Month: September 2019

Revisiting an incredibly expensive insurance policy

Michael Reddell Uncategorized

The Reserve Bank’s radical bank capital proposals –  markedly increasing required capital for locally-incorporated banks, in a country with (a) a low demonstrated risk of financial crisis and (b) high effective capital ratios by international standards anyway –  hasn’t been much in the news lately.  The Governor –  unelected, but sole decisionmaker on this –  his own –  proposal has presumably retreated to his high tower to contemplate.   He hired some carefully selected overseas academics to review bits of the Bank’s analysis, and we might expect to see their reports shortly (but recall the tight constraints on what they were allowed to look at, who they were allowed to talk to etc).

I was doing an interview yesterday on various aspects of the proposal, including making the point that what the Governor is proposing can be seen as –  on the Bank’s own numbers – an incredibly expensive insurance policy, paid not by the Governor and his colleagues of course, but foisted on the people of New Zealand.      But I used a number in the course of the interview and when I got home I realised it didn’t sound quite right, so thought I should review the estimates.   I’d written a post on this some months ago.

There are various estimates around as to how much difference the proposed new capital requirements might make to real GDP.  I gather the ANZ has suggested anything up to a steady-state levels loss of 1 per cent (ie each and every year GDP is lower than otherwise by that amount).    Channels could include higher costs of credit and possible reductions in the availability of credit.

I wouldn’t completely rule out such numbers, but for my purposes I’m content to use the Reserve Bank’s own estimates.  In a speech in February the Deputy Governor told us the Bank thought the cost could be “up to 0.3 per cent per annum”.   So lets use 0.25 per cent  (if they really thought the effect would be no higher than 0.2 per cent, they’d have said “up to 0.2 per cent per annum”).

That might sound like quite a small number.  In fact is something like $750 million this year, and that cost is repeated each year.  And since the real economy is growing over time, the dollar value of the cost –  the annual insurance premium  –   only increases with time.

We can discount back to the present the value of all those annual insurance premia.  The answer, of course, depends in part on other assumptions.   Over the longer-term, real GDP growth will be largely a reflection of population growth and productivity growth.  In a New Zealand context, 1 per cent per annum each might seem a reasonable central estimate.   And then there is the discount rate: current Treasury guidance suggests using a real discount rate of 6 per cent for regulatory proposals, but of course long-term rates have fallen quite a long way since that guidance was issued, so I’ve also shown the numbers for a 5 per cent per annum real discount rate.

I’ve done the calculations for 150 years (recall that the Bank’s proposal is about having resilience to cope with a 1 in 200 year shock), but of course the bulk of the present value costs are borne in the first few decades.

Present value cost over 150 years ($bn)
Real GDP growth
1.5 2.0 2.5
Real discount rate 5% 21.60 25.20 29.90
6% 16.90 19.10 21.80

Recall that the output cost was the Bank’s own number, the discount rates are based off Treasury numbers, and that these are probably low-end estimates since (a) they take no account of transitional disruptions, which are front-loaded, and (b) being GDP focused they take no account of the additional income transferred to foreign shareholders in domestic banks (a very substantial sum on the estimates done by my former colleague Ian Harrison).

And what are we getting for our insurance premia?

You might recall that, waving his finger in the air, the Governor decreed that his proposals were conceived with the goal of ensuring that New Zealand didn’t have a financial crisis (probably, a succession of bank failures) more than once in 200 years.

So lets assume, just for the sake of argument, that the Bank’s proposals are implemented and they are sufficient to prevent one serious financial crisis that would otherwise have occurred every 150 years.  (Existing, quite high, capital ratios are assumed to prevent other smaller, more frequent crises).

We don’t know when in the 150 years that crisis might occur, so lets just assume it happens 75 years from now.

But then the key variable is what scale of output losses is saved.    The Bank likes to assumes very large losses, sometimes permanent ones (ie a financial crisis now itself reduces the level of GDP even 100 years hence).     I’ve argued that much of the analysis and discussion in this area is wrong and (when undertaken by regulatory agencies) self-serving.      Many of the output losses associated with (word chosen carefully) financial crises do not arise from the crisis itself (bank failure etc) but from the poor quality lending and investment decisions that happened in the years prior to the crisis, and which –  most likely –  would have happened anyway, regardless of the level of capital.   The segment of any apparent output losses than might be saved by higher capital requirements is some fraction –  probably a fairly small fraction –  of the total economic underperformance in the wake of the crisis.   As I’ve noted before, in my own analysis and that undertaken by William Cline at the Peterson Institute, actual differences in output growth between crisis and non-crisis countries (eg post 2007) are much smaller than the numbers the Reserve Bank and foreign regulators like to wave around.    And as I noted in my own submission to the Reserve Bank

Note also that the Cline methodology still overstates the amount that higher capital ratios alone might save, since his output path comparisons include (for the crisis countries) both kinds of losses – from the initial misallocation of resources, and the pure crises effects.   Only the latter should be relevant in assessing the costs and benefits of higher minimum capital ratios.

