What was and what might have been

Yesterday’s short post –  which countries were rich or highly productive in 1900 and which are now –  wasn’t really about New Zealand at all (it was an article about the US and Argentina that prompted me to dig out the numbers).   But it prompted a question about New Zealand from a reader that sent me off playing around with the relevant spreadsheets again.

The question was along the lines of when were we at our economic peak (relative to other countries) and, given that we no longer are what it might have taken, in terms of different growth rates, for us to match the leading group now.

As a reminder, for historical periods the standard collection of reference data is that by the late Angus Maddison.  He collated estimates of real GDP per capita for a wide range of countries.  The numbers are only as good as the estimates made by the researchers Maddison drew from.  Perhaps they could be improved on  –  some researchers have tried for individual countries –  but for now they are still the standard starting point.   For more recent decades, I prefer to use real GDP per hour worked estimates (which will tell more about an economy’s productive performance, the wage rates it will support etc), either from the OECD or the Conference Board (the latter for a much wider range of countries).

My first chart yesterday was the top group as at 1900 – a date chosen just as a nice round number.

1900 GDP pc

The top five countries on this chart were the top five pretty much all the way from about 1890 to just prior to World War Two.   Here is how New Zealand did relative to (a) the median of those five countries, and (b) to the country that would emerge after World War Two as the clear leader, the United States.

NZ rel to others pre war.png

There is a bit of noise in the year-to-year estimates (particularly those for New Zealand), so I’m not putting any weight on that 1920 peak,  But abstracting from year to year noise the picture is reasonably clear.  Relative to this group of countries –  highest incomes anywhere at the time –  New Zealand did just fine in the quarter-century to the start of World War One.  We were, there or thereabouts, right up with the very richest. On these estimates, the number one slot moved around among the UK, the US, New Zealand and Australia.

Wars are dreadful things.  But they tend to be relatively less bad for countries producing food and wool, and not facing any physical destruction to their own country.  Even better perhaps for distant neutrals, as the US was until mid-1917.

New Zealand’s relative decline in the 1920s is notable (and not inconsistent with a story I’ve run for some years, about the lack of any really favourable idiosyncratic productivity shocks favouring New Zealand based industries, of the sort we’d had in the 30-40 years prior to World War One).

But perhaps what is interesting is the recovery –  especially relative to the United States – in the 1930s.  In 1939, for example, we were basically level-pegging again with this top group of countries –  a touch behind the US (No. 1), a touch ahead of Switzerland (No. 2).

Was everything then fine as late as the start of World War Two?  I’d argue not.   First, business cycles matters and don’t always run in phase across countries.  The United States, in particular, was very slow to recover from the Great Depression. Here is the unemployment rate

fredgraph U 30s

That is an unemployment rate in excess of 15 per cent at the end of the 1930s. In New Zealand, by contrast, the unemployment rate had been under 6 per cent as early as the 1936 census and the numbers registered as unemployed dropped away very sharply in the following few years, especially in 1938.

I was reading the other day an academic volume The Macroeconomics of Populism in Latin America, and was rather struck by the parallels between New Zealand in the late 1930s and some of the Latin American case studies (from the 70s and 80s).  Most of those experiences ended very badly.  New Zealand authorities were running very expansionary policies in the late 1930s which certainly boosted GDP and employment in the short-run, but culminated in the imposition of extensive foreign exchange controls at the end of 1938 and would almost certainly have ended in a highly public debt default in 1939 or 1940 if we hadn’t been –  as it were –  “saved by the war” (first, the British desire to avoid serious ructions in the run-up to the war, and then the intensified demand for our primary exports etc once the war began).

Consistent with that story is that after the war, when all three economies were pretty much fully employed –  and none had been directly physically affected by the conflict – New Zealand’s GDP per capita was well behind (10-20 per cent depending on the precise year and country) those of Switzerland and the United States.  Our heyday really had been the pre World War One period.

The second strand of my reader’s question really related to how far behind we now are.

Here was my second chart from yesterday, showing the top-20 real GDP per hour worked countries (from the Conference Board database) in 2018.

GDP phw 2018

I’m happy to set aside Norway (markedly boosted by oil/gas) and Luxembourg (city state with some material tax distortions) and focus on the next group of countries (Switzerland to Belgium) I’ve highlighted here in various posts.    On this measure, the median real GDP per hour worked exceeds that of New Zealand by 68 per cent.

New Zealand implemented a huge range of policy reforms in the late 1980s and early 1990s.  The aspiration was to make material inroads on closing the gaps that had opened between New Zealand and the OECD leaders.  Sadly, the gap has actually widened.  1990 is a common starting point for comparisons –  not only was it well into the reform period, but it was just prior to the New Zealand (and other advanced country) recession of 1991, so comparisons are not messed up but that particular cyclical issue.   In 1990, the median of that group of seven leading OECD countries was “only” 56 per cent ahead of New Zealand.

But what if things had been different?  How much more rapid productivity growth (than we actually experienced) would we have to have had since 1990 to have caught up with this leading bunch?   That is 28 years.  We”d have needed productivity growth that was 1.85 percentage points faster on average, each and every year.

Would that have been possible?   Who knows.   28 years seems a bit ambitious. But I did have a quick look at the data for some emerging OECD countries. Over the last 20 years or so, these countries have had productivity growth rates (on average over that long period) in excess of 1.85 percentage points above those of the median of that “leading bunch” of OECD countries:  South Korea, Lithuania, Poland, and Slovakia.

Would it have been possible for us? Who knows?  Would it be possible now, for the next 25 or 30 years?   I don’t know.  Personally, I’d be a bit surprised if we could close the gap that quickly, or fully.  But for now we are still going backwards (relatively)…..as we have, more or less, for 100 years.   And there seems no great sense of angst, unease or urgency among any of political parties, or the economic establishment.

