Month: August 2023

Almost done…at least according to the Reserve Bank

Michael Reddell inflation, Monetary policy

I’m not a huge fan of central banks publishing medium-term economic forecasts (or projections as we were usually schooled to call them). As I understand it, decades ago the Reserve Bank of New Zealand only started publishing them because the Official Information Act was passed (and in those days the forecasts made little or no difference to policy so there wasn’t even an arguable ground for withholding). My scepticism only increased as the projections assumed an increasingly significant place in the policy communications, including the move to endogenous interest rate projections from 1997. It isn’t that a central bank’s forecasts are likely to be worse than anyone else’s, just that medium-term economic forecasting (cyclical stuff 2-3 years ahead) is really a mug’s game, and those medium-term forecasts rarely if ever have much impact on the accompanying OCR decision. OCR decisions are almost always, and necessarily (given the state of uncertainty, limited knowledge etc), driven by the latest data releases, which are at best real-time contemporaneous, and more often relating to periods a month or three back (the latest NZ GDP data are for the quarter that ended in March). And that is as it should be. And yet in my experience of the Reserve Bank forecasting and policy process, inordinate amounts of time (including time of the Governor) was spent on numbers for periods so far ahead they would, almost inevitably, be quickly invalidated; often more time (and more senior management smoothing, for messaging purposes) on where we thought things might be in 2 years than on where we think they are right now. I recall a speech some years ago now from a retiring senior European central banker who suggested that perhaps central banks shouldn’t bother publishing for horizons much more than six months, and that line still has some appeal to me. It isn’t about trying to withhold information, but about having nothing useful to say and no robust grounds on which to say it. None of that is a criticism of the Reserve Bank, or their peers abroad, it is just the state of (lack of) knowledge.

Of course, the international trend has been in the other direction, with more central banks publishing more forecast information, and for the time being we are where we are. The Reserve Bank of New Zealand was once considered a leader in forecast transparency, but there are some areas in which they really aren’t very transparent at all. Thus, despite the (quite appropriate) policy focus on core inflation, the Bank does not publish forecasts (even for the next few quarters) for any of the measures of core inflation, and despite the evident seasonality in the inflation data (sufficient for SNZ to publish seasonally adjusted series), the Bank’s inflation projections are not seasonally adjusted (in contrast to almost all quarterly quantity series). On core inflation, even the Reserve Bank of Australia, publishes projections (albeit at six-monthly rests rather than for each quarter) for annual trimmed mean inflation

But if I’m sceptical of the merits of published forecasts, that doesn’t mean those forecasts have no information about the central bank’s own thinking at the time of publication. In fact, the numbers can be – and often are – a significant part of the Bank’s storytelling and tactics, in support of a current policy stance. And how those numbers change over time can also be revealing.

You’ll recall – I highlighted it in my post last Thursday – that one of the good features of last week’s MPS was the upfront acknowledgement that core inflation was hanging up, and that if anything domestic inflation had been a little higher in the most recent quarter than the Bank had been expecting. For example, the minutes record that “measures of core inflation remain near their recent highs”, a point reiterated a couple of times in chapter 2 (the policy assessment). In case there is any doubt, they have a chart showing the core inflation measures grouped around 6 per cent (annual rate). The target, you will recall, is 2 per cent – the midpoint (that MPC is required to focus on) of the 1 to 3 per cent target band.

The Bank doesn’t use one of my favourite graphs, of quarterly core inflation

…but they don’t really need to. They seem to be in no doubt that core inflation has been hanging up, in ways that are at least a little troublesome.

Of the published forecasts, the closest one to showing their hand on the outlook for core inflation is the forecasts for quarterly non-tradables inflation. Non-tradables inflation tends to run persistently higher than tradables inflation (for this century to date, annual non-tradables inflation has averaged 3.4 per cent while annual tradables inflation has averaged 1.4 per cent), and so even as tradables inflation has been abating, non-tradables inflation has been running at an annualised rate 6.6 per cent, a bit higher than core.

Looking out to the medium-term, the Bank seems to consider that non-tradables inflation of about 3.3 per cent will be consistent with inflation being at 2 per cent (for the final year of the projections, to September 2026, they show things being settled at those rates).

In the nearer-term they have generally been having to revise up their forecasts for non-tradables inflation. Here is how RB forecasts evolved over the last year towards the actuals for the two quarters in the first half of 2023.

And here is the SNZ series for non-tradables quarterly inflation on a seasonally adjusted basis.

That last observation is modestly encouraging although (a) per the previous chart, it was quite a bit higher than the Bank was expecting, and (b) there is no sign of anything similar in the analytical core inflation measures themselves. Better than the alternative I guess, but nothing to hang your hat on (and as I noted earlier, when writing about inflation outcomes to date the Bank does not do so in the MPS – it is appropriately uneasy about core and domestic inflation holding up).

As it happens, the Bank has also been revising up its forecasts of Q3 non-tradables inflation – its latest view for the current quarter is (a touch higher) than any of its projections for the quarter over the last year.

But….seasonality matters. The Bank doesn’t publish its inflation forecasts in seasonally adjusted terms. But if we compare the actual data, seasonally adjusted and not, we can back out some approximate seasonal factors, and convert the Bank’s projections into (approximately) seasonally adjusted terms (more technically oriented people could no doubt do it more formally).

This is the result

On these projections, non-tradables inflation (projections for which have been revised up to new highs) does fall a bit in in the September quarter, but then by the December quarter – measured centred on 15 November, now less than 3 months away, starting less than 6 weeks from now – suddenly the whole domestic inflation problem is solved. In (rough) seasonally adjusted terms, non-tradables inflation is back down to 0.8 per cent for the December quarter, a rate not seen since the start of 2021, and a rate consistent with all the inflation problems being solved. Annual rates take a while to come down to be sure, but any policy-setting agency would be firmly focused on quarterly tracks and…..within three months we are there (at least according to the Reserve Bank).

Quite the contrast: revising up the Q3 forecasts (a quarter we already know a bit about) and revising materially down the December 2023 and March 2024 forecasts, which we don’t yet know anything firm about.

I won’t bore you with the charts but it is not as if they are suddenly expecting a much sharper rise in the unemployment rate. Actually, unemployment rate projections for the next 6 months have been revised down quite a bit.

It all seems like a rather miraculous good news story. and yet one that the Bank left buried in the website tables and made no mention of at all, not in the MPS itself or at FEC.

Suggesting they don’t really believe it themselves. How likely is that we’d go from an entrenched (core) inflation problem now (and in the most recent published quarter) back to something consistent with the target midpoint in a matter of weeks? Frankly, it doesn’t seem very likely.

One possibility – and who knows if it is the explanation – is that they really don’t want to raise the OCR again. That might be for political reasons, or because they like this idea of being (one of the first) central banks to reach a peak rate (or some, conscious or unconscious, mix of the two), but had those quarters from 2023Q4 into next year been a bit higher – domestic inflation abating more gradually, consistent with the fairly modest recession forecasts – they would have been under a great deal more pressure to raise the OCR now or in early October. Neither explanation would be to the Bank’s credit. Perhaps neither is the correct story, but then we don’t have any explanation at all from the Bank. If they really believed inflation was collapsing as we speak, surely they’d have told us?

There are some other odd features in the numbers. Take the wage forecasts for example. The Bank doesn’t publish forecasts for the only data we have on wages rates themselves (that is the stratified LCI Analytical Unadjusted series). As I’ve shown previously, inflation in private sector wage rates seems to be levelling off (but not yet falling).

The Bank publishes forecasts for the LCI itself, for the private sector. The LCI is not a measure of wage rate but is designed to be a proxy for something like unit labour costs. Over the decades inflation in the headline private sector LCI has averaged somewhere not too far from the core rate of CPI inflation.

Eyeballing the chart might suggest that annual increases in this measure of the LCI of around 2 per cent might be roughly consistent with inflation at target.

Here are the Bank’s forecasts for LCI inflation

Note first that straight line. No model will have produced that, but rulers are a handy tool for forecast teams responding to gubernatorial whims. But more importantly, note that again they think the job is all but done – those quarterly rates of increases come down hardly any more (that apparently now being consistent with core inflation at the 2 per cent target, but again with no explanation). But then this measure of wage inflation holds up at a remarkably high levels even as the unemployment rate rises from the current 3.6 per cent to 5.3 per cent and only gets back to 5 per cent by the end of the projection period. It doesn’t make a lot of sense and simply isn’t very plausible.

None of it makes much sense. And these days, with a central bank whose Governor and Board chair just make up stuff when it suits, it is impossible to take anything they say or publish at face value. Which is a terrible place to be, when so much power is vested in the Bank, and so much havoc and loss wreaked, with no sign of any effective accountability at all.

Misleading Parliament

Michael Reddell Adrian Orr, Monetary policy

In my post on Thursday I commented briefly on the appearance by the Governor and his Chief Economist at Parliament’s Finance and Expenditure Committee. They tried to suggest to the Committee that to the extent there had been inflation forecast errors over the last year – responding to a question from Nicola Willis – that much of it was down the summer storms including Cyclone Gabrielle. But then a helpful staffer in the back row – who may not have been so popular with management after that – piped up and explained to FEC that the impact of the cyclone was perhaps 0.1 or 0.2 per cent. The forecasting error Willis had asked the Governor about was 1.9 percentage points (the Bank had last August forecast that inflation would be 4.1 per cent in the year to September 2023, but now think that inflation rate will be 6.0 per cent).

It was pleasing to see yesterday that veteran journalist Jenny Ruth has emerged from her restraint of trade purdah after leaving Business Desk to begin a new Substack newsletter (free for the first few weeks) and that one of her first columns was about the very same Reserve Bank appearance. Her piece is worth reading. She and at least one other journalist have commented on the Governor having “toned down his hostility” towards Nicola Willis in this appearance. The tone may have been less bad, but the substance was just as contemptuous as ever – and not just of Willis but of Parliament itself. That was, once upon a time, treated as a serious matter. This is from Parliament’s own website

My Thursday post was written from listening to the appearance live and scrawling a few notes as I went. Jenny Ruth’s column prompted me to go back and listen to the recording (you can find it here), being able to stop as needed and take fuller notes. I pick up that segment of the appearance with Orr closing his opening remarks declaring that he was very proud of the Monetary Policy Statement document.

