Coronavirus can’t just be thought of as an illness for other countries

February 26, 2020 Michael Reddell pandemic

There was quite a bit of media coverage this morning around the potential economic impact of, and possible policy responses to, the coronavirus. There have been commentaries from, or interviews with, various economists and a fairly substantive interview on RNZ with Grant Robertson, the Minister of Finance. Each of them left me a little concerned, but of course the comments from the Minister of Finance – who gets to decide things and is backed by phalanxes of official – matter the most.

In his comments at the post-Cabinet press conference on Monday, the Minister indicated that he and his officials were working with three distinct scenarios. There doesn’t appear to be anything in writing (eg on The Treasury’s website) but broadly the scenarios were as follows:

something (probably not too different than the Reserve Bank’s quite-sanguine recent published forecasts) that seems wholly focused on China, and with things beginning to get back to normal next month,
something where the effects, perhaps around a wider range of countries, linger for the rest of the year, and
a third scenario which he characterised as a serious global recession.

The government is still working with the first of those scenarios, although the Minister acknowledged that the risks of the second scenario looked to be rising.

Many of the other commentators seemed to be thinking along similar lines. The NZIER, for example, released their quarterly forecasts overnight and their press release says

It is early days and there is a large degree of uncertainty over the magnitude and duration of the effects from the coronavirus outbreak. In the short-term, the uncertainty revolves around the ability of exporters to redirect their exports to other markets. Over the longer-term, the uncertainty is whether the coronavirus has any persistent negative effects on global growth.

And I’ve seen/heard other economists commenting on whether or not GDP growth for the first couple of quarters might or might not be negative (the popular definition of a recession – more demanding here than in most countries, given our fairly rapid population rate).

But, frankly, it all seems a bit pointless, especially the very short-term forecasting, because all of them – including the Minister of Finance – seem to be dealing with a scenarios in which coronavirus is someone else’s health (and attendant domestic disruption) problem, for which New Zealand is only exposed to the global growth backwash. Of course, that backwash might well be quite severe. But none of them seem to be grappling with the near-certainty that coronavirus will soon be confirmed in New Zealand (based on what we’ve seen abroad, there must be a reasonable chance it is already here – and the Ministry of Health tell us that under their narrow criteria only 120 tests have taken place here). And, more specifically, none of them is grappling with the possibility that we – like any city in the world, it appears – could have Korean, Iranian, Italian, Bahrain situations here at any time from today (none of those countries seem to have thought last week that they’d be imposing all the the restrictions they now have). If the experts who tell us there is now a high chance of a general global outbreak, perhaps infecting 40 to 70 per cent of the world’s population, are correct, probably most cities will face such a scenario. And those sorts of events have the potential for huge disruption, and economic cost, which would swamp the sorts of narrow effects forecasters like the Reserve Bank have already allowed for.

Take as a scenario a significant outbreak in Canterbury (or Wellington). Canterbury accounts for about 12.5 per cent of New Zealand’s GDP, and suppose that for a month economic activity in Canterbury is reduced to 50 per cent of normal (some mixture of schools and daycare centres etc being closed, lots of people being sick or self-isolating because a family member was sick, restrictions on public gatherings, the evaporation of tourist arrivals, and fear). If that was the only effect New Zealand’s GDP for the quarter of the outbreak would fall by 2.1 per cent – not annualised, an actual fall of that amount. That alone would be almost as bad as the worst quarter of our worst recession in modern times in 1991. You could triple the effect if the outbreak was in Auckland (38 per cent of national GDP).

And even if by some chance the outbreak – and tough restrictions – was contained to a single city/region, the economic effects won’t be – partly about domestic supply chains, partly about transport networks, and lot about precautions and fear. If there is a Korean or Lombardy style outbreak in Sydney or Brisbane, we’ll already see a lot of costs start to rise rapidly here – both domestic fear, and how many foreign tourists do we suppose would still be coming here? So we can’t even assume that even if an individual city’s outbreak takes just a month to work through, that the national effects would be limited to a single month. It isn’t inconceivable that we – or small/compact countries like us – could see the level of GDP fall by 10 per cent or more in a single quarter, and then take quite a long time to recover from the shock of what the society has just gone through. Quite apart from anything else, that is quite a lot of lost tax revenue, even if 12-18 months hence things were more or less back to normal.

Of course, no one doing quarterly forecasts can allow for these sorts of events in their specific numbers, because we have absolutely no idea whether these scenarios hit tomorrow, next month, June (or, indeed, not at all). But anyone – policymaker, business, or householld – thinking about the outlook for the next year would be pretty unwise not to explicitly factor in a fairly probability that exactly that sort of highly disruptive short-term scenario could occur. And then you have to factor in the near-certainty (so to speak) of extreme uncertainty, and associated disruptions – forced on individuals or firms, or self-chosen as a precaution – across the world for much of the year ahead. At very least, a lot of travel just won’t happen, a lot of investment projects will go on hold, and cash-flow/liquidity is likely to be a big issue for many firms and households, whether or not banks are more or less as supportive (or otherwise) in other stress periods. Whether that will amount to the Minister’s “serious global recession” scenario or not, who knows (but probably, given other underlying vulnerabilities).

In many ways, GDP is just a headline number in thinking about the challenges we face, and in time it is likely to recover more or less fully (even allowing for the limits of monetary policy). Much the bigger issue in the disruption to lives – even lives lost – lost jobs, debt defaults, perhaps stranded sick tourists, overwhelmed health systems, disrupted supply chains for things as (normally) mundane as food. I suspect policymakers shouldn’t be focused so much on the Minister of Finance’s scenarios – which in many respects from a New Zealand perspective are fairly vanilla as regards policy responses – as on handling, and preparing for, the extreme but short-term disruption of actual coronavirus outbreaks here.

(As a reminder here of my post last week with some speculative thoughts on the potential economic ramifications if things go really bad.)

Of course, “preparing for” here should include preparing the public. So far, both officials and ministers have been almost totally silent on that count. In the early days, Health officials seem to be more interested in minimising the issue, but even having got beyond that they and their political masters seem to think all these issues are really just matters of bureaucrats, not for the public themselves. News coverage seems more interested in what the government might or might not do to help currently-affected industries, and media representatives don’t seem to be pursuing ministers on how they will handle (the likelihood of) a significant outbreak here. There was not a single question along those lines at the PM’s press conference on Monday.

There is, of course, a pandemic plan on the Ministry of Health’s website. It was last updated in 2017, under a previous government. It was designed with influenza in mind, and the current virus appears to be different in some material ways. There is even an explicit appendix (p155f) on “public information management”, including for use at a stage when a pandemic might be looming. But almost none of the messages mentioned there seem to be being conveyed at present. There is no evident leadership – from the Prime Minister, the Minister of Health, or some other minister leading the government’s response – and no sense of what choices the government might make under what conditions.

As just one example, what approach does the government intend to take around schools and daycare centres? Some places have closed them pretty quickly – Hong Kong just extended school closures until April – while other places (notably Singapore) have left them open. That single choice has big implications for many parents, and for their employers, and yet we’ve heard nothing, meaning no one can plan with reliable information.

Or at a more-mundane level, is there any sign of advice to people to consider stocking up on various non-perishables that might better enable them to cope with a few weeks at home. Probably many of those paying attention will already be doing so (I certainly am) but a lot of people are probably barely conscious of the issue – which could be on us tomorrow, or months away. And what thought has the government given to people without the financial capacity to do much about stocking up – living from pay cheque to pay cheque – including if we were to see the sorts of runs on supermarkets you can see photos of from Milan. If cities are more or less closed down, foodbanks aren’t likely to be available/effective either. And what are the plans if 10 per cent of the population needed fairly serious medical treatment over a matter of a few weeks? What plans might community support groups be making now? Is it wise, or humane, to look at encouraging more young foreigners in now, when we might soon face serious stresses on our own health systems, with the visitors having few/no domestic support networks? And so on.

There are lots of these sorts of questions/issues. Eric Crampton had a useful post on the point with some more of the relevant questions set out. Perhaps there is some really effective planning going on behind the scenes, but even if so that simply isn’t good enough in the face of this sort of event, especially when we can all see and read about what is going on elsewhere and the advice being given elsewhere. How much better to have some visible leadership and open serious conversations about how, as a society, we manage the high likelihood of extremely disruptive, costly, perhaps deadly, events quite soon.

A tweet from the Reserve Bank

February 25, 2020February 25, 2020 Michael Reddell Monetary policy, Reserve Bank

I was in a meeting all morning and don’t have that much time this afternoon, so I should offer a special thanks to the Reserve Bank for suggesting a topic for today’s post. It is prompted by this tweet, which turned up in my feed just as I was about to head into my meeting

One of our jobs at the Bank is to forecast where we think the economy is heading. While there is still things that could trip up our prediction, we expect activity will pick up later this year, meaning more investment, more jobs & higher wages. More here 👉https://t.co/H6MGIBAzI4 pic.twitter.com/4ds5s2dmI0

— Reserve Bank of NZ (@ReserveBankofNZ) February 24, 2020

The Bank used to use Twitter for not much more than sending out links to press releases etc. But they seem to be trying to use it more actively, with a strategy (if any) that is less than entirely clear to the outsider. For example, a couple of weeks ago there was the invitation to us all to submit questions via Twitter for the Governor’s MPS press conference – which went rather badly when they only took two questions that were reframed as soft platforms for the Governor to declaim on some or other favoured topic. Yesterday, there was a puff piece telling the world that the Bank was now 43rd most favoured employer for graduates in New Zealand. I suppose that didn’t sound too bad – small organisation and all that – until I clicked on the link and found that the Bank came in behind 11 other government departments and a couple of local government entities. Oh well, thanks for letting us know I guess.

This morning’s tweet has the potential to be quite a bit more concerning, on several counts. Most concerning is that it reads as a statement of the institution’s view – that of the MPC? – on matters directly relevant to monetary policy, launched into the ether with no notice at all. That is no way to do monetary policy – or rather it was the sort of way we did monetary policy 25 years ago, before we moved to a clearer, more scheduled, more predictable system. This might seem like only a picky inside-the-Beltway issue, but this isn’t way things should be being done. It would be interesting to know whether the MPC were consulted, or even advised, that a statement on the economic outlook was about to be made.

More substantively concerning is the content of the comments, perhaps especially when released in the middle of one of worst financial market trading days in several years. Look at the substance of their new text: “we expect activity will pick up later this year, meaning more investment, more jobs, and higher wages”. The link is to their cartoon summary of the Monetary Policy Statement, released almost two weeks ago, based on forecasts finalised almost three weeks ago. Those were forecasts based on very short and quite limited negative coronavirus effect. Those are the forecasts today’s statement links to. How can they possibly still be the MPC’s best view now, when a growing range of medical experts now expect the virus to go round the world, infecting (in time) perhaps 40 to 70 per cent of the world’s population, with attendant disruption and uncertainty? At very least, the risks to the happy upbeat story must be much more serious than the MPC thought them two or three weeks ago.

My guess is that the tweet wasn’t really intended as monetary policy and related economic commentary at all. My guess is the MPC wasn’t aware of it, and quite possibly the Governor was not either. Perhaps someone down the organisation running the Twitter account just thought it would be a good idea to tell us a bit more about the Bank (“we do forecasts”). But official communications need to be managed better than that – an excellent central bank, best in the world, would certainly do so.

Excellent central banks also communicate carefully and precisely about things bearing directly on their mandate. A reader yesterday drew my attention to (something I’d missed) the way the Reserve Bank is falling short there too. A good example was in the cartoon summary of the latest MPS, linked to in that tweet, where I found these

target 1

target 2

It isn’t just the cartoon version either. Here from the MPC’s minutes

The Committee agreed that recent developments were consistent with continuing to meet their inflation and employment objectives

And my assiduous reader tells me the same phrasing pops up in comments made by the Governor, and in the last few MPS rounds as well.

Can you tell me what the Reserve Bank’s employment target is?

Trick question, as there isn’t one.

