of, in his years in Parliament, uttered a single word critical of the PRC regime.  A man who openly defends the Chinese conquest of Tibet, and the brutal suppression of the people and their identity.   And here is what Anne-Marie Brady wrote about him in her Magic Weapons paper last year.

Even more so than Yang Jian, who until the recent controversy, was not often quoted in the New Zealand non-Chinese language media, the Labour Party’s ethnic Chinese MP, Raymond Huo霍建强 works very publicly with China’s united front organizations in New Zealand and promotes their policies in English and Chinese. Huo was a Member of of Parliament from 2008 to 2014, then returned to Parliament again in 2017 when a list position became vacant. In 2009, at a meeting organized by the Peaceful Reunification of China Association of New Zealand to celebrate Tibetan Serf Liberation Day, Huo said that as a “person from China” (中国人) he would promote China’s Tibet policies to the New Zealand Parliament.

Huo works very closely with the PRC representatives in New Zealand. In 2014, at a meeting to discuss promotion of New Zealand’s Chinese Language Week (led by Huo and Johanna Coughlan) Huo said that “Advisors from Chinese communities will be duly appointed with close consultation with the Chinese diplomats and community leaders.” Huo also has close contacts with the Zhi Gong Party 致公党 (one of the eight minor parties under the control of the United Front Work Department). The Zhi Gong Party is a united front link to liaise with overseas Chinese communities, as demonstrated in a meeting between Zhi Gong Party leaders and Huo to promote the New Zealand OBOR Foundation and Think Tank.

It was Huo who made the decision to translate Labour’s 2017 election campaign slogan “Let’s do it” into a quote from Xi Jinping (撸起袖子加油干, which literally means “roll up your sleeves and work hard”). Huo told journalists at the Labour campaign launch that the Chinese translation “auspiciously equates to a New Year’s message from President Xi Jinping encouraging China to ‘roll its sleeves up’.”   However, inauspiciously, in colloquial Chinese, Xi’s phrase can also be read as “roll up your sleeves and f..k hard” and the verb (撸) has connotations of masturbation.  Xi’s catchphrase has been widely satirized in Chinese social media.  Nonetheless, the phrase is now the politically correct slogan for promoting OBOR, both in China and abroad. The use of Xi’s political catchphrase in the Labour campaign, indicates how tone deaf Huo and those in the Chinese community he works with are to how the phrase would be received in the New Zealand political environment. In 2014, when asked about the issue of Chinese political influence in New Zealand, Huo told RNZ National, “Generally the Chinese community is excited about the prospect of China having more influence in New Zealand” and added, “many Chinese community members told him a powerful China meant a backer, either psychologically or in the real sense.”

and

During his successful campaign for the Auckland mayoralty, in 2016, former Labour leader and MP, Phil Goff received $366,115 from a charity auction and dinner for the Chinese community. The event was organized by Labour MP Raymond Huo. Tables sold for $1680 each. Because it was a charity auction Goff was not required to state who had given him donations, but one item hit the headlines. A signed copy of the Selected Works of Xi Jinping was sold to a bidder from China for $150,000.  A participant at the fundraiser said the reason why so many people attended and had bid strongly for items was because they believed Goff would be the next mayor.

and

In June 2017, at the Langley Hotel in Auckland, the State Council Overseas Chinese Affairs Office hosted an update meeting to discuss the integration of the overseas Chinese media with the domestic Chinese media. In attendance was Li Guohong, Vice Director of the Propaganda Department of the State Council Overseas Chinese Affairs Office, and other senior CCP media management officials, representatives of the ethnic Chinese media in New Zealand, representatives of ethnic Chinese community groups, and Labour MP Raymond Huo.  Update meetings (通气会) are one of the main ways the CCP relays instructions to the domestic Chinese media, in order to avoid a paper trail. Party directives are accorded a higher status than national law.

There is no sign at all of Huo putting any distance between himself and one of most repressive totalitarian regimes on the planet.  If anything, he only seems to want to hug the regime, and Xi Jinping, closer.  No wonder former diplomat and now lobbyist Charles Finny told a TVNZ Q&A interviewer last year that he was always very careful what he said in front of Huo.

And since this was a prayer being said, what about the religious dimensions?  Parliament’s prayer is an odd sort of beast, made odder by the current Speaker who rewrote the prayer to remove any distinctive Christian aspects, while keeping it distinctively monotheistic (references to Almighty God –  and not to localised tree gods or other minor deities).  As a Christian, I’d be happy enough (would probably prefer) Parliament dropped the prayer altogether: even if hypocrisy is the tribute vice pays to virtue, I’d rather MPs just recognised that the dominant “religion” of New Zealand (and every society has one, defined broadly) isn’t theistic at all.

But, for now, Parliament is opened each day with a monotheistic prayer, some vague nodding reference to our heritage, but vague enough that the small numbers of Muslims and Jews in New Zealand can probably nod along.

And what is the status of religion in the People’s Republic of China?   The Communist Party, which runs the state, is avowedly atheistic.  Religous believers, of whatever stripe, aren’t allowed to join the Party, as a matter of ideological commitment.    And both the Party and state are threatened by any sense of higher loyalties, not just theistic ones –  witness the extreme measures they’ve taken to suppress Falun Gong.   And what of theistic religions?    In the case of Islam, consider the extreme repression now in place in Xinjiang province, where some estimates suggest more than a million people may be in concentration and indoctrination “camps” (prisons), the surveillance state is taken to extremes, kids are taken from imprisoned parents, declared orphans, and then retrained to forget the identity, or even the existence, of their parents.   No New Zealand public figure –  no minister, no MP, and certainly not Raymond Huo (former countrymen of these victims) –  has spoken up, or spoken out, against that almost unbelievable persecution.     What you don’t speak up about –  when you in a position to be heard – is what you tolerate, what you really don’t care much about at all.  And yet Raymond Huo has the cheek to accept the offer to utter the prayer to this monotheistic Almighty God.

What of Christians?   They’ve had an uneasy relationship with the PRC over recent decades.   There are tame churches, in the Three-Self Patriotic Movement (Protestant) and a parallel with Catholics.  In many respects, they are orthodox, and yet they allow themselves to be placed under the thumb of the party-State (as for example, much of the Lutheran church in Germany did during the Nazi era).  But those churches who won’t bend the knee to the party-State are subject to increasing persecution in the Xi Jinping era, and attempts to suborn them and their leaders.  One large independent church in Beijing recently closed –  went to operating in small groups and by podcasts –  after the authorities insisted on the right place surveillance cameras in their buildings.  In response to growing repression and threats more than 100 pastors recently signed a declaration ending this way (emphasis added)

Christians are obligated to respect the authorities, to pray fervently for their benefit, and to pray earnestly for Chinese society. For the sake of the gospel, we are willing to suffer all external losses brought about by unfair law enforcement. Out of a love for our fellow citizens, we are willing to give up all of our earthly rights. 