Nicola Willis then asked “what is going on? Inflation has been out of the target range for 27 months. Why is it taking so long to get inflation out of our economy?

The Governor responded along the lines of “Good question. It is a global question. The drivers of inflation have been changing through time, but all biased up, There were lockdowns, supply constraints, the Ukraine war and pressure on commodity prices, and now supply shortages in New Zealand, with severe storms. The drivers have changed but we are confident, subject to the next shock, that inflation pressures are easing”.

Nicola Willis asked if the Bank had stimulated the economy too much, and the response was yes.

The Bank’s Chief Economist (and MPC member) Paul Conway added that “it had been one supply shock after another, citing Covid, the Ukraine War, the pressure moving from goods prices to services prices, and all in all a very unusual period.

He added that the Reserve Bank had however been one of the first central banks to tighten and one of the first to signal that they thought they had reached a peak.

Nicola Willis then asked about the contrast with the US, where inflation had come down faster and appeared to be doing better.

Conway responded that he had “been amazed at the performance of the US, that it was a very different economy, a very flexible one”. He noted that unemployment had rocketed upwards when Covid began and then had fallen very sharply with resources being reabsorbed. The US was “leading the globe when it comes to inflation coming down”, but that “without thinking about it too much” New Zealand had been somewhere in the middle of the pack over the last year.

Willis observed “it strikes me how inaccurate the Reserve Bank’s forecasts have been”, citing the August 2022 forecast that CPI inflation for the year to September 2023 had been 4.1 per cent, and that the latest forecast was for 6 per cent. “Have you looked at the inaccuracies and what is going on there?”

Orr responded that “yes, we do so constantly”, stressing that the great thing about monetary policy was that it as a repeat game, reviewed afresh every six weeks, when they could reflect on surprises relative to forecasts. He indicated that the Bank was working across a whole range of different issues on how to improve. Recent forecasts erros had been “very well explained” by supply shocks, noting that a year ago they had not known about cyclone Gabrielle.

Willis then asked “how much of the difference of 1.9 percentage points is down to Gabrielle?”

The Governor responded “I don’t have that”.

Willis responded that “it seemed a stretch” that cyclone Gabrielle could account for that much of it.

Conway responded that they could back the numbers out to look at exactly that question, and then launched into a bit of a defence of the Bank’s inflation forecasting more generally, argued that they were “pretty good” relative to other forecasters but that it was challenging even in normal times, but that these had not been normal times and that the supply shocks had been “incredibly disruptive”. He said that the Bank had an active programme underway to better understand economic dynamics.

Anna Lorck (a Labour backbench MP) then asked “just for clarity, how much lower would inflation be without Gabrielle?”

At this point the Bank’s forecasting manager, who was sitting at the back of the room, piped up. She was invited to come forward and grab a chair. Her response was that the cyclone effect on inflation had been less than initially expected and was probably 0.1 to 0.2 per cent, mostly in fruit and vegetable prices. Conway noted that the cyclone had been a negative supply shock (boosting those prices) but would also be a positive demand shock (rebuild activity), and either he or the forecasting manager noted that they did not have estimates for any eventual effects on construction costs more generally.

At this point discussion moved on to other topics.

There are several things worth noting just from that record:

  • not once did the Governor or the Chie Economist suggest that excess demand had had anything to do with inflation.  All the talk was about the sequence of supply shocks,
  • it was pretty clear from the answers that actually the Bank had done no serious analysis of the forecast errors over the last year or so,
  • it was also clear that the Bank had done no serious work on trying to understand lessons from other countries, whether those where core inflation has turned down (US, Canada, Australia) or those where it hasn’t,
  • the Governor wanted MPs to believe that the storms/cyclone were a big part of the story for why inflation had been so much higher than the Bank was forecasting just a year ago,
  • the Chief Economist seemed more interested in backing up the Governor rather than providing straight answers to the parliamentary committee, and
  • they might have gotten away with it (well, even more than they will anyway) if it weren’t for one of their capable staff in the back row giving the answer to the question from MPs, an answer very different from what her bosses had been trying to imply just minutes earlier.

There is no way any of this was simply the result of information not previously having been passed up the line.  As Orr had noted in his press conference the previous day, the OCR/MPS decision came as the culmination of “8-10 days” of meetings and deliberations, and paid tribute to staff and MPC members for the work that went in.   I’m sure in substance the meetings are little different than they ever were: lots of detailed papers, lots of presentations, lots of opportunity for questions, and lots of little snippets like “we think the direct effects of Gabrielle on the CPI have been about 0.1 to 0.2 per cent, a bit less than we’d initially expected.  The Governor and Chief Economist knew (that it was very small, relative to the difference Willis was asking about) and chose to mislead the Committee anyway).

But having listened to the FEC appearance again, I went back to the Monetary Policy Statement itself, dozens of pages of text, charts and tables.

First I searched the document for “storms”, “cyclone” or “Gabrielle”.  There were no mentions at all.  “storm” did appear once, but only to note some reduction in March quarter horticulture exports (fine and good to note, but…..the Governor was talking about (and being asked about) inflation.

But surely “supply shocks” would appear in the document. After all, the Governor (and chief economist) had just told MPs that the series of supply shocks were the inflation story.  Perhaps with pardonable license they only meant a big part of the story (remember that the question was about the last 12 months’ forecast error)?  But anyway, “supply shock(s)” doesn’t appear in the MPS either.  I did find two references to “supply constraints”, but they were both good news stories

rather than explanations for why the Bank’s forecasts had again so under-forecast inflation. A few references to “supply chains” (bottlenecks etc) were also all positive, with things having markedly improved (so all else equal lowering inflation) rather than explaining why inflation this quarter is now expected to be 6 per cent when a year ago they expected it to be 4.1 per cent.

The contrast is just staggering, and really pretty shameful when one reflects that these were senior public figures, appointed by the Minister of Finance, testifying to a parliamentary committee when inflation is far outside the target band the MPC had been given.

I’m not even sure why honesty and contrition – whatever their innate virtues – need have been so hard. Forecasting at times like these is really challenging: were it otherwise we (and a whole bunch of other countries) wouldn’t have 6% (eg) inflation in the first place. But for reasons known only to them Orr in particular, and Conway, chose just to make things up, rather than provide honest testimony to one of the bodies charged with holding them to account. (I guess they must take lessons from their Board chair, although his just-so story was “only” to The Treasury, another body charged with monitoring the Bank, not to Parliament itself.)

As I noted in the earlier post (and as Jenny Ruth reminded readers at more length) the deceptions and misrepresentations have become a disconcerting pattern under Orr’s watch. For a certain class of person, why wouldn’t one if there are no consequences to doing so. But down that path lies the further erosion of any sort of serious accountability – accountability supposedly being the quid pro quo for operational autonomy and all the power and status that goes with it,

As a reminder, from the earlier post, here were the inflation forecasts Willis had raised

and these were the parallel unemployment projections

It wasn’t mostly about “supply shocks”, but about misjudging the extent of capacity pressures and the speed at which they would ease. But that would have been to have focused attention on the demand side, and the big misjudgements there, by the Reserve Bank, which is charged with cyclical demand management to keep core inflation in check. All these numbers are part of the MPS suite of documents on the Bank’s website.

(There was quite a bit more spin and highly questionable claims in Orr’s soft interview with a Herald journalist, but we really should be able to expect better – straightforwardness, messages actually consistent with the document he was speaking to, serious transparency, and so on; little things lilke that – when the Governor of the central bank faces a parliamentary committee.)

(Oh, and although it is an old line, it is still not true: Conway claiming to FEC that the Reserve Bank had been one of the first central banks to raise rates. There are 21 central banks making their own monetary policy (20 countries and the ECB) in the OECD. Of them, 7 started tightening earlier than our central bank, and another moved on the same day. The Reserve Bank was scarcely a stellar outlier. They did move earlier than the central banks of Australia, Canada, the US, the UK and the euro area, but then it seems now that Australia, Canada and the US have seen core inflation begin to abate earlier and further than it has here. One of the virtues of the MPS itself is that it doesn’t shy away from that fact that New Zealand core inflation is still holding up. And that, surely, is the relevant accountability test.)

At it again

Michael Reddell inflation, Monetary policy, MPC

Senior figures at the Reserve Bank have an alarming record of just making stuff up (and getting away with it). Just last week, documents showed that the Board chair had told entirely made-up stories to Treasury, apparently trying to rewrite history, in turn leading an incurious Treasury to lie to the media. And on several occasions the Governor has been found actively misleading Parliament’s Finance and Expenditure Committee (eg here, here, and here).

He (and, sadly, his chief economist) were at it again this morning at FEC. Asked why it was taking so long for inflation to come down we got a long list of supply shocks (ie things they weren’t responsible for) and little or no acknowledgment at all that excess demand (reflected in things like the unsustainably tight labour market), the thing monetary policy influences, might have played even part of a role.

But then this conversation ensued (not word for word)

Nicola Willis: A year ago your forecasts said inflation by now [September quarter 2023] would be 4.1 per cent, and now you are picking it will be 6.0 per cent. What explains that magnitude of error?

Orr: [after some burble] supply shocks and in particular the storms and cyclone Gabrielle

Nicola Willis: How much difference did the cyclone make?

Orr: I don’t know.

[a minute or two later]

Anna Lorck (Labour backbencher): Governor, how much difference has the cyclone made to inflation?

At this point, the Bank’s forecasting manager, sitting in the back row, pipes up and is invited forward and she explains that they think the cyclone might explain 0.1 or 0.2 per cent, (the effect through fresh fruit and vegetable prices)….. [and it seems very unlikely that the Governor did not already know this, having just sat through days of MPC deliberations].

As I say, they just make stuff up. Here it is worth remembering that a) fruit and vegetable prices, and especially extreme moves in them, will be out of all/most core inflation measures, and b) that as the Bank’s own MPS yesterday noted, several times, core inflation – the bit shaped by excess demand and expectations pressures – was hanging up and had not yet shown signs of falling.

These are the RB inflation projections Willis was referring to

And here are their unemployment rate projections from the same two sets of forecasts

Slack simply has not re-emerged in the economy as early or to the extent the Reserve Bank expected a year ago. That isn’t about adverse supply shocks. It is just a(nother) forecasting error re excess demand from the well-paid committee (and their large supporting staff) charged with delivering annual inflation near 2 per cent.

