The NZIER Economics Award: creative writing

An Eric Crampton tweet earlier this week brought the news that former Reserve Bank chief economist John McDermott had been awarded the NZIER Economics Award.

John was my boss for six years or so.  We sat across from each other and exchanged notes on all sorts of things, including our (then) young families, which has always left me a bit hesitant about writing about him.  But when you hold a high profile, influential, public position you have to be open to challenge and scrutiny.  My summary: nice guy, wrong job (notwithstanding the Yale PhD).

The NZIER award, typically offered annually, used to be a high profile, and quite lucrative, thing –  Qantas were sponsors and, from memory, there used to be a decent airfare on offer.   It has been awarded for 25 years now, and the list of past recipients is, in many respects, a moderately impressive one, at least by New Zealand standards. It isn’t clear what the selection criteria are, but winners have been drawn both from academe and from “the great and good” officeholders more generally.   There is, perhaps, a hint of the establishment looking after its own  (it isn’t obvious for example what Paula Rebstock has done for or with economics), but perhaps that isn’t very surprising from such an establishment body as the NZIER, and when the Governor of the Reserve Bank and the Secretary to the Treasury have representatives who make up two of the six person selection panel.  There are a few surprising omissions, even among establishment figures.

Since the selection criteria are unknown, it is hard to tell whether the McDermott award is really justified.  Of those who weren’t primarily academics up to when they received the award, all of them seem to have run something (Suzi Kerr founded Motu and Brian Easton was head of NZIER for a time), while McDermott only ever held a second-tier position, albeit as manager in charge of one of the larger groups of economists in the country.   He has published some research –  I recall him telling me a few years ago that some work he’d done in his youth at the IMF meant he was still the most-cited economist in New Zealand –  but most of it was a long time ago.

Having said that, the reason for this post isn’t really to question whether McDermott should have received the award, although with two of his former staff (including his successor) on the selection panel there is the risk it could be seen as something of a consolation prize, McDermott having been somewhat sidelined and demoted by Adrian Orr last year, prompting his departure from the Bank.    But if the establishment want to give each other baubles –  even as the New Zealand economy continues its long-term underperformance –  I’m not really going to quarrel much.

My problem is with the citation which seems to be an almost entirely imaginary recreation of history.  Whoever wrote it doesn’t know what they are talking about –  or, just possibly (since the Bank’s chief economist is on the committee) did but made stuff up anyway.  It starts this way

Dr John McDermott has been the foremost macro-economist in New Zealand policy circles for at least the past decade.

Perhaps, but there are slim pickings.   And one might reasonably expect the chief economist of the Reserve Bank –  in its monetary policy responsibilities, a macro institution –  to be counted thus, at least if (as in this case) successive Governors and Deputy Governors didn’t qualify.    After all, “foremost” doesn’t mean “best” or “most productive”, “most insightful” or “most challenging” but

“most prominent in rank, importance, or position”

Thus far, the award seems to be for turning up to his well-remunerated job.   But it goes on

He was Chief Economist and Assistant Governor at the Reserve Bank of New Zealand from 2007 to 2019. Over this period, John has been a beacon in ensuring that economic rigour is brought to bear on policy formulation.

I just cannot believe that anyone around the Reserve Bank over that period could say that stuff (“beacon” etc)  with a straight face.   It just wasn’t so, whether on monetary policy or in the other areas of Bank policy (where, as Assistant Governor, he sat on the key advisory committees).   On monetary policy, in particular, I’m not wanting to suggest that he was opposed to rigour or anything of the sort, but there was simply nothing very distinctive about the voice he brought to the monetary policy table, or to the analysis/advice that staff provided.  A few years ago, a former colleague noted to me that –  now outside the Bank –  he’d been digging into old Monetary Policy Statements and that what was noticeable was how mechanical they had become (this over John’s time).

On the other areas of Bank policy, John might as well not have been there.  Perhaps things changed in his last few years, but for years we both sat on key internal committees responsible for financial system oversight, macro-financial policy, and the Bank’s own balance sheet.   John might as well not have been at them –  and frequently bemoaned having to attend (some of the FSO papers were really pretty dull).  When LVRs were first in the wind, for a while he refused to believe the Governor was serious, and then was more interested in closing down any criticism or attempts to improve the supporting analysis (probably more as His Master’s Voice more than from his own preferences) than in leading the charge for rigour.    Sure, he had a busy management role in his own department………but contributions beyond that are largely imagined.

Then we get the GFC puffery

John began his senior role at the Reserve Bank of New Zealand just prior to the onset of the Global Financial Crisis. It is difficult at times such as this to draw on experience of prior crises because, by nature, crises are rare and each differs from the one before. It is at times such as this when a combination of a deep understanding of economic forces plus common sense is required. The team at the Reserve Bank, led by Dr Alan Bollard and supported by the macroeconomic expertise of John McDermott and his colleagues, ensured that the GFC impinged only marginally on New Zealand (relative to most other countries).