The MPC and the Governor surely know this, as their Remit – the mandate set for them by the Minister of Finance – is reproduced at the start of each Monetary Policy Statement. Here is the central section

The current Remit sets out a flexible inflation targeting regime, under which the MPC must set policy to:

• keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent midpoint; and

• support maximum sustainable employment, considering a broad range of labour market indicators and taking into account that maximum sustainable employment is largely determined by non-monetary factors.

There is a clear and measureable inflation target, basically the one we’ve had for almost 20 years now.

And then there is a requirement to “support” maximum sustainable employment – which is, more or less, what monetary policy tends to do when it acts to keep inflation near the inflation target. There simply is not an employment target, so what are the Governor and MPC doing claiming that they’ve met this non-existent target. It might be quite reasonable for them to argue that they believe they’ve done what they can to support keeping actual employment near maximum sustainable employment – reasonable people might differ from them on that, but the debate would then be around an explicit mandate the Bank has been given.

Perhaps to many the loose language will seem harmless. And perhaps when we are near to full employment it does little damage, but that won’t always be the case. Come the next serious recession, unemployment will rise a lot/employment will fall a lot. The Bank will do what it can to lean against those changes, but it won’t be failing – not hitting a target – just because the unemployment rate is high, perhaps even for several years (especially if the limits of monetary policy are reached). More generally, it creates a sense in which someone there are equally important employment and inflation targets, when the Minister of Finance – the one responsible for setting the target – has clearly specified otherwise.

Mostly, it is probably some mix of sloppiness and the Governor’s ongoing efforts to play the “tribune of the masses” card. And we should expect (demand) better than that from the Governor and the MPC – especially in formal written documents, whether aimed at the “specialists” Orr affects to despise or at a wider general audience. You do not need to be sloppy in the use of language to communicate the essence of what you are supposed to be about. From the Bank recently we’ve had loosely-grounded factual claims, outright misrepresentations, and repeated sloppy use of language to misrepresent the Bank’s mandate. I’m guessing it would not go at all well with the Bank’s bank supervisors if they found the banks and financial institutions they regulate operating in so loose a way. Apart from anything else, those supervisors might reasonably ask themselves “if things are this loose in what we see – prepared for the public face – what are things like where we cannot see, inside the organisation”.

These might be issues the Bank’s Board and the Minister of Finance – both charged with keeping the Governor (and MPC) in line and accountable – might be asked about. I imagine they would just run defence for the Bank, but you never know. Perhaps some journalist might approach an MPC member for comment – and if, as most likely would happen, they simply refused to comment then report that stonewalling.

Orr speaking

February 24, 2020February 24, 2020 Michael Reddell Adrian Orr, Reserve Bank

We’ve been hearing quite a bit from the Reserve Bank recently (in addition to the OIA disclosures of the Governor’s antics last year), just not much about monetary policy, short-medium term economic developments, or financial stability and regulation. In a few weeks the Governor will have been in office for two years, and in that time we’ve not had a single serious and thoughtful speech from him on either financial stability/regulatory issues or on monetary policy and cyclical economic issues. It is extraordinary, and not the sort of thing we’ve seen here in the past or in other advanced countries today. As it happens, the new MPC members have now been in office for 11 months, and we’ve not seen or heard a word from any of the external members at all.

But what of Bank management? If they haven’t been talking about core business (that small matter of the statutory responsibilities they are funded for), they’ve been out championing other causes, including themselves.

Last Wednesday the Governor (and accompanying senior managers) turned up at Parliament for the annual Finance and Expenditure Committee financial review hearing. The Governor’s opening statement is here. The only bit that immediately caught my eye was this

Amendments to the Reserve Bank of New Zealand Act, which came into effect on 1 April, gave responsibility for monetary policy decisions to the newly-established Monetary Policy Committee.

This framework has now been implemented and is working well, with six Official Cash Rate decisions by our new Monetary Policy Committee. The Summary Record of Meeting provides insights into how decisions are reached, and improves our stakeholders’ understanding of each Committee member’s contribution.

That final sentence, and particularly the second half of it, is at best spin, more accurately just a lie. The Governor explicitly states that the Summary Record “improves our stakeholders’ understanding of each Committee member’s contribution”, when of course – go and read them for yourself if you like – that is simply false. Not only does the Summary Record give no real sense of “how decisions are reached” but, by explicit choice and design (endorsed by the Minister of Finance), there is no reference at all to the views, arguments, analyses etc of any individual Committee member. And – did I mention this? – none of the externals has been heard from in any other fora. We have no idea whether they are making any contribution at all. It is breathtaking that the Governor can so actively and deliberately – in writing – lie to a parliamentary committee. In isolation perhaps it is a small point, but if we can’t count on a very and powerful public official in the small and visible points, how do we trust him more generally.

The FEC appearance was also an opportunity for the Governor to bid for more resources – a lot more resources we are told. According to the Stuff account, the Governor is bidding for a “30 per cent perhaps” increase in the Bank’s funding, claiming that (in respect of bank supervision)

The Reserve Bank’s existing resource was at the the low-end, if not “the lowest”, in the OECD

Which might sound more worrying/inappropriate were it not for the fact that New Zealand is among the smaller OECD countries and one of the poorer OECD countries, and also a country with a record of a sound financial system, and one dominated by banks already subject to serious supervision in another country that also has a long record with a sound financial system.

On several occasions over the years I’ve been willing to defend or even champion the case that the Reserve Bank is probably a little underfunded. But it gets progressively harder to defend that view as the evidence mounts for how undisciplined the Bank is in the use of the resources it already case. There was the million dollars for the Maori strategy, or the trips to international climate change meetings (and resources devoted domestically to such issues, for which the Bank has no particular responsibility) and there is the sense of a proliferation of staff in the communications/PR areas of the Bank. I can’t yet formally verify that – although I have lodged an OIA to get chapter and verse – but I’m not the only person to note the range of new people/positions (on the bottom of press releases, emails or whatever) and my favourite anecdote was one a friend told a few months ago about being approached by a headhunting firm to consider applying for a job in something like “stakeholder relations” at the Bank, a job my friend characterised as “having coffee with a lot of people, getting paid $180000 a year”. I hope The Treasury and Grant Robertson will be having a close look at whether there is any sort of culture of ruthless prioritisation, frugality etc in how the Governor uses what he has, before offering up yet more public money. There isn’t much sign of it.

Stuff also reports that National’s Finance spokesman Paul Goldsmith challenged Orr on his conduct

National Party finance spokesman Paul Goldsmith questioned Orr on the bank’s reaction to “criticism and debate” during a series of exchanges at the select committee, saying the Reserve Bank governor had “very significant independent powers” over the industries the bank regulated.

“From my point of view it is very important that we have open and robust discussion,” Goldsmith said.

“We wouldn’t want to have an independent governor with a glass jaw or a sensitivity to robust criticism,” he later added.

Orr’s response?

“What I won’t stand for is abuse of my team or myself,” he said.

He keeps claiming he and his team have been “abused” in some inappropriate or unacceptable way, but has not yet shown us a shred of evidence for those claims, suggesting that what is really at work is a powerful public figure who simply can’t cope with being challenged. As one of his former staff put it last week “he could always dish it out, but could never take it”.

I hope Goldsmith won’t let the matter rest, especially if he should become Minister of Finance later this year.

Orr was back on the public stage on Friday with a speech, delivered to a business audience in Christchurch, under the title “Aiming for Great and Best at Te Putea Matua” (that being that Maori label the Governor has chosen to attach to the Bank). The, perhaps rather odd, title refers to the Governor’s vision for the Reserve Bank “Great Team and the Best Central Bank”, the even more overblown goal than the one his predecessor had introduced, aiming to be the best small central bank in the world (when I asked, a few years later, what steps they’d take to benchmark themselves and measure whether they were getting close to the goal, the answer came back “nothing”). Nothing wrong with aspiration and ambition of course – although it is not clear that taxpayers would choose spend resources so heavily that a small, not very rich, country’s central bank would ever be best in the world. The real problem is the delusional nature of the claims, the visions, which seem more about spin than substance. Excellent central banks don’t have thin-skinned bosses, unable to keep their thin-skinnedness under control. Excellent central banks have senior figures who make excellent thoughtful speeches. Excellent central banks are producing a steady stream of insightful research. Excellent central banks underpin major policy initiatives with confidence-inspiring research and analysis, taking seriously alternative perspectives.

(Come to think of it, excellent central banks don’t just make stuff up when testifying to Parliament.)

We don’t have an excellent central bank (although it still has some good people); instead we have an organisation that has become little more than a platform for the Governor’s ambitions, whims, and political preferences, with little or no sense of boundaries, restraint, or the proprieties of public office.

I’m not going to waste a lot of time on a detailed review of the speech. Frankly, it is fairly dull although suffused with the Governor’s personal whims, especially around climate change (important issue and all, but really nothing whatever to do with the Reserve Bank). But do notice just how the Governor operates. There was this line

We have now made six Official Cash Rate (OCR) decisions – as a committee. We have managed robust discussion and come to consensus decisions. The nature of these discussions is published as a ‘Record of the Meeting’ for all to see. We also won this year’s Central Bank award for transparency in how we operate.

It is technically accurate, except that the transparency award they won was explicitly for one small element – the (quite good) Handbook they’ve published on monetary policy – not at all for anything about how the Monetary Policy Committee functions or how the ‘Record of the Meeting’ operates. It is just dishonest. It should be unworthy of – beneath – a major public institution in a sector where trust is supposed to be central.

A Stuff story appeared this morning about some more of the Governor’s comments. I first assumed it must be referring to the (published) Christchurch speech, but the article says it is talking about a speech given in Auckland (perhaps he used much the same text?). We get accounts of Orr as populist (also there in the published speech)

“I’m not here to talk to a few narrow specialists. I’m not here to talk to just the institutions we regulate.

“We are the central bank of everyone here in New Zealand, present and future, and we have been too narrow and too lax in our engagement with you all, and it is not going to happen again.”

The problem, of course, is that (a) few “specialists” actually have much confidence in him, (b) in all fields of life, we rely on “specialists” to help us evaluate and hold to account powerful public agencies (something Orr isn’t keen on at all), and (c) all that business about how his predecessors didn’t get out and talk to wider audiences is just so much nonsense, simply inconsistent with the facts. Perhaps Orr has forgotten Don Brash’s in(famous) retail roadshows, or Graeme Wheeler’s repeated talk about how he and the Bank were going to talk to a wider range of people. Some questionably, Alan Bollard even wrote a book (not inaccesible either) while in office.

And the article ends with an account of Orr’s answer to an audience question, which seems like quintessential undisciplined Or

Orr spoke about the importance of economic and social inclusion in response to a question from Jackie Clark, founder of The Aunties whanau support movement, who complained New Zealand was a low-wage economy.

“The owners of capital have been doing a great job over and above the owners of labour,” Orr said.

“It’s been extreme, unprecedented, over the last 40 or 50 years of that ongoing return to the owners of capital, and labour has become a global commodity, where production goes to the lowest common denominator.”

“We want low and stable inflation, but that does not mean we want low wages,” he said.

“We’ve been celebrating the fact that nominal and real wages have been growing recently.

“That’s how we roll. That’s how we have to roll, otherwise create yourself a gated community. Enjoy yourselves, but don’t leave.”

Would have sounded just great in a stump speech from Bernie Sanders, Alexandria Ocasio-Cortez – there is at least some evidence in support of his story in the US – or even Marama Davidson. But (a) this is New Zealand, and (b) you are the Governor of the Reserve Bank, with quite narrow responsibilities for monetary policy (affecting only nominal variables beyond the short-term) and regulation for prudential purposes of some classes of financial institutions. Instead, we get a rampantly partisan/ideological answer (inappropriate in itself, but when did bounds and norms bother Orr?), but one with little or no grounding in facts.

(A prudent grounded answer to the question might have been to note that distributional issues are not an issue for the Reserve Bank, but that in the longer-term only productivity growth will support a much higher wage economy. Both statements would be accurate and uncontentious.)

