Lest Reserve Bank readers think I’ve lost interest in them, it is time for an update on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill, currently before Parliament.

The government introduced this not-very-good piece of legislation some months ago, carrying out their election pledge to reform the Bank, but in such a minimalistic way that it is likely to make next to no difference.  Being seen to have done something, anything, seemed to be more important than properly overhauling our monetary policy agency, to be fit for purpose in an open and transparent democracy.   As a well-informed commenter here put it a few months ago

It appears to me that the Government has largely made its mind up about what it wants; the illusion of change rather than anything fundamental.

It’s a pity because as you say, this is probably a once in a generation opportunity to throughly review the legislation, to learn from best practice abroad, and bring into being a stronger Reserve Bank better aligned with public benefit.

What was proposed seemed only marginally better than the status quo, and even then on a couple of dimensions only.  The reforms proposed simply didn’t address the evident weaknesses in the way the Bank has been run, including:

• the dominance of a single unelected official,
• the structural weaknesses that made it unlikely the Board would ever really hold the Governor to account (despite being designed entirely to do so), and
• the lack of transparency of the institution.

Some of these issues can be seen as “cultural”, but legislation supports, and underpins, the sort of culture we can expect to see in powerful public institutions.

The bill was sent to the Finance and Expenditure Committee for consideration.  I made a submission, which I wrote about here.    Although I made some specific suggestions in other areas, including a better formulation of the proposed employment objective, and on how the Board works, my main concern was about the proposed new Monetary Policy Committee where I noted

The Monetary Policy Committee provisions of this bill are unambitious and disappointing, especially when set against the expressed aspiration of a once in a generation update to the legislation to reflect the way in which the world (including central banking) has changed since 1989.  Among the features of our age are a much degree of openness, a greater recognition of uncertainty and of the benefit of an open contest of ideas, and less willingness to build institutions based on a deference.  This bill reflects almost none of that.

In considering the bill, I would urge the Committee to look closely at the experiences of open central banks in the United Kingdom, the United States, and Sweden (in particular).  All are more open than anything envisaged in this legislation, and in the way the Minister has described his intentions for how the proposed New Zealand system should work.  Each of those central banks has had strong individuals willing and able to challenge consensus views, and to debate monetary policy issues thoughtfully and openly.  They do so in part by avoiding designing a system where the Governor (chief executive) has a too-dominant formal role.  The current bill does not really address that glaring weakness in the New Zealand system.

I concluded my post on the issue this way

This shouldn’t be a particularly partisan issue.  Everyone should want a better, more resilient, better-governed institution handling monetary policy, and for the regime itself to command confidence across the political spectrum.  I hope the select committee deliberations do finally prompt the Minister of Finance and the government to reconsider, to give up their small ambitions, and to embrace the idea of more far-reaching change and improvement in the way monetary policy is governed, contested, and accounted for.

I wasn’t optimistic.    The chair and deputy chair of the committee are both parliamentary under-secretaries; the chair the under-secretary to the Minister of Finance.  It is hardly arms-length parliamentary scrutiny.  And, from their public comments and a couple of reports I saw of committee sessions, the National Party members seemed more interested in playing partisan politics –  with silly arguments that adopting a (marginally) more internationally comparable model was putting at risk New Zealand macroeconomic stability.

And, having expected little, I was not thus unduly surprised when the Committee reported back a couple of weeks ago.   It was a pretty short report, falling along partisan lines (ACT even called the bill “an invitation to corruption”), and recommending hardly any changes to the bill.    The one (welcome) change of significance relates to a new document provided for under this legislation, the charter.

The charter would impose additional requirements on the MPC relating to transparency, accountability, and decision-making procedures. The requirements in the charter would go beyond what is provided for in legislation, allowing for flexibility as best practice evolves. The charter would be set by agreement between the Minister and the MPC, while the remit [effectively the policy target itself] would be set by the Minister following a specified process. Whenever the Minister issued a new remit, the Minister and the MPC would need to consider issuing a replacement charter. We agree that there is a legitimate public interest in the MPC’s decision-making procedures (for instance, vote attribution), and that changes to the charter could potentially be quite significant. To increase transparency, we recommend requiring public consultation on key issues relating to a replacement charter alongside the consultation on the remit required by clause 37.