Despite the chief economist’s claims (again, at FEC this morning) that the Bank is pretty good at forecasting, in this episode (last few years) they’ve been consistently worse than respondents to the Bank’s own expectations survey (who’ve been bad enough).

All that was just about a few minutes in the MPC hearing, where (as so often) that Bank treats parliamentary scrutiny and accountability as some sort of game where anything goes. The post was actually going to be about the MPS itself.

It was a pretty thin and disappointing document, even with the modest nudge in the direction of possible further OCR increases. I read it more slowly and carefully than I sometimes do, and came away if anything more convinced that the combination of their own persistent mistakes and their own read of the data support a higher OCR now, to be confident that we will really get inflation back to 2 per cent fairly promptly from the current still elevated core levels. And astonished that, with no supporting analysis for the claim, the MPC continues with the bold claim – not paralleled as far as I’m aware in any other advanced country central bank – that they are “confident” they have done enough. “Confident” here seems most likely to be empty bluster, with the risk that it is also intended to keep the natives quiet for the weeks remaining before the election.

I have been, and still am, hesitant about suggesting that the Governor and the MPC are operating in a deliberately partisan way. But it gets harder to believe such a pro-incumbent bias is playing no part (consciously or unconsciously) in their words and actions. I’ve documented previously the skewed, highly unconventional, and very favourable to Labour, way the Bank treated fiscal policy in May following the more expansionary Budget. In this MPS, the word “deficit” appears 44 times, but it appears that every single one of those references is to the current account deficit, and not one to the budget deficit (altho there is a single reference to “the Government’s plan to return the Budget to surplus”). The same weird framing of fiscal issues was there not only in the rest of the document but explicitly from the Governor this morning. He claimed that what mattered for the Bank from fiscal policy was only/mostly government consumption and investment spending, not taxes (or apparently transfers), let alone changes in structural deficits (the usual model). Having provided no supporting analysis or rationale whatever – speech, research paper, analytical note, just nothing – the Governor appears to have simply tossed the conventional fiscal impulse approach out the window, at just a time when doing so suits his political masters. Perhaps it is all coincidence, but either way it is troubling.

More generally, relevant supporting analysis was remarkably thin on the ground. There was no analysis at all of past reductions in inflation in New Zealand, no analysis of the forecasting mistakes of the last year (see above), no serious analysis of what has gone on in the US, Canada, or Australia where core inflation has turned down (and what, if any, comparative insights those experiences might offer). (At FEC this morning, they were asked about the US case, and it was clear they’d not even thought hard as the chief economist was reduced to lines like “it is a very different economy”, “very flexible”, and that was it…….) And there seemed to be considerably more discussion of the current account deficit – which the Bank has no direct responsibility for – than of inflation for which it does. Even with a four page special topic on the current account and a five page one on immigration it is hard to think of any useful analytical insight one comes away from the document with. And remember that this is it: there is no stream of thoughtful speeches likely to emerge from MPC members over the coming weeks elaborating on bits of research or analysis there was no space for in the MPS itself.

And, revealing the poor quality of the MPC itself, even though core inflation lingers high, miles above target, there is no sign in the minutes of any serious thoughtful alternative approaches. We are left to assume that in a highly uncertain environment all these senior public officials just went with the flow. They are “confident” we are told again, but with no hint of why, or no hint of anything like the normal degree of divergence one might reasonably expect if seven able people were debating such challenging issues at the best of times.

Even allowing for signs that things are slowing – and remember we had two negative quarters of GDP growth late last year and early this year already – there seems to be more wishful thinking and hopefulness than serious supporting analysis (and, of course, any contrition – these people wreaked this inflationary havoc and the expected rise in unemployment – is totally absent). Not even the MPC hides the fact that “domestically-generated inflation” is not only hanging up but is also “marginally higher” than they’d expected as recently as May.

Among the straws they attempt to clutch at is a claim that “private sector wage inflation appears to have peaked and has started to ease” and “most measures of annual wage inflation have begun to ease”. But of all the series they seek to draw on, the only one that actually attempts to measure wage rates (rather than hourly or weekly earnings, or something approximating unit labour costs) is the LCI Analytical Unadjusted series. As I showed earlier in the week, at best this series seems close to peaking, but there is no sign yet of any slowdown.

Perhaps as to the point, even when some series have started slowing – and neither core inflation nor wage rates yet have – there is a long way to go to get core inflation from 6 per cent to 2 per cent, and the Bank’s forecasts and policy have been repeatedly wrong in the same direction over recent years.

Then there is the fact that the Bank has revised up its view of the neutral nominal interest rate by 25 basis points. That may well be sensible (respondents to their expectations survey have raised their view of neutral by 60 basis points in the last 18 months), but what it means is that the Bank now thinks the current OCR is less contractionary, all else equal, than it has assumed previously. It is as simple and mechanical as that. With core inflation still holding up, the labour market still tight (in their words), the output gap still positive, and other excess demand indicators still pointing to imbalances, it might then have seemed natural to have moved to raise the OCR, or at least to move the near-term forward track up by 25 basis points, putting October and November firmly into view. Instead, the track is ever so slightly higher in the near-term and the 25 points increase only really becomes apparent in the far (and largely irrelevant) reaches of the years-ahead OCR projections. The MPC was keen on a so-called “least regrets” framework when they were (unintentionally) giving rise to the current mess, but seem to prefer just to punt and hope now.

One of the (many) disappointments around the Reserve Bank’s analysis in recent years – a period when not only do we have a shiny new MPC but the biggest monetary policy failures in decades – is the lack of any really systematic and overarching view of the excess demand pressures that have built up in the economy. They show up, of course, most evidently in the high inflation (which then the Bank too often – see above – tries to minimise with handwaving rhetoric about supply shocks), and it shows (more abstractly) in the Bank’s output gap estimates and (more concretely) in the unsustainably low unemployment rates. But it also shows up in the labour force participation rate, which has stepped up a long way in this boom, tends to be pro-cyclical, and yet the Bank assumes the increase is permanent. Is that likely, and if so why?

And then there is the sharp widening in the current account deficit, which does not get the attention it deserves as an indicator of macro imbalances and excess demand. As noted already, there is a four page special chapter (and I agree with the bottom line re the NIIP position), but it is rather light on macroeconomic analysis (a basic savings-investment lens) and longer, earlier, on accounting (the absence of Chinese students and tourists). There is a nice sectoral balances chart

and this is where even the Bank has to acknowledge the government contribution to the demand imbalances.

But in playing around with the data yesterday, I came up with this chart

The extent of the domestic pressure on available resources relative to domestic output is quite unprecedented in recent decades (both the consumption and investment lines individually are also around record highs, but it is the combination that is striking). Since GDP is what it is (already stretched beyond potential – that is what a positive output gap is) the excess demand pressures are reflected in a current account deficit. This is annual data. Using the quarterly seasonally adjusted data, the most recent quarterly observation was slightly higher than the last four quarter average. There is a lot of excess demand adjustment that seems likely to have to occur (if, for example, this ratio is to get back to the 98-100 per cent range observed most of the time in the last 35 years).

Central banks are well-positioned to make such points and present data in telling ways. Our mostly does not.

Any new government will face a lot of challenges, and a lot of areas of the public sector that really need sorting out. Given the great power handed to the Reserve Bank, their glaring failures in recent years, and their apparent indifference to matters of integrity, the combination of considerations mean they should be high on the priority list for a new Minister of Finance.

Monetary policy miscellany

Michael Reddell inflation, Monetary policy

I did an interview with Mike Hosking this morning on monetary policy and inflation, against the backdrop of this afternoon’s Reserve Bank Monetary Policy Statement. Where we differed seemed to be around wages. Hosking asked how did wage inflation get so high, contributing to the ongoing inflation problem, and suggested that wage earners should now hold back in order to help bring inflation down.

Such lines aren’t unknown, even from central bankers (the Governor and other senior Bank of England people have run such lines recently, and not emerged well from the experience). I think they are almost entirely misplaced. Inflation (well, core inflation anyway) is a monetary policy failing, a symptom of persistent excess demand across the economy (for goods, services, labour, and whatever). One symptom of that excess demand was the incredibly tight labour market – record low rates of unemployment (not supported by microeconomic structural liberalisations) and firms crying out for workers, reporting extreme difficulty in finding them etc. All those pressures appear to be beginning to ease now, but employment growth has been very strong even recently, the unemployment rate is still well below most serious NAIRU estimates, and the participation rate is far higher than it was pre-Covid.

If anything, it is surprising we have not seen stronger growth in wage rates. Here is a simple chart showing wages (the stratified LCI Analytical Unadjusted index of private sector wage rates) and prices (the CPI) since just prior to Covid.

Over that 3.5 year period real wages have hardly changed (in fact they are slightly down, but the difference at the end of the period is less than 1 per cent). Even allowing for the fact that the inflation took everyone by surprise – most notably the central bank and its MPC – it isn’t really what I’d have expected this far into an inflation shock. Note that over time you’d normally expect real wages to rise as trend productivity improves, but the best estimates so far suggest little or no economywide productivity growth in New Zealand over the Covid period.

Now, as I noted in yesterday’s post the terms of trade for the New Zealand economy as a whole have been falling, reducing purchasing power relative to the real output of the economy. Perhaps wage rates have been doing something unusual relative to overall capacity of the economy to pay?

In this chart, when the line is rising (falling) private sector wage rates have been rising faster (slower) than nominal GDP per hour worked.

The orange line is the average for the couple of years immediately prior to Covid. As you see, the final observation (Q1 this year, as we don’t yet have Q2 GDP) is almost exactly at that pre-Covid level. Wage rates have not risen in any extraordinary way relative to the either prices or overall economic performance in the last year or two.

The gist of Hosking’s question was that if only workers now took lower wage increases the adjustment back to low inflation might be easier. At one level, I guess it just might, but only in the same way as if firms decided to increase their prices less (the CPI is, after all, ultimately just a weighted average of firms’ selling prices). But things don’t work like that, and it isn’t even clear that they should (there is a lot to be said for decentralised processes for both price and wage setting). As I noted in response, the labour market these days mostly isn’t a union leviathan confronting a combined employers’ leviathan, but a decentralised process in which individual firms and their workers make the best of the situations they find themselves in. Firms want/need to attract and retain staff and have to pay accordingly, and when employees have other options they can either pursue them or suggest they need to be paid more to stay where they are.