Those first two sentences in Orr’s answer seemed to be about the labour share of income. The data are summarised in a chart in this post. In New Zealand – it is different in some countries – the labour share of income rose in the 1970s, fell in the 1980s and (depending on your measure – I show three) is now just a little higher or a little lower than it was fifty years ago. You might personally argue for some different split of the pie, but what in the New Zealand experience justifies Orr’s flamboyant off-reservation ideological rhetoric.

Or what about how wages have been rising relative to economic capacity (say, nominal GDP per hour worked, capturing productivity and terms of trade effects). Well, as I illustrate every so often (most recently last month), this century, wage rates in New Zealand have been rising faster than GDP per hour worked. Perhaps Orr doesn’t know that – it certainly doesn’t suit his ideological message – but whether he knew it or not he actively misled his audience, while working on the taxpayer’s dime.

I was going to round off this post with a fairly detailed critique of a truly dreadful speech given a week or so ago by one of Orr’s principal deputies, Christian Hawkesby, the Assistant Governor responsible for economics, monetary policy and financial markets on “The Maori World View of the Reserve Bank” but with quite a bit else – including some atrociously bad history – thrown in, concluding with the absurd hubristic claim that the Orr/Hawkesby Reserve Bank is “putting the New Zealand back into the Reserve Bank of New Zealand”. You’d think they were candidates at this year’s election, not senior (supposedly non-partisan, supposedly operating within the constraints of specifc statutes) statutory public officials. But perhaps I’ll save that speech for another day, rather than risk losing the focus on the Governor who yet again reveals himself as simply unfit for the office he holds. And yet those paid to hold him to account sit idly by.

Preferring to look the other way

February 21, 2020February 21, 2020 Michael Reddell China, NZ politics

It was remarkable to pick up the Herald yesterday and find their coverage of the SFO prosecutions over the donations to the National Party given over to some “gotcha” attacks on Jami-Lee Ross. The huge headline is “Own Goal” and the next level down is “Jami-Lee Ross’ spectacular political faux pas”. Almost as if it were some sort of National Party newsletter.

Three things struck me about the Herald’s coverage (and, as far as I could see, other mainstream media were not that much different).

The first was that this jeering at Jami Lee-Ross’s comeuppance seems a weird approach for a major media outlet to take, when we’d not have known anything about the events now subject to prosecutions on serious charges without Jami-Lee Ross’s disclosures. There was certainly no sign the Herald had been getting to the bottom of the issues. Whistleblowers have a wide variety of motives, and not all of them are noble – and even those with elements of nobility are not infrequently tinged with more than a little of the less savoury side of things. And yet we rely on whistleblowers to uncover lots of wrongdoing: in specific circumstances, we even have statutory protections for them (but whistleblowing often comes with costs to the whistleblower, perhaps especially if they themselves have been directly involved in the alleged wrongdoing).

I guess I could understand the attacks at Ross’s expense had he, prior to all this coming out, been a longstanding public campaigner for clean elections, transparent financing of political parties, keeping foreign influence out of politics etc etc. The (apparent) hypocrisy would be stunning – akin to, for example, the morals campaigner caught in an extra-marital affair. But that wasn’t Ross. Did anyone ever mistake him for the moral face of politics when he was rising rapidly up the ranks of the National Party?

Perhaps he just generally was not a very nice or admirable person – there are, for example. those reports of his flagrant, repeated, violations of his marriage vows etc. But the fact remains that this wrongdoing (as alleged by the prosecutors for the SFO) would not be known had Ross simply stayed silent, whether that had involved continuing his efforts to climb National’s greasy pole, or just moving on quietly. Either might have suited the National Party. But it isn’t clear why such silence – about these specific donations, or about his involvement with others (Todd McClay and the PRC billionaire) that aren’t illegal but aren’t universally regarded as proper either – would have been in the wider public interest. Unless, somehow, all that now matters to the New Zealand elite (political, media or whoever) is maintaining that veneer of cleanness, even when they know the substance has become very different.

Perhaps some of the jeering might have seemed reasonable to some back in late 2018 when the story first broke. But the SFO clearly seem to think there is enough evidence that makes it worth a severely resource-constrained organisation actually laying charges on points of substance. It doesn’t have the feel any longer of something just relying one (motivated) individual’s words.

And to Ross’s credit, since the story first broke (and all the drama of that time) Ross does seem to made some effort to contribute constructively to the public debate on some of the policy issues around donations to political parties. He participated in the Justice committee’s (rather lame) inquiry into foreign interference, and spoke very forcefully in the House when the government was pushing through its travesty of a foreign donations law in December (the one that accomplished almost nothing useful,but perhaps looked/sounded to some like action). Who knows quite what mix of motivations he has. Perhaps some desire to bring down the existing National Party leadership (in Parliament and outside) with whom he previously worked so closely. Perhaps some element of genuine remorse, or recognition of how far he himself had been part of the system degrading. In a way, his motives don’t matter – it is the facts and the merits (or otherwise) of his arguments. No one appears to have contested the facts around the Todd McClay/billionaire donation. Few appear willing to openly champion the current law which allows tightly-held foreign-owned New Zealand registered companies to donate freely to our political parties (even as none of the parties is willing to end that provision). Ross’s call – having been a key figure in the alternative model in recent years – that only those registered to vote in New Zealand should be able to donate is a constructive contribution to the debate on our future laws (one I happen to agree with, but that isn’t the main point here).

In many ways, Ross seems an unsympathetic character – down to and including the claims about whether he had ever wanted his name suppressed – but when alleged serious wrongdoing is only brought to light by the voluntary choices of one individual (however self-destructive some of those choices might also be for now), there is something a bit tawdry and desperate about media kicking the man when he is down. Better, surely, to encourage Ross to tell us all he knows – and then test and scrutinise such claims/records – whether or not particular actions happen to skirt inside current law or pass to other side of the law.

Perhaps the second thing that struck me was how little all of the coverage tied back to the National Party. Jami-Lee Ross was re-elected to Parliament at the 2017 election under National’s imprimatur, and he was hardly a peripheral figure. In fact, he’d risen quite rapidly and might have seemed to be a face of the future. He was Chief Whip, and then was moved further up into senior spokesman roles. Most likely, he’d have been a Minister of the Crown had National remained in office after 2017. The (alleged) donation splitting occurred both when National was in office (under Bill English) and while it was out of office (under Simon Bridges). Not only had Bridges promoted him, but read the transcript of one of those calls between the two of them – only a few months before all this became public – and this clearly wasn’t someone on the outer with the leadership, no matter how quickly they later jettisoned him (while still trying to pretend nothing was wrong).

Before the names of those being charged become public, National had sought to distance itself with a statement welcoming the fact that no one now involved in the National Party had been charged. But it doesn’t really wash does it, when (mostly from that transcript)

the donations involved were to the National Party,
the recipient of the donation (the Botany National Party account), and liaison with the donors, was a front-bench National MP,
one of those charged had hosted Bridges and Ross to dinner at his house, and Bridges was planning to host him for dinner at his own house (with Ross also to be invited),
one of the others of those charged was quite openly being championed for a place on the National Party list, and – we are told – had put his name in to go through National’s “candidates’ college” – which presumably would require either prior party membership or some high level support from somewhere in the party,
one of those charged had been nominated not long previously for an honour by another National MP.

Very conveniently, National is now saying nothing further on the grounds that “the matter” is before the courts. And isn’t it convenient for them, in an election year, that the justice system works so very slowly that the cases are unlikely to come to trial before the election (and then, of course, we’ll have excuses about rights of appeal etc). The defendants are entitled to a fair trial, but the public – voting just a few months from now – is also entitled to some straight answers from National and its leaders.

I’m not here taking a view on whether Bill English or Simon Bridges (or perhaps John Key before them) knew about the specific transactions and conduct over which the four individuals have been charged, in ways that might render them liable themselves to prosecution. Who knows (perhaps Ross, but he has yet to produce firm proof). And frankly, I’m less interested in prosecutions as such, than in the underlying culture and conduct. And there it is very hard to believe that the party leaders (in Parliament and outside) were somehow oblivious to that, especially when a rising MP is involved. Organisations are rarely like that, when something pretty central (for a political party these days, fundraising) is involved, even if key people sometimes deliberately refuse to inquire more deeply into methods, lest that knowledge prove awkward.

This is the bit from the transcript that struck me

JLR: [laughs] Hey um you know at Paul Goldsmith’s function you saw those two Chinese guys, Zhang Yikun and Colin? You had dinner at their home?

SB: Yes.

JLR: They talked to you about a hundred thousand dollar donation –

SB: Yep

JLR: That is now in.

SB: Fantastic

and, a little later,

JLR: Donations can only be raised two ways – party donation or candidate donation. Party donation has a different disclosure which is fine, and the way they’ve done it meets the disclosure requirements – sorry, it meets the requirements where it’s under the particular disclosure level because they’re a big association and there’s multiple people and multiple people make donations, so that’s all fine, but if it was a candidate donation it’s different. So making them party donations is the way to do it. Legally, though, if they’re party donations they’re kind of under Greg’s name as the party secretary, so –

Bridges doesn’t challenge, dispute, express surprise or anything here. The conversation just moves on.

It just beggars belief that Bridges did not know that what was being talked about here was, at very least, sailing extremely close to the legal line. Note that “hundred thousnad dollar donation” and the description “it meets the requirements where it’s under the particular disclosure level because they’re a big association and there’s multiple people and multiple people make donations”. No talk of 20 people independently chipping in and the total happening to come up to $100000, no talk of an aim that a group might look to raise something like $100000 – but explicit prior talk (with a key figure being someone we are told does not speak English) about “a $100000 donation” – a description Bridges clearly recognised – and then once the money is in talk about how “it” meets the requirements. Bridges either knew/realised, or actively preferred not to. Neither should be acceptable in someone who wants to be Prime Minister.

It is remarkable that Bridges is not facing more scrutiny, relentlessly, whether from the media (every time he faces the media), in Parliament, or from other political parties more generally. Even just straightforward questions like were any of the other defendants (notably Colin Zheng) ever National Party members, for how long, when did that membership cease? Have other caucus members dined privately with any of the other three defendants? What exact role does the leader play in party fundraising? And so on.

(For the record, and in case it has not long been clear, while this particular issue involves the National Party, I have no unusual animus towards them – except perhaps as a party for whom a social conservative pro-market middle-aged person might more normally be inclined to vote for.)

The third aspect of the coverage that I find perhaps most troubling is the near-complete media silence on the connections of one of the defendants, the Auckland businessman Yikun Zhang. These are issues which have no direct bearing, it would appear, on the cases to come before the courts, and yet nothing.

It isn’t as if Yikun Zhang is some independent and private individual who just happened to one day invite the Leader of Opposition (and his senior offsider Ross) home to dinner and out of the goodness of his heart popped a modest donation into the National Party account. Apart from anything, media reports of a statement issued on behalf of the defendants suggests they claim to have given to various different parties (a point which really should be verified). But when you don’t speak English, you don’t invite senior politicans home for dinner – let alone welcome an invitation to dinner at the Leader of the Opposition’s (no doubt much less fancy – as Bridges says, less-good wine) house – for the quality of the sparkling intellectual debate around, policy, political philosophy or the mechanics of government.

This rather is someone who seems to assiduously cultivate associations – how much substantive, how much photo-op isn’t clear – with almost anyone in New Zealand political circles. Before his background was widely known, he pops up in photos with Andrew Little, Jacinda Ardern, Raymond Huo, Phil Goff, Paula Bennett, Simon Bridges, Jami-Lee Ross, Jian Yang, Simeon Brown, Paul Goldsmith and more. He was nominated for his 2018 Queen’s Birthday honour – conferred under Labour, initiated (we are told) under National – with nominations from prominent National and Labour politicians. Not the sort of thing that happens to your run-of-the-mill community-oriented private citizen.

Yikun Zhang’s net stretches more widely: there are the ties to the Gary Tong, Mayor of Southland, which came to light a couple of year ago. Tong went to China with Yikun Zhang. Not a typical connection for a businessman with an Auckland construction company. [UPDATE: Anne-Marie Brady reminds us of this interview with Gary Tong, acting as some sort of mouthpiece for, and defender of, Yikun Zhang in 2018.]

