The current government – like its predecessor – hasn’t done much that’s good. Neither has done anything to even begin to deal with New Zealand’s longstanding productivity growth underperformance (for the current government, better – apparently – to pretend it doesn’t matter and talk a lot about “wellbeing” instead).
But they have made some modest reforms to the Reserve Bank, which take effect today. After almost 30 years, the Governor is no longer the sole legal decisionmaker around monetary policy (he remains in sole charge of all the rest of what the Bank does), and a newly-created statutory Monetary Policy Committee has taken over (with surprisingly little media coverage, including no profiles of these new statutory policymakers, who will heavily shape how New Zealand handles the next recession).
Moving to a legislated committee-based system for making monetary policy decisions has been a cause of mine for almost 20 years now. It is the way almost all other major decisions in public life (and much of business and non-profit life) are made, from Cabinet on down to the local school’s board of trustees. Earlier this decade, I greatly upset the then-Governor by even writing a limited-circulation internal discussion paper proposing such a reform, and first media coverage I had after leaving the Bank was for a revised and updated paper along similar lines. To their considerable credit – and I don’t credit them for much – the Green Party had also been championing reform in this area for some time. Labour was late to the issue – and showed little sign of really caring much – but as the largest component of the government, reform wouldn’t have happened without them.
The new model MPC will be an improvement on what went before it. It is good to have it now clear in law that the government of the day sets the target (taking advice, consulting etc, but in the end the Minister sets the target and is accountable for it). And the final form of the new system is a little better than what the Minister of Finance was first promising (MPC members were initially to be prevented from airing their views in open at all), or than the Governor appeared to be championing (when he was reported as suggesting he didn’t want economists as external members of the MPC).
But, to a considerable extent, the reforms represent a lost opportunity. We’ve ended up with a system designed to be dominated by the Governor, and with not much more openness and accountability than we’ve had before. In practice, it looks likely to be a system little different than the Bank operated since about 2002, when “external advisers” were first appointed to the (then) Official Cash Rate Advisory Committee. There is little reason to suppose that the policy mistakes of the last decade (recall the enthusiastic rate hikes in 2014 and the reluctant unwinds, and nearly a decade of undershooting the inflation target) would have been avoided if this particular system had been put in place in 2009.
It looks, mostly, like cosmetic change – cosmetics which suit both Reserve Bank management and the government, neither of whom was interested in the sort of open and accountable, disputatious at times, central banks of the sort they have in Sweden, the UK, or the United States. It is there in the official documents – the relentless drive for “consensus”, of which I noted recently
“Consensus” isn’t a recipe for getting the best answers, but for lowest common denominator answers that everyone can live with. It isn’t really a recipe for a robust examination of competing arguments and analyses either – at least unless one has exceptional people (which is always unlikely, almost by definition) – and especially when management has (a) an inbuilt majority, and (b) control of all the research and analysis resources (and of the pen in drafting MPSs etc).
As always, there is the law and there is practice. It will take some time for the new system to bed down. Perhaps the published minutes will prove more revealing than currently seems likely. Perhaps MPC members – internal and external – will be willing to give periodic speeches and interviews outlining views different from those of the Governor. Time will tell. I hope it works better than I expect. But I’m not holding my breath.
The members of the new MPC was finally announced late last week. Recall that the committee has four internal members and three external members, and hence a built-in management majority. There is no necessity for the internal members to all vote together (if things ever come to a vote – recall all that talk of “consensus”), but the internals (in their day jobs) all work for the Governor. In future, the Deputy Governor will be appointed by the Minister, but only on the recommendation of the Board, who in turn must consult the Governor (in practice, the Deputy Governor will be the Governor’s appointee). The other internals will just be senior staff appointed to their positions in the Bank by the Governor, and hoping for pay rises, promotion, resource allocations to their areas, all in the sole gift of the Governor. A good Governor will, of course, encourage challenge, debate, active disagreement etc etc. Rather more average Governors – and the typical Governor is likely to be rather more average – won’t, especially not in public fora. So although on paper the internal members of the MPC are statutory appointees (in respect of that specific role), they are just part of the Bank’s management structure, and under the old and new law work wholly to the Governor.