That is a small step forward, at least in principle.    However, since the first of these charters is to be set by the Minister and the Governor (rather than the MPC), and the initial provisions are likely to be quite influential in how the MPC operates for some considerable time, there should be a commitment by the Minister to apply the same process of public consultation to the initial charter as will be required for subsequent replacements.   I can’t see any sign of such a commitment, or legislative requirement, at present.

One of the things the Reserve Bank management has consistently opposed is the idea that members of the Monetary Policy Committee should be able to openly articulate their views on issues relating to monetary policy (whether in speeches, interviews, or in comprehensive published minutes.  The Minister of Finance appears to have allowed himself to be persuaded by those arguments –  arguments which serve the institutional self-interest of public sector managers, rather than the public interest, which is advanced by robust debate, inside and outside the institution, on issues characterised by huge uncertainty, and where bureaucrats have no monopoly on wisdom.  (And, of course, the Governor himself shows no sign of any sort of personal self-restraint, apparently regarding it as appropriate for him to talk on all manner of things, whether or not the Bank has responsibility for them –  just no serious speeches on his core areas of responsibility.)   There are good, and highly-regarded, central banks abroad that do things quite differently, much more openly –  without the scary bogeyman the Reserve Bank invokes (“adds to uncertainty, lacks clarity, creates confusion”) coming to pass.

The United States is one example of such a system.  And as a specific example of how a more open system works, the Wall St Journal had a long interview with Patrick Harker, president of the Philadelphia Fed, one of the regional presidents who rotates through voting positions on the FOMC.  In fact, when I went looking for the transcript again I found they’d had three such interviews in just the last few months.

Of course, the US is a big country with much deeper journalistic resources, but the key point is that markets didn’t shake, confidence in the Fed wasn’t eroded, because citizens (and markets) were able to see and hear what these influential policymakers thought about important issues.   And it wasn’t shocking that not everyone agreed on everything. There is no reason to think it would be different in New Zealand, if our minister hadn’t allowed the bureaucrats to wrap him round their little finger.  It was, after all, supposed to be a government committed to openness and transparency.

As I’ve noted here previously, the very narrow scope of the proposed New Zealand Monetary Policy Committee, the legislated dominance of the Governor, the lack of resources for MPC members, and the tight constraints on their ability to do or say much is likely to make it hard to attract good people into those roles, and won’t encourage those who do get appointed to take the position very seriously.   Of course, that will probably suit the government and the Governor

And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.

The (minority) external MPC positions were advertised some time ago.   As I wrote about a few weeks ago, it appeared that the recruitment process had run into trouble.   I’d lodged OIA requests for a breakdown of applicants and of those taken to the next stage of the process, but when the Bank responded they indicated that no one had been taken to the next stage of the process at all.   I hadn’t even asked about a short-list, just about the group who hadn’t immediately been ruled out as totally unsuitable.

The other day I had a first stage substantive response, providing a breakdown of the people who had lodged applications for the external MPC positions.

There were 75 candidates in total, including candidates identified through a search process, for the roles of external members of the Monetary Policy Committee being established under the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill.

Of these 75 candidates: 23 percent (17 candidates) are women, 92 percent (69 candidates) are currently resident in New Zealand, and 8 percent (6 candidates) are currently employed at a university.

It was a surprisingly large number of people (although I’d asked about applicants, and it isn’t clear from the response whether all the people “identified through a search process” were necessarily actually wanting to be considered).

But it also makes it all the more odd that the process is moving so slowly.  There was a Reserve Bank Board meeting last week (the Board is responsible for the selection of MPC members) and yet the email I had earlier this week says they still don’t have a short-list.

Perhaps in the end they will manage a barely-credible set of appointees, but even if they manage it the first time (perhaps the Minister twists a few arms, and hands the nominations to the Board to send back to him), it is going to be hard to sustain even that as time goes on, so inadequate is the model the Minister has chosen.

It isn’t democratic (even questionable Deputy Commissioners of Police are directly appointed by elected people), it isn’t broad-ranging (the MPC has a deliberately very narrow mandate), it isn’t conducive to a serious contest of ideas (being too dominated by a single unelected person), it isn’t very accountable (formally or otherwise) and it isn’t very open and transparent.  It simply isn’t very good legislation.  And that is a shame, a lost opportunity.