Over the last couple of months, the National Party has been running the line that a Reserve Bank Governor should not be appointed to the normal full five-year term when Orr’s existing term expires in late March, but that rather an appointment should be made for just a year so that whichever party takes office after next year’s election can appoint a Governor of their preference. We are told (although we have not yet seen the letter) that they made this case to the Minister of Finance when, as he was required to, he came consulting on his plan to reappoint Orr.

It is a terrible idea, on multiple counts.

But what is also irksome is the idea that in making a five year appointment, for a term beginning probably at least six months prior to the election, the Minister is breaching some established convention. That is simply a nonsense claim. This clip (from Bernard Hickey’s newsletter, this one opened to everyone) has some relevant quotes

There is simply no foundation to what Luxon is saying about what happened in the past. Since the Reserve Bank was made operationally independent in 1990, there have been two cases in which a Governor’s term has expired in election year but before the scheduled election. The first was in 1993, when Don Brash’s term expired on 31 August. The 1990 election had been held on 6 November 1990, so presumptively any new term was going to start within three months of the 1993 election. As it is, and partly to allay any possible market concerns (these were still fairly early days), Don’s reappointment was made and announced very early (if memory serves correctly in late 1992). I don’t recall any particular controversy about that reappointment (although the then Prime Minister had not been a huge Brash fan), but then Brash had initially been appointed by a Labour government (and the then Labour leader and finance spokesman had both sat in the Cabinet that had appointed him).

Of the next few (re)appointments:

• Don Brash was appointed to a third term commencing in September 1998, not an election year
• Don Brash resigned suddenly in April 2002, about three months before the general election.  The then Deputy Governor was immediately appointed (lawfully) as acting Governor, both to run the Bank in the interim and to enable a proper search process to take place.  Recall that under New Zealand law, the Minister of Finance cannot simply appoint his or her own person as Governor, and in those days the Bank’s Board used to guard its prerogatives (right and responsibility to nominate).  The eventual appointment of Alan Bollard was not made until after the election.
• Bollard was reappointed in 2007 (not an election year) and Wheeler was appointed in 2012 (also not an election year)

Which brings us to 2017.  In 2016 Graeme Wheeler had advised that he would not be seeking a second term (probably to the general relief of both government and opposition parties at the time).  Documents later released show that The Treasury (and the Board and minister) envisaged making a permanent new appointment some time early in 2017, well clear of the likely election date.  However, those same papers also show that when the relevant authorities (in this case, Cabinet Office) were consulted it was established that the convention now (though perhaps not in 1992/93) was that permanent appointments should not be made when the new appointment would commence very close to (within three months of) an election date.  In other words, the government could not get round the fact that Wheeler’s term expired close to the expected election date simply by making an early announcement of a permanent replacement.   And thus they more or less had to settle on the idea of an acting Governor (Grant Spencer).  Unfortunately, the then law was badly written (did not envisage the circumstances), and Graeme Wheeler (who could lawfully have been extended for six months) seemed keen to get back to commercial life ASAP, and the actual solution they landed on was almost certainly unlawful (I wrote a lot about it at the time, but here is a post that comments on the best arguments the Crown’s lawyers could make in defence).

So there is a precedent for an acting appointment (which, since the law was amended, could now be done lawfully) when the Governor’s term expired within three months of the election.  That same convention, about not making permanent appointments, isn’t just about the central bank.  But Orr’s term expires on 27 March, and the election seems likely to be at least six months after that, in a system with a three-year parliamentary term.  It simply isn’t very serious or credible to argue that the government –  otherwise still governing fully –  should be unable (or even unwilling) to appoint a permanent Governor six or more months out from an election.  You might argue, and I might have a bit of sympathy for such a view, that perhaps it would be better to give a Governor a six year term (the RBA Governor has a seven year term), so that overlaps with election years happened much less often, but the law is as it is, and I don’t recall the Opposition opposing five year terms when the reform bills were before the House.   But there is no established precedent or convention about not making permanent appointments that start that far out from a likely election.