I reckon the most one might allow for a saving might be 10 per cent of GDP (eg annual GDP 2 per cent lower than otherwise for five years, purely as a result of the crisis, and despite best stabilisation estimates of macro policy).   But, for illustrative purposes, lets say the number is 20 per cent (something like the Cline estimates) or even –  heroically 30 per cent.    Remember that the crisis is happening 75 years from now, so that even though GDP then will be much bigger than it is now, we need to discount that saving back to today’s dollars, to compare against the present value of the insurance premium.

In this table I’m assuming real (potential) per capita GDP grows by 2 per cent per annum (the middle scenario above)

Present value of GDP benefits ($bn) of averting a crisis 75 years hence
Size of saving (% of GDP)
10 20 30
Real discount rate 5% 3.2 7.2 9.5
6% 1.5 3.5 4.5

My view of the likely savings would be represented by the first column: it doesn’t really matter which discount rate one uses and the present value of the benefits is derisory relative to the present value of the annual insurance premia  (in fact the benefit/cost ratio would look almost as bad as for –  say –  light rail in Wellington).   But even if you use the Cline numbers, even if you go beyond that and assume really huge savings 75 years hence from this one regulatory intervention, in no scenario do the benefits (this table) come even close to matching the cost (first table).

And all this on the Bank’s own view of the annual insurance premium.

To all of which one could add the reminder that while the Governor talks today of implementing policies which made generate a real saving decades hence, he has no commitment mechanism.  His own term is only five years.  He’ll probably get reappointed for another term, but even then the government is consulting on proposals that would mean he would no longer be the sole decisionmaker.  Regulatory tastes, fashions, and judgements change and there is almost no chance that a regime inaugurated today would last 50 or 100 years (long enough to generate real benefits, since no one thinks the New Zealand banking system is at serious risk of crisis right now).   If the regime only lasts 10 years, until some other decisionmakers change tack, we’ll have paid a present value of perhaps $6 billion (plus all the transitional costs and disruption) for no benefits at all.  Another way of looking at it is to put a 50 per cent chance on any regime being persisted with for multiple decades: the expected present value of benefits halve, but the present value of the annual costs is frontloaded.  The equation looks even worse for the Bank’s case.

Not all risks are worth insuring against (try introspection on the risks to your own life or finances, or that of any business).  On the Bank’s own estimates of the premium costs, the policy they are offering (well, planning to impose) simply isn’t worth it.

Of course, if we had a decent policy process in the first place, we’d have had cost-benefit analyses –  perhaps various approaches –  laid out by the Bank months and months ago.   Don’t get me wrong.  No cost-benefit analysis is ever perfect, or the definitive “right” answer, but laying out the assumptions and the sensitivites helps enable more critical scrutiny of what the regulator is proposing, and (if done well) may even enhance confidence in what they are proposing.  The Governor’s approach remains one of not showing us any serious cost-benefit analysis –  and not engaging with the perspectives others offer –  until he has made his final decision.  At that point, any cost-benefit analysis –  done by his own staff to support his own decision –  serves only decorative (or PR) purposes, not functional ones.

It isn’t good enough.

UPDATE: A commenter points out, correctly, that non-linearities mean that the simplification of just focusing on a shock halfway through the 150 year horizon isn’t really valid (skews the results against the proposal).    I extended the analysis, and checked that the conclusion didn’t change, in a separate post here.

 

The NZIER Economics Award: creative writing

Michael Reddell Reserve Bank

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).

The Bridges kowtow

Michael Reddell China, NZ politics, Uncategorized

In his Herald column last week Matthew Hooton offered some thoughts on what sort of Prime Minister Simon Bridges might be.   It seemed optimistic to me.  For example, according to Hooton.

Like Bolger, Bridges’ ambition is not just joining the prime ministerial club for its own sake, but to be one of the few to achieve genuine intergenerational change.

