Never mind democracy or effective accountability

Bernard Hickey had a column on Newsroom yesterday, on which the summary reads as follows

A generation of baby-boomer leaders revolted at Robert Muldoon’s conservatism and rewrote the nation’s software in 1989. So what should Gen X/Y/Zers do if they win power in the next decade? Bernard Hickey argues they should give the Infrastructure and Climate Change Commissions Reserve Bank-like independence and tools to target housing affordability and carbon zero by 2050.

He starts with a look back to the reforms of the 1980s and early 1990s. I’m not quite sure why he centres on 1989 (as “year zero…in modern New Zealand”), a year when the governing Labour Party was tearing itself about and heading towards one of its biggest defeats ever, but it was the year the Reserve Bank Act was passed –  near-unanimously in Parliament, and yet with large amounts of opposition (just short of a majority in National’s case) in both main party caucuses.  And the Reserve Bank framework appears to be Hickey’s model for how some new generation of reformers should deal with such major public policy challenges as “housing affordability and carbon zero by 2050”.

Thirty-one years on, the country could have used the creation of the Climate Change Commission and the Infrastructure Commission to acknowledge these problems and take the long-term decisions out of the hands of politicians and the three-year electoral cycle.

That would have involved giving the commissions clear targets and control over tools to achieve those targets.

For example, the Infrastructure Commission could control the balance sheets of NZTA and Kāinga Ora in a way that allows them to borrow and build to achieve targets such as carbon zero by 2050 and housing costs of around 30 percent of disposable income for the bottom quintile of households under the age of 65.

I guess at least we should be grateful he proposes boards with multiple members (not mostly owing their jobs to the chief executive) –  at the Reserve Bank all power was vested in one man for 30 years, and even now the Governor  –  himself not even appointed by a minister – controls a majority of the MPC.

There can be case for the delegation of some operational policy decisions to unelected boards (and, of course, we typically want the application of rules to individuals and individual companies to be determined by people who aren’t politicians).   And we want judges to be independent.   But if you are at all committed to a democratic system of government and to effective accountability for decisionmakers, the range of policy issues appropriately delegated is remarkably narrow. In fact, I’d argue it is very close to an empty set.

I’ve written here previously about the book Unelected Power published a couple of years ago by Princeton University Press, and written by former Bank of Engand Deputy Governor Paul Tucker.  In the book he deals with exactly these sorts of issues: what sorts of decisions should be delegated to the unelected, and under what circumstances.   He draws heavily from his career as a central banker, but his focus is broader than that.    I’ve found this little table an effective summary of his case


(IA here is “independent agency”).

One could debate some of these points at the margin, but broadly speaking they seem like a good framework against which to evaluate proposals to delegate policymaking to the unelected.  I think it is pretty arguable whether even monetary policy would pass that test, but think about it in light of Tucker’s points.

If there wasn’t general agreement in 1989 about the appropriate target for monetary policy (recall that in 1989, “inflation targeting” barely existed outside a few internal Reserve Bank memos), there was pretty general agreement that we wanted inflation rates that were a lot lower and more stable than they’d been for the previous couple of decades.  These days, there is pretty strong agreement on something like 2 per cent inflation as the target.

There is also a reasonable consensus of relatively-expert opinion that, in the longer-term, there are no adverse trade-offs such that (say) maintaining inflation at around 2 per cent would make us poorer than maintaining inflation at 4 per cent.   The monetary policy framework, and the delegation to the Governor/MPC, is based on the notion of the long-run neutrality of money (monetary policy).  There are short-term trade-offs, which do need to be managed, and dealing with those is why we have active monetary policy.

And monetary policy in 1989 wasn’t a new thing.  There had been literatures on money and prices going back a couple of hundred years, active use of monetary policy since the 1930s, and not even central bank operating autonomy was new (we’d had it previously, and in places like the US, post-war Germany, or Switzerland, it had never been otherwise).

And while the Parliament was giving  Reserve Bank powers that were fairly pervasive in effect –  the point about monetary policy is getting in all the cracks, and influencing aggregate demand across the whole economy –  in fact no one was compelled to deal with the Reserve Bank, the Bank had no regulatory powers (as regards monetary policy) and could really only influence –  later set directly, once the OCR was adopted –  a single short-term interest rate.   In giving the Bank operational independence, Parliament also removed the Bank’s ability to set, for example, reserve ratios and similar direct controls.  (And it is worth noting that the independent Reserve Bank doesn’t even really decide whether the OCR will be 8 per cent or (say) 1 per cent –  monetary policy is adjusting the actual OCR relative to the changing (not directly observable) neutral rate.)

And then it is worth recalling that the Reserve Bank Policy Targets Agreements were signed for five years at a time, but for quite some time rarely lasted anything like that long: between 1990 and 2002 there were three  (arguably four) different targets for the rate of inflation, and two different targets for just the time horizon to get down to the level, as well as frequent changes in how the Bank was supposed to deal with short-term deviations.  Almost all these changes were driven from the political side –  no complaints about that, they were elected.  Oh, and at all times Parliament reserved to the Minister of Finance the power to override the target signed with the Governor and impose a quite different goal for a time (a power never used, but Michael Cullen as Minister mused aloud about the option).