And what of the three external members, who were appointed last week? Notionally, they were appointed by the Minister of Finance – it is his press release at the link – but in law the Minister (elected by the voters) has little or no say in who serves on the committee that, at least on paper, has the biggest say in cyclical macro management. The Minister can only appoint people recommended by the Bank’s Board (most of whom were appointed under the previous government). And the Board – despite being charged in law with holding the Governor to account – works very closely with the Governor, mostly providing cover and support for the Governor. In fact, the Governor is a member of the Board. And all the resources of the Board are provided by…..the Governor. So we can be pretty safe in assuming that no one with whom the Governor is uncomfortable with is ever going to find their way onto the Monetary Policy Committee. Since this is new legislation, and this feature has been pointed out repeatedly, one can only assume that is deliberate intent.
And if the Board has no independent resources, neither do the external members of the MPC. This could become a matter of some contention over the next few years. It did at the Bank of England after their reforms 20 years ago, although since the appointees in the UK system had more independent status (directly appointed by the Chancellor) and were “bigger beasts” with more forthright tendencies, perhaps here the externals will just go along. They will have no independent research or analysis resources, and no ability to require specific pieces of work to be done by staff. They will be largely dependent on their own resources, and perhaps any public commentary, while almost always being outnumbered. It could drive really able people silly, but then actual appointees will have been selected for (probable) docility.
Which brings me to the members of the committee themselves, who haven’t yet had much/any media scrutiny. In the title of this post, I characterised them as the Second XI. That is a deliberate and careful phrasing. A big school might, say, have six or even ten cricket teams, some comprised of people with no talent but a bit of enthusiasm and a desire for some exercise with their mates on a Saturday afternoon. But on my reading this is a Second XI; people who aren’t bad, or grossly unqualified for the role, and yet who – individually and collectively – don’t represent a committee of the sort of stature for which we might have hoped. That is true of both of the internal and external members. Lee Germon captained the New Zealand Cricket team for a while, but was widely regarded as not quite up to it, not really justifying his own selection. The new MPC, at least taken as a whole, seems a bit like that. Other advanced countries mostly seem to do better.
I’m not someone who thinks the MPC should necessarily be dominated by economists (although the expert advice to the committee should be), but when the Governor was talking of not wanting economists at all as external members I thought he had gone too far. Clearly others agreed, and as it happens all seven members were economists by training and education.
But of the internals, none stands out on that score. It isn’t helped by the fact that the Bank is currently without a Chief Economist, and one of the internal appointees – Yuong Ha – has been appointed as not much more than a placeholder (a one year term) until they manage to fill the position (it isn’t a great look that in an organisation like the Bank, where economics skills have historically been central, there wasn’t a natural successor to the former (demoted and then resigned) Chief Economist). Perhaps in time the fulltime successor will add some real intellectual stature and gravitas to the MPC. In the meantime, the Minister should have rejected a one-year appointment of a mid-level internal appointee: independence is partly about security of tenure, and any mid-career person appointed for one year only is going to have the boss’s views and interests in mind.
Of the other internals, for my money to Deputy Governor Geoff Bascand is probably, at this stage, the best of them. I have plenty of disagreements with Geoff, and I wonder if there is any track record of him disagreeing robustly with his boss (whether Wheeler or Orr) on policy. He was also one of the internal champions of the OCR tightening cycle in 2014, but he does have a track record of thoughtful speeches on some macroeconomic topics (if not really monetary policy itself). Arguably, he is better equipped for the MPC than for his day job (Head of Financial Stability).
As for the Governor, the fact that he went for a year as sole decisionmaker on monetary policy and didn’t see fit to give us even a single on-the-record speech on monetary policy, the cylical state of the economy etc, should be telling. His interests seem to lie elsewhere. That might matter less if the other management appointees were real stars (after all, the Governor has a wide range of responsibilities) but they aren’t.
What of the externals? Three economists have been appointed: Caroline Saunders, Bob Buckle, and Peter Harris. Again, it is surprising that no media outlet (I’ve seen) has done interviews with or profiles of them.