I racked my brains, dredging the recesses of my memory, and still struggled to think of anything –  whether in what he said as a minister in the previous government, or as Opposition leader in the last 18 months –  that would offer even a hint of such ambition, or of policy proposals that might bring about such change.   What sort of “intergenerational change” does Hooton have in mind I wonder?    Judging by the economics discussion document last week – which had some good, but not very ambitious, bits –  not something about reversing our decades of disappointing economic performance.

But one thing we have every reason to be “confident” of is that Simon Bridges as Prime Minister would be every bit as deferential to Beijing and its interests as Jacinda Ardern or John Key and Bill English before her.    All while, no doubt, trying to tell himself and us that somehow this shameful pandering is for our own good, in our interests.  The only interests it actually serves are (a) those of the PRC, (b) those of the political party fundraisers, and (c) a few exporting companies, including our universities, that made themselves (conscious choice to sup with the devil) too dependent on the PRC market, and thus exposed to the threats and pressures of the regime and Party.     Selling out the values of your people for a mess of potage never ends well.

It is only quite recently that Simon Bridges has been directly accountable for most of the National Party’s choices in this area.   Even in John Key’s final ministry, Bridges was only the 9th ranked minister, with internally-focused portfolios.   But by 2017, he’d climbed further up the Cabinet rankings and was Minister of Economic Development.  In that capacity, he was the minister who signed, on behalf of the New Zealand government, the memorandum of arrangement on the Belt and Road Initiative of the PRC.

I wrote about that document here.   I’m going to do Bridges the courtesy assuming that he (a) read, and (b) believed what he was signing.     Among those commitments was that the participants (Bridges’ government and the PRC) would promote a ‘fusion among civilisations”, and “coordinated economic, social and cultural development”.   There was also the commitment to advance “regional peace and development”, as if the PRC had any interest in such peace, except on its own terms (‘submit and you’ll be fine”).

Perhaps Bridges didn’t really mean it.  Perhaps the boss just told him to sign.  But there has never been any suggestion he didn’t mean it.  If he’d objected to this unsubtle attempt to suggest that the PRC system and our own are somehow equally valid options, I’m sure they could have found another minister to sign.  But Simon Bridges did.

Since then, of course, he has been elevated to the leadership.   Perhaps, as Hooton claims, the Bridges leadership style is a consensus one.  But things leaders care about tend to happen, and things leaders don’t care about don’t.     Perhaps as a mere minister, Bridges had known little or nothing about Jian Yang’s background in the Communist Party and in the PLA military intelligence system –  perhaps not even why he’d been moved out of the foreign affairs committee of Parliament –  but next week it will be two years since all that went public.   I’m sure Bridges back then didn’t know what Jian Yang has subsequently told us: that he misrepresented his past to get into New Zealand, and did so on the instructions of the PRC authorities.  But he has known it all for the entire time he has been leader.     Perhaps he didn’t know that serious figures –  not flame-thrower types –  would take the view that because of Jian Yang’s closeness to the PRC embassy it was important to be careful what was said in front of Jian Yang.   But he has now known that for a long time too.   Jian Yang sits in caucus meetings every week, and presumably Bridges is not particularly careful what he says.

Bridges didn’t control the National Party list in the 2017 election.  But he controls caucus rankings and responsibilities now.    And not only has he never expressed any public unease about the Jian Yang situation, only recently Jian Yang received a promotion (chair of Parliament’s Governance and Administration Committee) from Bridges, and this very week we learn that Jian Yang is part of the Simon Bridges/Gerry Brownlee official visit to the PRC.  No one really doubts that if Bridges had any serious concerns at all, not only would Jian Yang not be receiving these signs of favour, he wouldn’t even be in the caucus any longer.   (Of course, it is shameful that the other parties do nothing to call out the Jian Yang situation, but he is primarily the responsibility of the National Party, and of Simon Bridges in particular.)    Far too valuable as a fundraiser I guess, and if Bridges had said or done anything other regime-affiliated people and institutions might have looked on him with disfavour.  And he wouldn’t have wanted that would he?   Yikun Zhang, for example, mightn’t have invited him and Jami-Lee Ross to dinner.

Of course, the indications of how far gone Simon Bridges is in his deference to Beijing aren’t just about the Jian Yang situation.  No one heard him express any concern either about the ridiculous situation earlier in the year when regime-affiliated Labour MP Raymond Huo was going to chair the inquiry into foreign interference in our electoral processes etc.