What a diminished legacy for the next generation.

 

 

 

Dear Board members

You’ll recall that in Sunday’s newspaper Reserve Bank Board chair Neil Quigley declared, when asked by a journalist, that

Orr’s chequered behaviour is not something on which the Reserve Bank chairman, Neil Quigley, is prepared to act.

“I have not received a formal complaint from any party about the governor’s interaction with them,” he said. “The Board has full confidence in Adrian Orr’s leadership.”

Such an underwhelming attempt to avoid any pro-active responsibility to look into concerns in plain sight, let alone those under rocks.  He hadn’t had a “formal complaint” (but had presumably heard quite a few informal expression of concern) “from any party about the governor’s interaction with them” (suggesting that if someone had expressed concern to Quigley about how the Governor had treated other people, let alone other issues or processes, it wasn’t covered by his denial.  And all that without acknowledging the difficulty many people would have in formally complaining –  even if they had any confidence in the Board itself – given the Governor’s power over numerous financial sector businesses.  But it was all too much par for the course from the Board, which consistently seems to act as if it is more interested in covering for the Governor (whichever one) than in acting on behalf of the Minister and the public.

But as I noted the other day, Quigley’s narrow comment could be seen as a bit of an invitation for people to lodge expressions of concern.   I heard that someone had written to the chair of the Board expressing various concerns and calling on them to exert greater leadership in holding the Governor to account, and that in response Quigley had indicated the issue would be discussed at the Board’s regular meeting on Friday (Orr himself is a Board member, so one hopes at least some of the discussion occurs in his absence).  I decided to add my tuppenceworth to the mix and wrote to the Board last night.  As I’ve noted here, I’ve not had any bad interactions with the Governor myself, but what I’ve seen and heard of other episodes, and the succession of issues around poor process, poor policy substance, and poor communications were, to me, ample to think that the Board really needs to start taking these issues seriously.    It is hard to think of an advanced economy where so many people have had such broad-ranging concerns about an incumbent Governor –  and our one has more power than most.

The full text of my letter is here

Letter to RB Board re Orr October 2019 FINAL

Here is some of the text

You will, no doubt, be aware of the recent series of articles by the Stuff journalist Kate MacNamara. One does not have to be persuaded by all her arguments, or those of the individuals she quotes, to be seriously disconcerted by the perspectives on the Governor’s conduct that she reports. Some of the questionable conduct – the Governor’s treatment of Jenny Ruth at a recent press conference – was visible to all. Others weren’t. Perhaps all those other stories are false, perhaps all are grossly exaggerated. You would surely want to know whether or not that was so – MacNamara clearly having talked to people who are at least somewhat well-informed and the claims having been run prominently in a major mainstream media outlet – but you cannot have that assurance yourselves, or offer it to the public or Minister, without a serious review of the allegations, and of the wider “culture and conduct” that are claimed to have characterise the Governor increasingly in recent months. And yet your chair, when approached for comment, simply fell back on the line of “we haven’t received a formal complaint” (clearly suggesting you’d heard the informal unease many are feeling) as if that meant there was thus no need to do anything more. Frankly you owe it to the Governor, almost as much as to the public, to treat these issues seriously. If there is nothing to the stories – bullying, intimidation, bad-mouthing critics in public fora etc – surely the Governor’s name deserves to be cleared? If there is much to the stories, you need to act, and – having let things drift to this point – to be known to have acted.

And towards the end

Most recently, there was the statement released late last week by the Bank’s senior management – but clearly under the Governor’s aegis and in the Governor’s personal style. Anyone I know who has read it – and fortunately perhaps it hasn’t had much coverage – has been incredulous. How could the Governor of the central bank – the most powerful unelected person in New Zealand – be reduced to so much bluster, and attempts at distraction, trying to suggest that critics were raising unfair issues about Bank staff, when almost all concerns I’ve seen or heard have been about the Governor himself and, to a lesser extent, his senior management? The fact that his handpicked senior management went along with that statement, and were fully party to it, should itself raise further concerns for the Board (including because you also have statutory responsibility for keeping under constant review the performance of the Deputy Governor).

I could go on, but won’t. But there are ample prima facie reasons why the Board should be concerned about how the Governor is conducting himself and how he is conducting public affairs, and why that concern needs now to result in some open-minded but searching investigation and some serious accountability.

We should have a right to expect a Governor who is temperate, who displays gravitas, who demonstrates rigour, who recognises that every one of us has blindspots and is prone to making mistakes, who is open to genuine debate and challenge, who exercises a judicious authority, and models this sort of behaviour to the staff in the organisation he leads. You were responsible for Adrian Orr’s appointment. You need to act to ensure he operates in a manner consistent with those reasonable expectations. If you don’t, the Bank will be diminished – substantively, and in the eyes of domestic and foreign observers – the conduct of policy will be impaired, whatever potential Adrian has to be good Governor will never be realised, and your own standing as guardians of the public interests in the Bank will rightly -and perhaps irretrievably – be stained.

I gather from Neil Quigley that my letter will also be discussed by the Board on Friday.

I also wrote this morning to the Minister of Finance, partly to send him a copy of the letter to the Board, but also to highlight to him his responsibility for the Bank and for the Governor.