Core inflation is an excess demand phenomenon, which can be reinforced to the extent that people (firms, households, whoever) have come to fear/expect that inflation in future will be higher than it has been in the past (and whatever weight one puts on them that is what inflation expectations surveys are now showing). What we need isn’t firms or workers to be showing artificial “restraint” but the central bank to do its job, to adjust overall demand imbalances in ways that once again delivers core inflation sustainably near 2 per cent. Unfortunately, that can’t just mean heading back to things as they were at the end of 2019 when inflation was low, on the back of years of low inflation, but rising: achieving the reduction from 6 per cent to 2 per cent is the dislocative challenge.

Changing tack, as I mentioned yesterday one of the key things I will be looking for in the MPS today (more or less regardless of what immediate policy stance the Bank takes) is evidence of engagement with the question of why (core) inflation has come down so much in some (by no means all) other advanced economies and not in New Zealand.

To illustrate, here is the US trimmed mean CPI (monthly annualised)

The weighted median series looks much the same.

And here are the Bank of Canada’s annual core inflation measures

But it isn’t only in North America. Here are the Australian core measures (both now showing much the same story)

And yet here are the NZ measures

The trimmed mean appears to have fallen from a peak 18 months ago, but is hardly falling at all in the last couple of quarters, while with the weighted median it is not clear that there has been any reduction at all. Both are at levels a long way from the target midpoint.

At one level, perhaps the US and Canadian inflation reductions are less surprising. Their central bank policy rates are now at or above the pre 2008 peaks. By 21st century standards these are now high interest rates for those countries

New Zealand makes quite a contrast……but Australia even more so.

I don’t understand quite why core inflation has already clearly come down in Australia at what seem to be quite modest interest rates. If you look carefully at those core inflation charts you will notice that core inflation started rising two quarters later than in New Zealand, and now seems to be clearly falling more and sooner.

Relative to New Zealand, Australia has had a better run with commodity prices

And whereas Australia usually has a higher unemployment rate than New Zealand, at present they are roughly the same, suggesting that if anything Australia may have an unemployment rate further below NAIRU estimates than New Zealand does.

There must be good explanation for what is going on, for why core inflation has not yet fallen (as it has not in some other advanced countries) but to be persuasive such explanations need to be able to encompass credible explanations for why things have gone better (inflation fallen earlier and faster) in the US, Canada, and Australia. Those stories matters: on the face of it, the US and Canadian comparisons might suggest that the RBNZ has simply not done enough, but the Australian comparison (in an economy with a very similar Covid experience, and also a more similar labour market experience) might reasonably suggest the opposite. One sees stories from the UK and North America ascribing inflation to the low post-Covid participation rates, and (in the US) some easing in inflation perhaps being down to a recovery more recently in participation. But of these four countries NZ stands out as having the largest rise in participation (true even if some might discount the latest quarterly rise) and apparently (thus far anyway) the stickiest core inflation.

Perhaps the explanation will eventually be shown to have been some mix of “the cheque was in the mail” and “New Zealand data were published more slowly and infrequently than many other countries” – plenty of places already have July inflation data, in some cases July unemployment data, while we have only mid-May inflation and unemployment data, and have a two month wait for more.

Or perhaps there is more of an economic story. I hope the Reserve Bank can offer some serious analysis this afternoon.

The $11bn men and women of the MPC

Michael Reddell LSAP

Three months ago I wrote a short post here using some new data the Reserve Bank had started to publish on the monthly payments Treasury was making to the Reserve Bank as the losses were gradually realised on the huge portfolio of bonds the Bank and MPC had run up in 2020 and 2021 (the LSAP). It was to the Bank’s credit that they have started making the data available, and although there have been a few glitches since then, when I have got in touch they have been very helpful.

I can remember the days when I and a few others used to jeer at them for having lost $7 billion (and these numbers are a proxy – albeit an imperfect one – for big and very real losses for the taxpayer from the asset swap programme, executed at probably the single most inopportune time since interest rates were liberalised 40 years ago). Last year, the Taxpayers’ Union gave the Governor a lifetime achievement award for waste, citing then estimates of $8.5 billion of losses.

That was then. When I ran the first post in May total RB losses (now properly measured, with the indemnity payment data) had been bobbling just either side of $10 billion. With today’s update by the Bank of the relevant spreadsheet, here is the position to the end of July.

Yes, total RB losses from this grossly overblown under-analysed programme have now reached $11 billion (which was also the last total estimate from The Treasury I’d seen).

But, again, that was then, and in August to date bond yields appear to have risen another 20 basis points or so. As the portfolio slowly shrinks and the longest bonds are sold off first, the extent of further losses should diminish, but there is no sign we’ve yet reached the limit.

I’ve tended to focus in on the Governor as responsible, and there is little doubt that he is the dominant figure on the MPC.

But we shouldn’t forget the other internal MPC members who shared in the decisions to accumulate the risk:

Then Deputy Governor, Geoff Bascand

Then Assistant (now Deputy) Governor, Christian Hawkesby

Then Chief Economist, Yuong Ha

One has since been promoted and two have moved on, although with no hint that sharing responsibility for absolutely huge taxpayer losses was a part of either move.

More recently, Karen Silk and Paul Conway have joined the MPC. They weren’t there when the risk was taken on, but they have been part of the decision not to close it out quickly, and thus to continue to expose taxpayers to further losses.

And then of course, there are the three externals, all reappointed since the LSAP folly: Bob Buckle, Peter Harris, and Caroline Saunders.

And who reappointed them and Orr? Well, that would be the Minister of Finance and the Bank’s Board, the latter chaired by Neil Quigley, who has just proved you can apparently just make up stuff to Treasury, lead Treasury to lie to the press, and still carry right on as chair of a government board. In this country new depths of poor governance seem to be plumbed almost every week.

Finally, we shouldn’t completely exclude the Secretary to the Treasury from responsibility. She sits as a non-voting member of the MPC and she advises the Minister on things like indemnities and Bank performance. There is not even a hint (eg in the MPC minutes or OIAed papers) that she has ever dissented from the highly risky and costly LSAP intervention.

That is quite a list of people who share responsibility for losses that have now reached $2000 per man, woman and child in this country. Readers will reflect on just what nice-to-haves that politicians are now competing to bribe us with (with borrowed money) might have been considerably more affordable had the Bank stuck to the OCR which, boring as it may be, tends not to make or lose taxpayers much money at all.

I suppose one way of looking at that list of the responsible men and women is that if we averaged it out, the loss was a bit under $1 billion per responsible public figure. There wasn’t even a good party (as Mr Leauanae enjoyed on leaving MPP) just reckless waste and losses on a scale not seen in New Zealand public finances for a very long time.

And no one paid any personal price. There was no personal accountability at all. Most of these people still hold their high, and highly paid, offices. While you and I are covering the losses they so carelessly racked up. It is some slim consolation that one of them is up for election in a few weeks.

What should the MPC do?

Michael Reddell inflation, Monetary policy, MPC

There is a full Monetary Policy Statement from the Reserve Bank and its Monetary Policy Committee tomorrow. No one expects them to do anything much, but I’m less interested in what they will do than in what they should do. It is hard to be optimistic that the Committee will do the right thing at first opportunity – it mostly hasn’t for the last 3.5 years – but whatever is required will, presumably, eventually get done, perhaps after a prolonged dalliance with the alternative approach (if you think that cryptic, think $10-11bn of LSAP losses, entirely the responsibility of the MPC, and core inflation persistently some multiple of the target that had been set for them).

I wrote a post a couple of weeks ago looking at what had been happening to monetary policy and inflation across a bunch of advanced economies in the light of the complete suite of June inflation data. I’m not going to repeat all the analysis and discussion from there, and nothing very much has changed in the published data (for real nerds, still disconcertingly high Norwegian core inflation has come back down again after rising the previous month or two). But some key relevant points were:

  • as yet, there is no sign that core inflation in New Zealand is falling (and even if one measure it might be lower than the early 2022 peak there is no sign it is still falling now).  That is a quite different picture from some other advanced countries (notably the US and Canada, but also Australia).
  • employment appeared to continue to be growing strongly (and even confidence measures were stabilising),
  • New Zealand is one of a small handful of advanced countries where the policy rate now (5.5 per cent) is still well below the pre-2008 peak (8.25 per cent)
  • The MPC asserted at their last review that they were “confident” that they had done enough.  Neither those words, nor the idea, appear in the recent statements of any other central banks, and our MPC offered no reasons for their confidence.

Bear in mind that with core inflation around 6 per cent and the Bank’s target requiring them to focus on the 2 per cent target midpoint, there is a very long way to go.   It isn’t a matter of getting core inflation down by 0.5 or 1 per cent, but of a four percentage point drop.

Bear in mind too that whereas past New Zealand tightening cycles have typically seen total interest rates rises similar to what we’ve seen to date (a) the scale of the required reduction in core inflation is greater than anything we’ve needed to achieve for 30+ year, and b) unlike typical New Zealand tightening cycles there has been no support from a higher exchange rate.

What local data there have been in the last couple of weeks hasn’t given us any more reason for comfort.  Late last week, there were the monthly rentals and food price data.   The food price data did look genuinely encouraging, although it was a single month’s data in a part of the CPI that had seen inflation far faster than the core measures until now.  Rents, on the other hand, appeared to be continuing to rise quite strongly, with no sign of a (seasonally adjusted) slowing at all.

The suite of labour market data (HLFS, QES, LCI) was not really any more encouraging.  Labour market data do tend to be lagging indicators, but we have to use what we have.   4 per cent annual growth in numbers employed (comprised of four individual quarters each showing material growth) is absolutely and historically strong, by standards of past cycles the unemployment rate has barely lifted off the (extremely low) floor, and there is no sign of any slowing in wage inflation (remember that much of services inflation is, in effect, wage inflation).  There is seasonality in the wages data and SNZ don’t publish seasonally adjusted series but as this chart illustrates at best wage inflation might be levelling out, not much higher than the same quarter in the previous year.

To the extent the mortgage borrowers/refinancers tend to go for the lowest shortish-term fixed rate on offer, current two year fixed rates are barely higher than they were at the end of last year, and all the reports from the property market suggest a bottom has already been found and prices are already rising (still modestly) again.