And when a defence policy document uttered some mild, and pretty factual, statements about the PRC, what did we hear from Simon Bridges?  Not some support for a robust defence of New Zealand interests, values, and historical alliances, but rather complaints that the PRC might be upset.    There is no sign that he has reined in party president Peter Goodfellow’s enthusiasm for singing the praises of the PRC/CCP.   And when he senior MP, and close ally apparently, Todd McClay was defending the concentration camps in Xinjiang as “vocational training centres” and really nobody else’s concern, was there any apology, any distancing himself from McClay’s stance.  Not a bit of it.

When there were doubts about how ready the PRC were to invite the Prime Minister to visit, Simon Bridges was early into the fray to criticise –  not the PRC but –  the Prime Minister.  Can’t have Beijing being upset at all, ever, can we?  Not like a normal relationship.  For Bridges it appeared to be all about abasing ourselves (well, himself) and asking only “how high” when Beijing says jump.

Or, when the current government quietly (and embarrassedly) signed up the recent multi-country letter of protest about the Xinjiang concentration camps, did you see words in support from Simon Bridges or his senior spokespeople?  No, it was all quiet on the National Party front.  Nothing about supporting a robust stance on Huawei either.

Has anyone ever heard Simon Bridges utter a critical word about the regime in Beijing, even as ever-more evidence of its excesses (whether political, religious, civil, economic, or whatever) comes to light?  I haven’t.  And I’ve searched and found nothing.  And that despite the values of the regime being antithetical to what used to be the stated values of the National Party.   When something more than deals and donations mattered.  I still recall as a university student in 1980 Don McKinnon coming up to a lunchtime meeting on campus to defend the then National government’s stance discouraging New Zealand participation in the Moscow Olympics. I think we can imagine how Bridges (and McKinnon) would react to any suggestion that a New Zealand government might discourage participation in the next Winter Olympics, to be held in the PRC.   Are there any limits to National’s deference to Beijing?   None have been apparent under Bridges.

Oh, and then there are the donations.  There was the Yikun Zhang business last year, where Bridges was not exactly rushing to suggest that donations from a donor with strong regime-affiliations might “buy” another place on the National list (recall too Jian Ynag’s involvement in getting Yikun Zhang an official honour for –  in effect – services to Beijing).   All Bridges was reduced to was the claim that any donation wasn’t illegal.  Lots of things aren’t illegal, but it doesn’t make them right.   It was much the same story when the Todd McClay donation story came out just recently –  our foreign trade minister had been actively involved in securing a very large donation from a PRC billionaire, routed through a New Zealand registered company.  “It wasn’t illegal” was again the only Bridges line.   As if large donations from known donors don’t create expectations of future relationships etc –  nothing so crass as a specific policy purchase, but cast of mind and all that.

We’ve had no leadership at all from Bridges on the foreign donations issue more generally.  No suggestion that if you can’t vote here you shouldn’t be able to donate.  No suggestion –  proactively –  that the National Party would not seek, and would not accept, significant donations from anyone with close ties to a foreign government (although, of course, the PRC is the main issue).  Bridges seems quite happy to keep the current compromised regime, and the flow of tainted money to the party.

And then, of course, there is the current trip to the PRC.  The timing is pretty extraordinary, and perhaps telling of the National Party’s utter lack of interest in expressing any sort of moral dimension to our foreign policy.  1 October is the 70th anniversary of the Chinese Communist Party takeover.  The tyrants of the Party will no doubt be making great play of their accomplishment – holding onto near-absolute power for that long –  but why would anyone else, anyone of decency, associate themselves with the regime right now.  Do you forget the tens of millions who died in the Great Leap Forward, do they forget the Cultural Revolution, do they forget Tiananmen Square, do they prefer to ignore completely Xinjiang, do they prefer to pretend that the renewed suppression of any domestic dissent, the heightened persecution of religions of whatever stripe just isn’t happening, are they unbothered about the renewed threats to Taiwan, or in the East and South China Seas, or the state-sponsored intellectual property theft (called out by GCSB last year, with not a word from Bridges) just aren’t happening?  Or are no concern of ours, things we can simply walk by on the other side, and trade merrily with the repressors.

Perhaps we will be told quietly that in their meetings Bridges, Brownlee, and Jian Yang will have raised “human rights concerns”.  It is the standard official defence.  But it should be no defence at all.  Embarrassed shufflings and pro forma private comments count for nothing if you aren’t willing to say anything in public.   National doesn’t, and won’t (neither of course does the government, but this post is about the Opposition –  who are freer to talk, freer not to travel etc but who chose the path of deference and submission.  Not so different from vassaldom.    It is all the more extraordinary that they proceed with the trip just after the Todd McClay revelations.  Bridges has been blathering about seeking spiritual blessings on the India leg of the trip, but you can’t help thinking that making obeisance before Beijing and receiving their words of approbation isn’t more the point.