In many areas of the Bank’s operations the Governor operates independently of the Minister of Finance, and the Reserve Bank has day-to-day responsibilities for monitoring the Governor’s stewardship and conduct. But none of that diminishes your responsibilities as Minister of Finance. You appoint the Governor (on the Board’s recommendation) and the Deputy Governor, you appoint Board members (and now, specifically, the chair) and it is only on your recommendation that, if things got particularly bad, that either Board members or the Governor (or the Deputy Governor) can be removed from office. Moreover, you are the only person referenced in the Reserve Bank Act who is directly accountable to Parliament and to the public. If serious issues or concerns arise it is not satisfactory for a Minister of Finance to fall back on lines about operational independence or about leaving the Board to do its thing. You are responsible to ensure that all these appointees are doing their jobs to the high standards the public should expect from public officeholders.

and

These are serious matters and need to be addressed as such by both you and the Board. To the extent that concerns raised are either ungrounded or exaggerated, it is important that the Governor’s name be cleared. But to the extent that those concerns are warranted, it is important that they are addressed and issued remedied, for the sake of the Bank itself (including its staff), for the sake of good quality policymaking, in the interests of good governance in New Zealand more generally, and (frankly) for the Governor’s own sake. It isn’t good enough for the chair of the Bank’s Board – who is directly responsible to you – to suggest that not having received a “formal complaint” there is no need for the Board to do anything. Anyone charged with a monitoring responsibility needs to be much more pro-active than that.

One of criticisms of the Governor has been the lack of any serious or substantive speeches from him on topics he is responsible and accountable for.  As I noted to the Board, apart from anything else, such speeches can be one way of benchmarking the Governor’s performance.    As it happens, late this morning the Bank issued a speech by the Deputy Governor. I haven’t yet read it –  so reserve the right to disagree and criticise specifics (good serious speeches create the basis for intelligent discussion and debate) – but flicking through it it simply looks like a serious speech, of the sort a thoughtful central banker would give anywhere in the advanced world.  Of the sort unseen from Adrian Orr.  Bascand has his weaknesses (I’ve written about some of them here, including his apparent reluctance to make a stand) but back in 2017 he told media that he had applied to be Governor (which I wrote about here).  He missed out.  But whatever his other weaknesses, it is impossible to imagine that anyone would be raising the range of concerns –  process, substance, conduct –  had the Board and Minister appointed Geoff Bascand as Governor.

 

 

Prosperity then and now

I have a few other things on today, so these are just a couple of charts that are background for a post I may write tomorrow, prompted by this article.

The first shows the countries with the highest GDP per capita in 1900, expressed in international dollars, and taken from the Maddison project database.  Where I stopped is a bit arbitrary, but there is a reasonable step down from Chile to the next group of countries (ones in Europe).  Which countries make the list doesn’t depend on the precise choice of year (I checked 1913 and got the same list).

1900 GDP pc

I’ve also marked, in red, the countries that wouldn’t make a top-tier grouping today.

And here is the top tier of countries now, ranked by real GDP per hour worked (a better indicator of the capacity/possibilities of an economy, but for which there isn’t data for the earlier periods).   I’ve included a slightly larger number of countries, recognising that some of the very small ones (notably Luxembourg and Iceland) weren’t in the 1900 database.  For Ireland, I have followed the local authorities’ guidance and used their “modified GNI measure”.

GDP phw 2018

I find both the similarities and differences striking.

Most of the top-tier countries in 1900 are still there now.  Most of today’s top-tier countries (recognising that the oil exporters generally aren’t in the database) were there in 1900. Long-term persistence in prosperity is well-recognised in the literature.

But there are differences too.

In 1900, four Anglo countries topped the chart.  These days, only the United States is anywhere near the top.

And of the five southern hemisphere countries on the list in 1900, only one (Australia) is still there today.  All of the four who have dropped off the list are well below the lowest country on it (Ireland).

And the only Asian country that yet makes the list is Singapore (although Taiwan and Japan would take two of the next three places).

 

Holding the Bank to account: OIA requests

I was looking for something this morning on the Reserve Bank website and was surprised to find a very long list of Official Information Act responses this year.   When I counted, there were 50 for year to date, and it is only mid-October.

Here is the number of responses the Bank has on the website for each year since they started publishing.

RB OIA responses.png

I’m pretty sure it isn’t a consistent series.  Back in the earlier years, they seem to have only published the odd high-profile release (eg papers on South Canterbury Finance, or a joint one with The Treasury on the earthquakes).   They will, almost certainly have had more requests than were recorded here (even abstracting from the technical point that any request for information from a public agency –  be it ever so small a statistical query – is covered by the Official Information Act).

My interest is mainly in the years from 2015.  As it happens, I left the Bank in early 2015 and lodged a number of requests that year, perhaps a third of those shown.  I’ve remained a moderately active user of the Act –  which is what it is there for –  in requesting information from the Bank and the Board.  But the sharp increase in the number of responses shown  in the last couple of years has nothing directly to do with me.

I’m still a bit sceptical as to whether there is really a consistent series. I know that some of the responses I’ve had from the Bank have been published on the website and some not (ones to the Board seem to have been less likely to be published).  And this specific response –  to a National Party request asking for the number of requests the Bank had handled in a particular quarter –  confirms, by implication, that they are not publishing all the responses.  But a minimum of 50 requests over the course of this year to date is many more than the Bank was facing just a few years ago.

For such a powerful agency, making controversial policy and organisational changes, and subject to a review of its legislation, it doesn’t seem an unduly large number.  A few years ago, the Bank got very upset about the (then) rising number of OIA requests (this was 2015/16) suggesting that they were facing unreasonable burdens, threatening to charge etc etc.  As I pointed out at the time, there was no evidence they were facing as large a burden as (say) The Treasury –  which has 87 responses published so far this year – and I hope it has been something of a salutary lesson for them that the number of requests has only increased over the last few years.