And what of Yikun Zhang’s associations back in the PRC? Auckland ethnic Chinese writer Chen Weijian documented those a couple of a years ago. I wrote about it here, where I observed

On my reading, the author’s key point is that the evidence of Zhang Yikun’s close association with the Chinese Communist Party, and the high regard in which he is held by the Party, is crystal clear. Among that evidence is his very rapid ascent in various significant organisations that are part of the party-state’s overall United Front programme.

and there is a translation of the original article here. None of this seems to have been disputed. It looks a lot as though Yikun Zhang’s principal orientation – despite now being a New Zealand citizen (how do we let people become citizens when can’t speak English – or, presumably, Maori?) is to the CCP/PRC. Since then specialist China commentators have further highlighted the prominent position Yikun Zhang has in the regime’s United Front activities, advancing the interests of the CCP at home and abroad. (There is no suggestion that any of this is illegal.)

All this became public knowledge more than a year ago. You’d have hoped that political leaders would have done due diligence on people their leaders are regularly photographed with, but even if they’d chosen to keep their eyes wide shut before late 2018, they had no such excuse since.

And yet remarkably, even after the material about his background, even after the allegations re donations emerged, there is little or no sign that either side of politics has become warier of Yikun Zhang. One of his big activities last year was the international conference for a grouping of people from the area he originally came from in China, which was held in Auckland.

Zhang Yikun brought together senior @NZNationalParty @nzlabour MPs, plus mayors, & leaders of other top orgs in NZ at the conference he hosted in Auckland in 2019.

NZ political elite may not have heard of #CCP united front work before 2017, but in 2019? https://t.co/9qVbVzcDZW

— Professor Anne-Marie Brady FRSNZ (@Anne_MarieBrady) February 19, 2020

He’d managed to get the National Party’s president – known for his past praise of the PRC regime and of Xi Jinping – to serve as honorary chairman of this conference, and the turnout of prominent political people, from both sides, is striking. There is an article from the PRC consulate here (open in Chrome for a translation), featuring (perhaps among others) John Key, Jian Yang, Anne Tolley, David Parker, Jenny Salesa, Willy Jackson, Peter Goodfellow, Raymond Huo, Nicky Kaye and Phil Goff.

This is one very well-connected person, across both sides of politics, with considerable pulling power, who was gifted a New Zealand honour essentially for services to Beijing……who is now facing serious charges around electoral donations. Who was known for months to have been caught up in allegations around party donations. And yet our politicians – National and Labour – just wouldn’t stay away.

I hope at least somewhere in our media one assiduous journalist, working with people who can navigate the Chinese language sources, is doing a serious investigative piece on Yikun Zhang and his connections – local, and in Beijing. Perhaps it wouldn’t sell many papers on the day – all those confusing acronyms etc – but it is the sort of scrutiny our tarnished democracy needs.

It all looks, from the outside, like that combined New Zealand “elite” determination to do all its possibly can to never ever upset Beijing, to pander in public and behind the scenes, to tap apparently generous sources of donations from people without regard to their ties to an alien regime with no regard for democracy, freedom of speech, and human rights. Keep the deals flowing, keep the dollars flowing, make sure no one can ever drive a wedge between the CCP and the National and Labour parties. It is why, to me, the big issue isn’t really whether or not Yikun Zhang, Jami-Lee Ross or the other split donations to get round the law – courts can and eventually will rule on that – but the value-free mentality that has taken over our political “leadership”. What was Simon Bridges doing going to dinner at the house of someone with such close regime ties, discussing party donations with, and soliciting from, him – he was hardly a personal friend (that English language gap is telling)? Why were MPs, mayor, and the Cabinet getting together to honour him? Why was such a galaxy of political figures turning up at his event, all of them surely realising the regime-affiliation and interests of all such events? But then why was Jacinda Ardern posing alonside Xi Jinping in Beijing a few months ago, why was Simon Bridges meeting the Politburo person in charge of domestic security (Xinjiang and all that), and so on? The pander continued as recently as this week, with the PM reportedly calling for a minute’s silence at the Lunar New Year function at Parliament for those who’ve died of the coronavirus – nothing wrong with that perhaps in its own right but, of course,she’s never called out the deaths and mass imprisonments in Xinjiang, the imprisonments and persecutions that inhibit freedom of speech and worship and politics in the PRC, or the tens of millions of live that regime has claimed.

Then again, these are the parties that (in National’s case) keep Jian Yang in Parliament and (in the case of all the other parties) do and say nothing about it, the parties that administer a government adminstration that seems unbothered by Jian Yang’s acknowledgement that he had lied about his past to get into the country. It is shameful, and it is mostly not covered by our media.

In ending, some kudos to David Seymour, the ACT MP, re Yikun Zhang. On his telling

“I’m pretty happy I didn’t take the invitation to a private dinner at Yikun Zhang’s house right now,” Seymour, leader of the ACT Party, told reporters on Wednesday.

“Multiple times the guy invited me to have a private dinner at his house and I thought ‘that sounds dodgy’ and never went…I have no idea what his intentions were.”

Seymour said he received the invitation in 2018, adding: “I don’t normally go to their house for dinner if I don’t know them and we can’t speak the same language – very unusual.”

He said Zhang Yikun “made frequent appearances at various Chinese events on the calendar that a lot of MPs go to” and that he would usually have “several intermediaries standing around who would speak English”.

Seymour said, “On multiple occasions he tried to get me to have dinner at his house, I said I won’t do that, he said ‘I own a restaurant and we could meet there’, and I said that sounds worse.

“So, as a result I never had any kind of arranged meeting with the guy and I’m pleased about that.”

It can be done.

National’s economic plan

February 20, 2020February 20, 2020 Michael Reddell New Zealand economic performance, Productivity

I’d seen a few underwhelmed comments on the speech by Simon Bridges earlier in the week, “National’s economic plan for 2020”. But just possibly some of those critics had missed some real gems, that might signal an Opposition party really serious about addressing New Zealand’s longrunning economic failures. For anyone wanting the short version, there was nothing of that sort.

I was quite critical of Bridges’s speech to the National Party conference last July

But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing – not a word – to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments – led only by National and Labour – have presided over. There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards. And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development) – and if you think politicians never make such acknowledgements then (and in fairness to Bridges) I should point out that in his brief speech at the start of the conference he did acknowledge that National hadn’t done that well on housing (“but we weren’t Phil Twyford”).

But I was a bit more positive about the economic policy discussion document released a month or so later.

Quite a few of things National is proposing look sensible. The general direction looks sensible. The rhetoric is better than it was – although, by itself, such rhetoric is cheap, and is the sort of thing most Oppositions for 25 years have eventually come round to saying. But the scale of the policy response they are talking about is simply incommensurate to the scale of the problem (much of the policy mix they are suggesting is carrying on a broad approach they adopted in government, and productivity growth was very disappointing then). For New Zealand average labour productivity to match that in top-tier OECD countries would require a 60 per cent lift from where we are. That is simply huge. Huge problems are rarely successfully answered with small changes (even a succession of them).

And so my challenge to National is along the lines of that the rhetoric is great, and I hope it reflects a shared sense that New Zealand’s long-term economic performance really is deeply disappointing, and has not sustainably improved – relative to other advanced countries – for any prolonged period for many decades now. As they say, that has real implications for us, our children and our grandchildren, for the material living standards – and public and private services – we can achieve for the population as a whole.

But if you are serious, and you really mean what you say – all those good quotes I posted earlier – you need to keep thinking harder, digging deeply, consulting broadly and testing and evaluating the proposals and analysis put to you. Great ambitions need to be matched by excellent analysis, courageous policy, and skilful management of the political challenges. Perhaps for many in the National caucus, winning the next election is all that matter, but I’d urge the party, and its members, not to focus on the small ambitions, but on the really big challenge that, successfully confronted, would so much transform New Zealand for the better, for almost all New Zealanders.

That was six months ago, The election is now only seven months away, and if the speech earlier this week wasn’t intended to set out too many details (specific tax rate changes etc), if there was any sign at all that they were serious about more than just gettingback into office, it should be showing through by now, reflecting some sort of integrated story – and telling that story – about what has gone wrong, what needs to be done quite differently, and how National under the leadership of Mr Bridges proposed to set about doing it. But no.

So what does he have to say?

It is pretty much all cyclical stuff.

The first page is pretty much a boilerplate recitation of the woes and challenges of the wider world, and there isn’t anything very much to disagree with. Then we get this

Our commodity prices are high and our terms of trade are near the best they have ever been. From our primary sector through to our technology and innovative sectors, New Zealand should be booming and the envy of the world.

Perhaps there is a small amount to such a story on a cyclical basis, but no one in their right mind would envy our structural performance, among advanced economies, at any time this century (arguably, for most of the previous half-century either).

I’m not going to disagree with much of the shorter-term stuff

Because Jacinda Ardern’s Government has failed to deliver on its promises, has piled on the tax, cost and red tape, made things more uncertain domestically at a time of global uncertainty, and as a result New Zealand has become a country of lost opportunities.

They [people] deserve a government that does what it says it will, that delivers with certainty and removes barriers and burdens like tax, cost and red tape.

But then it starts getting a bit odd.

We have slipped to the seventh lowest GDP per capita growth in the OECD. We are behind countries like Chile, Hungary, Poland, Latvia, Estonia, Lithuania, Spain and even Greece.

Which is a rather odd list to be anguished about, seeing as all those eight countries have lower per capita GDP than we do (Spain is very close). In conventional analysis of such things, one might reasonably expect (and hope) that poorer countries will grow faster than rich countries so that, over time, economic performance converges. Oh, and Greece was coming off the back of probably the most savage economic downturn in the advanced world in almost a century, so it would be a surprise – nay, a worry – if they did not eventually begin to limp back towards full employment.

So, really strange list of countries, but it is certainly a fair point that seventh lowest per capita GDP growth in the OECD is pretty bad. Unfortunately it has become par for the course. For the whole period since 1970, we’ve had the third lowest growth in real per capita GDP in the OECD (small sample of countries for which there is data for the whole period). There is complete data for the whole OECD membership since 1995, and over that period – after all the reforms we did, but also period presided over by both National and Labour governments – we were 11th worst (out of 36 OECD countries).

And on productivity growth – real GDP per hour worked – the only secure underpinning for long-term improvements in living standards, we’ve been 7th worst in the entire OECD over that whole period since 1995.

We’ve been doing poorly, mostly drifting backwards, relative to other advanced countries for a long time. And if one year’s growth – thrown around by all sorts of things, including measurement challenges (who knows how our latest annual growth rate will finally be measured, or ranked against those of other countries, when all revisions are in several years hence) makes for short-term political headlines, it is mostly a distraction from the real long-term failures. A deliberate one one might suggest.

I couldn’t exactly replicate the Bridges claim that we were 7th worst in per capita growth – I’m sure it is so on some or other series, but the ones I happened to check gave slightly different results. I’m assuming he was using annual data, for which the most recent numbers are of course 2018 – quite a lot (good and ill) has happened since then. I also checked the OECD quarterly seasonally adjusted per capita data, and as happens can offer a factoid Bridges might like: in the two years to September 2019 (latest official data, and covering the full period of this government) New Zealand’s per capita GDP growth shows as being 11th worst in the OECD, while for the previous three years (final term of the National government) we were 14th best – ie actually better than the median OECD country.

But…..productivity. Have I mentioned productivity? (Bridges didn’t) Over that whole five year period, our labour productivity was fifth worst in the OECD. That was National’s failure, and it is Labour’s failure. It would now take a 67 per cent lift in average New Zealand labour productivity to match average productivity in the leading OECD group (a bunch of north European countries and the US).

Now, in fairness to Bridges, there is one vestigial reference to such gaps

In comparison, if our GDP per capita were as good as Australia’s, the average Kiwi would be 35 per cent richer.

By my reckoning that is more like the productivity gap than the GDP per capita gap, but either way it is a big number. No narrower now that it was – wider on the productivity measure – before the last recession.

Bridges goes on

That doesn’t happen by accident, it doesn’t take a country the size of Australia to achieve it. It happens when you have a strong economy focussed on you. Led by a competent government with a track record of delivering.