And then, not least, there is Hong Kong.   Freedom is dying by the day in Hong Kong, and there is no doubt that the PRC itself is calling the shots (see, for example, the Carrie Lam tape). Police brutality is rampant, and protestors –  who see only the prospect of complete absorption by the totalitarian PRC (whether now, in 2047, or some point in-between) –  have courageously taken to the streets week after week to stand up against the threat to  the sort of freedoms we take for granted, that National once claimed to stand for.  A decent and courageous political leader –  a man of faith, or morals, of a belief that freedom matters even when it costs –  would have recognised the climate and chosen to call off his trip to Beijing.  The PRC wouldn’t have liked it one bit.  Nor would MFAT.  Nor would Goodfellow and the party fundraisers.   But it is just an idle fantasy anyway, the idea of some leading political figure in New Zealand ever making a stand, be it ever so modest –  from the position of Opposition even.  And never more so, it seems, when Simon Bridges leads the National Party.  And Jian Yang –  CCP membership, misrepresented past and all – remains at his right hand.

Are there any limits?

(And, to repeat, Jacinda Ardern is quite as bad, but this post is about National.)

 

80 years today since we entered World War Two

Michael Reddell New Zealand economic history, Productivity

It is eighty years today since New Zealand declared war on Germany, joining the United Kingdom in responding to the unprovoked aggression of the German invasion of Poland.  Until just now, glancing at one of the government historical websites, this statistic hadn’t occurred to me

New Zealand was involved for all but three of the 2179 days of the war — a commitment on a par only with Britain and Australia.

It is estimated that 11928 New Zealanders died in the course of that conflict, a death rate (per million population) higher than in any other Commonwealth country.  Dreadful as the war was, it still strikes me as something closer to a just war (for our side) than most other conflicts in modern history –  although, of course, the counterfactual is unknowable.

Back in the very early days of this blog, I wrote a short post on some aspects of the New Zealand economy in and around World War Two (while lamenting the absence of a modern analytical book-length treatment).  Here is the gist of a few of the paragraphs from that post

Two things from the period did stand out.

The first is that, while New Zealand devoted almost as much of its GDP to the war effort as any of the major combatants (at peak similar to that in the UK, although the UK held the peak for longer), material living standards for the civilian population seemed to remain relatively high –  notably the quality of the diet, access to petrol etc.  Perhaps that partly reflects just what a rich country New Zealand then was.  Using Angus Maddison’s data:

1939 GDP pc

New Zealand’s GDP per capita in 1939 was second highest of those countries shown (a year earlier –  the US in recession –  we’d been top of the table).  It may have been easier to devote a larger share of GDP to the war in a rich country like New Zealand than in a relatively poor one like the USSR, where a larger share of resources would have to have been devoted to subsistence.

And the second point is the dramatic transition: New Zealand went from being on the brink of default in 1939 to being, in effect, defaulted on just after the war.  In 1939, in the wake of the imposition of exchange controls, Walter Nash emerged from a humiliating mission to London, with a very onerous schedule of overseas debt repayments.  If the war had not been looming –  which made the British government keen on maintaining good relations with the Dominions –  it is quite possible that New Zealand would have been unable to rollover maturing debt at all, probably ending in a default to external creditors.  By just after the war, New Zealand  –  having markedly reduced its external debt ratios during the war – made a substantial gift to the UK (as did Australia): in reality, Britain was quite unable to meet all its obligations and needed some of them written down.

In a paper a couple of years ago, some IMF economists looked at examples of countries that had markedly reduced their overseas debt.  The New Zealand experience during WWII was as stark as any of those reversals, but is too little studied.  It seems to have mainly resulted from a determination to pay for as much of the war as possible from taxation, together with the controls and rationing that limited private sector consumption and investment.  But it was not because of any strength in New Zealand’s terms of trade:

WW2 TOT.png

New Zealand’s terms of trade fell during the war years –  our import costs rose as global inflation increased, but there was little adjustment in the prices of the agricultural/pastoral products New Zealand sold to Britain.