Both Buckle and Harris are older – Buckle is retired (and Professor Emeritus) from Victoria University, and Harris while billed as an “economic consultant” must be at least in his late 60s. That was partly inevitable as a result of the decision to make the MPC jobs substantial (50 working days a year was the expectation), but not large enough to be even half-time, let alone fulltime. Actual or potential conflicts or interest would rule many others who might have been interested or suitable.
The third appointee, Caroline Saunders, is also an academic (with a couple of other ministerial appointments) – and the only one of the seven MPC members I’ve never met. Quite how one squeezes in a 50 day part-time role with a fulltime job at Lincoln is an interesting question, but that is her problem and that of her employers. Although she is an economist, her interests and experience don’t appear to encompass monetary policy or macroeconomics at all (her publications are here). But I thought it might be telling that her most recent publication was as a co-author (with a couple of colleagues) of a new book on “wellbeing economics”. As it happens, after I made some negative comments here recently about the government’s focus on wellbeing – suggesting it was a distraction from dealing with the productivity issues – a PR firm working with the authors sent me a copy of the book. I haven’t yet read it, but as I’ve dipped in one is left with impression that Prof Saunders may be more useful to the Governor (and government?) in championing his interest in all sorts of (loosely) left-wing issues, rather than in advancing the cause of good monetary policy decisionmaking and communication.
One of the skills asked for in the advertisement last year for external MPC members was “exceptional communication skills”. Time will tell, but my impression would be that neither Buckle nor Harris (of whom Google shows up very little in the last 15 years) would qualify on that score. Perhaps the Board changed its mind about the skill sets?
One area where I do have some concern is around the role of the Minister of Finance in these appointments. In principle, I think the Minister should be relatively free to appoint his or her own preferred candidates, and should be fully accountable for those choices (including through the sort of non-binding “confirmation hearings” – of the sort UK MPC members face – that I’ve proposed for New Zealand). As it is, on paper the Minister has no say at all (can reject Board nominees, but nothing more).
But then I’m a bit troubled by the way in which the Board – all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme. They look a lot like the sort of people that a left-wing Minister of Finance – one close to Michael Cullen – might have ended up appointing directly. I don’t think Peter Harris is grossly unqualifed for the role, but I am uneasy that one of the very first external appointees is a former political adviser to a former Minister of Finance of the same party as the one making the appointment. Note too that the only appointee Labour has so far made to the Reserve Bank’s Board was another former political adviser in the office of a former senior Labour minister. He too (Chris Eichbaum) is not manifestly unqualified for the role, but I’m not sure it is entirely a good look first up. (I don’t think former political advisers should be perpetually disqualified, but it might be more confidence-enhancing had they been appointed by the other party from the one for which they used to work – thus Paul Dyer, former adviser in Bill English’s office, would probably be better qualified for the MPC roles than any of the recent external appointees.)
I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments. I hope the answer is none. I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board. It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence. So any backroom dealing is something it is then hard to hold him to account for. Perhaps nothing went on, but I have lodged a series of Official Information Act requests with the Minister, Treasury, and the Board of the Bank about any contacts (written or oral) between them on this issue.
In the meantime, given the role these appointees are supposed, by law, to be playing, it might be appropriate for the media to start asking them some hard questions, including around preparedness for the next serious recession, given the very real limits on how much further the Reserve Bank could cut the OCR.
(On a related matter, I saw a suggestion this morning that personnel changes at the Reserve Bank explain the Bank’s now more-dovish stance, notably the departure of longserving former chief economist John McDermott who, as this story put it, was responsible for the forecasts etc that led to bad policy calls in 2014. But, for all their faults, the Reserve Bank’s inflation forecasts at that time were typically lower than the published forecasts of New Zealand economic forecasters, and those forecasts were embraced enthusiastically by senior management. Among those deliberating on monetary policy at the time, Geoff Bascand – now a member of the statutory committee -seemed quite as hawkish as anyone. There weren’t many local dissenters at all at the time – of those with views in the public domain, this was the only one I found. And, perhaps entirely coincidentally, the small handful of internal sceptics were dumped off the key advisory committee just as a rate-hiking cycle got underway in 2014.)