For this reason, we believe and are obligated to teach all believers that all true churches in China that belong to Christ must hold to the principle of the separation of church and state and must proclaim Christ as the sole head of the church. We declare that in matters of external conduct, churches are willing to accept lawful oversight by civil administration or other government departments as other social organizations do. But under no circumstances will we lead our churches to join a religious organization controlled by the government, to register with the religious administration department, or to accept any kind of affiliation. We also will not accept any “ban” or “fine” imposed on our churches due to our faith. For the sake of the gospel, we are prepared to bear all losses—even the loss of our freedom and our lives. 

The situation has got consistently worse under Xi Jinping – who Raymond Huo holds close –  who is reported to regard churches as “severe national security threats”.

And yet Raymond Huo is invited by the Speaker of our Parliament –  presumably with the acquiescence of other party leaders, including the Prime Minister and the Leader of Opposition – to utter the daily prayer to the monotheistic Almighty God?   It is shameful.

But also telling.  After all, Simon Bridges last year signed up to the idea of a “fusion of civilisations” with this evil totalitarian regime.  Party presidents, Haworth and Goodfellow, head up to Beijing and sing the praises of the party/State and of Xi Jinping himself.

And just the other day, the chief executive of the Ministry of Foreign Affairs and Trade  –  about to become head of the PM’s department, and so we can presume was assuredly on-message –  gave a rare published speech.     In it he articulated New Zealand foreign policy, including among his ten basic principles this one

Second, be deliberate in supporting New Zealand’s values, speaking out in defence of them when required, even where that might put us at odds with others.

In fact, he quoted the Prime Minister from a speech earlier in the year

“In this uncertain world, where long accepted positions have been met with fresh challenge – our response lies in the approach that, with rare exceptions, we have always taken. Speaking up for what we believe in, standing up when our values are challenged and working tirelessly to refurbish rules and build architecture, and to draw in partners with shared views.

And noted

I can say with confidence that all of the Governments for which I have worked would hold these things to be true. 

In which case, I guess we must be able to deduce the real values of our leaders –  ministers past and present, and MPs –  but what they do and don’t say.    After all, they speak up for what they believe in, or so we are told?

When our Parliament invites a CCP-affiliated MP, who champions the interests of the atheistic PRC regime, and has his own party campaign under a Xi Jinping slogan, to open the day’s parliamentary sitting in prayer, in Chinese it seems unlikely that any of them care much about anything other than trade deals for big corporates and their donors, and none of them has the slightest regard for our own heritage, our own values, or for the freedom (including to worship, or not) of Christians, Muslims, and others in China.   There are, so we are told, Christian MPs in our Parliament.  But apparently not even a single one of them was willing to speak up, or speak out.

I don’t suppose New Zealand ranks very high among the issues that concern Beijing, but it must have been a good day in the relevant corners of Beijing officialdom yesterday –  bonuses for the Ambassador perhaps –  as they looked at the useful idiots masquerading as leaders in the New Zealand Parliament.

As a matter of urgency, we need someone –  some party –  to stand up for taking back our country, for asserting the values, traditions, and liberties of its people, the self-respect that (among other things) was presumably part of what attracted some ethnic Chinese to move here in the first place.  As for the present leadership, heedless, careless, and useless……selling out their country (mostly not for personal enrichment) whether by their indifference or their active involvement.

Yes, it will have been a good day in Beijing.  If the butchers ever take time to chuckle, yesterday might have been one of those days.

 

 

 

 

Orr among the forest gods

Michael Reddell Adrian Orr, Reserve Bank, Uncategorized

Almost 1300 years ago, the English missionary priest and bishop Saint Boniface confronted the belief of some pagan German villagers in Thor, god of (among other things) oak trees. Tree gods (or beliefs in them) were vanquished, and Boniface became known as the apostle to the Germans..

Pre-evangelisation, Maori had their own tree god, Tane Mahuta.    As far as I can tell, not many believe any longer in this local tree god: when I looked up the 2013 Census data, there were lots of Maori recording no religion, and there were plenty of Catholics and Anglicans.  But there wasn’t a category shown for tree gods, or any of the other deities (Wikipedia has a list of at least 35 of them).

But the Governor of the Reserve Bank seems intent on bringing them back.

Tomorrow will mark six months since Adrian Orr became the most powerful unelected person in New Zealand, as Governor of the Reserve Bank.  Six months on we’ve had not a single serious and substantive speech on the policy areas he is responsible for, and where he exercises a huge amount of barely-trammelled power.  No speech on monetary policy, no speech on banking regulation, and nothing either on the less prominent things the Governor is responsible for –  such as, for example, insurance prudential supervision, a New Zealand insurer having failed, regulated by the Reserve Bank just before the Governor took office.  He hasn’t substantively and openly engaged with, or responded to, the damning survey results on the Bank’s performance as a financial system regulator.

Instead, we’ve heard the Governor on almost everything else.  There was infrastructure, climate change (repeatedly), the failings of capitalism, geopolitics, women in economics, and of course bank “conduct” (playing distraction from his institution’s own failings, by trying to butt into a field for which the Bank has no statutory responsibility).    There have been lots of words, but not much sign of in-depth reflection or distinctive insights, and even less sign of doing him well, and being open about, the jobs Parliament has actually given the Bank.   Throw in some considerable complacency about monetary policy and it should be a pretty disquieting picture.

Some of it is probably just the Governor’s well-known propensity to talk.  Some of it might even be an understandable (if misguided in application) desire to lift the esprit-de-corps at the Reserve Bank after the demoralising Wheeler years.  And a lot seems to be about winning the turf battles, ensuring that in the reviews of the Reserve Bank Act that the government has underway as much as possible of the Bank’s powers are kept, in effect, under the Governor’s control, and that the existing powers and functions of the Reserve Bank are all kept in the Reserve Bank.  Part of that seems to be about openly subscribing what should be a non-partisan agency to every trendy left-wing cause that is going (and which, presumably, the Governor believes in personally.) A power play in other words –  and, with a weak government that probably doesn’t care much, quite likely to succeed,  somewhat to the detriment of New Zealand.

The latest example was the release on Monday of a rather curious 36 page document called The Journey of Te Putea Matua: our Tane Mahuta.   Te Putea Matua is the Maori name the Reserve Bank of New Zealand has taken upon itself (such being the way these days with public sector agencies).  It isn’t clear who “our” is in this context, although it seems the Governor  – himself with no apparent Maori ancestry – wants us New Zealanders to identify with some Maori tree god that –  data suggest –  no one believes in, and to think of the Reserve Bank as akin to a localised tree god.  Frankly, it seems weird.  These days, most New Zealanders don’t claim allegiance to any deity, but of those of us who do most –  Christian, Muslim, or Jewish, of European, Maori or any other ancestry – choose to worship a God with rather more all-encompassing claims.

But the Governor seems dead keen on championing Maori belief systems from centuries past.    In an official document of our central bank we read

A core pillar of the evolving Māori belief system is a tale of the earth mother (Papatūānuku) and the sky father (Ranginui) who needed separating to allow the
sun to shine in. Tāne Mahuta – the god of the forest and birds – managed this task after some false starts and help from his family. The sunlight allowed life to flourish in Tāne Mahuta’s garden.