Notwithstanding the lives lost (and the constraints on consumption, free speech etc) New Zealand’s experience of World War Two was pretty mild.  No combat occurred on our shores –  nor was it ever credibly likely to –  and we didn’t even have anything akin to the bombing of Darwin or of Pearl Harbor.

Of all the countries involved, perhaps Poland’s experience was worst.  I wrote a post here late last year, at the time of the 100th anniversary of the end of World War One (in turn leading to the re-establishment of an independent Poland), in which I noted that

My own reflection on Poland is that it is hard to think of a place in the western world (say, present day EU, other bits of western Europe, and western European offshoots – eg New Zealand, Australia, Canada, US, Argentina, Chile, Uruguay) that wouldn’t have been preferable to live in over the last 100 years or so, at least as judged by material criteria.   Perhaps if you were German, you have to live with the guilt of World War Two, but most of Germany was free again pretty quickly.   Romanians and Bulgarians might have been poorer on average, but they largely escaped the worst horrors of the German occupation.  To its credit, Bulgaria managed to largely save its Jewish population, while the Polish record was patchy at best.  With borders pushed hither and yon, and not a few abuses of other peoples (notably ethnic German) post-war, sanctioned by the state, the place then settled into 40 years of Communist rule.   There is a lot to admire about Poland, but I wouldn’t have wanted to live there any time in the 20th century.

And never more so than during and just after World War Two.

But against that backdrop it leaves the story of the Poland in the last 30 years or so all the more impressive.    Some will be critical of various aspects of Polish governance etc, but they are now bringing up 30 years of democratic government –  and changes of government –  something that would have been hard to imagine when I was young, or –  in the late 30s –  when my parents were young.

And then there is the economic performance.  In 1938, it is estimated that Poland’s average real GDP per capita was just a third of New Zealand’s.    The most recent IMF estimates suggest that this year, Poland’s GDP per capita will be 82 per cent of New Zealand.  New Zealand has, of course, been a poor performer, but relative to Germany over the period Poland’s GDP per capita has improved from 40 per cent to 60 per cent.

And then, of course, there is productivity: real GDP per hour worked.   We don’t have very long runs of data for this variable, but here is the ratio of Poland to New Zealand for the 25 years for which there are data for both countries.

poland real GDP phw

Them doing better doesn’t make us worse off (of course).  Their success is great for them and their people.

But, as we ponder the deeper issues of loss, sacrifice, freedom, the threat of tyranny etc –  all exemplified in the story of World War Two –  it might still be worth reflecting on how extraordinary New Zealand’s relative economic decline  (relative to every single country on that first chart above) would have seemed to our leaders in 1939 if someone could have told them then how poorly New Zealand itself would do over the next 80 years.

 

Obstructionism from SSC

Michael Reddell Treasury

Several months ago now the State Services Commissioner announced the appointment of a new Secretary to the Treasury.   The new appointee finally takes up the position later this month.

When the appointment was announced I wrote a fairly sceptical post, noting that the appointment process had been long and slow, suggesting that there had not been an abundance of high quality applicants, let alone a standout one or two people who might, almost naturally, have succeeded to the position.   That in itself should been enough to raise questions about how well the State Services Commission has been doing its job, given that (a) one of those roles was to nurture and develop talent at the senior levels of the public service, and that (b) really successful organisations tend to promote from within (an element of the success having been in nurturing and retaining talent).

As I wrote then, I am also sceptical about the new appointee herself.   She has no experience in a national economic policy agency (having worked primarily in research at the World Bank, and then in NSW state government roles –  NSW being more than a city council but rather less than a country), has no apparent knowledge of, or background in, New Zealand, and has no obvious long-term vested interest (her own future or that of her family) in the economic success of New Zealand.     At best –  and as I noted at the time, no one in New Zealand willing to comment publicly seems to know her well –  we might have acquired a smart generic public sector manager who would not have been a serious contender for a similarly senior role in her own country, and probably sees herself on a career path back to upper levels of the Australian (or NSW) public service in a few years time.  At best.    And this in a country where (a) The Treasury is the government’s premier economic adviser, and (b) whose long-term economic underperformance has been dire, a situation that shows no sign of reversing.

Against that backdrop it seemed reasonable to ask a few questions about the selection process, evem bearing in mind that –  as I wrote when the position was advertised –  the advertisement seemed designed to recruit a safe generic sector manager, and that seems to have been what the SSC found.

