Day: October 14, 2019

Culture and conduct in question

Michael Reddell Adrian Orr, bank capital requirements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

He gives serious thoughtful speeches as well.

MacNamara concludes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

eric orr.png

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

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

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

Reopening parent visas

Michael Reddell Immigration

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

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

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

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

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

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

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

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

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

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

The move will:

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

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

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

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

parent visa

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

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

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

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

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

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

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

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