The Reserve Bank Board may choose to do no serious scrutiny, to do little about holding successive Governors to account, but Parliament long ago provided for citizen scrutiny, through the (much abused and avoided) mechanisms of the OIA.  It is good to see people using those provisions.

Better still, of course, would be if the Board and the Minister of Finance were adequately doing their job, holding the Governor and the Bank to account on process, substance, and conduct.

 

 

Culture and conduct in question

Stuff’s new, apparently Canadian, journalist Kate MacNamara is doing a pretty good job of keeping up the pressure on the Governor of the Reserve Bank, Adrian Orr.  It is hard to believe a New Zealand journalist would have done so –  one column perhaps, but not three in a week.  Then again, I’m pretty sure we’ve never had a Reserve Bank Governor behaving in quite such an egregious and unacceptably poor way –  not as a single lapse of judgement either, but as a sustained pattern of behaviour.  Sadly, the conduct of the Board (and the Minister?) in such matters, of which more below, is all too typical of the New Zealand establishment.

MacNamara’s latest (“Orr’s culture and conduct in question”) was in the Sunday Star-Times yesterday.   She frames the issue as one of whether the desired end (a stronger banking system) justifies the means (Orr’s conduct).  I’m not sure that is the best way to frame the issue, but here is her take

In December, the Reserve Bank released its boosted capital reserves proposal and asked all interested parties to make submissions.

It would be an open process, the bank said, welcoming all views. But that characterisation was soon at odds with the governor’s behaviour.

Numerous parties involved in the submission process described a pattern of behaviour by Orr of belittling and berating those who disagreed with him.

Orr has penned his critics letters and threatened to broadcast them. He has confronted submitters on the sidelines of industry conferences. Sometimes he called them up at odd hours to tear a strip off them for their views.

And that is before starting on the not-particularly-robust analysis in support of the Governor’s proposal  –  for a huge increase in bank capital ratios, after years when the Bank assured us the system was sound and robust – that the Bank has, only slowly, been rolling out.  Cost-benefit analysis anyone?  Only after he has made his final decision –  for which there are no rights of appeal –  the Governor tells us.

As MacNamara notes, Orr wields an extraordinary level of power in this area –  unparalleled, as far as I know, anywhere in the advanced world.  He can wheel up a proposal, working to no very well defined parliamentary mandate, has only to jump through process hoops around consultation, and then makes the final decision all by himself.  There are no substantive appeals allowed, and the Minister of Finance cannot overrule him (though could, if he chose, bring other pressures to bear).

One of my criticisms of the Governor is that he doesn’t stay in his lane, and sounds off on all manner of highly political issues in pursuit of his personal ideological agendas (in ways we’d find quite unacceptable if other senior independent figures –  the Police Commissioner, the Chief Justice eg – were to do it).  Sadly, that has become quite common –  especially around climate change – among central bankers globally, and Mark Carney (Governor of the Bank of England) has made pretty clear his personal views on Brexit.  As MacNamara notes, apparently

To provide a little context, Orr was recently compared in his outspokenness to Bank of Engand governor Mark Carney.

Paul Waldie covers Carney in London as the European correspondent for Canada’s Globe and Mail newspaper. Carney was previously governor of the Bank of Canada.

Carney has been criticised for playing politics in his estimations of the cost of Brexit in the United Kingdom.

But Waldie is emphatic. “He’s never rude. He’s never personal. He doesn’t hit back at his critics. He’s cool-headed.”

Carney provides no precedent for phoning adversaries after hours, neither blasting them from the lectern or on the sidelines of industry meetings and events.

He gives serious thoughtful speeches as well.

MacNamara concludes

On the contrary, Orr appears to be unrivalled among central bankers in the developed world for the tempestuous and personally directed venting of his views.

I’ve watched, and participated in, central banking for a long time, and that would be my view too.  MacNamara introduces another overseas expert on such matters.

Annelise Riles of Northwestern University’s Buffett Institute for Global Affairs, who’s studied the behaviour of central bankers and has even written a book about them, couldn’t think of a single comparator in contemporary times.

Central banks certainly use many channels to communicate with banks, she said. And it’s not uncommon for central bankers to let banks know how they feel.

“But berating them publicly is just not seen very much,” she said. And though private exchanges are less visible, she couldn’t think of any examples of bald incivility or hostility.

Central bank heads often aren’t even close to saints  (just think back a few years to the way Graeme Wheeler and his top team –  including the current Dep Governor – were used in a not-at-all subtle attempt to shut down criticism from the BNZ’s Stephen Toplis), but nonetheless Orr’s sustained pattern of conduct seems to stand out.  Perhaps the only “defence” one might make of it is that what you see is what you get –  he has always been known for these sorts of tendencies.  He can behave fine when he is on top in an unquestioned way, but put him under any sort of pressure and he isn’t someone to conduct himself with dignity, civility, and respect.

I haven’t had particularly bad experiences of Orr’s personal conduct myself. I had quite a bit to do with him in his two earlier stints in the Reserve Bank, but when he was Chief Economist I was in the Financial Markets Department and when he was head of financial markets and bank supervision I was in the Economics Department.  I saw shonky analysis in support of questionable policies, and didn’t have much time for his divisive style (which, remarkably, he owned up to in a farewell speech when he left the Bank the first time).  But I was left some mix of underwhelmed and bemused  –  at this extremely ambitious, outgoing, sometimes amusing, opportunistic, but not fundamentally serious person –  rather than having any particular sense of personal grievance.  When he was appointed Governor I wrote a couple of posts (one here) that I still think read as a pretty balanced treatment, if generous with the benefit of hindsight.

Others have had a much stronger view.  This comment was left on my Saturday post by Geof Mortlock, who worked directly under Adrian during both of Orr’s previous Reserve Bank stints.