As Economic Development Minister and Associate Finance Minister, I saw how real this is.

Except that the gaps didn’t narrow then either, and all he goes on to enumerate is a series of either modest cyclical points or wholly rhetorical ones

It’s about getting up in the morning and seeing New Zealand ambitious and confident about itself again.

National’s response

National’s focus is simple and resolute.

We will keep taxes and red tape low and grow incomes to help with your cost of living

We will be responsible managers of the economy

We will focus on growing the economy for all

We will invest more in core public services like health and education

Finally, we will create more jobs and opportunities for all New Zealanders

Except for the first half of item 1, Labour could – probably did – trot out exactly the same list in 2017.

He then gets a little more specific

To do this, today I am announcing five key measures that I want the sixth National Government’s first term to be measured by. They are things that matter to Kiwis because they impact us in our everyday lives.

New Zealand’s economic growth is back to at least three per cent per annum.

New Zealand’s growth rate per person is in the top half of the OECD

We are reducing the after-tax income gap with Australia

More New Zealanders feel they can reach their potential at home, rather than overseas

We have revived business confidence so that businesses feel like they can take more risks and create opportunities for you and your family

Nothing very wrong with that I guess, but not much ambition either – nothing about the level of GDP for example. Nothing about productivity, and – re the final point – business investment was really rather subdued under the previous government as well.

How will this be done?

Over the next few months I will be announcing our comprehensive Economic Plan.

The five major planks to it are five packages on:

Tax relief

Regulation reduction

Infrastructure

Small Business

Families

Details to come, to be sure, but it is hard to believe it will amount to much, beyond a bit of political product differentiation, and (no doubt) a few useful steps at the margin. If you plan to spend more, and keep the budget more or less in balance, for example, there is hardly room for game-changing tax reform. And if I really quite like this

We have already promised to cut red tape and regulation. We will light a regulations bonfire in our first six months of government, and cut two regulations for every new one we create.

it isn’t much different to what National always says in Opposition, which never amounts to very much in government. Why will this time be different? Did Bridges have a reputation as a reforming liberaliser when he was a Cabinet minister?

The speech goes on with some soft-soap stuff that I won’t trouble you with. And then we get to the conclusion

National’s view is that the 2020s should be New Zealand’s decade.

Which sounds good, but there is nothing in the speech suggesting thought, ideas, plans, ambition commensurate with the scale of that challenge. It is really just a promise to manage a bit more compentently – not an unworthy goal necessarily, but just part of keeping our ongoing relative decline tidy. Ours kids deserve better.

Then there is this sentenc. I read it first yesterday and read it again today and it still makes no sense – or, most generously, just repeats itself in saying nothing.

Our ambition as a country can never be too great for what we need to achieve.

The decades of economic failure just keep on mounting up, on watches overseen by both National and Labour. The scale of the failure – the extent to which relative material living standards here have slipped away – is huge. But while Bridges – just like Ardern, or Key, or Clark, or Shipley – might like to leave the impression they might finally be the one to wave a magic wand, all the evidence is that they (a) they don’t really care, and (b) have no serious ideas about what went wrong and no serious interest in knowing, or doing, what it might take to really turn this country’s economic future around.

If, perhaps, none of that is a surprise, I suppose we should simply be “grateful” that Bridges’s speech, just a few months out from the election, makes that indifference utterly clear.

What if COVID-19 things get really bad?

February 19, 2020 Michael Reddell pandemic

As I prefaced my very first post on coronavirus-inspired issues – less than four weeks ago – “who knows quite what will happen with the current coronavirus”. No one does, and I certainly don’t claim any insight on that medical/epidemiological point. But there are serious experts in those fields now beginning to talk about the possibility – some put it much stronger than that – of it turning into something that infects perhaps 40 to 70 per cent of the world’s population (I gather that sort of incidence isn’t uncommon in past serious pandemics), with perhaps 1 to 2 per cent of those people dying. In that scenario – it is purely a scenario – something from 0.4 to 1.4 per cent of the world’s population dies. The middle of that range would be similar to New Zealand’s experience in 1918.

My interest here is in the the economic impact of such a scenario (and can I repeat, this is simply based on one scenario – with no probability attached, and one every sane person presumably hopes does not eventuate, but probably still the sort of thought experiment people in the economic agencies of governments should be thinking through, even just as a tail risk).

Perhaps a first stake in the ground is that even if something this bad happens, in a couple of years time the crisis would be over and something akin to normality would have returned. Societies would no doubt still be scarred by the disruption – economic, social, and perhaps political – and by the utterly unexpected scale of the human losses (the normal annual number of deaths in New Zealand is around 0.8 per cent of the population), perhaps in a way they don’t seem to have been in 1918 (coming off far greater death, destruction, and dislocation in the war). But borders would open, commercial premises operating, people free to come and go within countries as they like with no unusual fear etc etc. Health systems – potentially grossly overloaded during the crisis scenario – would be back to more or less normal either. In other words, most of the effects are temporary.

Readers will know that there are debates, with real world consequences, about the nature of the costs and losses associated with financial crises, and debates about whether most of the effects are temporary or more permanent. I can’t see how the overwhelming bulk of the economic effects of a even a very severe pandemic would be other than temporary. The pandemic won’t have been endogenous to our economic system (so it won’t tell us much about initial gross misallocation of resources), isn’t likely to affect innovation or incentives to innovate or invest, and isn’t even likely to have much impact on productive human capital (especially if, as at present, deaths are concentrated among the elderly). Perhaps there would be some persistent effect in dampening globalisation (reassessment of risk of cross-border supply chains etc), but the aggregateeconomic effects would take time to cumulate and spot, and be second-order relative to the near-term disruption.

But if we could be pretty confident that a couple of years hence things would be functioning more or less normally again – even if, as globally in 1918, there were several distinct waves of the infection – at the other end of the calendar, things would be characterised by extreme uncertainty. First, even if a scenario of the sort I’m dealing with here comes to pass, none of us it will know it for some considerable time. There would be duelling optimists and pessimists, each with plausible arguments and straws in the wind. And presumably none of us would know where the infection rate would surge next.

That alone is a recipe for economic paralysis: the rational response to extreme uncertainty (often quite well-warranted uncertainty) is to postpone (travel, investment, discretionary spending), delay, stick close to home etc etc (and that without the seemingly irrational responses we see reports of in New Zealand at present, of people avoiding Chinese restaurants). Even if air travel was still possible – it would quickly get much harder, as commercial imperatives (let alone regulatory ones) led to cancellations, and the rational prospect of future cancellations – the number of people willing to travel far or for long will drop away. Travel insurance also becomes a real issue. Who wants even a modest risk of being stuck for weeks, with a potentially life-threatening conditions, in some foreign hospital with doubts about your ability to pay. Nations will be reluctant to host lots of visitors who could fall sick while in your country, who – even with ability to pay, which not all would have – could further overburden a potentially severely stretched health system. As flights get cancelled, air freight is also disrupted.

We are already seeing the extent of social-distancing, cancellation of events etc – mostly not forced by governments – in places that currently have a relatively modest number of cases (Singapore, Hong Kong, and to some extent Japan). Imagine the demonstration effects when – this is a scenario remember – the next country, and one more transparent than China, gets a severe outbreak. And the next, and so on. (Scenario, remember.)

When such an outbreak happen, lets assume that no free country is going to be able or willing to impose such extreme lockdowns as the PRC has done. But you don’t need that level of lockdown for the level of economic activity to be savaged. Lots of people are sick in this scenario, in many cases really quite seriously ill, and typically (it appears) not just for a few days. Those people will need people to care for them (not necessarily medically, but just the comfort we’d all want to offer to a seriously ill family member). And between voluntary and semi-compulsory pressures, not that many people with a sick family member are going to be welcome in the office/workplace for a while. More than a few employees will find hours drying up, or jobs disappearing altogether. Sure, people still need to eat – though who knows how effectively distribution systems hold up – but there is a great deal of expenditure, business and private, that is discretionary (over a horizon of several months). At one extreme – long-term asset sales – for example, the Chinese data show the property market having dried up for now.

(There were estimates last week that regions accounting for more than 50 per cent of Chinese GDP were in lockdown. If those areas are operating at no more than half capacity for a month – stabs in the dark, but they don’t look implausible numbers based on (for example) charts like these – “true” Chinese GDP for this quarter could be 8 per cent lower than otherwise, when reported quarterly GDP growth is about 1.5 per cent.)

Now assume – as the scenario requires – that this isn’t just about one country, but about a steadily increasing number of countries. And start factoring in the serious disruption to supply chains – which we are already seeing in and from China (and recall that a supply chain isn’t much stronger, in effect, than its weakest link) – and there is lot more economic activity at risk, even if all the workers were available and ready to work.

In each and every country, lots of businesses – and more than a few workers – are going to be facing big drops in income. Initially each will like to think it is a matter of a week or two, but already that doesn’t really look like the China experience, and on this scenario, the problem has become worldwide. Plenty of businesses have debt or very very limited cash reserves and so lots of firms will soon be in the hands of their bankers. Responsible banks will want to stick by and support good longstanding clients, but there are limits (collateral values are likely to be falling, markets illiquid, even if temporarily), and banks themselves are likely to be affected by fresh waves of caution and risk aversion. Bank funding might start to become a bit on issue playing on the minds of boards and management.

Financial markets have proved remarkably sanguine about the coronavirus so far. Perhaps that makes sense if you believe the public-facing PRC story, that everything is coming under control before too many more weeks things will be getting back to normal. But that isn’t the scenario I’m working with in this post. In such a scenario, global uncertainty would be huge and uncertainty is the enemy of asset market valuations. Quite probably there would be some real high profile company failures (or big state bailouts) going on – airlines anyone? – short-term earnings estimates would be being savaged, and risk spreads would be widening I doubt any supervisory agency has stress-tested its financial system for a shock of the sort I’m using in this scenario, and even if the event wasn’t severe enough to pose a systemic threat (a) there would be a great deal of uncertainty, including about who had what exposures, and (b) this scenario would come on the back of a global economy with a lot of vulnerabilities, including in financial systems, anyway – the euro area economic performance anyone?

Perhaps the mitigating factor in all this is macro policy? Which is a nice thought, except that so many advanced countries already have official interest rates at zero, or below (few/none have more than a 200 basis point buffer, and in major past downturns – even shortlived ones – 500 basis points has been a not uncommon reaction). No doubt, fiscal policy would swing into action – in fact, you rather hope practical contingency thought is already going on. Even in highly-indebted countries, for a genuinely short-term shock (1-2 years) there is room for some additional spending. Some of it might even be effective – in eg retaining attachment to the labour market (some of the specific subsidies after Christchurch and Kaikoura), but it is hard to be that optimistic about the overall degree of effectiveness. Governments can cut taxes in short order and put more money in individuals’ pocket, but in this scenario risk-aversion, social-distancing etc, suggests that cash constraints won’t be the ones binding individuals. Governments can, of course, purchase real goods and services…..a common last-resort stimulus suggestion, but not one likely to work as well when it is a struggle to keep factories/shops open with staff turning up.

For New Zealand, one mitigant we could probably count on to help would be a lower exchange rate. Historically, global risk events tend to be really rather bad for the NZD (and the AUD). Export volumes and world prices might take a hit – savage in some cases – but what foreign exchange was being earned would generate quite a bit more income.

What about inflation? One sees various stories already about disrupted supply chains putting upward pressure on prices/inflation for manufactured goods. That seems plausible enough in some cases – if, as reports suggest now, there are disruptions to the flow of winter fashions to our stores, there is less likely to be excess stock for sales late in the season, and so on – but my sense is still that a scenario of the scale I’m writing about here is, on balance, a seriously disinflationary one. That is both because commodity prices would be falling – in some cases plummeting – but also because the hit to demand for the fear, uncertainty, delay, distancing, physical disruption, would exceed the disruption to supply (but that needs teasing out with further analysis) and the risks of inflation expectations taking a further downward hit is also real. This is the risk I, and others, have been highlighting for some years – that in the next serious downturn, people will quickly realise that policy capacity is much less than usual and adjust expectations accordingly. If that happened, it would risk severely impeding a return to full employment, even after the virus itself had passed into history.