This quote appears twice in the document.

All very interesting perhaps in some cultural studies course, but what does it have to do with macroeconomic management or financial stability?  Well, according to the Governor (in a radio interview on this yesterday) before there was a Reserve Bank “darkness was on our economy”.  The Reserve Bank was the god of the forest, and let the sun shine in.  Perhaps it is just my own culture, but the imagery that sprang to mind was that of people who walked in darkness having seen a great light.   But imagine the uproar if a Governor had been using Judeo-Christian imagery in an official publication.

On the same page we read

Many of these birds feature on the NZ dollar money including the kereru, kaka, and kiwi – core to our belief system and survival.

I’m a bit lost again as to who “our” is here.  I’m pretty sure I’m like most New Zealanders; I never saw a bird as “core” to my “belief system”.  Perhaps the Governor does, although if so we might worry about the quality of his judgements in other areas.

As I say, it is an odd document.  There are pages and pages that have nothing whatever to do with monetary policy or the financial system.  Some of it is even quite interesting, but why are we spending scarce taxpayers’ money recounting stories of New Zealand general history?  There is a page about the Maori navigators and, somewhat out of order, an earlier one about what early Maori ate and what the tribes traded among themselves.   And there is a whole page about Kate Sheppard who, admirable as she was, has nothing whatever to do with New Zealand economic or financial history and policy.  There is questionable history:  simple matters of fact (eg Apirana Ngata wasn’t the first Maori Cabinet minister and didn’t first hold office in the 1920s – James Carroll, who held high office for a long period (twice as acting Prime Minister), preceded him), highly questionable and tendentious economic history, and overall a tone (perhaps comforting to today’s liberal political elite) that seems embarrassed by the European settlement of New Zealand.     There is lots on the difficulties and injustices that some Maori faced, and little or nothing on the advantages that western institutions and society brought.  Reasonable people might debate that balance, but it isn’t clear what the central bank –  paid to do monetary policy and financial stability –  is doing weighing in on the matter.

As I noted earlier, in a radio interview yesterday the Governor claimed that prior to the creation of the Reserve Bank ‘darkness was on our economy’, that the Reserve Bank had let the sunshine in, and that Australia and the UK had somehow turned their backs on us at the point the Bank was created.   In fact, here it is – Reserve Bank as tree god –  in the document itself.

The Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the economy.

I think there was a plausible case for the creation of a central bank here, but to listen to or read the Governor you’d have no idea that New Zealand without a Reserve Bank had been among the handful of most prosperous countries in the world.  Here from the publication, writing about the period before the Reserve Bank was created

The infrastructure funding was further hindered by the banks being foreign-owned (British and Australian) and issuing private currency. Credit growth in New Zealand was driven by the economic performance of these foreign economies, unrelated
to the demands of New Zealand. Subsequent recessions in Britain and Australia slowed lending in New Zealand when it was most needed.

Very little of this stands much scrutiny.  You’d have no idea from reading that material that the New Zealand government had made heavy and persistent use of international capital markets, such that by 1929 it –  like its Australian peers –  had among the very highest public debt to GDP ratios (and NIIP ratios) ever recorded in an advanced country.  You’d have no idea that New Zealand was among the most prosperous countries around (like Australia and the United States, neither of which had had central banks in the decades prior to World War One).   You’d have no idea that the economic fortunes of New Zealand, trading heavily with the UK, might reasonably be expected to be affected by the economic fortunes of the UK –  terms of trade and all that.   Or that economic cycles in New Zealand and Australia were naturally quite highly correlated (common shocks and all that).  And of course –  with all the Governor’s talk about how we could “print our own money” – within five years of the creation of the Reserve Bank, itself after recovery from the Great Depression was well underway, that we’d not unrelatedly run into a foreign exchange crisis that led to the imposition of highly inefficient controls that plagued us (administered by the evil twin of the tree god?) for decades.  Or even that persistent inflation dates from the creation of the Reserve Bank

One can’t cover everything in a glossy pamphlet, even one that seems to purport to be aimed at adults (including Reserve Bank staff according to the Governor), but there isn’t much excuse for this sort of misleading and one-dimensional argumentation, aka propaganda.

The propaganda face of the document becomes clearer in the second half.   Among the issues the government’s review of the Reserve Bank Act is looking at is whether the prudential and regulatory functions of the Bank should be split out into a new standalone agency, a New Zealand Prudential Regulatory Authority.  I think that, on balance, that would be a preferable model.  It also happens to be the model adopted in much of the advanced world, including many/most small advanced economies.  There are arguments to be made on both sides of the issue, but you wouldn’t know it from reading about the Governor’s vision of the Bank as a Maori tree god, where one and indivisible seems to be the watchword.      Everything is about “synergies”, and nothing about weaknesses or risks, nothing about how other countries do things, nothing about the full range of criteria one might want to consider in devising, and holding to account,  regulatory institutions for New Zealand.

I don’t have any problem with officials, including from affected agencies, offering careful balanced and rigorous advice on the pros and cons of structural separation. But that is a choice ultimately for ministers and for Parliament.  And among the relevant considerations are issues of accountability and governance.  Neither word appears in Governor’s propaganda piece.   But then tree gods probably aren’t known for accountability.  New Zealand government regulatory institutions should be.   If ministers and Parliament decide to opt for structural separation, I wonder how the Governor will revise his document –  his tree god having been split in two.

Among the tree god’s claims about financial regulation and what the Bank brings to bear was this breathtaking assertion, prominently displayed at the head of a page (p27).

The Reserve Bank is highly incentivised to ‘get it right’ when it comes to prudential regulation. We have a lot at risk

It is an extraordinary claim, that could be made only be someone wilfully blind –  or choosing to ignore –  decades of serious analysis of government failure, and the institutional incentives that face regulators, regulatory agencies, and their masters.

There is nothing on the rest of that page to back the tree god’s claim.   On any reasonable and hardheaded analysis, the Reserve Bank has very weak incentives to “get it right”, or even to know –  and be able to tell us –  what “get it right” might mean.   When banks fail, neither the Reserve Bank Governor nor any of the tree god’s staff have any money at stake (at least in their professional capacity, and as I recall things, Reserve Bank staff – rightly –  aren’t allowed to own shares in banks).  It is all but impossible to get rid of a Reserve Bank Governor, and it is even harder to get rid of staff (for bad policy or bad supervision).  Most senior figures in central bank and regulatory agencies of countries that ran into financial crises 10 years ago, stayed on or in time moved on to comfortable, honoured (a peerage in Mervyn King’s case) retirements, or better-remunerated positions in the private sector.