Um….there wasn’t a financial crisis in New Zealand, we had a fairly deep recession and a slow recovery, and on the monetary policy side the Bank –  a little belatedly –  did what it had to do, and cut the OCR dramatically.  It is what inflation targeters do.   Liquidity support measures weren’t led from the Economics Department –  former chief economist and then Deputy Governor Grant Spencer led those functions – other interventions were led from The Trasury, and if anything John’s Economics Department was slow to recognise the seriousness of what was unfolding abroad (in late 07 and early 08). John himself in mid-2008 was still more worried about rising inflation expectations.   I think Alan Bollard deserves a fair degree of recognition for that period-  but he has already received the NZIER award.

Then we get onto research

John’s contributions have shone through not just in his direct contributions to policy-making (such as during the GFC) but also through his championing of economic rigour amongst his colleagues within the department that he led at the Bank. Policy-relevant research from experienced colleagues such as Ozer Karagedikli and Christie Smith are relevant examples.

I hope Ozer won’t mind me saying so, but this is pretty extraordinary stuff as mostly he and John didn’t get on that well, and I recall plenty of management meetings with John bemoaning Ozer’s contribution (which personally I thought was pretty significant, and his departure abroad recently is a significant loss).

More generally, the Bank’s research function has constantly struggled for viability and regard from the Bank’s senior management, even though the chief economist himself had a strong interest, and past experience, in research.    John should have been able to shape the flow of research product, and shape the interests of the senior management customers, in a way that made a more secure, and central, place for good quality research, whether on macro or financial regulatory issues.    But he didn’t.

More specifically, if one looks back over the 12 years McDermott was chief economist it is hard to spot any really influential New Zealand specific research generated by the Bank.  I’m not saying there was not some good stuff done –  some overseas awards were even won – but there is no distinctive and insightful Reserve Bank take on, for example, inflation processes over the last 10 or 15 years, the conduct of monetary policy, or really anything or the sort.

And is there a single compelling insight –  whether from speeches, press conferences  comments or whatever –  that one associates with McDermott?    An Andy Haldane or Ben Broadbent he hasn’t been.

As we get towards the end of the citation, the gush only flows more freely

John’s academic credentials are undisputed. What sets him apart from many of his highly trained academic colleagues is his ability to bring those academic credentials to play in shedding light on real world problems facing central bankers and other macroeconomic policy-makers.

John has set an example to colleagues and institutions alike: top class economists can make very important contributions to real world policy-making, while good economic policy requires the input of rigorous thinking from excellent economists. John has set a very high standard over an extended period showing how this match can work for all concerned.

They are almost unrecognisable descriptions, better suited perhaps to the creative fiction department, or a volume of hagiography.

I could go on.   I think John had a degree of genuine intellectual curiousity, and he read fairly widely.  But too often –  apparently under pressure from above – he became an agent for shutting down debate or discussion (internally) rather than opening it up.   And, as I’ve noted here previously, his speeches tended towards the ponderous, rarely offering any particular insight.  If his instincts were sometimes sound –  if perhaps not when he was championing a 50 basis point OCR hike in late 2011 –  he too often found himself not shaping the organisational view but forced to parrot the gubernatorial line.

And for all the talk of insight and rigour, wasn’t John responsible for the forecasting function of the Bank that provided the underpinnings that led the Reserve Bank into two post-crisis tightening cycles, both of which had to be fairly quickly unwound?   Was there any evidence that this was going against John’s best insights or endeavours?  Not that I observed?   Even late in his term, did anyone reading Bank material have a real sense that the Bank –  with John supposed to be at the intellectual forefront –  was breaking new ground, was ahead of the pack in understanding quite what was going on with the economy?

Oh, and when it comes to shutting down debate/discussion/criticism, I was being reminded yesterday of John’s part in the Toplis affair.    You might recall that in 2017, Graeme Wheeler took offence at some critical commentary on the Bank’s monetary policy by BNZ economist Stephen Toplis.  All sorts of things bother chief executives, but in the circumstances, the role of the Bank’s chief economist (and the rest of the senior management) should have been to get the Governor to see sense, to calm down, and to recognise that debate and strongly-held differences of view are part of being in public office.  Instead, McDermott allowed himself to be actively used by Wheeler in attempts to put pressure on Toplis, both directly and through pressure on the BNZ itself, to shut him down, and get him to stop being so critical.   I’m told that McDermott’s managers were all cheering on this effort, so there is no sign that he was even a reluctant participant.  In someone who had themselves been a trading bank chief economist, it was particular disappointing and inappropriate performance.    But across his entire term, he functioned more as His Master’s Voice (really why he’d been hired –  as safe) rather than as the sort of intellectual or policy leader the NZIER citation makes out.  He wasn’t even a champion of greater openness or transparency –  and I will always remember the complaints about independent voices on Monetary Policy Committees (he had a particular aversion to Lars Svensson’s –  correct –  opposition to the premature Swedish tightenings).