And it is also worth remembering that we’d already broken the back of (really) high inflation before the Reserve Bank ever came into effect (and that some other countries with formally independent central banks –  including the US and Australia –  had also had quite bad experiences with inflation in the 1970s and early 80s).

I am not, repeat not, arguing against operational independence for the Reserve Bank on monetary policy (although I think the case is less strong that I once thought, including because the challenge of the last decade has been central banks delivering inflation too low, contrary to the propositions that underpinned the case for autonomy).  But monetary policy is pretty straightforward, fairly fast-acting, working within what had been generally agreed frameworks, and with few or no long-term distributional/values-based choices/consequences (although the shorter-term ones are greater than most involved in 1989 probably realised). And it uses a single instrument that alters incentives, rather than directly (regulatorily) affecting individual firm or households.

Contrast that with what Bernard Hickey seems to be championing.

One might start by wondering where we would be on housing if we’d given “independent experts” free reign in 1989 or 1991.  First, you’d have to know which “experts” managed to get hold of the levers of power in this area.  Some might have produced quite good outcomes (or rather facilitated the private sector doing so) but most likely the same planning establishment that still infests most of local government and much of central government (“highly productive” land consultations anyone) would have taken charge with their visions for what towns and cities should look like.   There is little reason to suppose outcomes now would be any better for removing what little democratic accountability there was.  If anything, they might have been worse.   And the distributional effects of those choices are (a) very large, and (b very long-lasting.   Contests of that are inherently political.

And while it is fine to suggest some independent commission might be charged with delivering a particular cost of housing by taking control of large chunks of the government balance sheet (leaving the associated large financial risks to the rest of us), a) there is no agreement that housing affordability issues are mostly about (insufficient) government capital spending, b) no agreed and generally accepted model for what should be done where, and c) if a Commission’s only tool is infrastructure, but the main causes lie elsewhere (whether you believe land use law, taxes or whatever) the independent commission will be incentivised to grossly overdo the infrastructure spend in a futile, and distortionary, attempt to make up for other problems.  And no one, but no one, is going to delegate to an independent agency all the laws and regulations that might affect housing affordability (be it RMA provisions, Local Government Act provisions, CGT or land tax, transport charging, immigration or whatever).  Let alone offer protection against agencies pursuing their affordability target by structuring policy to force us all into tiny houses.   It simply will not happen.  And neither should it.  There is no conceivable agreed monitoring and accountability framework either.   We need to be able to toss out the people who make these decisions.  And the political process needs to grapple with the tough choices.

What about climate change?  Here’s what he has to say

And for the Climate Commission?

Another set of tools could be used by the Commissions working in tandem to hit zero carbon by 2050, including controlling a carbon price in the same way the Reserve Bank controls the Official Cash Rate, and controlling emissions standards and import regulations for petrol and diesel engine cars.

Of course it technically could be done.  In our system of government, Parliament can give away whatever power it likes whenever it likes –  but can also always grab them back again – but it shouldn’t be.  This is about a target 30 years hence, which makes sense (or not) only in the context of what the rest of the world is doing, with huge distributional distributional consequences, and no agreed models on what measures (or carbon prices) would be required, and thus no ability to assess ex ante an expected cost of the policy.    No one has any idea what technologies will emerge either, whether to ease adjustment or reduce the case for it.     There is almost nothing about the issue that suggests it would naturally be something where we could safely and prudently trust the matter to a particular group of experts or “experts” (and don’t come at me about existential threats, since whether or not climate is really such, it is so almost entirely independently of whatever New Zealand does).

If one were looking for parallels in history, perhaps one might think of World War Two, a pretty serious threat to the world as we knew it, and our side was very much of the backfoot for a couple of years.   You can fight wars without any democratic independent –  broadly describes Germany, Japan, Italy, and the Soviet Union.   But we  –  the Anglo world, including New Zealand –  prided ourselves that we didn’t do things that way.  The big calls, the big choices (many of which changed through time as events unfolded) were made by the people’s elected representatives.  Some of us –  including New Zealand –  even had elections during the war, and an active parliamentary Opposition almost throughout.  Sometimes those elected leaders did really badly.  But the process mattered; it was part of what we were fighting for.

I guess lots of people are frustrated by a variety of poor outcomes in New Zealand –  be it productivity, house prices, climate change or whatever.   But big and hard choices are what we elect politicians for, and the accountability (ability to toss them out) is one of our few real protections.  In very few areas of policy –  and probably generally not very interesting ones –  is there the degree of consensus that anything like what Bernard Hickey is proposing might require.   There is a class of technocrats who would really like to turn politicians/Parliament into little more than a nominating committee, occasionally passing legislation on the current whim of the technocracy.  It is a system I suppose, but long may it not be ours.

(And all that defence of politicians from one so disillusioned with our actual politicians/parties that at present I’m minded to choose to not vote at all this year.  To my mind, the issue is not that we don’t give enough power to “experts”, as that there is singular abandonment of leadership among our political class.)