In passing, one might note that whereas with past appointments all powers of the Reserve Bank rested with the Governor, the various reforms put in place by this government have (at least on paper) considerably diminished the extent of the Governor’s powers, and created other appointments (notably external MPC members) which (at least on paper) provide avenues to shape and influence the Bank.  I don’t want to put too much weight on this argument – I’ve spent years arguing that many of these changes in practice have been largely cosmetic – but not only could those provisions be used more aggressively by an incoming government that cared, but it would be quite legitimate for an incoming government to amend the legislation further (at the margin) to reduce the relative dominance of any particular individual serving as Governor.  Our system would be better for such changes.  (To be clear, like various other commenters, I would not support law changes designed directly to remove Orr: that way lies Erdogan type central banking.)

Whatever the law and precedent, it would also be a bad idea to be making acting appointments in circumstances like the present one.  Our whole system around the Reserve Bank –  and central banks in other advanced economies of our type –  is set up around the idea that incoming governments don’t just get to pick their central bankers as soon as it suits.  Instead, the system of operationally independent central banks has been built on (among others) the notion of technically capable, respected, non-partisan figures serving (whether as Governor or MPC members) for terms that do not align with the parliamentary term.   Consistent with that vision, New Zealand’s legislation went further than most (too far in my view) in not even allowing the Minister of Finance to choose a Governor (or MPC members), but rather requiring that the Minister only appoint people who had first been nominated by the Board of the central bank, itself appointed for staggered terms by the Minister of Finance.     Legislation was recently amended to even further reinforce this vision – of technically competent, respected, non-partisan appointees – when Labour explicitly added provisions requiring that other parties in Parliament be consulted before appointments are made (whether as Governor or Board members).  

You could mount a counter-argument that this approach is a bit wrongheaded.  After all, the legislation has also been amended recently to make it clear, that in monetary policy at least, the target the Bank works to is directly set by the government of the day.  But notwithstanding that, the central bank still has a lot of practical policy discretion, and not just around monetary policy.   Most advanced countries have made the choice that we do not want key central bank decisionmakers changing routinely when the government changes.  That still seems, on balance, prudent to me, and in their calmer moments I’d be surprised if National really disagreed.

So the big problem in the current situation is NOT that an appointment has been made for five years. That should be the norm, whether or not it is six months from an election.  The problem is specifically with the appointment (at all) of Adrian Orr.   National seems reluctant to say that (perhaps because they may well be stuck working with him) but it is the main issue.  There would be no such concern had a (hypothetical) generally highly-regarded (professionally, and among politicians), technically excellent, respected, non-partisan figure been appointed to the role.  Specifically, National (and ACT) would not be raising concerns about the term of the appointment if they had any confidence in Orr.  They do not.    One can perhaps debate whether or not they should have such confidence, but in our system respect and confidence are earned, they are not something anyone can simply be forced to adopt.    As I noted in yesterday’s post, the rank politicisation that has happened this week is not of National’s or ACT’s making, but of Robertson, in pushing ahead with an appointment –  to a long-term position, where cross-party respect etc is important for the institution and its functioning – that the main Opposition parties seem to have been quite clear in opposing.   It is not the job of Opposition parties to simply go along with whoever Robertson (and his, technically ill-equipped, board (itself, in some cases appointed over Opposition objections) determine).  All the more so when Robertson himself was the one who introduced the formal consultation requirements, seeming to establish an expectation that strong (and reasoned) objections would be taken seriously.    The responsibility was on Robertson – who holds the power to appoint or not – to respect the notion of only appointing someone who commands (even grudging) professional and personal respect.  Orr no longer qualifies on that count.  It is hard to think of any advanced country central bank Governor who will start a new term commanding so little respect, support, and confidence.  That is really bad for the institution, and the institutional arrangements.

(Having said all this it would be good if National and ACT would pro-actively release their responses to Robertson’s consultation, rather than making us wait for OIA releases. It would be helpful to see what grounds the parties objected on, and whether they actually raised substantive concerns, or just relied on ill-founded process arguments.)

UPDATE: Having been sent a copy of the National letter of 30 September, it is now clear that National did not raise any substantive concerns about Orr, and focused wholly on the non-existent “convention” about not appointing a substantive Governor even 6-7 months out from an election.