None of what we are seeing with Adrian Orr surprises me in the least. It is precisely what I had expected when he was appointed as governor. The problems so clearly revealed now for all to see were very much evident to me and many others when Orr was deputy governor and head of financial stability in the period 2003 to 2007.  He created a sense of panic when there was no need for it. He engaged aggressively with Australian banks when mature, adult dialogue would have been far more effective and appropriate. He facilitated and abetted an aggressive and petulant fight with APRA, RBA and Aussie Treasury over trans-Tasman regulatory issues rather than seeking to resolve them in a considered, intelligent manner. He engaged aggressively with staff and routinely bullied them. He created a deep level of stress in the RBNZ among staff that contributed to the departure of some key people. I can attest to what it was like working with him. I and others departed the RBNZ because of the severe impact he had on morale and because of concerns over mismanagement of issues and because of the appalling culture that he and others created in the RBNZ. Bollard presided over much of this, either unaware or unconcerned, and did nothing to address the matter from what I could see.

Now that Orr is governor, his unsuitability for the job is evident for any impartial observer to see. The lack of judgement, unsuitable temperament, lack of maturity, inadequate knowledge of the issues and a serious failure to intelligently addressthe policy issues are all obvious to anyone who cares to look at his performance.

Sadly, the RBNZ Board seems to lack the competence or mettle to do anything about it. Its recent annual report was a pathetic effort at exercising meaningful scrutiny over Orr. Even more sadly we seem to have a minister of finance who is asleep at the wheel and either turning a blind eye to Orr’s appalling incompetence in handling the tasks entrusted to him or who is happy to see Orr playing an overtly political role that is totally inappropriate for someone holding office as governor.

It is time that the people with authority over Orr did something about his conduct, statements and handling of policy issues. The RBNZ’s credibility is at stake. And serious policy outcomes are under threat. Robertson and the Board need to take action to address the Orr problem.

Ah, the Board.  They got us into this mess.   Assuming they followed the provisions of the Act (and didn’t just take guidance from Grant Robertson) they are the one’s responsible for his appointment as Governor.  They don’t have many other specific powers, but they have an overarching responsibility to keep under “constant review” the performance of (a) the Bank, and (b) specifically, the Governor in whom most of the powers of the Bank are still personally vested.    If the Board isn’t satisfied they must advise the Minister in writing, and may go so far as to recommend the dismissal of the Governor.  (Regardless of the views of the Board, the Minister may also recommend dismissal of the Governor is satisfied that the Governor has not “adequately discharged” the responsibilities of his office.)

Last week I suggested that one omission from the first MacNamara article was any sign of having approached the Board.  I didn’t expect she’d get much if she asked, but what the chair said was likely to be telling, even if he simply stonewalled.   Anyway, for this week’s article MacNamara went to the chair, the economist academic (and Vice-Chancellor of Waikato) Neil Quigley and sought comment.  This is what she got.

Orr’s chequered behaviour is not something on which the Reserve Bank chairman, Neil Quigley, is prepared to act.

“I have not received a formal complaint from any party about the governor’s interaction with them,” he said. “The Board has full confidence in Adrian Orr’s leadership.”

Some people will argue that Quigley had little choice but to express full confidence (for a corporate board you back the incumbent until you sack him or her).  I don’t agree with that take, given that the Reserve Bank’s Board is explicitly set up as a monitoring and accountability body, with its own public reporting responsibilities etc separate from those of the Bank.     It isn’t an executive body.

But what startled me wasn’t the formulaic “full confidence” line  so much as the rest of the comment.  Here is how Eric Crampton phrased his response to Quigley’s comments

eric orr.png

Quite.   Of course, Orr doesn’t have much power over some people who have been badly treated by him –  for example, the academic Martien Lubberink –  but the general point, that one is dealing a very powerful man here, is well made.  How did the Board so diminish its own sense of its role that the only thing they’d be interested in is a “formal complaint”?  And why would they suppose anyone would bother them when the Board –  under Quigley and his predecessors (think of the Toplis business or the OCR leak) –  has a long record of really only acting as fronts for successive Governors (even on rare occasions when something approaching a “formal complaint” has been made).    It is almost like a climate in which everyone knows there has been, say, a culture of sexual harrassment in an organisation, perhaps starting from the top, but no one quite has the courage to lodge a formal complaint –  the fact that “everyone knows” something should still put a Board on notice that there is something to get to the bottom of, something that needs addressing.   Quigley and his colleagues surely are reading the newspapers and other commentary and they should be keeping an ear open on the cocktail party circuits etc they no doubt frequent. It is their job –  “constant review”, not simply responding to a “formal complaint”, whatever one of those might be in this context.

That is what serious people doing the Reserve Bank Board job would be doing.  But, of course, no one –  with the possible exception of the Governor –  has any confidence in the Board to do its job.  It is why the government has made an in-principle decision to remove that role from them, but in the meantime perhaps they do a public service in demonstrating just what a pointless useless entity there are.  I gather the Board has its monthly meeting on Friday,  It is time for a rethink, and for beginning to finally take seriously the growing concerns about the Governor, not waiting for “formal complaints” Perhaps Quigley’s comment could even perhaps spur a few people to consider lodging ‘formal complaints” –  not necessarily because as individuals they can’t cope with a rude bully, but because we should expect much better standards of behaviour from powerful public figures.