This is all very speculative – and around a scenario we must all hope never happens. But we need policy agencies – and others, be it academics or other commentators – to be thinking hard about these contingencies, including thinking about what options (and when) make sense to deploy early to minimise, to the extent possible, the human and economic dislocations, which could be very large.

I’m wedded to very few of the arguments here, and would welcome comment/challenge (not about the probability – on which I have no particular view – but on the implications of a deliberately extreme scenario, even if one that more medical experts of warning us we could yet face). It would also be good to have a sense that the New Zealand governments was taking the issue and risk seriously and pro-actively planning. On what we see at present – which perhaps isn’t all there is – it looks like lethargic political leadership, as keen as anything on keeping Beijing not too unhappy, with not much sign that the bureaucracy is much more than reactive either (officials will, no doubt, respond to political incentives).

Annual productivity data

February 18, 2020February 18, 2020 Michael Reddell Productivity

Statistics New Zealand last week released their annual measured sector and individual sector labour and multi-factor productivity data for the year to March 2019. It isn’t data I tend to focus on, mostly because my interests are substantially in cross-country comparisons and also because my focus is whole-economy rather than on specific sectors and sub-sectors. But it is still useful for thinking about productivity performance within New Zealand over time and we are now beginning to get a reasonable run of time series

(I can’t quickly find the official SNZ definition of the measured sector, but think of it in terms of what it isn’t (non-market bits of the economy like government administration).)

Here is labour productivity for the measured sector. I’ve shown both the actual data (in logs) and the extrapolation of the trend line for the 1996 to 2008 period.

measured sector LP

The difference at the end of the period is roughly equal to 10 per cent productivity foregone.

Here is the same chart for multifactor productivity (MFP).

MFP to 19

Those who are inclined to minimise New Zealand’s longstanding and ongoing productivity failures will, of course, (correctly) point out that productivity growth in the advanced world as a whole has been slower in the last decade. That might be some sort of excuse for countries at or very close to the productivity frontier – best in pack. It is no excuse at all for a country starting so very far behind the leaders (and, as I’ve pointed out here before, hasn’t stopped a bunch of eastern and central European countries – often now about as productive as New Zealand, having been communist basket cases 30 years ago – continuing to put in strong performances).

What about further disaggregated data? SNZ publishes data/estimates for labour productivity for a wide range of individual sectors and subsectors, in many cases – making up what is known as the “former measured sector” – going back to the 1970s. (Sadly, even if I run the trend line through the data all the way from 1978 to 2008, the gap around the last decade’s performance still looks stark.)

What about some more disaggregation? SNZ show results for three high-level groupings: goods, services, and primary production. The latter can be quite volatile (droughts and the like). Here are the MFP numbers for those groupings.

MFP sectoral

The primary industries performance was pretty impressive – doubling in twenty years – but that good performance itself ran out more than twenty years ago now. Within primary industries, agriculture itself still does quite well relative to productivity growth in the rest of the economy.

And finally a couple of charts on individual sectors. Here is the MFP estimate for something SNZ call “Information and communication technology industries”

MFP tech

Not much growth this century – in fact, less than for the measured sector as a whole.

Then again, rather better than the performance in these two sectors.

health MFP

And for anyone interested, these are the six sectors with the highest (estimated) MFP growth over the last 15 years as a whole.

Per cent increase in MFP, last 15 years
Rental, Hiring and Real Estate Services	19.1
Forestry, Fishing, and Services to Agriculture, Forestry and Fishing	20.1
Textile, Leather, Clothing and Footware Manufacturing	27.1
Information Media and Telecommunication	33.4
Retail Trade	42.6
Wood and Paper Product Manufacturing	45.2

Quite a mixed bag.

Overall, however, the productivity performance of this economy remains dismal. Sadly, there is little sign any of our major parties care.

Simply unfit

February 17, 2020February 17, 2020 Michael Reddell Adrian Orr, Reserve Bank

In yesterday’s Sunday Star-Times another article by their reporter Kate MacNamara shed further light on just how unsuited Adrian Orr is to be Governor of the Reserve Bank, exercising huge public policy and regulatory power still (in large chunks of the Bank’s responsibilities, often with crisis dimensions to them) as sole decisionmaker, with few/no effective checks and balances. These disclosures should also raise serious questions about the judgement and diligence of the Board who were primarily responsible for Orr’s appointment and are primarily responsible for holding him to account, and of the Minister of Finance who formally appointed Orr, and is responsible now for both him and for the Board.

In this latest in her series of articles, MacNamara draws on the responses to one of several Official Information Act requests she had lodged late last year. She had sought from the Bank copies of communications between the Governor and (a) the head of the financial sector body INFINZ and (b) Roger Beaumont the executive director of the Bankers’ Association (those responses are here), and copies of communications between Orr and the New Zealand Initiative think-tank, especially its chair Roger Partridge (responses here). Her article draws mainly on the response re the New Zealand Initiative.

The context here is Orr’s (then) proposal to dramatically increase the volume of capital locally-incorporated banks would have to have to fund their existing loan books in New Zealand, disclosed in December 2018. A wide range of commentators locally were critical of the Bank and many drew attention to the rather threadbare nature (at least initially) of the supporting material (it took three waves of releases over several months before we finally got the full extent of the Bank’s – still-underwhelming – case). There had been no technical work preparing the ground, even though Orr was to be prosecutor and judge in his own case. There was no serious cost-benefit analysis for what Orr was proposing, no serious benchmarking against capital requirements in other countries (notably Australia), no serious analysis of the nature of financial crises, and a strong sense that Orr wanted to compel us to pay for an insurance policy that simply wasn’t worth the price. All this from an organisation where a recent careful stakeholder survey – conducted by the New Zealand Initiative before Orr took office – had highlighted very serious concerns about the Bank’s financial regulatory functions. Meanwhile, Orr was already underway with his open attempts to cast anyone who disagreed with him as a “vested interest”, somehow “bought and paid for”.

Various people made public comments. Among them was Roger Partridge, chair of the New Zealand Initiative, who had a column in NBR in early May critical of what was being proposed, and the processes used (at the time the Initiative was finalising its submission to the formal Bank consultation). In my contact with Roger, he always seems much more interested in the substance and process of any issue. But in a single decisionmaker model, it is a single person in focus. [UPDATE: Here is a link to the “offending” column.]

Anyway, the Governor did not like Roger’s column at all. Normal people who disagree might either let things wash over them (being in public life, exercising great power, not only does but should, bring scrutiny, challenge, and criticism). Or perhaps you might even ring the author and have an amiable chat. But not Orr.

The OIA release begins with Partridge emailing Orr after learning that Orr had rung the Executive Director of the Initiative had been “upset” by Partridge’s column. This is a bit of a problem for the Initiative, as Orr is scheduled to speak at a private lunch for their members the next day, so Partridge offers up one of those semi-apologies (“if I crossed the line I apologise, but don’t resile from the criticisms of the policy process”), and even goes so far as to send Orr a copy of the remarks he intends to use to introduce Orr the next day (typical gush).

But that is not nearly enough for our thin-skinned Governor who replies to Partridge with a page and a half email. All this after Orr had already talked to Hartwich both before and after a flight to Auckland they had both been on. Just a slight loss of perspective and focus you might wonder?

And so we read (of his conversation with Hartwich)

I talked of the personal abuse I receive in this role. I also talked of the vested-interest driven articles that are prevalent and portrayed as analysis.

and

I do not accept your apology as it provides no reflection on your:
1. Stating I have a gambling problem.
2. Mocking our use of a Maori mythology to connect with a wider NZ audience – something we have been tasked by the public and stakeholders to do (I noted to Oliver this is a common thread of online abuse I receive from other purported banking/economic experts that go even further in ethnic/religious/personal comment).
3. Claiming below that you aimed to provide a robust critique of the proposal. You do not. You quote selective work of purported experts. You also pull only selected components of our submission process (which has stretched nearly 2 years).

From context, I understand that Partridge had said something along the lines that Orr was doing little more than gambling with his ill-supported capital proposal. If so that seemed (and seems) fair to me, and would not to any reasonable person, with any sense of perspective, suggest they thought the Governor had a gambling problem.

I guess we are expected to just believe the lines about “online abuse” (and, who knows, perhaps I’m one of the people he is alluding to).

It goes on, before ending this weird way

I do not see your article as a robust critique. What I do see is ongoing character assassination, an undertone of dislike of the RBNZ, and a clear bias in economic and ethnic preference.

At the Bank we are open minded and working on behalf of all New Zealand and do so in a transparent manner.

See you tomorrow. The introduction looks fine. I will be professional and courteous towards your members.

Adrian

The person

But, of course, he is calm, open-minded, and – apparently unlike any of his critics – only focused on the national interest. And what to make of that “The person”? If any upset junior staffer sent such an email to his/her boss, you might seek to get them some support and counselling. But this was the most powerful unelected person in New Zealand, responding to a private citizen who happened to disagree with him.

(Of course, I can well understand why they didn’t do so, but in some respects it is a shame the Initiative didn’t disclose this correspondence at the time, so poorly does it reflect on a leading public official, making major policy decisions while clearly not coping. I hope at least they referred the matter to the Minister and the chair of the Bank’s Board.)

Partridge sent another placatory email to the Governor, only to get yet another page-long missive

The behaviours displayed by your institution make it appear that it is a low chance that a well informed discussion where all parties come out better off could be ever achieved. We Remain open minded.

ending

See you later today. I will be professional and respect your members. I do not gamble.

There had been no mention of the “gambling” thing in Partridge’s email Orr was here replying to.

The rest of that OIA release is fairly uncontroversial stuff from 2018 on the release of the Initiative’s report that dealt with the Bank’s financial regulatory functions (the one the Governor claimed at the time to take seriously and welcome, although also the one he was rubbishing by late last year.)

What about the other OIAs? It is mostly less egregious stuff. But we have this odd example from a letter to the Executive Direction of INFINZ on 24 May 2019

For closure sake as promised, I mentioned to you at the event that I was disappointed with the process that you adopted in the preparation of a submission to our bank capital proposals. I did so as I want to be open and frank consistent with the ‘relationship charter’ we recently established with our regulated banks I read about your views first in your published op-ed and then via a newsletter you sent to INFINZ members. It was some time after that you met with RBNZ staff. The process created a perception of a predetermined outcome for the submission.

How shocking. A private sector industry group first published its views in an op-ed and a newsletter and didn’t first talk to RB staff. Quite who does the Governor think he is in objecting to that?

Even odder was this

In the spirit of the ‘#me too’ commentary promoted at your awards evening, I have received personal written and verbal abuse from within the industry during this consultation process. For New Zealand’s capital markets to have the ‘social license’ to operate – another theme at your event – I believe the industry’s culture needs ongoing improvement.

As a reminder to the Governor, we don’t have lese-majeste laws in New Zealand, and certainly not for central bank Governors. And as for this weird appropriation of the “#me too” movement – mostly about the mistreatment of women by men in positions of power over them – to apply to criticisms of a very powerful public figure…..well, weird is just the best term for it.

It wasn’t the only time he’d tried this line. In a column late last year, Hamish Rutherford told us he’d even used it at a parliamentary committee

me too

Being in position of power, Orr’s complaints brought forward this response from the INFINZ Executive Director

We are concerned and disappointed that you have received verbal and written abuse from within the industry during the consultation process – bullying is not acceptable and we agree that all discussions should be both professional and respectful.

Quite how anyone in the industry – or anywhere else for that matter – could have “bullied” the Governor (who single-handedly wields all the power that mattered on the bank capital issues) is beyond me, but I guess INFINZ didn’t want to jeopardise their ability to get the Governor as a speaker etc.

The final set of OIA responses cover the Executive Director of the Banker’s Association.

The first was a Saturday morning email to Beaumont and the chairs of the four main banks in April. It isn’t offensive and thin-skinned as he later became, but while the submissions are still open, he is clearly trying to put pressure on them

FYI only as I am eager you understand the effort we are going to in order that the Bank is open and listening.
This was not the impression you all conveyed to me over the last couple of weeks in our individual one-to-one meetings.