And when the Reserve Bank uses its powers in ways that reduce the efficiency of the financial system, or stopping willing borrowers and willing lenders writing mortgage contracts, where are incentives on the Reserve Bank to “get things right”.  There are no personal consequences –  the Governor and his senior staff either won’t have, or would have no problem getting, mortgages.  The previous Governor got to exercise the bee in his bonnet about housing crises, and to play politics, with no supporting analysis and no effective accountability.    The current head of the tree god opines that lenders and borrowers can’t be trusted –  but tree gods apparently can –  but when challenged produced no analysis to support his claim.  That sort of system creates incentives for sure, but they aren’t to “get it right”.  Officials have incentives to keep things secret, and we saw that on full display with the Bank’s supervision of CBL Insurance last year –  they might argue it was in the public interest, but even if so, it was clearly in their private interests, and against the interests of many members of the public.

Another word that hardly appears at all in the document is “transparency”.  If you wanted to call yourself a tree god who sheds light upon the dark world that was pre-1933 New Zealand (or, presumably, a modern New Zealand without our current Reserve Bank) you might think there would be at least some self-awareness of the other side of letting the light in: letting in the light on the Bank’s own operation.   As I’ve documented here over the years, the Bank is quite open about what it wants to be open about.  But what credit to them is that, everyone releases what they want to release: the essence of transparency is readily and willingly releasing material that they might, in some senses, prefer to keep to themselves, to make for an easier life for the tree god.  Our Reserve Bank –  the Governor’s pagan tree god –  is notoriously secretive and obstructive, consistently pushing to and beyond the limits of the Official Information Act.  Only a few weeks ago the Ombudsman’s office had to intervene to remind them that simply invoking “Chatham House rules” doesn’t enable you to keep things secret.  And with even the Cabinet having promised pro-active release of Cabinet papers, and pro-active release of Budget background papers and advice, the Reserve Bank looks not like a tree god shedding light in dark places, but like some more malevolent self-interested dark deity.

The Governor also tells us he has adopted an ever more ambitious goal than the previous Governor’s one.  Graeme Wheeler articulated a vision of the Reserve Bank as “best small central bank” in the world.  It was pretty empty.    There was no sign that citizens or other stakeholders had asked him to be the “best small central bank”  –  richer countries than us will often choose to spend a lot more (and with less accountability) on their central bank.  In any case, when challenged a few years later, it turned out that there was nothing going on to benchmark themselves against that ostensible aspiration.   But Orr’s aspiration for his tree god is an unqualified “best central bank”.     The institution is a very long way from that at present –  and getting further away if Orr uses the Bank as a platform for pushing for his personal political agendas, well beyond the Bank’s statutory responsibility.  It isn’t open, it isn’t excellent, it is accountable.  It should do much better (although I’m still not convinced that a small poor advanced country should be expecting, ir aiming, ot have best central bank there is.)

And finally, among the oddities of Orr’s apparent aspirations is something about an island.  There is a full page under the heading “Our island and Tane Mahuta”, complete with lots of (mostly) worthy (if sometimes threatening, for staff ) aspirations, and this picture.

RB island

It appears to be the island where the imaginary tree god dwells.  But, here’s the thing, it doesn’t look a bit like anywhere in New Zealand.  And the Reserve Bank of New Zealand is supposed to be primarily about New Zealand and New Zealanders.   Has the tree god flown the coop (so to speak) and fled to some poor Pacific Island where –  perhaps –  well paid senior central bankers take their winter holidays and commune with the deity?   I’d prefer a central bank –  even one deluded that it is a tree god –  to think New Zealand, New Zealand people, New Zealand places.

Better still, ditch the pagan religion –  not (according to the Census) taken seriously by Maori, and never part of the heritage or beliefs of most New Zealand –  leave it to the cultural studies textbooks, and get on with doing your job, openly, accountably, excellently.

And, as part of that, abandon the complacency about monetary policy, expressed again  by the Governor is his Radio NZ interview yesterday.   The next serious recession  is, according to him, nothing to worry about.  Monetary policy faces no serious constraints.  Which, presumably, is why all those other countries who did find themselves at the effective lower bound last time round were able to rebound so quickly and effectively, and deliver inflation consistently near target.  Or perhaps that is only in a false tree god’s imaginary world?

UPDATE: I meant to include, but accidentally left out, reference to the fact that the Bank of New Zealand had been majority New Zealand government owned from 1894, forty years before the Reserve Bank was formed.   Surely the Governor was aware of that?

Not much business investment

Michael Reddell New Zealand economic performance, R&D

Yesterday’s post was prompted by looking at the export and import data in last week’s GDP release.   Today’s is prompted by looking at the investment data.

The latest quarterly data wasn’t that interesting in itself –  business investment fell a bit, but from quarter to quarter there is quite a bit of noise, and not much can be read into a single quarter’s data.

But here is a longer view on a proxy for business investment spending as a share of GDP (total gross fixed capital formation less residential investment less government investment spending), using the annual data back to the year to March 1972. The latest quarterly observation is almost exactly the same level as the final (annual) observation on the chart.

bus investment sept 18

Years into the recovery, after several years of very rapid population growth, business investment as a share of GDP has crept back up to levels that are only higher than seen in past recessions.  And by international (OECD) standards, business investment as a share of GDP has been low in New Zealand for decades.  It is consistent with the story numerous analysts have highlighted over the years: one of the proximate symptoms of our long-term economic underperformance is that firms haven’t found it worthwhile to invest more heavily here.   The last few years look as if they simply reinforce that story.

(And that isn’t, of course, because we have too many houses for our people.  If anything, we have too few, so when people –  like the Minister of Finance –  talk of shifting investment from housing to other things, while not changing anything about population growth, it is meaningless or worse.)

That first chart, which I’ve shown previously, is the flow –  each year’s new investment as a share of total GDP that year.  But this chart uses the stock figures: SNZ’s net capital stock (total less residential less government) relative to GDP.  That takes account of depreciation, and also of the changing growth rate of the population.

bus cap stock

The business capital stock (as estimated by SNZ) hasn’t been growing relative to GDP for over 40 years.  Over most of the last decade that ratio has been shrinking (and although these data are available only to March 2017, it seems unlikely anything in the last 18 months will materially alter the picture).  Businesses –  as a whole – simply haven’t found it attractive to invest and grow here.

The government is very keen on promoting R&D spending, rushing to put in place new and bigger subsidies without much evidence of having thought much about why it might not be attractive to profit-maximising firms to spend more here.

R&D is included in both the annual new investment spending shown in the first chart above and in the net capital stock data shown in the second chart.   SNZ don’t provide a breakdown between government and private components, but for what it is worth I found this chart interesting.

R&D capex

If anything, R&D spending seems to have been holding up quite a bit better than overall business investment and the business capital stock.  Which tends to reinforce my doubts about why more taxpayer money should be thrown at this type of spending.  Overall R&D spending might be quite low by advanced country standards, but so is business investment more generally, and so is foreign trade.  My hypothesis is that all three things are related, and that there is no obvious reason (and no analysis the government has advanced) suggesting that the root cause of the problem is insufficient subsidies for R&D spending.