And then there was the latest RB survey of expectations. Medium-term expectations of inflation actually rose a touch (one could discount the small rise, but we should have been hoping for a fall, especially as the relevant horizon date moves out each quarter). This group of respondents has consistently and badly underestimated inflation in recent years. The Reserve Bank has too, but it has done even worse than these survey respondents.

The survey responses regarding the inflation outlook don’t seem anomalous. The same respondents revised up their GDP growth forecasts, revised up their wage forecasts, revised up their house price inflation expectations, and revised down their medium-term unemployment expectations. They might be wrong – and often are – but are there good grounds for thinking the Reserve Bank is any better at present (in a period when no one really has a compelling model of what has happened with inflation – if they had, they’d have forecast it better).

You may have noticed that a couple of local banks think the Reserve Bank will raise the OCR later in the year (presumably a view that the Bank will eventually be mugged by reality). One presumes this predictions are best seen as a view that “more will need to be done”, rather than a specific confident prediction of 25 basis points being specifically what is needed. No one can be that confident (with 25 basis points). It may be that the MPC has already done enough (as they thought) or that it needs to do quite a bit more, but even in hindsight it will be very difficult to distinguish between the effects of a 5.5 vs 5.75% peak choice.

In the NZIER Shadow Board exercise, where respondents are asked what they think should be done, Westpac’s Kelly Eckhold thought that an increase in the OCR to 5.75 per cent at tomorrow’s MPS would be warranted (as does one other economist in the survey).

When I tweeted yesterday about the Shadow Board results yesterday I was still hedging my own position. I noted that I thought a least regrets approach – remember the MPC’s enthusiasm for such a model on the downside – suggested that it would have been better if the OCR had been raised more already.

That was deliberately an answer to a slightly different question than what I would do tomorrow if I were suddenly in their shoes, or (separate question again) what I think they should do. The actual MPC is somewhat boxed in by its own past choices (not just the “confident” rhetoric, but the absence of any speeches etc giving any hint of how they, individually or collectively, have seen the swathe of data that has come out since they last reviewed the OCR). To move the OCR tomorrow would bring a deluge of criticism on their heads, from markets and economists, but it would then be amplified greatly by politicians as we descend into the depressingly populist election campaign.

Since I think making the right policy adjustment (even amid all the uncertainty) is more important than communications, and since there is already reason to think the MPC has been playing party political games (its treatment of the Budget in the last MPS), I think they should raise the OCR anyway, by 25 basis points, and shift their forward-looking approach back to a totally data-dependent model, rather than trying to offer reassurances. Were I suddenly in their shoes, shaped to some extent by past choices, I would probably be wanting to indicate concern that core inflation was not yet falling, emphasising how far there was to go, and making clear that the real possibility of OCR increases would be on the table for both the October and November reviews (the latter the last before the MPC moves into its very long summer holiday).

To me, the issue now is not whether core inflation is going to fall. It seems most likely that it will finally begin to (and although overseas experience in by no means general, perhaps the US, Canadian, and Australia recent experiences offer grounds for hope) but rather how far and how slow the reduction will be. We need large reductions in core inflation, not just the beginnings of a decline, and two years into the tightening cycle we need to see large reductions soon. Perhaps it will happen with what has been done already, but that seems more like a hopeful punt than a secure outlook. One thing we should be looking for tomorrow, especially if the MPC does nothing, is some serious analysis illustrating their thinking as to why it is that core inflation here has not yet fallen (whereas, for example, it has in the US, Canada, and Australia). I don’t know the answer myself, but with all the resource at their disposal we should expect the MPC to make a good fist of a compelling story.

The world economy, and the travails of China, have got some attention recently. That global uncertainty will no doubt be cited by some, including around the MPC table, as reason for waiting. I’m not convinced, partly because over the decades I’ve seen too many occasions when such potential global slowdowns have been cited as an argument, only for them to come to not much. Relatedly, over the years one of the most important ways global events affect New Zealand has been through the terms of trade. A serious global slowdown might be expected to dampen the terms of trade (and thus real incomes and demand relative to the volume of domestic output) but…..

….New Zealand’s terms of trade have been trending down since Covid began, and quite sharply so since the start of last year. We’ve been grappling with an adverse terms of trade shock and have still had persistently high core inflation (and super-tight labour markets etc). There isn’t any obvious reason why the terms of trade couldn’t fall another 10 per cent (dairy prices have already weakened further in recent months, this chart only being to March), but if so it won’t be against a backdrop of recent surges of optimism (unlike the reversal in the recession in 2008/09). In short, there is plenty of time to react to really bad world events if and when they actually happen.

Finally, the immigration situation has materially changed the New Zealand macro position in the last year. In the June quarter last year, there was a net migration outflow of 2600 people. In the June quarter this year (June month data out only yesterday), the estimated net inflow was 20000 people (consistent with an annual rate of 80000 or so). The Reserve Bank is on record as saying it doesn’t know whether the short-term demand or supply effects are stronger (which is quite an admission from the cyclical macro managers) but all New Zealand history is pretty clear that – whatever the longer-term effects might be – in the short term demand effects, particularly from shocks to migration, outweigh supply effects. Without that effect, it might have been safe to assume enough had been done with monetary policy months ago. But not now, not against the backdrop of high and not falling wage and price inflation, strong employment growth, recovering housing market and so on.

Note too that the net inflow numbers are held down by the high and rising number of New Zealanders leaving. Outward migration of New Zealanders tends to be particularly strong when the Australian labour market is very tight (see 2011 and 2012), and if that market were to ease – as seems to be generally expected and thought to be required – the overall net inflow to New Zealand could surge again

Bottom line: I think the MPC should raise the OCR tomorrow, and certainly should flag October (once the Q2 GDP numbers are in) as live.

But all these views have to be held somewhat lightly. Doing that Shadow Board exercise (see above) myself, and it is something the Governor’s advisers at the RB used to have to do, I might distribute my probabilities as to what OCR is appropriate now something like this (none of those individual probabilities is higher than 20 per cent)

UPDATE:

In the comments Bryce Wilkinson points us to this. Having been in the weeds in 2007 I’m not convinced that on the information we had at the time an OCR of 10% was needed in Dec 2007. That said, an OCR of 4.3% in February 2022 would have been much better than policy as actually delivered. And note that an 8% OCR now would be close to the 2007/08 actual peak (as many other countries’ policy rates now are). Food for thought.

Laxity, or worse

Michael Reddell Uncategorized

Reading the hardcopy Herald over lunch I spotted an article under the heading “Ministry boss apologises over spend-up”, referring to Mr Leauanae, the chief executive of the Ministry of Culture and Heritage (MCH) as regards the events surrounding his farewell from his previous role as head of the Ministry of Pacific Peoples (MPP) and his welcome to MCH. This was the key bit

“on my watch”? He seemed to be trying to minimise what PSC had found had actually happened (written up in my post yesterday) and suggest that he himself hadn’t done much, but had after all just been the CE (so, in some sense, formally responsible but not really to blame). It was as if his wayward former underlings had done stuff that didn’t relate to him at all. What the PSC report actually described was Leauanae having accepted $7500 of taxpayer gifts himself at the farewell and then accepting $4000+ of travel for family members and friends for his welcome to MPP. (In addition of course to the rest of the extravagant $40000 spent in total on his farewell, as he moved from one small Wellington government department to another.)

As I noted on Twitter, one of the things the PSC report carefully never directly stated was quite when (a) the gifts were returned, and b) when the travel was reimbursed. It would have been easy for either the PSC report or Mr Leauanae to have given us specific dates, but they (obviously deliberately) chose not to. I have now lodged a couple of OIA requests to find out. Was it the day after the relevant events (say) or only after PSC started digging into the matter? The difference is likely to be quite important. If the former, one might take a more charitable view.

But the comments reported in the Herald prompted me to read the statement from Peter Hughes again more carefully. The lines Hughes will have been keen to see reported were

I thank Mr Leauanae for putting the matter right at the first opportunity.”

The “first opportunity” might suggest the day of the events or perhaps the day after. After all, as the full PSC reports note (carefully, without either evidence or further comment)

He advised it was always his intention to pay for his family and personal guests’ travel costs.

So on a casual reading you might have assumed it was all an oversight and was put right within a day or two.

But, from the Commissioner’s own statement, that can’t have been the case.

Perhaps the gifts really were returned very promptly (eg the night of the farewell function or at worst the day after), although the report/statement carefully does not give dates or times. (There is also that strange comment that he returned both the gifts and the money spent on them, which leaves questions as to whether the gifts had been able to be returned to the vendors for full refunds or not).

But that clearly wasn’t the case with the travel, because the second paragraph above says that it was the PSC review which uncovered the fact of this spending on Mr Leauanae’s family and friend’s travel, and that it was only in light of the review finding that he reimbursed MPP. And we know from the documents PSC released that they did not formally decide to look into the spending regarding the welcome to MCH until 19 June. That was eight months after the personal benefit to Mr Leauanae. That doesn’t seem even close to putting things right at the “first opportunity”, casts further doubt on Leauanae’s claim that he had always intended to pay for the travel himself, and strongly suggests someone with no strong sense of what is right and wrong when public money is being spent. Someone who still sits in a highly paid job as head of a New Zealand government department.

Peter Hughes was obviously somewhat constrained by the facts, but he consciously chose not to explicitly point out this timing, but to spin a story that would lead quick readers to think Leauanae had fixed things up straight away, not many months later only after the inquirers from his boss came calling.

Nothing in this story reflects at all well on Leauanae, and it really should be staggering that he goes on as a government department CE with, as far as the report suggests, no adverse consequences (he just repaid things when he finally got caught). Of course, it isn’t just the personal benefit, but the modelling and leadership (or lack of it) that will have led his former MPP underlings to think the lavish expenditure was ever acceptable, and the undisciplined processes etc reported last night in the Newshub story after they got hundreds of pages of documents from MPP. What gets you dismissed, or strongly encouraged to resign, when you hold a New Zealand government department CE role? Clearly not this record.