Only there is nothing in the rest of the letter to give anyone any reassurance.

In late May there is a letter (presumably emailed) from Beaumont to the Governor, copied to the Minister of Finance, about the “independent experts” the Governor had selected to help make his case. The letter isn’t aggressive in tone but noted that none of the independent experts had New Zealand specific knowledge and suggest a couple of locals they could work with.

But this sparks a petulant email back from Orr, also copied to Grant Robertson

Dear Roger,
Your letter is unsigned. Can you confirm it is legitimate please? Apologies, one must be careful.

and

I do not understand the reason you have copied the Minister of Finance in to this dialogue. Is there something specific you are looking for from the Minister’s office that I need to understand?

Minister of Finance? Well, you mean the elected person with overall responsibility for economic policy, the person who has formal responsibility for your performance etc etc?

Recall, that all the stuff covered in the material that came to light yesterday is really just another glimpse at what was apparently a pattern of quite inappropriate behaviour. From one of Kate MacNamara’s earlier articles

But other observers were not surprised. Details of [Victoria banking academic Martien] Lubberink’s experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank’s plan.

“There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,” said one source who’s been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn’t agree with.

“I’m worried about what he’s doing.”

The source said some companies have “withheld submissions,” for fear of being targeted by Orr.

“They’re absolutely scared of repercussions. It’s genuinely disturbing,” he said.

We can only wonder what he was like inside the Bank or around his own Board table.

Does any of it matter, or is this simply the degraded state of public life we now have to get used to? Age of Trump, age of Orr etc.

It should be utterly unacceptable, in any public figure, but perhaps especially so when that one public figure is (a) unelected, and (b) wields such huge discretionary power on far-reaching policy matters, with few/no checks and balances. I was tempted to suggest that the individuals in receipt of these particular Orr missives are big enough to stand up for themselves, except that evidently they aren’t really – Partridge, Hartwich, and McElwain find themselves rushing around the placate Orr. That’s costly and uncomfortable: much easier just to pull your punches and offer less challenge or scrutiny next time the bully (for on his revealed behaviour it is him not his critics who better fits that description) wants to push through some half-baked costly idea.

The banks themselves will long since have gotten the message – it was Orr’s predecessor who heavied the BNZ to shutdown Stephen Toplis when he wrote a critical commentary on some aspect of Wheeler’s monetary policy – but the experience last year will only have reinforced that extreme caution. Recall that Orr wields direct power over them in all sorts of way, visible and less so, and clearly does not cope with being challenged or criticised (no matter how many times he claims to be “open-minded”. It is great that Kate MacNamara has kept up the scrutiny, but that will presumably mean no access: much easier for her fellow journalists to keep their heads down and not ask hard questions of the Governor and Bank (who – news though it may be – are not infallible).

And what about people inside the organisation? Recall that on regulatory matters the Governor is still the sole decisionmaker, and on monetary policy he has – in effect – most of the clout, all of voice, and no real transparency. It is vital that the Governor’s priors, whims, and even well-considered ideas are seriously scrutinised – and even that the Bank sticks to its statutory roles – but seeing the Governor treats outsiders, how are people inside the Reserve Bank likely to respond. All but the most brave or reckless will be strongly incentivised to keep quiet, go along, join the cheerleaders etc. In any public agency that should be grossly unacceptable, but particularly so in one as powerful as the Bank. Orr has grossly abused his office, and looks increasingly unfit to hold it.

And if Orr gets away with it what message does it send to other thin-skinned bullies elsewhere in the upper ranks for our public sector, let alone to those who work for them.

And yet it looks as lot like Orr will get away with it. Perhaps there was some quiet word in the hallowed halls of the Bank’s Board room, but these are the same people who selected the Governor less than two years previously. They are invested in his success, and they and their predecessors have a long track record of providing cover and defence for the Governor, not serious scrutiny and accountability on behalf of the public. This behaviour occurred in 2018/19 and there is no hint of concern in the Board’s published Annual Report.

If any of this bothered Grant Robertson, it can’t have been much. You’ll recall that response I had late last year from Robertson, when I wrote to highlight his formal responsibilities for the egregious conduct highlighted in earlier MacNamara articles. He then expressed his full confidence in the Board and suggested he was satisfied with the Governor too. In the great tradition of “lets look after each other” Robertson has just appointed the Board chairman to a further two year term, even as he walked by such appalling conduct by the person he is paid to oversee.

(It is sad to reflect that much of the material covered here relates to events in May 2019. That was the same month the then Secretary to the Treasury was also going rogue, grossly mishandling – and then refusing to apologise for – his handling of the “Budget leak” episode. Doesn’t exactly instill confidence in the top tier of our leading economic agencies – or the Minister responsible for both – does it?)

Perhaps it is all in the past now. Perhaps having got through the year, made his final decisions etc, Orr has returned to some sort of stable equilibrium and is operating effectively, rigorously, and deeply to provide leadership in difficult times. Perhaps. But even if that were so – and that sort of Orr was not on display last Wednesday – no one who can lose all perspective as badly as Orr clearly did last year, who simply cannot cope with serious criticism and scrutiny, simply should not hold high office here or anywhere else. It is risky for New Zealand, it is dreadful for the reputation of the Bank, bad for the reputation of the New Zealand public sector, and reflects pretty poorly on our political leaders – in government and Opposition – who simply walk by, at least in public, such egregiously unacceptable conduct from such a powerful public servant (one who doesn’t even have the redeeming quality of being consistently rigorous, excellent and right to perhaps compensate in some small measure for his grossly unacceptable).

The Productivity Commission

February 14, 2020February 15, 2020 Michael Reddell Productivity Commission

Writing, somewhat critically, the other day about the latest Productivity Commission paper got me thinking a little more about the Commission itself.

I welcomed the decision to set up the Commission, partly in the backwash to the then-government ignoring and thens disbanding the under-resourced one-off exercise in focusing on New Zealand’s productivity failures, the 2025 Taskforce. But I’ve long been fairly ambivalent about what it has become, and unsure what the future might hold.

It certainly isn’t anything personal. The longserving chair of the Commission, Murray Sherwin, was an old boss of mine and until recently we shared the misfortune of being trustees of the Reserve Bank staff superannuation scheme (he got off, I still serve penance). They’ve run numerous interesting seminars over the years. The people I’ve known there are smart and happy to engage. In fact, I was just on their website and clicked on a piece I thought sounded interesting only to find that it was a link to one of my posts.

The Minister of Finance must also have had some doubts. Papers just (pro-actively, but very belatedly) released show that shortly after the Minister took office he asked Treasury to conduct a review of the Commission, and they in turn commissioned David Skilling (independent consultant, now based in Singapore, and former head of the centre-left New Zealand Institute think-tank) to write a report. Remarkably, the Commission itself was not invited to provide input – and perhaps was not even aware the review was going on, since were it aware it would surely have provided input pro-actively. The Commission seems only to have been invited to comment on the final Skilling report, completed in June 2018. That seems a strange way to treat an agency that wasn’t evidently dysfunctional, was headed by a respected former senior public service chief executive and which at the time had a respected former Secretary to the Treasury as another of its longserving commissioners. Even if Graham Scott had once stood for Parliament on the ACT list, no one has seriously accused the Commission of being partisan (and if anything their inclinations often seem to lean in the direction of “smart active government”, of the sort centre-left parties have often favoured, with too little emphasis on “government failure”).

None of which is to criticise the Skilling report. I found it clarifying in a number of places and was pleasantly surprised to find myself agreeing with the bulk of his recommendations. He draws extensively on some recent OECD work reviewing institutions in various countries trying to do things somewhat similar to the Productivity Commission, with a focus – consistent with the emphasis of his consultancy firm – on small advanced economies.

As Skilling notes, the explicit model for our Productivity Commission was the Australian Productivity Commission, at the time a very highly-regarded body. But Australia is a much bigger economy than New Zealand’s (big economies tend to have relatively smaller export sectors), and although still some considerable way from global productivity frontiers, has nothing like the economywide challenges facing New Zealand. And there is the not-insignificant issue of resourcing: there aren’t that many economies of scale in policy analysis and associated research (policy issues are just as complex in fairly large as in fairly small countries) and yet our Productivity Commission has perhaps 20 staff, while the Australian Productivity Commission has about 170. That allows for a much greater depth and specialisation than is possible at the NZPC, no matter how able the individuals here might be.

Skilling usefully highlights that the Productivity Commission is not really focused on economywide productivity at all (“bluntly, it is a misnomer”). Rather, and rather like the Australian counterpart, it is really a detached (from day to day political pressures, or even just the immediacy of the urgent) policy advisory group on specific topics that take the fancy of ministers from time to time. Sometimes those are really important issues, other times they have the feel of topics it is good to be seen having someone doing, or even (the current “future of work” inquiry, which there are signs the Commission has struggled with) just as – in effect – a research resource for a political party’s next election manifesto. To be clear, topics are chosen by ministers, not by the Commission.

This “chip away at bite-sized topics” approach seems to have been deliberate. After all, the previous government (which set up the Commission) had no interest in serious reform on the sort of scale that made have made a really significant difference. 2.5 years in, neither does the current government.

It is an approach that probably makes a lot of sense in a country that was already at or near the global productivity frontiers. Whatever challenges you face in Belgium, Netherlands, Sweden, Denmark (let alone Norway) – and there are always areas where specific policies could be improved – you know that your overall economy (productivity) is already about as good as it gets anywhere. That simply isn’t the New Zealand situation: you’ll recall I’ve highlighted previously that it would take a 60 per cent lift in average labour productivity in New Zealand to match that leading bunch of countries.

Here, the approach taken to the Productivity Commission ends up serving as a distraction. There is a pretence of an institution devoted to the issue, to taking the whole thing seriously, but not the substance. If the Commission is to be kept as it now operates it might better be renamed, more prosaically as something like the Medium-term Microeconomic Advisory Group. But even then there is a real problem, in that because there is no sign that the Commission has a shared narrative, or model, of the bigger picture economic underperformance, causes and broad remedies, it is often hard to have much confidence in the specific recommendations they throw out, and whether they should be priority areas for a government interested in change. It also means they have no consistent framework underpinning their public communications. (There was a narrative document published a few years back – which I wrote about here – but it was still exploratory in nature, and although it was owned at the time by the Commission, it seems to have been more the thinking of the author, who has now left the Commission.)

This issue has become more stark over the years. When the Commission was set up there were two separate allocations of funding by Parliament: 90 per cent of the total funding was for specific inquiries initiated by Ministers, and the remaining 10 per cent was for the Commission’s self-directed research programme and related activities. That formal split, in parliamentary appropriations, has been discontinued, but in the context of a flat overall level of funding (the total level of funding is unchanged over 9 years – a period in which there has been not-insignificant total inflation), it is likely to be the discretionary activities that get squeezed.

As the Commission’s last Annual Report noted

The 2018-19 year ended with an operating deficit of $98 000, our second successive year with a deficit. The Board has been acutely aware that with rising costs, especially from remuneration costs, and an appropriation unchanged since the Commission commenced operations in 2011, we would eventually reach a point where spending would run ahead of our appropriation. In early years, our budgets provided for surpluses in order to build a small buffer of reserves. But we clearly face a decision about reducing costs and outputs should our business case for additional funding be unsuccessful. Decisions on funding will take place within the context of the review of our operations.

and

Given resource constraints we were no longer in a position to facilitate the Productivity Hub nor provide support to the Government Economics Network.

and

It has also been suggested that the Commission should have greater capacity to undertake wider ranging productivity-relevant research, exploring the nature, sources and characteristics of New Zealand’s poor productivity performance. Our capacity for such research remains limited. ….our capacity to pull resource away from our inquiry teams is quite limited. To provide more research output requires either an increase in funding or a reduction in inquiry outputs.

Of course, one challenge is that a generalist policy analysis function (essentially what the bulk of the Commission is doing) and something seriously focused on getting to the bottom of New Zealand’s longrunning economic underperformance might not sit that naturally together in the same small semi-detached organisation.