On a completely different note, tomorrow I’ll take a lot at the latest from the Reserve Bank: Adrian Orr and the tree gods.

 

Once were traders

Michael Reddell Exports, New Zealand economic performance

For small countries in particular, foreign trade is a key element in economic prosperity.  Firms in your country develop products and services that people abroad want, and that enables your citizens to consume from the wider range of products and services the rest of the world has to offer.  It isn’t just final products, but trade in intermediate goods and services (inputs to other production) also enables specialisation and the general gains from trade.

Foreign trade wasn’t always important in the islands of New Zealand.  For the centuries after first settlement there was none.  And (although not solely for that reason) the people –  Maori –  were poor.   In modern New Zealand, foreign trade has been critical: 100 years ago there was a widely cited claim that New Zealand did more foreign trade per capita than any other country.  Hand in hand with that, we were among the countries with the highest incomes per capita.

But no longer, on either count.

The latest quarterly numbers out last week did show an uptick in both exports and imports as a share of GDP.  But here is the chart back to 1972 –  annual data, plus the latest quarterly observation.

external trade share

The foreign trade share has been, at best, static for almost 40 years (in most countries they’ve been increasing).  The last few years have seen the trade share the weakest for almost 30 years (and the late 80s construction boom).  I’ve highlighted the only three occasions when exports and imports have averaged 30 per cent or more of GDP: the year to March 1985, the years to March 2000 to 2002, and the year to March 2009.   What was the common feature of those years?   It wasn’t the stellar success of outward-oriented businesses.  It was the (unexpected) severe weakness in the exchange rate: the devaluation of 1984, the period around the end of the dot-com boom when US interest rates were high, and New Zealand (and Australian) dollars were unattractive, and the international financial crisis (and extreme risk aversion) of 2008/09.   Based on the rest of the set of New Zealand policies, those low exchange rates weren’t sustainable, and there was a relatively quick rebound.

What of other advanced countries?

Big countries tend to do less foreign trade (share of GDP) than small countries.  That is no surprise, as there are many more markets and opportunities for specialisation (gains from trading) close to home.  Here are the OECD countries that in 2016 (last year with complete data) had exports and imports averaging less than 30 per cent of GDP.

Australia 21.0
Chile 27.8
Italy 29.0
Israel 28.2
Japan 15.6
Turkey 23.4
UK 29.1
USA 13.3

Of them, Italy, Japan, Turkey, the United Kingdom and the United States are big countries and big economies.    You’d expect to find them on this table, and if anything the anomaly is Germany, with a foreign trade share now in excess of 40 per cent of GDP.

Of the remaining countries, there are

  • Australia, with five times our population,
  • Chile, with more than three times our population, and with the second lowest labour productivity in the OECD (beating only Mexico), and
  • Israel, which isn’t much larger than New Zealand but which –  as I’ve highlighted here previously –  has a similarly lousy productivity growth record.

And all, in one form or another, with severe disadvantages of distance.

There has been a tendency in some circles to excuse New Zealand’s low foreign trade shares by citing distance, but simultaneously a reluctance to take seriously what is implied by that limitation.  If the opportunities for foreign trade from this remote location don’t look particularly good, isn’t there something deeply illogical (or worse) about continuing to use policy (as successive governments have done for last 25 years) to drive up our population –  more people in an unpropitious location?  All the more so when adopting that policy approach also involves driving the real exchange rate up, away from where it would likely settle otherwise.  Not all New Zealanders suffer in the process –  if you run a business geared, in effect, solely towards population growth you may well flourish –  but New Zealanders as a whole have.

For all the occasional talk about rebalancing the economy (from both main parties, at least when they first take office) none of it seems to take any serious account of this constraint.   Which is only set to become more seriously as –  relative to other countries –  the opportunities here shrink with the apparent determination to pursue net-zero emissions targets.  Planting (lots more) is unlikely to be a path to sustained prosperity or higher productivity.

These days, New Zealand’s per capita foreign trade will among the lowest in the advanced world.   Among the rich countries, only (very big) Japan and the United States will be materially lower than us.  It isn’t a mark of a successful economy.  But neither government nor opposition have any real strategy –  or interest? –  in turning things around.

Inflation and the tax system

Michael Reddell inflation, Taxation, zero lower bound

When I went looking for the interim report of the Tax Working Group, I found that various other papers had been released.   These include background papers prepared by the Treasury and IRD secretariat looking at various possible options for reducing other taxes if, for example, new capital taxes were to provide more government revenue.

Among them was a short and rather unconvincing paper on productivity.   It was notable for highlighting how difficult it was to give any concrete meaning to the aspiration repeatedly expressed by the Minister of Finance, and included in the terms of reference, of “promoting the right balance between the productive and speculative economies”.  And it was also notable for the aversion of officials to lowering the company tax rate (or the effective tax rate shareholders pay on company income), even though they accept that our business income tax rates are now high by international standards, and that business investment (including FDI) is low by international standards. This chart is from the paper.  In general, what is taxed heavily you get less of.

corp income tax

But this time I was more interested in another of the background papers, this one on the possibility of inflation indexing the tax system.   Even with 2 per cent inflation, failing to take explicit account of inflation in the tax system introduces some material distortions and inefficiencies.  Many of the costs of inflation arise from the interaction with the tax system, and these distortions may be greater in New Zealand than in many other countries because of the way we tax retirement income savings (the TTE system introduced, as a great revenue grab at the time, in the late 1980s).

In the days of high inflation there was some momentum towards doing something about indexation. It had, for example, been a cause championed by former Reserve Bank Governor Ray White.  And in the late 1980s, the then government got as far as publishing a detailed consultative document.  But then inflation fell sharply (and maximum marginal tax rates were cut) and the issue died.  We don’t even have the income tax thresholds indexed for inflation, allowing Ministers of Finance ever few years to present as a tax cut an increase in revenue that should never have occurred in the first place.

In the early days of inflation targeting there might even have been a case for letting the issue die.  The inflation target was centred on 1 per cent annual CPI increases, and that target was premised on a view that the CPI had an annual upward bias of perhaps as much as 0.75 per cent per annum).  But since then, the extent of any biases in the CPI have been reduced, and the inflation target has twice been increased.   The inflation target now involves aiming for “true” inflation” of at least 1.5 per cent per annum.