I’m also a bit surprised no one seems to have asked relevant ministers whether they have any confidence in Leauanae. In one of the weird bits of our legislation, they can’t sack him themselves, no matter (apparently) what he did, but the position of a CE would surely be untenable if the Prime Minister and the Minister of Culture and Heritage (as it happens the Deputy PM) indicated that they had no confidence in Leauanae. The PM has been reported as saying that the expenditure was unacceptable, but what of it? What is he going to do about it? He is, after all, the Prime Minister, and it is hard to believe that the Opposition parties will be leaping to the defence of Mr Leauanae.

Of course, it is always possible Hipkins and Sepuloni do still have confidence in Leauanae, even after what is already revealed about him (personal entitlement, weak and undisciplined financial management and people leadership etc). If so, that would be sadly telling. But you might have thought media outlets would at least ask whether they still have confidence in him, and if so why.

Laxity

Michael Reddell Uncategorized

Yesterday the news broke of the extravagant spending at the Ministry for Pacific Peoples (MPP), and to a lesser extent at the Ministry of Culture and Heritage, centred on the transfer from one division to another of the core public service of MPP’s then chief executive Laulu Mac Leauanae. In the spirit of the unified public service (all that stuff that Peter Hughes and Chris Hipkins touted), shifting from running one smallish unimportant department to running another one seems about on par with someone moving from one modest division of an indebted private company to another.

As the Herald reports MPP has already been a bit of an example of the extravagance with the public purse over recent year. A quadrupling in staff numbers for an agency with no clear or legitimate purposes….

In this example, staggering amounts ($40000) were spent on a farewell (for a person who’d worked for the Ministry for only five years), including extravagant personal gifts to the outgoing chief executive. Probably there was a case for a morning tea in the office (a cake and a few sausage rolls etc) or a drink after work for staff and a handful of outsiders. But it is hard to see a case for having spent more than a couple of thousand dollars in total. And impossible to see any case for (anything more than token) taxpayer-funded personal gifts…..the more so when the outgoing CE was just transferring to another wing of the same organisation.

And thousands of dollars spent by MCH on a welcome? What happened to simply turning up – at your new division of the same (government) enterprise – and starting work, with perhaps a staff morning tea or all-staff meeting at some early getting-to-know-you point? MCH has under 200 staff. Supermarket sausage rolls come quite cheaply. Four Governors started at the Reserve Bank in my decades there, and I don’t recall anything more extravagant for any of them (and in the earlier years the Reserve Bank was not a notably austere organisation).

You can read the Public Service Commission’s report and statement here. But what isn’t said there is at least as interesting as what is.

Starting with, how did PSC come to be so asleep on watch?

The farewell (and welcome) occurred in October. But this is the introduction to the PSC report

So either PSC didn’t even know about the event(s) – which frankly seems unlikely, unless they are even more slack than it seems – or no one there stopped to wonder just how much public money was being spent….until someone in the public asked. It is also pretty remarkable that MPP – by then under an acting CE – never thought of mentioning the OIA request to PSC until after the response had already gone to the respondent. As regards the costs of a farewell for one of the Public Service Commissioner’s CEs. And even when in mid January PSC decided to look into the farewell spending, it wasn’t for another five months that they thought to look at what had gone on as regards the welcome.

And that Herald extract above leaves one wondering just how much of all this we might have heard of the waste if it had not been for the written parliamentary question. Perhaps that is unfair, but the Commission’s approach was on display in a letter sent by the Deputy Public Service Commissioner on 17 January to the acting CE of MPP.

In that letter she states

my expectation is that the entire review process will be completed by mid to late February 2023. The final report will be published on the Commission’s website, but it will not identify any individuals by name and your agency will have the opportunity to comment on the draft report before it is finalised.

Not sure how she envisaged a report on a farewell for a CE naming no names but…. And it is August now.

Perhaps more concerning was this later in the letter

Which feels a lot like an attempt by PSC to stymie uses of key instruments of scrutiny and democracy (OIAs and PQs). It isn’t clear what OIA grounds they might have tried to withhold using……but with the OIA that rarely seems to stop agencies…..and PQs are questions from MPs to ministers, not matters that should be within the ambit of the PSC. The same text is in a letter dated 19 June from Peter Hughes to the MCH chief executive.

The PSC report has no reflections at all on PSC’s role or approach (or on any briefings they might have provided to their minister – at the time all this kicked off that was Chris Hipkins). In addition to the matters already touched on there was nothing at all about their own approach to agency oversight or to key appointments, that meant a culture developed in one or two of their agencies where spending of this sort happened. But of course to have done so might have been embarrassing for them, including because they had just promoted the CE, lauding him as a “sophisticated organisational leader” and not missing the opportunity to mention that expensive senior management course he’d recently done at Oxford. And yet his MPP senior management team not only thought it was okay to spend up big on his farewell (transfer) but (as the report documents) did so with no decent systems or budgets. The values and priorities of top leaders are well known by those beneath them. Nothing about this report suggests this CE preached or lived any sort of public sector frugality. But, never mind, he got the promotion……and holds the bigger job to this day.

Quite a lot else is glided over too. This is from the Peter Hughes statement

But neither here nor in the report are there any relevant dates. Mr Leauanae should simply never have accepted government departments paying for travel for his family members (tickets don’t just turn up), so reimbursing the cost when found out just doesn’t cut it.

Hard to see that sort of lackadaisical attitude being acceptable in anyone, at any level of the organisation. but……he was CE, displaying no sign of appropriate leadership at all. At best careless, at worst entitled (and note that the PSC report cites no evidence for his claim that “he always intended” to cover those expenses himself). And when did these refunds happen? A few days after the event, or only after PSC started digging? If it were the former it is highly likely PSC would have said so. Hughes refers to “the first opportunity” but the report itself does not.

And what of the gifts?

Many of the same questions arise? Surely on the day of the farewell, any public service leader should have expressed immediate extreme discomfort and returned all the gifts the same day? But there is no sign of any of that, and no indication that anything was returned before PSC started digging.

One could go on to note the sort of expenditure Hughes and the PSC seem to have no problem with. Recall that the welcome was to a transferring CE in a New Zealand public service department. As I said, a few sausage rolls and a welcome speech might seem reasonable. But not to PSC, which deemed all of this “moderate and conservative”

Sausage rolls and cup of coffee just don’t present the same challenges (or sheer waste). There was also this weird claim that somehow lavish expenditure was appropriate because

“In addition, the incoming Secretary was a Matai or chief, community leader as well as a public service leader.”

What he is or does in his private life is really neither here nor there (or shouldn’t be). You could be a hereditary peer, a billionaire, a generous philanthropist or whatever, and the fact remains that public money is being spent on a transfer of a public servant from one small agency to another.

In the end, the report seems to be largely a whitewash, at best slapping Mr Leauanae over the hands not even with a wet bus ticket but with a feather. He was found out, paid the money back after the event, and goes on to hold a CE position, in which if he ever utters words along the lines that public money should be used sparingly, rules adhered to in spirit as well as letter, staff probably scoff and go “one rule for you, and Peter Hughes’s favourites, another for the rest of us”.

But why should we be surprised? The twin cultures of entitlement and corruption, all accompanied by public sector bloat, are creeping ever onward. It is rare that any culprit ever pays a price – another Hughes CE took hospitality from an agency lobbying him to exercise discretion in their favour, and he went on to get a knighthood – and by their indifference we have to conclude that the government itself is unbothered.

As for the Opposition parties, they do part of their job in bringing some of this stuff to light and making a fuss now. But is there any sign of a robust open commitment to specific and much higher standards when their turn in government eventually comes? A CE who did what Mr Leauanae did (and allowed to happen) simply should not be still holding a government department CE job. That he is says that the standard now is not even “don’t get caught”. What standard is that for either other public servants? What sort of accountability to citizens and taxpayers?

There was a blackball on expertise

Michael Reddell MPC, Reserve Bank Board, Treasury

(This is a long post. The Executive Summary is that there was a bar on any active or future researcher on macro or monetary issues serving on the Reserve Bank MPC when it was established. Everyone accepted that this was so, and both the Minister and the Bank had defended the bar. Recently, the Reserve Bank Board chair Neil Quigley persuaded Treasury to state publicly that it had all been a misunderstanding and there had never been such a ban. None of the extensive documentation supports Quigley’s belated claims or explains Treasury’s willingness to champion his rewrite of history.)

About six weeks ago the ban that had been placed on anyone with current or likely future research expertise or interest in macroeconomics and monetary policy serving as external members on the Monetary Policy Committee was once again in the headlines. The Reserve Bank Board had just advertised to fill the two vacancies that will arise next year (yes, you might wonder why they were advertising now when it isn’t clear who will form the next government or what their expectations for the Reserve Bank might be, but leave that for another day). In the advertisement it was pretty clear that the former ban had now been lifted. If so, that was a really welcome step forward. The proof would still be in the sort of appointments eventually made, and the strong suspicion is that the more important (but unwritten) blackball is still in place – no one seriously likely to challenge the Governor or known for thinking independently was likely to be appointed. But it was a start. And would at least mean the Board and Minister were no longer open to the charge of having the only central bank in the advanced world (or most of the rest) where relevant expertise was a formal disqualifying factor from membership of a monetary policy decision making body. The list of former leading central bank figures internationally who would have been disqualified under such a rule is very long indeed.

I idly wondered what had led to the change.

The Herald’s Jenée Tibshraeny has done sterling work in giving this issue some of the coverage it deserved (where, one often wondered, were the Opposition parties), initially at interest.co.nz and now at the Herald. She asked what had gone on and got a surprising answer from The Treasury and the Minister of Finance. It had all, we were asked to believe, been a misunderstanding, and there never was such a restriction. Tibshraeny’s 21 June story is here. I wrote about the story, documenting how improbable these revisionist claims were, here. And then I lodged an OIA request with The Treasury.

To step back for a moment, the existence of this restriction was first confirmed in a response to an OIA I lodged with the Minister of Finance after the first MPC appointments were made in March 2019. The Minister’s response is here. A short Treasury report to the Minister, dated 29 January 2019 and signed out by the Manager, Governance and Appointments contained the following paragraph on the first (of two) pages (it was a covering memo relating to getting the Minister to send a paper to Cabinet’s Appointments and Honours Committee to make the MPC appointments)

It didn’t leave much room for doubt, and came as no surprise to me because what was written there was what I had been told some months earlier by a well-qualified academic who’d expressed interest in the possibility of an MPC role. Here is how I described in a post when the papers were first released by Robertson

I couldn’t use that information when the person first told me – and had to wonder if somehow they’d got the wrong end of the stick- but it informed the framing of my OIA. The person concerned was told of this bar as it applied to people like him by both the recruitment consultants the Board was using and by the Board chair himself.