The National Party seem to have thought it was worth asking questions in Parliament. That should have ensured that they got decent answers –  after all, parliamentary questions aren’t subject to all the agency protections the OIA provides.   But it seems to have been a hard road even for them.   They seem to have asked eight written questions of the Minister of State Services (in the 2019 series, questions 27398, 27396, 27394, 27393, 27392, 27391, 27390, 27389).

Most of the questions were asking about the applicants for the position of Secretary to the Treasury (not individually, but information such as the male/female split, citizen/non-citizen, resident/non-resident, total number of applicants, economics qualifications of applicants).  Every single one of those questions seemed reasonable and appropriate questions for MPs to ask about the appointment process around the most important public service job.   But on every single one of those demographic questions the Minister of State Services –  Chris Hipkins  –  simply refused to provide a substantive answer, offering this standard response

“I am advised that the State Services Commission does not release information about applicants to chief executive roles in the interest of privact. Information provided by applicants to the State Services Commission is done on a confidential basis.”

Which might have been fine had National been asking for the names and addresses of all applicants, but this was aggregated data they were requesting.  It looked a lot like obstructionism for the sake of it, by a Minister whose government used to claim it would be “the most open and transparent ever”.

Seeing these responses, I was aware that –  for example –  similar data had been requested, and released, in response to OIA requests around the appointment of Reserve Bank MPC members.    And so I lodged an Official Information Act request with the State Services Commission asking for a similar range of information, but not just about the applicants as a group (where there could be all sorts of non-serious people) but about the subset of applicants SSC had chosen to interview.  In my request I pointed out that another public agency had already released similar information around other appointments (ie the Reserve Bank roles), and that I was not seeking any individual personal information, or information that in total might allow the identification of any individual.  It seemed to me inconceivable that the OIA would allow SSC to get away with a blanket refusal.

At around the same time, the National Party lodged a new parliamentary question asking who had advised that releasing the information sought in the earlier questions would be a breach of privacy.  That seems to have helped spark a rethink, whether in the Minister’s office or at SSC.  This was the answer Paul Goldsmith received.

29115 (2019). Hon Paul Goldsmith to the State Services (Minister – Chris Hipkins) (07 Aug 2019): Further to WPQ 27394 (2019), who advised the Minister that releasing the number of applicants for the position of Secretary to the Treasury who were based in New Zealand or overseas at the time of the application breaches the privacy of the applicants?                                                                                                     Hon Chris Hipkins (State Services (Minister – Chris Hipkins)) replied: On 25 July 2019, I was advised by the State Services Commission (SSC) that it does not release information about applications to chief executive roles in the interest of privacy. I did not receive advice that stated releasing the number of applicants information breaches the privacy of the applicants.SSC has subsequently reviewed their advice and have advised they will be releasing the information in response to written parliamentary questions 27389, 27390, 27391 and 27394 (2019) having balanced privacy and public interests.

SSC has advised that 24 applications were received for the position of Secretary to the Treasury and that information provided in the applications indicates that eight applicants for the role of Secretary to the Treasury held a Masters or higher qualification in an Economics based discipline.

They also advised that information provided in the applications indicates that eight applicants were resident in NZ and 10 applicants were not resident in NZ at the time of their application for the role of Secretary to the Treasury. Information for six applicants is not held by SSC.

This is also my response to written parliamentary questions 29116, 29117, 29118, 29119, 29120, 29121, 29123, 29124, 29125 and 29127 (2019).

And last week I got a response to my OIA request to SSC.

I had requested this information

I am writing to request the following information about the recent process to fill the position of Secretary to the Treasury.

  1. How many applications were received?
  2. What proportion of applicants were (as best you can tell) female?
  3. What proportion of applicants were New Zealand citizens?
  4. What proportion of applicants had at least an honours/masters degree in economics?
  5. What proportion of applicants had a PhD in economics?
  6. What proportion of applicants could reasonably be described as long-term New Zealand public servants?
  7. What proportion of applicants were living/working abroad at the time of application?
  8. How many of the applicants were interviewed by SSC?
  9. What proportion of those interviewed were female?
  10. What proportion were living/working in New Zealand at the time of application/interview.

As I took pains to stress, it was inconceivable that even answering all those questions completely could identify any individual (since I wasn’t asking for any cross-tabs –  eg “how many male PhD applicants were living in New Zealand”).

In respect of the applications, SSC gave me much the same answers they provided to the Minister to answer Paul Goldsmith’s questions (which was a little annoying since some of the questions were different –  thus I never found out how many of the 24 applicants had “at least an honours/Masters degree in economics”).