If there really was a heyday for Reserve Bank research, intellectual ferment, and policy leadership it probably dates back several decades now to the time of Roderick Deane (an early recipient of the NZIER award).   The last decade wasn’t disastrous – at times there were good initiatives, at times good people –  but the legacy of McDermott’s term (whether in people, policy outcomes, policy analysis, or Bank reputation) isn’t one that looks as though it warrrants anything like the creative puffery in this citation.

The award seems like a rather sad reflection on the diminished state of the New Zealand economic policy institutions.

As for Eric, with a bit of feedback from a correspondent (not me) he has now revised his view (the last sentence of that tweet at the start of this post).

13 thoughts on “The NZIER Economics Award: creative writing

  1. Given that I lost $400k in burnt overdraft facilities due to rising interest rates that decimated an entire building industry and the Risk Finance industry during that 2008 to 2010 recession years. I lean more towards that he and Alan Bollard to be put arrested and jailed instead for forcibly and intentionally engineering the recession in NZ.

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    • Were they ever prosecuted I would go and join them in the dock. The OCR decision was the Governor’s but his advisory committee (which John and I were members of) was pretty firm in recommending the increases, the last of which was in mid 2007.

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  2. I have a series of charts from 2012 showing the Bank’s forecasts of the output gap, inflation, and the OCR (90-day bill rate). It is truly remarkable how large and persistent the Bank’s forecast errors have been over that time period. Completely one sided…

    At the investment bank were I ran a team of 20-odd economists and strategists, If they’d produced serially correlated and large forecast errors I’d have tinned them and Pronto (here they get awards).

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    • I probably have slightly more sympathy than you: after all, every central bank in the world, and the market as a whole, made much the same mistake (ask people in 2012 where interest rates would be, or where inflation would be if interest rates were at current levels), but…….(a) the RB still managed the 2014 tightening cycle stuffup all by themselves, and (b) no one deserves awards against that backdrop if responsible for macro analysis forecasting and producing those sorts of consistent errors.

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      • Yes, it’s not really the sign of the errors that’s the issue, it’s the magnitude and their persistence (which lives on).

        The RBNZ has yet to say – as the RBA and the Fed have – that: 1) the NAIRU has come down and therefore the estimate of slack in the economy is wider than previously thought and; 2) inflation expectations have fallen, have become highly auto-regressive and therefore the ability to push inflation up is becoming progressively more challenging.

        Having read the BoJ monetary policy documents religiously over the past decade, I’d say Japanisation is a frightening prospect. The only way out really for us is currency depreciation, a point you’ve made many times, albeit for tangential reasons.

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      • In summary, there is no sign they really know what they are doing or how the economy is behaving. They didn’t when John was around and there is no real sign things have changed for the better since – even if actual monetary policy settings aren’t too bad. No intellectual leadership, which should instill no confidence.

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  3. O/T here but have you seen any of the BBC’s series China A new world order ? Revealing on the Belt and Road programme and Chinese influence buying and subterfuge.

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  4. I disagree almost entirely with your assessment of Dr McDermott. In my observation he is a highly accomplished and passionate economist and econometrician who has had a multitude of senior and top economist roles in academia, the Reserve Bank and in the private sector as well as the IMF. I don’t really see the point of knocking a past colleague like this simply because he gets an award.

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    • Views can, of course, differ. But as you may have noticed in the post, I observed that my concern wasn’t mainly that John was given the award – the establishment is free to give out baubles, and John isn’t manifestly unqualified for this one – but the creative fiction that was the citation, that simply made up stuff about John and (more importantly) about one of our major public institutions, the RB.

      In my assessment, John was a reasonably capable status quo manager (and, I’m sure, a pretty good researcher) in times and situations that demanded more than that.

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  5. (Belarus): “…that: 1) the NAIRU has come down and therefore the estimate of slack in the economy is wider than previously thought and; 2) inflation expectations have fallen, have become highly auto-regressive and therefore the ability to push inflation up is becoming progressively more challenging.”

    In my view, the point is that in the face of these structural changes there is no need or point in pushing inflation higher – in fact it is damaging: either forget about aiming for the mid-point or better, lower the target range.

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  6. Matt,
    It has been the RBNZ’s answer that “expectations have become backward looking”. But why has inflation become more backward looking? If we go back to the beginning of inflation targeting,
    we used to argue that good monetary policy (policy that brings inflation down to target) would lead to more forward looking expectations. One can flip that around: persistently below target inflation outturns led to more
    backward looking expectations. For almost a decade of low outturns, there is only place to to blame: CB itself.

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