Tibshraeny gave the issue coverage. Here was her 1 August 2019 story. There were scathing comments from former Reserve Bank Governor Don Brash, critical comments from Eric Crampton (and some of my post’s critical lines), as well as some comments from former Reserve Bank Governor Alan Bollard suggesting that perhaps all that had really been meant was not having people with “market interests”. But what really mattered were comments from the Minister of Finance himself and an official “Reserve Bank spokesperson”.

Here was Robertson

which sounds defensive and unenthusiastic, but certainly not suggesting that there was not a restriction, let alone suggesting that a Treasury official had simply made a mistake in that January 2019 report.

And from the Bank’s side

To the first paragraph one goes “of course” (as in, we don’t want MPC members also selling their wares to hedge funds etc at the same time), the second para is beside the point (the issue with the blackball was about research), and as for the third……..doesn’t that first phrase (“looser criteria…..”) read almost exactly like the words of the initial Treasury report. There was no suggestion at all that some Treasury official had just got the wrong end of the stick. Rather, as was their right (and job), they defended the stance that had apparently been adopted by the Board and the Minister. And while it was an anonymous spokesperson, there is absolutely no way those lines would not have been cleared with the Governor, and probably cleared with – but certainly advised to – the chair of the Board, Neil Quigley. Had Quigley then thought the Treasury report had misrepresented him or his Board, it would have been easy to have issued a clarifying statement.

And there the issue lay for a couple of years – there were no external MPC vacancies, and Covid overran everything. But in early 2022 the first terms of two MPC members were coming to an end. And in the margins questions were getting raised as to whether the blackball restriction was still going to be in place. Tibshraeny – who had talked to at least a couple of us – was on the ball again and went and asked both the Minister and the Bank about the specific restriction. Her story appeared on 19 February 2022.

There are no quotes from either Robertson or the Bank (presumably she just got responses along the lines of “no, there has been no change” rather than anything more enlightening).

Tibshraeny went further, seeking comment from others. This time she sought comment first from John McDermott former Chief Economist and Assistant Governor at the Reserve Bank.

And he wasn’t just speculating about the nature of restrictions. He had still been Chief Economist and Assistant Governor in the second half of 2018 when these policies and restrictions were being formulated, and is an active participant in email exchanges among RB senior managers on the sort of people who might be appointed (that were contained in the Reserve Bank’s OIA release to me in 2019 around MPC appointments). He disagrees with the blackball restrictions, but doesn’t suggest anyone misunderstood, because he will have known that it did represent the agreed stance of the Board and the Minister.

She also got comment from Craig Renney

Renney also knew the restriction was for real, and never suggests – even though it might have suited his former boss if it really had been so – that it had all just been an unfortunate misunderstanding by a Treasury official.

(As it happens, in that Reserve Bank OIA there is a copy of the questions for the interviews the Board sub-committee (Quigley, Orr, and Chris Eichbaum) conducted for short-listed candidates for the MPC. It is interesting, although not conclusive on its own, that none of them invite candidates to offer any serious thoughts on monetary policy, frameworks etc. Note also that Chris Eichbaum – a VUW academic with Labour connections – used to be quite active on Twitter, and was not shy of disagreeing with comments I made about the Board or monetary policy, and never once suggested that the blackball didn’t exist, that it was all just a mistake by a Treasury official. Nor, of course, has Orr – not usually a shrinking violet when he thinks other people have the wrong end of the stick.)

Anyway, all that was the public record until 21 June when the new Tibshraeny article appeared. These were the key lines

From Robertson

and from The Treasury

I’d lodged an OIA with Treasury (maybe should have lodged one with the Minister too, but didn’t so) seeking to understand why they had said what they were quoted as saying. I got the entire 111 pages back on Friday afternoon.

Treasury OIA reply Aug 2023 re the MPC research blackball

Perhaps it amused Treasury to let me know they read my blog since the very first document released (but probably out of scope) was this advice from the manager of the macro team to colleagues in the media and governance bits of Treasury.

The Treasury comments were prompted by this request from Tibshraeny

Note that her request was cc’ed to media people in the Minister’s office and at the Reserve Bank.

I’m not entirely sure where she got the idea from that the 2019 line had been an error, although she illustrates her point by reference to Bob Buckle. I dealt with that point in my June post

Since then Buckle has finally delivered a conference paper (which I wrote about here) but that is 2023 and there seems to be no doubt that the blackball, if it once existed, does no more.

And this was the official Treasury reply

And this was not something just cooked up at a working level by junior staff. Two Treasury DCEs appear on the relevant email chains, as does the comment that the draft would be cleared by the Secretary’s office and sent to the Minister’s office before it was finally released to the Herald.

All the claims here about the 2018/19 process are simply false. Senior Treasury officials seem to have allowed themselves to be gulled into taking at face value an attempt by Neil Quigley, chair of the Reserve Bank’s Board (and Vice-Chancellor of Waikato University) to rewrite history, all the easier for them to do as it seemed to involve simply tossing under a bus the former Treasury manager (who signed out that 2019 paper) who no longer works there.

There is bit more context in the first draft response prepared by the current Manager, Governance and Appointments and the Treasury manager who was responsible for macro policy in 2019 (Renee Philip)

Later in the release we learn that in March this year Philip had had a meeting with Neil Quigley

This is a strikingly uncurious email (from an experienced manager to the Secretary to the Treasury and to the Deputy Secretary, Macro), in which it appears not to have occurred to her that the Bank and the Minister had defended the restriction in public (more than once), or that people who had been in a position to know – McDermott and Renney – while disagreeing with the policy had never once suggested it was all a misunderstanding. Or that the Bank’s defence of the restriction had used very much the same words – re future appointments – as were in the now-contested 2019 Treasury report. (And although she had apparently read my posts on the subject had not internalised the report of a qualified person who had explicitly been debarred from consideration.)

Quigley also cleared the Treasury June 2023 statement. Here is what he had to say then

(Nick McBride is the Bank’s in-house lawyer)

So we are supposed to believe that a fairly hands-on Board chair (there are lots of emails from him in various OIAs) simply wasn’t aware until this year of lines Bank spokespeople had explicitly addressed in 2019 (and again apparently in 2022) about a process he had been one of the key players in. The Tui ad springs to mind.

But none of it rings true. Perhaps no one at the Bank saw the initial Treasury report when it was written in January 2019 (although it seems not very likely given that the paper trail shows active engagement with the Bank and Quigley re MPC appointments issues in late January 2019) but it is beyond belief that Renee Philip hadn’t seen it (even though her comments suggest the macro team only really became aware of the issue after the OIA release in July 2019) as not only does the paper trail show that the request from the Minister’s office for the paper came first to the macro team but there is an extensive trail of emails from that time (Jan/Feb 2019) on MPC appointment issues which typically have both the manager, macro and the manager, governance and appointments on them. It seems very unlikely the macro team did not see the final (short) report. And there is also no sign – in the paper trail or his later comments – that the Minister or his senior staff read the Jan 2019 report and said “no, no, you’ve misunderstood, I never agreed to any bar like that”.

But, as it happens, we have contemporary lines from Quigley from the OIA the Bank released to me in 2019.

Mike Hannah was at the time the Board Secretary. He records the Board’s discussion the previous day, in a summary to be sent on to the recruitment consultants, in which the observations from the Board included “an academic researcher active in the Bank’s areas would likely be conflicted”. And Quigley welcomes the summary with no cavils or suggested amendments. It isn’t exactly the same words as turn up months later in the Treasury report but it is strikingly similar to those words (which Bank spokespeople later defended). It also aligns with the report from such an academic who had engaged with the recruitment consultants and with Quigley himself at the time.

The snippet is also interesting because it illustrates that at this stage of the process neither Buckle nor Harris were in frame, and casts further doubt on Quigley’s 2023 claim that in 2018 the Board had actively considered active macro researchers. Buckle comes into the frame a little later in this email from Hannah to Board members suggesting names proposed by Bank senior management. Note that Buckle is treated as a “former academic with an interest in policy”, not as an active (macro) researcher.

Now, 2023 Treasury officials cannot necessarily be expected to have had all this at their fingertips (although the relevant OIA was sitting on the Bank’s website, and Treasury does have a heightened monitoring role re the Bank), but what staggers me is the lack of critical assessment of the Quigley story.

Now, as it happens that is not universally true. In the latest Treasury OIA we find

Leilani Frew is the DCE responsible now for the governance and appointments function (and Stella Kotrotsos’s senior manager). Her instincts look to have been quite right…..but there is nothing else in the pack suggesting she did anything with them.

There was also this

James Beard is the Deputy Secretary, Macro. His instincts, while more limited, also seem to have been right, but again there is no sign his unease went anywhere either.

If either Frew or Beard were junior figures perhaps you might not be surprised they were ignored, but these are two of the most senior figures in the Treasury. It doesn’t reflect very well on them or on the Secretary or her office (whoever finally signed the statement out). Or, for that matter, on the managers past and present involved in responding to Tibshraeny’s request. You hope the standards they bring to their economic and financial policy advice are rather higher.

But if senior Treasury figures showed themselves gullible and too willing to go along, they weren’t the ones who perpetrated this exercise in mendacity.

I’d really prefer there to be a charitable explanation of Quigley’s comments. Perhaps if it was the June ones alone one might put it down to being caught on the hop on a busy day – he has a fulltime job and universities seem to be in some strife – but those comments are substantially similar to ones he is reported as making to a Treasury official in a scheduled meeting months earlier. It is hard to see any credible explanation other than an embarrassed attempt to rewrite history (would you want to be remembered as the academic economist who was responsible for banning active or future researchers from your country’s MPC?). In Orwell’s 1984 the bureaucrats literally rewrote the old papers. Thankfully – and for all their limitations – we have the private media and the Official Information Act.

If I was Treasury I would be fairly deeply unimpressed (as well as somewhat embarrassed myself), and if I were Tibshraeny the idea that I had simply been lied to by senior officials (directly and indirectly) wouldn’t have gone over terribly well either.