As all prudent government agencies must these days, if they want to impress ministers, they wave the flag for “wellbeing” (this from the front of the Annual Report)

NZPC wellbeing

Perhaps they will secure some more funding in this year’s Budget (though more policy advice might not be an election year priority).

Skilling’s report had four recommendations:

a greater focus in inquiry topics on the external facing tradables sector of the economy (noting the centrality of outward-facing sectors to successful small economies)
a more structured inquiry selection process, with more emphasis on criteria relating to economywide productivity,
more flexibility in inquiry formats,
more public reporting and analysis on overall productivity performance issues, including international benchmarking.

I generally agree (and will take the opportunity to note one of his suggestions for a specific area that would repay further work from the Commission: “important domestic issues, such as the impact of migration (and population) on New Zealand’s productivity performance”

But you can’t help thinking that there are severe limits on the value of any such agency (or any long-term thinking in major economic ministries such as The Treasury) unless and until some political leadership rises up that really wants to deliver something different for New Zealand, that takes seriously dealing with our economic failure. Of course, in an ideal world if/when that time ever comes those political leaders would find a rich and deep literature – from the Commission, from academics, from government agencies, from other researchers and commentators – on the issues and options for change. But why would politicians who are themselves indifferent want to spend much money on things they would do nothing with?

Part of my long-term pessimism about the Commission – quite independent of any individuals involved – involved reflecting on the fate of past New Zealand efforts and agencies. There was the Monetary and Economic Council, and then there was not. They produced some interesting reports in their time, but didn’t last much more than a decade. Same goes for the Planning Council, some of whose papers are still worth reading. What will make the Productivity Commission different? One difference is that it has its own act of Parliament, but that just means that it could be left to wither on the vine, funding gradually squeezed, good people no longer wanting to work for it, before one day someone tidies thing up and abolishes it. It does not have critical mass, it does not have specialist expertise (those generalist economic policy analysts instead)…..and there isn’t really much evident political appetite for excellent policy or the supporting analysis (even on the occasions – not always – when the Commission has delivered such). And if there were such an appetite, a revitalised Treasury would have the institutional incentives to seek to become the key provider (and in a small public sector, their arguments wouldn’t all be wrong).

There will be an interesting test just a little way down the track. Murray Sherwin’s second term as Commission chair ends next January and the government will need to find a replacement. The sort of person the government chooses (whoever is in government by then) could be quite revealing about the sort of future and role they see for the Commission. Sherwin is a very smooth and effective bureaucratic operator and effective manager – well-equipped for the sort of role the Commission has largely come to occupy – but if any government were serious about a greater focus on whole economy underperformance they’d probably have to be looking to a different sort of person to either Sherwin or to the other existing commissioners (able as they each no doubt are). I’m not holding my breath.

An unimpressive MPC

February 13, 2020February 13, 2020 Michael Reddell Adrian Orr, Monetary policy, pandemic, Uncategorized

I didn’t expect to be particularly critical of the Reserve Bank after yesterday’s Monetary Policy Statement. A journalist asked me yesterday morning what I’d say if they didn’t cut the OCR, and I noted to him that whether they cut or not, what I’d really be looking for was evidence of the Bank treating the issues in a serious way, alert to the magnitude of what was going on and the sheer uncertainty the world faces around the coronavirus.

They – the almost a year old new Monetary Policy Committee – did poorly on that score. And in his press conference, I thought the Governor simply seemed out of his depth. Much of what the Bank had to say might have seemed reasonable two weeks ago – no doubt when the bulk of their forecasts were brought together – but the situation has been moving (deteriorating) quite rapidly since then. They can’t update published forecasts by the day, but there was little sign in the record of yesterday’s meeting, or in the Governor’s remarks yesterday afternoon (or those of his senior staff), of anything more immediate or substantive. The Governor seemed to attempt to cover himself by suggesting that the Bank”s line was consistent with some “whole of government” inter-agency perspective, but….that is (or should be) no cover at all, since Treasury and MBIE don’t face the same immediacy the Bank does (it had to make an OCR decision) and whatever the Ministry of Health might be able to pass along about the virus itself, it knows nothing about economic effects. On those, the government should be able to look to the Bank for a lead. Instead, we got something that seemed consistent with the lethargic, lagging, disengaged approach of our government (political and official) to the coronavirus situation.

Thus, remarkably, faced with one of the biggest out-of-the-blue economic disruptions we’ve seen for many years, arising directly and most immediately in one of the world’s two largest economies, we get three-quarters of the way through the press statement before there is any mention of the issue, ploughing our way through upbeat commentary including on the world economy. Even when we do get there, the coronavirus effects are described only as an “emerging downside risk” – for something which has already sharply reduced activity in parts of our economy. It is the sort of language one might use for things where the effects are hard to see, not for something this visible, direct, and immediate. And on the day when the head of the WHO – who has often seemed to play defence for the PRC – was highlighting the scale of the global threat. On a day when a CDC expert was on the wires noting that the only effective response is social distancing – the more distant people stay the less economic activity there is.

The Bank loves to boast about how transparent it is. As I’ve noted, they are happy to tell us the (largely meaningless) forecasts for the OCR three years hence, but they are astonishingly secretive about their own analysis and deliberations. Thus, we now get a “summary record” of the final MPC meeting. Here is pretty much all we get to see about the coronavirus issue

The Committee discussed the initial assumption that the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration. The members acknowledged that some sectors were being significantly affected. They noted that their understanding of the duration and impact of the outbreak was changing quickly. The Committee discussed the monetary policy implications if the impacts of the outbreak were larger and more persistent than assumed and agreed that monetary policy had time to adjust if needed as more information became available.

….The Committee discussed alternative OCR settings and the various trade-offs involved.

There is no sense of the sort of models members were using to think about the issue and policy responses. There is no sense of the key arguments for and against immediate action and how and why members agreed or disagreed with each of those points. There is no sense of how the Bank balances risks, or of what they thought the downsides might have been to immediate action. There is no effective accountability, and there is no guidance towards the next meeting. Consistent with that, the document has one – large meaningless (in the face of extreme uncertainty) – central view on the coronavirus effects, but no alternative scenarios, even though this is a situation best suited to scenario based analysis. It is, frankly, a travesty of transparency, whether or not you or I happen to agree with the final OCR decision.

Consistent with that, there was no mention – whether in the minutes or in the body of the document or in any remarks from the Governor – of past OCR adjustments in the face of out-of-the-blue exogenous events. Again, perhaps there are good reasons why the cuts in 2001 (after 9/11) or 2011 (after Christchurch) or – less clearly – around SARS in 2003 don’t offer good lessons for policy-setting now. Presumably the MPC thought so, but they lay out no analysis or reasoning, and thus no way to check or contest (or even be convinced by) their thinking. It really isn’t good enough. Then again, in the press conference no journalist challenged the Governor on these omissions.

Similarly, there was no sign in any yesterday’s material or comments of having thought hard about the limitations on monetary policy (globally) as interest rates are near their effective lower bound. All else equal, and with inflation well in check, that starting point should typically make central banks more ready to react early against clear negative demand shocks to do what can be done to minimise the risk of inflation expectations dropping away. Perhaps again it still wouldn’t have been decisive this time – and our Reserve Bank still has a little more leeway than many – but to simply ignore the issue, and show no sign of having thought hard about the wider policy context, was pretty remiss.

From his tone in the press conference, it was as if the Governor really didn’t want monetary policy to have to play a part – to do his job – as if it was all just an unfortunate distraction from good news stories he’d been hoping to tell. So he told one journalist that at best monetary policy would be a “bit player”: for individual sectors that is no doubt true (but then monetary policy is never about dealing with specific sectoral problems), but not really the point, since there has been a clear and significant, highly observable negative demand shocks, and a huge increase in uncertainty (often a theme of RB speeches etc over the last year). In fact, in answer to another question the Governor was heard claiming that there was “no specific event” to consider reacting to (hundreds of millions of people locked down in China, second-largest economy in the world?) and – worse – then claimed that there was no need to act as we already have very low and stimulatory interest rates. The problem with that argument is that they were just as low six weeks ago, and since then we’ve had a clear large negative demand shock.

Asked about the fact that implied long-term inflation expectations (from the government bond market) were barely above 1 per cent, the Governor took a lesson from politicians and simply refused to answer the direct question. He then went to on to claim that the monetary policy foot was already on the accelerator, that we’ve had more positive global growth – even as global projections are in the course of being revised down – and that if anything the question that should have been being asked was why we weren’t thinking about raising the OCR (“renormalising”).

One journalist thought to ask the Governor about the difference between the Bank’s GDP forecasts for the year ahead (2.8 per cent I think I heard) and those of various outside commentators (more like 2.0 per cent) and asked about the difference. The Governor’s response was that of glib teenager: “0.8 per cent I think”. Pushed a bit further, he indicated that he had no idea why the difference and (more importantly) no real interest. He claimed (fair enough) not to accountable for anyone else’s forecasts, but showed no interest in the cross-check (that used to be pretty standard around the MPC table) of understanding why the Bank is different from others, and why the Bank still thinks that is the best forecast.

There was also the line about market prices constantly adjusting and buffering……all this as the exchange rate rose the best part of 1 per cent on his announcement yesterday, rather undercutting any exchange rate buffering of the economy that had been underway.

Oh, and then we had gung-ho political cheerleading for the government’s infrastructure spending plans. He claimed to be “very excited” by it and rushing past any issues around “crowding out” was keen to talk up all the possibilities of “crowding in” accompanying new private sector investment etc. No evidence, no analysis, but it probably went down well with the Labour Party. Sadly, the Governor seems to do campaigning and cheerleading better than he does monetary policy, and there seems to be no serious and substantial figure on his team to compensate for those weaknesses (while, as far we can tell, the invisible unheard external MPC members just function as ciphers and political cover).

As an illustration of what the Bank simply seemed to be missing – or choosing to ignore – a reader left this comment here last night

The shock from nCoV isn’t just confined to China. It’s spilling rapidly across the Asia-Pacific region…

I have just spent the past few days in Singapore and I write this on a flight to Hong Kong, which is maybe 15% occupied. Singapore is shutting down, which is worrying given its entrepôt status. Malls are emptying, as are hotels and restaurants. Traffic is thin. Companies are rolling out their business continuity plans which will further exacerbate the dislocation. This isn’t about just China, it’s region-wide.

The same reader sent me directly a photo of one of Changi airport’s main terminals at lunchtime yesterday, with this note “Changi T-3 unloading zone. Today, 12 noon. Not a soul in sight.. no cars no people..”

I noted yesterday that more or more people would be cancelling trips, business or leisure, in the face of some mix of risk aversion and sheer uncertainty. That happened to me yesterday – less about immediate threat than about the extreme uncertainty about the environment a few weeks hence.

And this morning we hear a local public health expert calling for our sluggish government to expand travel restrictions to people coming from various other countries (including Singapore and Hong Kong) where there is now established community outbreak. Or news of major international events in Hong Kong being cancelled. Or a major world telecoms convention in Barcelona being cancelled.

I’m not suggesting the Reserve Bank should have tried to turn itself into disease experts or even to pin their colours to a different central scenario. But they simply don’t seem alert to the magnitude of what is already going on, including that huge rise in uncertainty, and they provided us with very little useful analysis about the way they think about monetary policy, demand shocks, risks, instrument stability etc – nothing to give us any confidence in their stewardship.

Oh, and you’ll recall I mentioned yesterday their interesting – and potentially positive – experiment in transparency, inviting real-time questions to the Governor during the press conference via Twitter. As I’d noted in advance, one might well be sceptical about just which questions they would choose to answer. Actuals were even worse than my expectations. The Bank’s comms guy had clearly been primed not to expose the Governor to any searching questions, and only two were let through at all, essentially translated into patsy questions, allowing the Governor to wax eloquent on a couple of favoured themes. No one forced them to adopt this particular approach to being more open. But if they want kudos for it, they need to be seriously willing to allow real and searching questions to the Governor.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Year: 2020