The distortions are most obvious as regard interest receipts and payments.  Take a short-term term deposit rate of around 3 per cent at present.  Someone on the maximum marginal tax rate (33%) will be taxed so that the after-tax return is only 2 per cent. But if, as the Reserve Bank tells us, inflation expectations are 2 per cent, that means no real after-tax return.  Compensation for inflation isn’t income and it shouldn’t be taxed as such.  Only the real component of the interest rate (1 per cent) should be taxed.   The same distortion arises on the other side, for those able to deduct interest expenses in calculating taxable income: in the presence of inflation, this tax treatment subsidises business borrowing.  The amounts involved are not small.   As economist Andrew Coleman notes in his (as ever) stimulating TWG submission

Even at low inflation rates, these distortions are substantial. In 2017, for instance, residential landlords borrowed $70 billion. Even if the inflation rate is as low as 1 percent, this means residential landlords can deduct $700 million of real principal repayments from their taxable income, a subsidy worth over $200 million per year. New Zealand households lend in excess of $150 billion. When the inflation rate is 1 percent, lenders are expected to pay tax on $1.5 billion more than they ought. Many people who invest in interest-earning securities are elderly, risk averse, or unsophisticated investors. For some reason the New Zealand Government believes these investors should pay more tax than any other class of investors in New Zealand. It is a strange country that taxes the simplest, most easily understood, and the most easily purchased financial security at the highest rates. It suggests the Government has little interest in equity, its protestations notwithstanding.

There are other distortions too, notably around trading stock valuations and asset valuations on which true economic depreciation would be calculated.

As reflected in the paper released this week, officials are very wary about doing anything about fixing these distortions (and they fairly note that “no OECD country currently comprehensively inflation indexes their tax system”), and they devote many pages to outlining the practical challenges they believe would be involved, and the new distortions they believe would arise from partial approaches to indexation.

I have some sympathy with the stance taken by officials on the specific challenges to doing comprehensive indexation, especially in a way that does not bias transactions through favoured institutional vehicles.  But it is a particularly bloodless document that seems to reflect no sense of the injustice involved in taxing so heavily relatively unsophisticated savers (while subsidising business borrowers, especially those financing very long-lived assets).

This seems like a case where some joined-up whole-of-government policy advice would be desirable.  There would be no systematic distortions arising from the interaction between inflation and the tax system if there was no systematic or expected inflation.   Systematic inflation isn’t a natural or inevitable feature of an economic system –  in some ways it is about as odd as changing the length of a metre by 2 per cent a year, or the weight of a gram by 2 per cent a year.  In the UK, for example, (and with lots of annual variation) the price level in 1914 was about the same as it had been in 1860).  And the most compelling reason these days for targeting a positive inflation rate is the effective lower bound on nominal interest rates, itself created by policymakers and legislators.   Take some serious steps to remove that lower bound and (a) we’d be much better positioned whenever the next serious economic downturn happens, and (b) we could, almost at a stroke, eliminate the distortions –  and rank injustices –  that arise from the interaction between continuing, actively targeted, positive inflation, and a tax system that takes no account of this systematic targeted depreciation in the value of money.

It wouldn’t be hard, but our ministers, officials (Treasury and IRD), and central bankers currently seem utterly indifferent to the issue.

Debt default by the US government

Michael Reddell Economic history, USA

There was a great deal of debt defaulted on during the Great Depression.   Businesses failed, farms went bust, and some mortgage borrowers defaulted too.    But a huge number of governments also defaulted on their obligations, not just in places like Greece or Argentina which had form in that regard, but including many of the governments of the richest countries in the world.  You could read about the New Zealand episode here.   Most countries in Europe (including the UK and France) defaulted on their (substantial) war debts to the United States –  in fact, only Finland paid in full.  But even the United States government defaulted.

There is an interesting and accessible new book out about that experience, American Default.   It is written by UCLA Chilean academic Sebastian Edwards (who has been used as an adviser and author here, including this paper at a Treasury/Reserve Bank conference a few years ago), who got onto the subject after acting as an adviser to law firms involved with sovereign defaults by Argentina after 2001.

Going into the Great Depression most countries were, directly or indirectly, on the Gold Standard (indirect in New Zealand’s case, where the banks managed the exchange rate to maintain parity with sterling which was fixed to gold).  But the US situation was a bit different than most.   After the experiences with inflation (and fiat money) during the Civil War, in the subsequent decades –  right up to the early 1930s –  US government bonds were issued with a provision (the “gold clause”) that entitled the borrower, at his/her own option, to be repaid in gold.  Many corporate bond contracts had similar provisions.  They were intended as a protection for the lender against unexpected inflation (arising when the fixed parity between dollars and gold was broken, or abandoned), and at least in the early decades must have allowed US borrowers to borrow more cheaply, and/or for longer-terms than they would have otherwise been able too.  In that respect, they were similar to the way in which many countries with a track record of high or variable inflation found it difficult to borrow in their local currency, and borrowed in foreign currencies instead.

By 1933, many countries (notably the UK) had already broken the link to gold.  But the US (and France and several other smaller European economies) hadn’t.  Breaking the link was part of what enabled those countries to begin recovering from the Depression (both by devaluing against gold-based currencies, and by allowing interest rates to be cut further).   By 1933, there was plenty of gold in the US, but no recovery –  indeed, Roosevelt took office in the midst of a banking panic.  As in many other countries, the price level had fallen significantly, such that the real value/burden of any debt contract outstanding was materially greater than had been expected only a few years earlier.

That said, the US government itself was not particularly heavily indebted.  Economic historian Peter Temin’s book on the Great Depression includes a table suggesting that gross debt of all level of US government in 1929 had only been about 35 per cent of GDP.  (By contrast, in New Zealand, Australia, and the UK general government public debt in 1929 had been in excess of 170 per cent of GDP.)   Corporate bonds outstanding seem to have been of a similar size.   Of course, in all cases these debt ratios rose as economies moved towards the depths of the Depression, as both real GDP and the level of prices fell.

It seems that Roosevelt didn’t have a clear strategy in mind when he took office (and the tie to gold hadn’t been a campaign issue).  The actual approach unfolded gradually over the year or two after he took office.  What did the US government do?

The first major step –  extraordinary in a free society –  was to simply outlaw private sector holdings of gold.   All but trivial amounts of gold had to be delivered to the government, with less than a month’s notice, for which holders were paid at the then still-current official price of gold (US$20.67 an ounce).   Private holdings of gold were forbidden for decades.  A few weeks later Congress passed a declaration explicitly prohibiting gold clauses in future securities issues, and abrograting (voiding) existing provisions.   The government then began buying up gold (in the international market) steadily raising the US dollar price of gold until in January 1934, with Congressional authorisation, the official price was reset at $35 an ounce (where it remained until 1971).  US citizens couldn’t get hold of gold, but the US remained willing to buy at the price from overseas sellers.

In effect, the US was off the Gold Standard and had devalued its exchange rate. Gold purchases were increasing the domestic monetary base. In combination, such measures should, and did, support a lift in US economic activity and in prices (commodity prices in particular, in USD terms, rose quite quickly and substantially as one might expect).

And, in the process, the US government managed a huge windfall gain for itself.  As another recent treatment of this episode (by Richard Timberlake, not referenced by Edwards) records, the book profits on the revalued gold was roughly equal to total Federal government revenues in 1934.  Compel citizens to sell you an asset at one price and then re-set the price, more in line with economic realities, and in the process transfer a great deal of wealth from citizens to the government.   It isn’t the sort of approach one would normally expect in a country with the rule of law.