Secondary teachers’ pay and the Arbitration Panel

Michael Reddell Education

Having finished yesterday’s post I wasn’t going to give any more thought to the secondary teachers’ pay offer, but for some reason I was curious about the terms of reference the Arbitration Panel had been given, and found myself in the final report of the Panel.

The salary bits of it (the bits I read) were fairly underwhelming to say the least. I’m left assuming that by the time the two parties agreed to arbitration (not really arbitration, but a panel by that name) they both really needed a deal (grumpy parents, election looming etc), and the panel was really just a fig-leaf to enable everyone to save face. If it led to a settlement, both sides could point grumpy stakeholders (eg teachers or Treasury/PSC officials) to the panel and blame them for whatever was not to like.

(When you think of arbitration, one usually thinks of an arbitrator making a final decision. In this case however, the Ministry of Education simply agreed to recommend to Cabinet whatever the panel came up with and the PPTA agreed to recommend it to their members. The decisionmakers were still free to decide, settle, or continue in dispute. As it is, Cabinet has gone along, and the decision now rests with the PPTA members.)

The panel was, in principle, free to recommend whatever it liked. But…..there were the “guiding principles” of the two sides included in the terms of reference

Two mentions of “Te Tiriti” and none of educational excellence, and nothing at all from the government side about recruitment and retention of an able group of secondary teachers (had the government really thought the union bid was out of line with labour market conditions it would have been natural for it to have included recruitment and retention as a key consideration – ideally perhaps the key consideration).

And then there were the panel members. The chair was a retired High Court judge, but the other two were real insiders. On the one hand (presumably from the government’s side), Tracey Martin their former Cabinet colleague now chair of NZQA, and board member of NZTA. Safe for the Ministry/government side you would suppose. And then there was Craig Renney, economist for the CTU but also former economic adviser to Grant Robertson, reputed to be keen on a political career himself, and (as we saw earlier this week) active partisan player in the election campaign that was just about to get underway. He didn’t seem like someone who was going to make life at all difficult for the Ministry/government.

Both sides had to agree to the make-up of the panel, but if you were an ordinary teacher there might have been hints there that things were unlikely to go your way, no matter what the substance of the teachers’ case (which, when all is boiled down really should come down to the question of whether pay and conditions are sufficient to attract and retain the desired quality of teachers).

That wasn’t really how the panel went about things though: instead the nebulous “fairness, equity and affordability” were to the fore.

Note too those comments in para 4.3. We don’t have the submissions (presumably an OIA could eventually winkle out the Ministry’s) but what follows will suggest the submissions were probably anything but……but the parties will no doubt have been glad to read this soft-soap stuff.

The report goes on to note that the PPTA sought increases, partly backdated, sufficient to match the increase in the CPI (actual and forecast) over the proposed 3 year life of the deal (from the expiry of the old agreement in July 2022), while the government proposed something substantially less (a cut in real salaries). The union is reported to have cited the following considerations

Some of which are (much) more convincing than others, but several of which seem like very relevant considerations worth testing.

But instead, the panel reports that the Crown’s response was along these lines

Nothing at all about the relevant labour markets but, basically, “the government doesn’t want big wage settlements” (no matter how much inflation their central bank had generated).

I’m not completely averse to affordability arguments. If your business is in deep trouble and it is a question of whether or not you will even be able to stay in business lines like “I know inflation has been high and other wages are rising a lot, but I simply can’t afford it” make sense and may resonate. Rather less so when the employer is firmly committed to remaining in the business (running high schools and paying their teachers). If you are going to be in the business come what may, and care at all about offering a quality product, you simply need to match the market, and debate should centre on how best to make sense of the relevant market data, details of implementation etc.

Centralised wage-setting may be a far less than ideal model generally, but….it is what both the government and the union seem to like.

When it got to numbers, the report tells us this

I would usually have fallen off my chair when I read the Ministry’s LCI try-on, except that…..just yesterday chatting about this issue to someone I said “I don’t suppose they were dumb enough to have used the LCI as a comparator. Surely not?” And that was before I knew there was an economist on the panel.

The Labour Cost Index is a stratified measure (good) so not affected by compositional changes, but it is not a measure of wage and salary rates. It is, by design, much closer to a measure of unit labour costs (respondents are supposed to adjust their responses for things like productivity gains). Unit labour cost measure can be very useful in their own right – for insights on competitiveness – but not for benchmarking wage increases.

SNZ publish a (stratified) raw measure of wage increases, the LCI Analytical Unadjusted series, which is a stratified measure of wage rates. You can see the difference in this chart.

I’m quite sure the CTU’s economist knows all about this data (probably the Ministry does too, but they had an incentive to spin).

And if you are doubtful of my point, here is a chart of the QES measure of average ordinary time hourly earnings (which has all sorts of compositional issues and so is a lot more volatile) and the LCI analytical unadjusted series.

The LCI analytical unadjusted measure might be a mouthful of a label but it is the measure to use for purposes like this. I used the private sector component of it in yesterday’s post, because private sector wages are more responsive to market forces, less constrained by political imperatives and rhetorical stances. The panel itself is just wrong: there is no merit to using the plain LCI in exercises like this.

But nothing deterred here is the panel

Like me yesterday, they use Reserve Bank May MPS forecasts. They extend the analysis to June 2025, which is sensible as that seems to be the end of the proposed contract period. This is what the chart looks like using the LCI Analytical Unadjusted series (note that both charts use private sector wages, because that is what the Reserve Bank forecasts).

If you happen to prefer the (noisier but better known) QES measure, on RB forecasts it will have increased 27.7 per cent over this period, a bit more again. (The panel does show a chart of the QES, LCI, and CPI, but because the LCI itself undershoots inflation – see above – this seems to be an exercise in distraction, compounded by their repeated attempt to call the LCI a measure of “wage rates”, which it simply is not.

(Set aside here the absurdity of negotiating future wage increases in a climate where no one has any very robust idea what will happen to inflation in wages or prices over the next couple of years, having all gotten the last couple of years so wrong. But…..the Panel was stuck with that model.)

Anyway, the panel continues

Both are garbled messes really worth nothing. For example, few workers will have had wage increases formally indexed to the CPI (then again few workers have mass multi-year collective contracts) but as the chart above shows, over the period both sides want to look at, and using the forecasts both sides seem happy using, private sector wage rates are expected to have risen more than the CPI. The Panel pats the teachers on the head and suggests it wouldn’t be good for teachers to have their pay increased with inflation – even though future contracts will be negotiated in future years – and instead it proposes to give them even less…..

The following paragraph is made worse by the fact that the panel fails to recognise that it is using the wrong wage measure, and that it is quite normal for wages over time to rise faster than prices (that, ultimately is what productivity growth does).

Then the panel does another exercise in distraction. Eschewing the CPI they drag up the Household Living Price Index.

As it says, there are price indices by income quintile. What it doesn’t say is that the increase in the HLPI for the income quintile 5 from June 2021 to now was 15.9 per cent, while the CPI rose “only” 13.8 per cent. It isn’t clear what the last 10 years average increase in the HLPI has to do with anything and of course, there are no forecasts for the HLPI – so the Panel just plucks out of the air a number that suits the bottom line they are trying to produce.

All of this might seem tediously mechanical. What, you might be asking, did they make of recruitment and retention arguments? The short answer is that they never even tried. Here are their own words.

Remember how early on the Panel praised the submissions as “high quality and comprehensive”. But on this core issue they seem now to be saying they weren’t even in a position to know whether the submissions were of high quality. And they simply chose not to engage on the substantive issue. If there is, was, or will be a recruitment and retention issue, or it goes away when this offer is accepted, that will be all by chance because the panel had nothing even to say, and didn’t even try.

So, the bottom line of all this was:

Panel wage increase recommendation to June 2025: 14.5 per cent

CPI increase over same period: 20.7 per cent

LCI (private sector) Analytical Unadjusted increase: 25.2 per cent

QES private sector ordinary time average hourly earnings increases 27.7 per cent

Those last three use (as the panel did) Reserve Bank forecasts to June 2025.

So the Arbitration Panel proposed not only a material cut in real wages of teachers, but an even more substantial cut in real teacher pay relative to pay in rest of the economy (private sector). The logic of their position must be that there was an abundance of able teachers, easily retained, and now (real) pay rates should be cut to bring the market more into balance. But, of course, they never engaged on the substance of that issue and show no sign of having thought about it at all.

And just in case you were thinking, well maybe professional pay has increased less than that of all private sector workers in recent years, well…I checked that too

There was a bit of a dip in the second half of last decade, but the Arbitration Panel was focused on the period since mid 2021, and there is nothing of interest in that relationship over that specific period.

This Panel report was simply a shoddy piece of work, clearly much more about politics (face-saving settlement) rather than serious in-depth analysis and thought. I’m not usually a champion of teachers, and the standard of education has clearly been slipping, but on the government’s own terms – they deny the decline – it just seems extraordinary that over a period in which private sector wages are expected to have at least matched inflation, their panel proposes a material cut in teacher real wages, without a jot of evidence (or apparent thought) that recruitment and retention for (capable) secondary teachers has become materially easier than for the labour market as a whole.

Presumably the teachers will end up accepting the recommendation. Maybe at this point they should (election, new fiscal stringency etc), but it hardly seems a robust long-term basis, and we can only look forward to whole new disputes two years hence (especially if, as is far from impossible, the Reserve Bank inflation forecasts they all relied on prove to have been too optimistic (low)). What will attendance, achievement, and recruitment/retention look like by then?

(Some longer-term charts are in yesterday’s post.)

UPDATE: Saturday

I found secondary teacher salary scales back to July 2009, and had a closer look at matching the various entry and maximum salaries for different levels of qualifications. These don’t matter for the current proposal, since it lifts all rates by a common 14.5 per cent, but it does over longer period.

G3 is essentially a teacher with a general bachelor’s degree

G4 is a teacher with an honours degree or subject qualifications in two subjects

G5 is, as it says, a teacher with a masters or PhD

Maximum pay rates for all 3 levels have increased by much the same extent (49.4%) since July 2009 so I’ve shown only the common increase in maxima. Here are real wages changes for secondary teacher entry level salaries and maxima, alongside the real increase in private sector wages (all, as above, using RB May 2025 forecasts for the final two years of the proposed teacher agreement).