The whole episode –  the bank capital review –  has been characterised by poor process, poor substance, and astonishingly poor conduct, all of which are the Governor’s personal responsibility.  He needs to be called to account –  and not just by a journalist and a few specialist commentators –  by those formally charged with doing the job (Board and Minister), but also by his own senior managers (eg he has a deputy governor with a secure statutory position and earning $600000 per annum), decent people who must be getting increasingly uncomfortable with the boss’s style.   Apart from anything else, it is simply a shocking model for up and coming central bankers and financial system regulators.  People are shaped, for good and ill, by those who lead the organisations they are part of.   Rigour, detachment, courtesy, openness, gravitas, judiciousness and so on are the sorts of qualities we should expect to find in a Reserve Bank Governor.  Not one of them seems to characterise the incumbent.  It isn’t a single lapse of judgement, but a systematic pattern of  the sort of culture and conduct that should alarm anyone who cares about good governance and high-quality policymaking in New Zealand.

Reopening parent visas

Last week the government announced the reopening applications for parent residence visas.

For a couple of decades, parent visas made up a pretty large chunk –  around 10 per cent – of total residence visas issued.   From 1997/98 to 2015/16, 75000 parent visas were issued.  These were, almost certainly, all people who could not have obtained residence under the more-demanding skills-based segments of the immigration programme.  Most probably, given the overall target/guidance for the number of residence approvals to be issued, issuing parent visas lowered the average quality of those given residence.  Perhaps the effect wasn’t large – since the marginal approvals under the skilled streams often weren’t that skilled at all –  but the direction of effect was pretty clear.

Parent visas weren’t the only such questionable streams, although it was the largest. Over the same period, for example, almost 20000 people got residence under “sibling and adult child” provisions.

All this in an immigration programme that was avowedly primarily about the potential economic gains to New Zealanders.  Of course, the programme has never been all about economics –  there are refugees for example, a strand almost entirely about humanitarianism –  but the rhetoric of successive governments has been that the focus is economic benefit (and given how poor our productivity record, don’t we need better outcomes).  And it has never been obvious how the parent visa (and related family strands) help on that count.

Late in their term, the previous government suspended the parent visa programme and MBIE data suggests there have been very few approvals since then.  But no one had been sure what the future regime would be.  Now we are.

The positive aspect of the announcement last week is that there will only be 1000 places per annum.  By contrast, under the previous rules often in excess of 4000 parent residence visas were being granted each year (although there is an uncapped –  but  more demanding –  parent retirement residence visa on top of that).

Perhaps, then, one shouldn’t be unduly bothered about the new system.  But if we are going to have an economics-focused immigration system, operating on a very scale by global standards, we should be aiming to get the very best from it.     And it is hard to see how the parent visa policy fits that bill.

The fiscal dimensions of the equation are perhaps most obvious.  Sure, these new parent visa residents won’t be eligible for New Zealand Superannuation straightaway. But the median age of people getting parent visas used to be about 60, and you only need to live here for 10 years to get full NZS.  Average remaining life expectancy at age 60 in New Zealand is almost another 25 years.   If these new residents work and pay income tax at all, very few are likely to even come close to making a fiscal contribution approximating the NZS cost.  From some countries, any NZS entitlements have to be offset against pensions from home countries, but not all significant source countries have such systems.  Perhaps as importantly, new residents are entitled to full access to the public health system.  No doubt you have to pass a medical test to get your parent visa, but as for natives so for immigrants, health expenses tend to be materially higher in the last few years of life than in, say, your 20s or 30s.   Health spending is a large and rising share of government spending and, over time, GDP.    There are reasonable arguments –  also open to some debate –  that migration generally may be fiscally positive. For these elderly migrants it is almost inevitably not so.

The government doesn’t even try to pretend otherwise –  although it certainly does nothing to highlight, or limit, the fiscal cost (eg greatly extending the residency requirement for full NZS).  Instead, their argument for parent visas is a convoluted quasi-economic one.  According to the Minister

As part of its work to ensure businesses can get the skilled workers they need, the Coalition Government is re-opening and re-setting the Parent Category visa programme, Immigration Minister Iain Lees-Galloway says.

The move will:

  • support skilled migrants who help fill New Zealand’s skills gaps by providing a pathway for their parents to join them
  • ….
  • Help New Zealand businesses find the skilled labour they need
  • Further strengthen the economy by helping businesses thrive.

You can probably ignore the pure spin in the last line (the economy not being strong, businesses as a whole not thriving, productivity growth being atrocious etc).

As for the rest, recall that the average skill level of the “skilled migrants” just isn’t very high at all (all those retail and cafe managers, aged care workers and so on).  But also that the Minister and his department have never been able to produce remotely conclusive empirical evidence of the economic benefits of migration, and if we can only atract the people Lees-Galloway thinks “we need” by also taking on a big fiscal impost (see above) the gains must have been pretty thin and insubstantial to start with.  Especially when every non-working migrant (ie probably most of the parent visa arrivals) will add to the demand for labour (derived demand from their consumption) without adding to the supply of it.

There has been some criticism that the new income threshold sponsors (the adult children) will have to meet mean that parent visas will be an option only for  “the rich”.  And there are some anomalies there, including the fact that a couple in which both are working part-time are treated much more onerously than a single fulltime income earner, but in the end if you are going to offer only a few places, they need to be rationed somehow, and given the likely financial cost to the taxpayer, it makes some sense to focus on the migrants who are actually earning a fair amount (although a household income of $159000 across two earners –  while well above median –  is hardly “rich).  If there are any encouragement effects for really able younger migrants, they are going to be greatly attentuated if parent visas were handed out by lottery.

parent visa

All that said, the new rules look rather weak, and look as though they will reward those who are prepared to game the system, pushing the boundaries (perhaps beyond breaking point)) and/or who have the capacity to rearrange their declared income across time.   Work in a salaried position in a government department or big corporate and you probably have few options, but for others I’m sure smart accountants and lawyers will soon be advising on how to game the system.   As you’ll see above, the sponsors do need a reasonably high income, but they only need it until the parent gets their visa, and then only for two of the three years previously.  I guess that is supposed to allow for natural variability in eg business income, but it means you only have to find some way of inflating your declared income for a couple of years and your parent can get in, with no ongoing support or minimum income requirements.