But, of course, the interesting thing about the United States is the way the constitution sometimes intrudes in the freedom of governments to do just as they want.  Had a New Zealand, Australian, or British government adopted measures like those in the US, there would have been nothing much anyone could have done about it, once the parliamentary battle was lost.  But in the US many of these sorts of issues are only finally resolved at the Supreme Court, testing the validity of congressional or executive actions against the provisions and protections of the Constitution.

And that is what happened in this case, although only in respect of the abrogation of the gold clauses.  There were several cases taken, each with slightly different factual bases, covering both private and government obligations.    The claim wasn’t to be paid in physical gold –  private holdings of which were now illegal –  but to be paid the dollar value of the gold equivalent when the bond had been issued.  In dollar terms, that would be 69 per cent (35/20.67) more than otherwise.  There were substantial sums at stake.

As Edwards illustrates, the Supreme Court hearings were closely followed by markets and the press (and at the time the court was perceived to be roughly evenly divided between what might loosely be described as “conservatives” and those of a more moderate or “progressive” disposition).   Media coverage suggested that the government’s lawyers had not had the best of the hearings themselves.   The Court’s ruling was eagerly awaited, and with some trepidation by the government.  Contingency planning had been undertaken, and in Roosevelt’s papers is the draft text of an address he intended to deliver had the Court ruled comprehensively against the government, and papers outlining the actions he intended to initiate in response.    An adverse outcome wasn’t going to be acceptable.  Roosevelt seems to have regarded the abrogation of the gold clauses as an essential element in his overall strategy to lift economic activity and prices; indeed one of the key arguments made to the Supreme Court was around a justification of national emergency.

As it happens, the government won in practice.   The abrogation of the gold clauses, at least as applied to Federal government debt, was ruled unconstitutional (by an 8 to 1 margin).   But by a 5 to 4 margin, the Court ruled that the abrogation had not produced any damages to bond holders, and so those bondholders were prevented from taking further action (in something called the Court of Claims) against the government.  In other words, there were to be no practical consequences for having passed an unconstitutional law (I’m not entirely clear –  it isn’t discussed in the book – why having ruled it unconstitutional the Court didn’t overturn that provision, but clearly they didn’t).

Had the gold clauses in private and government bonds been allowed to stand, issuers would have been required to pay 69 per cent more (dollars) than otherwise (but, in effect, the same amount of gold).  In his book, Edwards seems to accept that this would have been a highly damaging, undesirable, and unacceptable outcome.  I’m less convinced.

For a start, they were the terms on which contracts had been entered into (at numerous different dates), and the cases before the Supreme Court all involved substantial and sophisticated issuers including the US government itself (although I understand that some residential mortgages at the time may also have contained the clause).  And it is not as if changes in gold parities and prices had never happened before (indeed, in other countries they had been frequent during World War One and the subsequent decade). No one, in contracting –  or purchasing – these bonds could credibly claim to have put no weight at all on the possibility of the US ever changing the gold price of dollars.  In fact, the US was still issuing bonds containing the gold clause into 1933, 18 months after the UK (for example) had gone off gold.

It is probably fair to suggest that no one really anticipated a deflationary event as severe and sustained as the Great Depression, but there is at least an arguable case that bankruptcy courts and limited liability exist to handle cases where things turn out unsustainably far from expectation.  But that is a case-by-case procedure, not a blanket transfer of wealth from lenders to borrowers.  In the US government case –  see the numbers earlier –  federal debt was not large and even Roosevelt acknowledged that losing the case would not have bankrupted the government.   Quite possibly the situation would have been different for some corporates.  But it is also worth remembering the whole point of the Roosevelt strategy (not so different in its end aims from those in many other countries), which was to markedly raise the economywide price level and reverse the sharp falls that had happened during the Depression.  To the extent that strategy was successful, the abrogration of the gold clauses would clearly leave lenders materially worse off than they would have been otherwise.  For borrowers in the tradables sector (admittedly probably a minority), the depreciation in the exchange rate itself markedly (and immediately) improved their capacity to service the debt, so it is even less obvious what the case was for the arbitrary use of government power to provide debt relief.

One of the government’s other arguments was that since the price level in the mid 1930s was materially lower than it had been a decade earlier, anyone who held the bonds throughout would be getting an unexpected windfall gain simply being paid out in dollars (since the purchasing power of those dollars was greater than it had been), let alone being paid out at the new higher gold price.  But even to the extent that argument was valid, it doesn’t take any account of secondary market trading in the affected securities.  A person who purchased a new issue bond in (say) 1926 might indeed be getting a windfall gain –  and windfall gains and losses happen all the time in economic life –  but a secondary market purchaser who’d purchased that bond in late 1932 would have lost out badly (and might well have put a high value on the gold clause as protection against just such an eventuality).

(To illustrate the windfall point, in the late 1980s and early 1990s New Zealand governments were determined to get inflation sustainably down. There wasn’t a great deal of confidence that would happen.  As late as November 1990, the 10 year bond yield averaged 12.96 per cent.  Actual CPI inflation in the subsequent 10 years averaged 1.8 per cent.  Similar windfall losses happened when inflation unexpectedly rose, and stayed up, in the 1970s.)

The sorts of revaluation effects the Roosevelt administration successfully tried to overturn happen not infrequently in systems where borrowers –  especially those not in the tradables sectors, without an export revenue hedge – have taken on considerable foreign currency debt, only for a substantial devaluation or depreciation in the exchange rate to occur.  It happened, for example, in New Zealand in 1984: much of the government’s debt was in foreign currency terms, and a 20 per cent devaluation immediately increased the servicing burden by 25 per cent.  Granted that New Zealand wasn’t in the depths of a depression in 1984 , but no one thought it would fair, reasonable (or even possible) to default on that additional servicing burden.

But in the early 1930s, both New Zealand and Australia were in the depths of really rather severe economic depressions –  perhaps not quite as bad as in the US, but certainly much worse than in, say, the UK.   Both countries had really large volumes of central, local (and state, in Australia) government debt issued abroad –  debt burdens far heavier than those facing the US government when Roosevelt took office.  The distinction between New Zealand or Australian pounds and pounds sterling wasn’t that clear in those days, but as the exchange rate diverged during the Depression, initially with government acquiescence and then at government direction (our own formal devaluation happened in early 1933) debts payable in London were suddenly costing the borrowers far far more than they had envisaged (in New Zealand pound terms).  And the price levels in New Zealand, Australia, and London were all quite a bit lower than initially envisaged.   New Zealand and Australian governments would have welcomed some debt relief on their overseas debts, but it never came: the powerful counterargument was “well, if we are going to successfully boost global price levels such relief won’t end up being necessary”.  And it wasn’t.