The information on applicants was only mildly interesting because all sorts of people, some wildly unsuitable, apply for all sorts of jobs –  whether because people are deluded about their abilities, or on the remote chance of it helping get a New Zealand visa.  You get the feel there must have been some of that going on with these applications: there were 24 of them, and yet SSC claims not to know where a quarter of the applicants were living/working at the time of the application, which simply isn’t credible in respect of any serious applicant (who will have details of currrent employment as part of their CV and application).  SSC also claims not to have known the citizenship of a quarter of the applicants, even though they were applying for a position requiring a very high level security clearance.  For what it is worth, here is what they did tell me

  • seven applicants had NZ citizenship and 11 did not have NZ citizenship

  • eight applicants were resident in NZ and 10 applicants were not resident in NZ.

NZ residency and NZ citizenship information for six applicants is not held by the State Services Commission (SSC)

I had asked about what proportion of the applicants could reasonably be described as long-term New Zealand public servants. I deliberately framed the question that way to (a) minimise work for SSC, and (b) because I wasn’t interested in whether someone had spent two years as a junior analyst 30 years ago or (indeed) disqualifying them if having spent 30 years in the public service, they had spent the last couple of years getting experience in the private sector or overseas.     SSC claimed not to know the answer to this question –   which looks a lot like obstruction again –  but did tell me that only seven of the 24 applicants (not including the successful applicant) had indicated some experience (who knows when) in the New Zealand public service.

Also looking like obstructionism, the SSC refused to tell me (or, via Hipkins, the National Party) how many applicants had a PhD in economics.  Again, they claimed this was on the grounds of privacy. But that is simply nonsense.  Whether there were one, five or seven such applicants (the successful applicant has a PhD in Finance) cannot possibly identify any individuals.  Perhaps it would be embarrassing to SSC if the answer was none (although in my view it needn’t be –  a research qualification, which is what a PhD largely is, shouldn’t be a prerequisite for such a position)?

In many respects, I was most interested in the group of applicants SSC interviewed –  after all, they were the people SSC must have regarded as the most credible applicants.  SSC told me that they interviewed five candidates, two of whom (including the successful applicant) were female. But they have flatly refused to answer the final question about what proportion of those they interviewed were living/working in New Zealand at the time of application/interview.  Again this was (allegedly) to “protect the privacy of individuals”.  They went on to say

The SSC information release confidentiality guidelines ensure we allow as much high value information as possible to be released, while ensuring that it is not in a form that could reasonably expect to identify an individual, or at a level of aggregation where the information is still informative.  These guidelines apply to any statistical information that contains private or confidential information and therefore prevent us releasing the exact number of applicants interviewed who were working in New Zealand at the time of their application.     

I’m not sure how they can justify release the share of interviewees who were female and not the share who were living/working in New Zealand.  Neither can possibly disclose individuals.   Perhaps the answer is in that chilling line that they do not release information “at a level of aggregation where the information is still informative” –  which would seem to run directly counter to the letter and spirit of the Official Information Act.

Since we know that one of the five –  the successful applicant – was living/working overseas, the answer to my question can only be 0%, 20%, 40%, 60% or 80%  (living/working in New Zealand).  The answer could be quite revealing about SSC’s priorities, and/or its talent management and development, but it simply could not tell us who these individuals are (and, of course, nor should it).  My suspicion now –  given SSC’s obstructionism –  is that we would find that hardly anyone living in New Zealand, or with a strong New Zealand background, was interviewed: I hope that wasn’t the case, but given SSC’s approach you have to wonder what they are hiding.

I have asked the Ombudsman to review this SSC refusal, both on the grounds that there is no legitimate protection of individual privacy ground available in this case, but also because the wider public interest would be served by the release of this information, in this case in helping to hold SSC to account for the way in which it is doing its job –  developing and selecting the top tier of the New Zealand public service.

In the meantime, what we do know is that we have an incoming Secretary to the Treasury who looks underqualified for the role, who has few/no New Zealand knowledge or networks, and whose incentives are simply not that well-aligned with the long-term interests of the people of New Zealand.  It looks like a poor appointment –  although time may prove otherwise –  but perhaps she was the least bad that was on offer.    SSC and the government don’t seem too keen on allowing us to get a better sense of that.

(As a reminder, I was not the only commentator to raise doubts about the appropriateness of yet another offshore appointment –  can’t we manage to run our own country? –  and there was a lot to agree with in this column from Simon Chapple, director of Victoria University’s Institute for Governance and Policy Studies.)