I guess parent visas issue looks and feels a lot different to people (like me) whose parents and grandparents were all born in New Zealand than they do to people who’ve migrated, including to couples where a native New Zealander married someone abroad and settled here.    I can even see how someone who migrated here at 25 when their parents were 45 might not have given much thought then to how a widowed parent abroad might cope at age 80.  But the bit I really don’t get, at all, is why there should be any presumption that if you migrate to another country, leaving home and family, that should in short order (and you only need to have been resident here for three years to sponsor a parent) create some expectation that if aged parents have issues they should be able to come here, rather than that you return home.    Migration –  especially that to New Zealand (where the overall productivity gains are so questionable) –  has always mostly benefited the migrant.  We are doing them a favour much more than they, by coming, have done us a favour. But if you have family responsibilities at home, go back and meet them.  Don’t expect the New Zealand taxpayer to support those who’ve never been a part of us, coming only at the end of life.

It would be different if any parent visas were provided only to those with guarantees of income and health support, and thus a rock-solid assurances that these individuals would not be a financial burden on the New Zealand taxpayer.  I’d have no particular problem with an uncapped scheme of that sort –  and the existing uncapped scheme doesn’t have those protections, especially as regards health spending. But it would require, say, evidence that an annuity had been purchased from a rock solid provider, and that rock-solid provision had been made for the purchase of lifelong comprehensive health insurance.   The number of people who could meet that sort of standard would be really small (especially with real interest rates at record low levels).  But in a sense that just demonstrates the difficulty of justifying parent visas on any reasonable economic test.

Perhaps there is a grounds for a weaker compassionate standard, but make that subject to a 20 year residence/citizenship test for the sponsoring child.  But if you’ve been here for only three years, or haven’t bothered to become a citizen, if your parent needs you, go to them (we could even hold open the child’s residence visa for, say, five years while they did).  I saw a a somewhat gung-ho columnist in the Dominion-Post on Saturday championing parent visas on the grounds that

Their children have become economically valuable New Zealanders.  They deserve to have an avenue that responds to family need.

But in many cases (a) the children have not become New Zealanders, and (b) the evidence for the economic benefit to New Zealanders from migration is thin, at best.  When and if, as a relatively new migrant, family needs you, go to them.  They are your responsibility, not ours.  It is a bit like the argument that it somehow isn’t fair that kids grow up without their grandparents –  not only can grandparents visit relatively easily (in most cases), but surely you should have thought about that before leaving home and hearth, and grandparents, and settling in the most remote corner of the earth.

As I say, at 1000 visas a year this isn’t the biggest issue there is around temporary or permanent migration policy.  But that doesn’t mean it shouldn’t be scrutinised and challenged.   If we are to be serious about lifting overal productivity, we need a hard-headed approach to policy, and one that prioritises the interests of New Zealanders.

(On another matter, I see that Stuff’s Kate MacNamara has returned to the fray with another column on the problem that is Adrian Orr.  As I have to spend this afternoon in a meeting with the Deputy Governor and a Board member, I will save my comments on the article and the issues it raises until later.)

Unfit to govern?

I’m presuming Stuff’s Kate MacNamara won’t be very welcome at the Reserve Bank for quite some time.

She was the author of the double-page spread in last week’s Sunday Star-Times about the Governor (“Portrait of the Governor as a strongman” – note that is one word, not two, and the difference is quite important).  I wrote about that earlier in the week.  As a reminder of some of that article, it included this

The video of the conference remains on the Reserve Bank’s website. Some reporters said they were stunned Orr would air his anger so publicly and called it bullying.

But other observers were not surprised. Details of Lubberink’s experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank’s plan.

“There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,” said one source who’s been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn’t agree with.

“I’m worried about what he’s doing.”

The source said some companies have “withheld submissions,” for fear of being targeted by Orr.

“They’re absolutely scared of repercussions. It’s genuinely disturbing,” he said.

and this, re the Governor’s approach around the bank capital debate

In the cut and thrust of the debate, Orr’s jokey style and everyman charisma fell away. In recent months he’s dogmatically insisted the cost of his plan would be minimal and has picked personally at critics in the media, academia, and the financial services industry.

He’s been variously described as defensive, bullying, and perilously close to abusing his power.

“He’s in danger of bringing scorn on his office,” said long-time industry watcher David Tripe, professor of banking at Massey University. “I used to know him well. I no longer feel so confident.”

The Governor was reported to have refused any comment when approached for that story.

MacNamara followed her story up with a detailed piece on the Bank’s staffing and the loss of a succession of highly-qualified and experienced researchers over this year.  Names were named –  people who probably hoped never to see their  names in the general media –  and specific information was clearly provided to the journalist from insiders and people still very well-connected to the Bank’s Economics Department.  The story listed the departure of seven capable researchers who had left in the last year or so (and, at that, missed another name).  Those are large numbers.   In my time at the Bank it would have been rare to have had more than perhaps 10 researchers across the (then) Research and Modelling teams.