The big difference perhaps between the New Zealand and Australian cases and the US one in the 1930s is that the US debt was almost entirely held by domestic investors and was issued wholly under US domestic law.  The US didn’t need to tap international markets on a continuing basis, unlike both New Zealand and Australia.  And so New Zealand and Australia imposed defaults in respect of government  debt issued to domestic holders, but not to foreign ones, and the bulk of the (public) debt was foreign.  But rereading the account of the New Zealand (and Australian) experience in the 1930s, what is striking is the extent to which lenders were willing voluntarily to write down the value of their claims, voluntarily converting to less valuable (government) securities, apparently from some sense of “fairness” or the “national interest”.   One can wonder what sort of response Roosevelt would have achieved had he tried moral suasion rather than legislative coercion.   Perhaps it wouldn’t have worked for private sector issuers –  and for example, the New Zealand government used various legislative interventions in the 1930s to relieve farm debt –  but some case-by-case approach still seems preferable than the rather arbitrary use of legislative instruments to relieve all corporate borrowers from obligations they voluntarily entered into.  Especially, when the economy and the price level were just about to recover, improving (markedly) future servicing capacity.

Of course, had the US recovery subsequently been strikingly more robust and successful than those of other countries, there might be a stronger prima facie case for this (distinctive) debt relief component of Roosevelt’s strategy.  But it wasn’t.  As is well-recognised, it wasn’t until around 1940 that real GDP per capita in the US got back to 1929 levels (years behind, say, New Zealand, Australia, and the UK in that regard).  And the recovery in the price level also lagged.

Here is a chart of the price levels, indexed to 100 in 1929.

price levels

Prior to World War One, price level movements tended to be quite slow and gradual.  There was little sign anywhere of entrenched expectations of future trend changs (up or down).  After World War Two, inflation became an entrenched feature of the system.  In this period, things were in transition.   There were windfall gains and losses, falling heavily on different groups at different times.   But if deflation was the story of the Depression specifically, across all four countries the dominant theme of the period is a lift in the price level.  Even by 1939, in New Zealand and Australia and the UK price levels were more or less back to pre-Depression levels (it took a few years longer in the US).     There seems little obvious case for a borrower, not initially over-indebted, to use legislative powers to abrogate contracts freely entered into to remove significant value from lenders, at a time when the entire of macro policy was to drive up the price level.

A fair, and interesting, point Edwards makes (and which I also make in the treatment of the New Zealand default) is that there were few obvious adverse consequences from this US default.  There is little sign that borrowers became more reluctant to lend, or charged higher risk premia.  If so, that suggests that perhaps people in aggregate really did see it as a step not unjustifed in the extraordinary circumstances.

It is an interesting book about a now little-known episode in US history.  Edwards combines history, economics, and legal analysis, but presents in a way designed to appeal to the intelligent lay reader, not just to the geeky economic historian.  Debt default episodes –  here, there, and everywhere –  should be better understood.  We surely haven’t seen the last of sovereign defaults perhaps –  the way fiscal policy is going – even in the United States.

A stuff-up by Statistics New Zealand

Michael Reddell Statistics, Uncategorized

Many readers will recall the fiasco of the leak of an OCR announcement back in March 2016.  It turned out that the Reserve Bank’s systems were had been so lax for years that people in the lock-ups they then held could simply email back to their offices (or to anyone else) news of the announcement that was supposed to be being tightly held.  This weakness only came to light because someone in Mediaworks emailed the news of this particular OCR announcement to their office, and someone in that office emailed me (from memory I was supposed to go on one of their radio shows later that morning).  I drew the matter to the Bank’s attention.

In the wake of that episode, the Bank (rightly in my view) cancelled the pre-release lock-ups for journalists and analysts.  But other government agencies went right on, relying on trust more than anything else.   One notable example was Statistics New Zealand, which produces and publishes many of the most market-moving pieces of economic data.    When asked about any possible changes to their procedures (outlined here) following the Reserve Bank leak in 2016, they responded

Statistics NZ has not undertaken any reviews or made any changes to the department’s policy for media conferences following the Official Cash Rate leak at the Reserve Bank of New Zealand and the subsequent Deloitte report into that leak released last week.

and

While Statistics NZ has never had a breach, if that trust is abused and an embargo is broken, offenders and their organisation would be barred from attending future media conferences.

As I noted back then

Unfortunately, that was probably the sort of discipline/incentive the Reserve Bank was implicitly relying on as well.

Unfortunately, after the confusion the Prime Minister gave rise to earlier in the week, confusing the crown accounts and GDP (which had some people abroad worried that the Prime Minister actually had had an advanced briefing), there was apparently more trouble this morning.  But this time, the fault was entirely with Statistics New Zealand, and not with those in the lock-up.

The embargo for the lock-up on gross domestic product (GDP) for the June 2018 quarter, held today, 20 September 2018, was lifted about one minute earlier than the planned time of 10.45am.

The lock-up is held in Stats NZ’s Wellington offices from 10am to 10.45am, to allow key financial media, bank economists, and other government agencies to understand the information and ask questions about GDP, before the embargo is lifted. It is held under strict embargo conditions.

Stats NZ staff in the lock-up check official New Zealand time on the Measurement Standards Laboratory of New Zealand (MSL) website.

However, a computer script (JavaScript) bug meant that the official time clock website that appeared on the staff member’s phone picked up the phone’s own time setting, which was slightly fast.*

In other words, those in the embargoed lock-up had the data –  and could communicate it to their dealing rooms – a minute earlier than anyone not in the lock-up got the data.     And it seems to have mattered.  GDP was higher than expected and the exchange rate jumped.   People who were in the lock-up got the jump on that.  I’ve heard that the exchange rate moved before 10:45 (the official release time), which isn’t surprising if people in the lock-up had been told the embargo had been lifted.

What is striking about the statement SNZ put out –  and it wasn’t exactly distributed widely (say, to all the people who got the GDP release itself) –  is that there is no mention at all of these possible early trades, which (in effect) distributed money/profits from one group of people (those not in the know) to another (those in the know).  Unlike the 2016 Reserve Bank leak, there seem to have been real financial consequences to this mistake.  And it isn’t clear that Statistics New Zealand is taking it that seriously.   When I asked about any investigation being undertaken, the implication of their reply was that there would be no further investigation or review beyond the narrow technical statement I linked to earlier. I hope that is not correct (and I hope, for example, the Reserve Bank is insisting on something more).

Writing about these data lock-ups in 2016 I noted of the SNZ situation

Is Statistics New Zealand that different?  There is, obviously, no policy message SNZ is trying to put across with its releases, and so no risks of different messages getting to different people.  But the security risks are the same.  Perhaps it is simply more efficient to have everyone in the same room, to clarify key technical points, but couldn’t the same end be achieved –  on a more competitively neutral basis (to analysts based abroad, say) –  by a dial-in (even webcast) conference call held a bit later on the day of the release?

That still seems right to me. I cannot see the case for a pre-release lock-up (and I can see a case for a technical conference call later in the day).   Mistakes will happen while they keep on with lock-ups.   The reliance on trust seems to be as strong as ever, and (as far as we know) that has been honoured.  This time, the stuff-up was by Statistics New Zealand themselves.   It was unnecessary, and it will at the margin (and especially in conjunction with the political contretemps earlier in the week) damage confidence in our statistics agency and the integrity of our data.