MacNamara’s sources were clearly keen on promoting a narrative of a hugely important and influential research function.  One might perhaps say, if only.  I have a high regard for several of the people in the list of the departed.     But the Bank’s key policy initiatives in recent years, whether in monetary policy or financial regulation, didn’t stem from, and were rarely directly supported by, good quality research generated by Bank researchers (there was some good work done, but often fairly tangential to the Bank’s immediate interests/needs).   The sources were also apparently keen on recently departed, having been effectively demoted, former chief economist John McDermott.  I have been on record as believing that Orr’s decision re McDermott was one of the better he has made, and as senior manager in charge of the research function McDermott has to take responsibility for the limited relevance of the research function over the last decade.    Even the Bank’s macroeconomic analysis was pretty underwhelming over much of that period.  All that was under previous Governors.   I’m critical of Adrian Orr for many things, but he can’t be blamed for that (whatever mix of factors played a part in the individual choices of the researchers to leave – and several of those who left were foreigners who had probably never seen their long-term future being in New Zealand).

The Bank must have been taken aback by MacNamara’s forthcoming story

A Reserve Bank spokeswoman said she could not answer quickly questions about staff departures and replacements.

She was unable to say how many staff with graduate degrees in economics or finance have departed in the last 18 months.

Neither could she tally immediately how many staff have joined in that time with similar academic credentials.

Pretty bad staff work, given that they must have known this issue was a point of vulnerability –  even the Annual Report had included a table showing high total staff turnover –  for which they should have been prepared.    Since the Bank publishes a page with details of their Economics Department research and analysis staff, it only took me a few minutes to run down the list and find several new PhD staff the Bank had hired relatively recently (albeit, by the look of it, only one with any knowledge of New Zealand).   It shouldn’t have been hard for the Bank to have got that information to the journalist.

(The article is mostly focused on the Economics Department, and although the journalist attempts to draw connections to the Bank’s poor performance around the bank capital proposals that is a bit unfair to the Governor – only rarely have Economics Department research staff had anything much to do with financial regulatory issues. Maybe it would be better if they did –  I used to argue for a broader focus (ie some actual research around the regulatory functions –  but the choice not to also long pre-dates Orr.  The absence of these particular researchers will have made little or no effective difference to how the bank capital proposals were made and marketed –  those choices were the Governor’s.

The sources who spoke to MacNamara were clearly also keen on PhD qualified staff.  The story highlights that there is no PhD held by anyone in the top-tier of the Bank (first time since 1988 I think), and repeats the contrast between the qualifications of McDermott and his replacements (new chief economist, new Assistant Governor).    Personally, I think this issue in considerably overdone.   Qualifications are not without value, of course, but research qualifications only take you so far in managing and leading a public sector policy organisation.  As I’ve pointed out, over the last 40 years the Bank has had 10 chief economists, only four of whom had PhDs, and at least on my reckoning both the best and worst of them had PhDs.   During the period when the Reserve Bank of Australia was widely-regarded as one of the best central banks in the world, it was led by people with much the same sort of academic qualifications as, say, Adrian Orr.  The presence or absence of a PhD at the top table is not what gave us a rushed, over-reaching, capital proposal with no ex ante cost-benefit analysis.  That is much more about the temperament and character of the Governor (and his right hand people who clearly weren’t willing or able to insist on something better).  In fact, the chair of the Bank’s Board not only has a PhD but is a university vice-chancellor no less, and he claims (in the recent Annual Report) that all is just fine at the Bank.

In many respects I don’t disagree with Eric Crampton’s concluding comment in the article

Eric Crampton, chief economist at the public policy think tank The New Zealand Initiative, said it mattered more in a small country like New Zealand that the Reserve Bank has internal research depth.

“There are very few academic macroeconomists and monetary theorists who pay much attention at all to New Zealand policy. There are, at most, a small handful who do.

“That means that having some of that serious firepower in the Bank matters more,” Crampton said.

Except that, in reality and in other countries, research depth inside and outside the central bank tend to be complements rather than substitutes.  And there is little point in having much of a research capability if it isn’t used to support robust policymaking and analysis. It hasn’t been for some time at the Bank, and that is mostly a reflection on a succession of senior managers and Governors (now including Orr), not on the staff involved.

The real prompt for this post was when, by chance, I noticed a statement from the Bank on its website, apparently released with no fanfare yesterday.  Here is the whole thing.

integrity.png

Get the sense Orr is feeling a bit embattled?

But instead of fronting up to, say, Kate MacNamara we get bluster and distraction (and this common confusion –  often found among senior public servants these days –  about the name of the country).

No one criticised their individual staff.  If there are criticisms to make they are of the leadership itself, mostly that of the Governor –  both because he is chief executive, and because he has a long track record of surrounding himself with people who will do his bidding and not challenge him.

See how the Governor suggests that the Bank somehow has a higher capacity for identifying what is good for New Zealand (yesterday, today and forever) than others, or even that they have a mandate to do so (they don’t).

See his claim that he holds “informed and mature conversations”, and contrast that with, for example, the rushed way they put out the bank capital proposals, the backfilling they had to do as the year went on, the refusal to engage on the substance of any concerns/challenges, the attempts to slur critics and regulated institutions alike, and those descriptions above of Orr’s “angry weekend phone calls” and the like.  This is the same Governor who has not given a single substantive speech on either of his core areas of policy responsibility in over 18 months in office.  It would be unheard of in any other other advanced democracy.

It is past time the Minister of Finance took the situation in hand. He is the one actually accountable to the public for the Reserve Bank.  He needs to be asking the Board chair and the Governor just what is going on, and why they are content for bluster to substitute for serious analysis and considered engagement –  not from staff, but from the Governor himself.   The problems at the Bank are at the top –  Board, Governor, and a weak senior management team –  not among the staff.   The Governor’s statement is an attempt at distraction, trying to suggest he is sticking up for staff (who don’t need it) when the problems start with him (and those paid to hold him to account).

Bluster shouldn’t be able to substitute for serious accountability.