Author: Michael Reddell

Natural resources and economic performance: Anthony Trollope’s observation

Michael Reddell Australia, New Zealand economic history

The great Victorian novelist Anthony Trollope (and senior public servant in the British Post Office) visited Australia and New Zealand in 1871 and 1872.  His son had become a New South Wales sheep farmer, so the trip was partly about family, and partly an income-earning opportunity to write a book about the Antipodean colonies.

Much of the material from the New Zealand leg of the trip –  two months travelling from Bluff to Auckland –  was reproduced in With Anthony Trollope in New Zealand 1872, edited by A H Reed, and published in 1969.  I read the book over the weekend (having dipped into it, and found some quotes on railways and the incentives facing officials and politicians, here).

In 1872, it was only 32 years on from the Treaty of Waitangi  –  as close as 1984 is today to 2016.  All the New Zealand and Australian colonies were young –  it was only 84 years since the Sydney penal colony –  and whenever I read about the period I’m struck by how rapidly development occurred in many of these places.

By 1872 New Zealand had already been through some turbulent times.  The 1860s had brought the South Island gold rushes, and the huge influx of miners, but they were also the time of the worst of the land wars in the North Island –  where the burden on manpower and government finances was so severe that one sometimes wonders why the British government persevered. Trollope records contemporary British estimates that the New Zealand “wars with the Maoris…have been declared by competent authorities at home to have cost England twelve millions [and] have cost that colony nearly four millions and a half”.   Nominal GDP for New Zealand is estimated to have been only £4.4m in 1859 and £16 million by 1870.    Fortunately for the New Zealand taxpayer, Britain bore most of the fiscal cost.

One of the issues often debated is the role of natural resources in explaining the wealth of nations.  Natural resources alone don’t make a country prosperous –  think Bolivia, Angola or Iran –  but it can help a lot, especially in a country with a fairly small population –  think Equatorial Guinea, Kuwait or Brunei.  The natural resources have always been there, but it takes technology, management. and capital to utilize them, and really bad governance can impede all of that, and see any gains rapidly dissipated.  Among advanced countries, I think there is little doubt that Norway (in particular) and Australia would not have reached their current living standards without the natural resource endowments their people and institutions have enabled those countries to tap.  I’m going to come back to the case of Australia in the next few days.

Trollope was writing about the situation in 1872, and he included an interesting couple of paragraphs (pp38-39) about what we might term a “natural experiment” –  contrasting the performance of the province of Otago (which at the time had its own provincial government, with quite extensive powers) with that of the colony of Western Australia.

I will quote a few words from a printed dispatch respecting Otago, sent home by Sir George Bowen, the Governor of the colony, in 1871 – “after the lapse of only twenty-three years” –  from the first settlement of the province, – “I find from official statistics that the population of Otago approaches nearly to 70000, that the public revenue, ordinary and territorial, actually raised thereon exceeds  £520,000; that the number of acres farmed is above a million; that the number of horses exceeds 20000; of horned cattle 110.000; and of sheep 4,000,000.  The progress achieved in all the other elements of material prosperity is equally remarkable; while the Provincial Council has made noble provision for primary, secondary, and industrial schools; for hospitals and benevolent asylums; for athenaeums and schools of art; and for the new university which is to be opened in Dunedin in next year”.  I found this to be all true.  The schools, hospitals and reading-rooms, and university, were all there, and in useful operation; – so that life in the province may be said to be a happy life, and one in which men and women may and do have food to eat, and clothes to wear, books to read, and education to enable them to read the books.

The province is now twenty four years old…. Poor Western Australia is forty-five years old, and, with a territory so large, that an Otago could be take from one of its corners without being missed, it has only 25,000 inhabitants, and less than one million sheep, –  sheep being  more decidedly the staple of Western Australia than of Otago. I do not know that British colonists have ever succeeded more quickly or more thoroughly than they have in Otago.  They have had a good climate, good soil, and mineral wealth; and they have not had convicts, nor has the land been wasted by great grants…  And in Western Australia gold has not been found.  I know no two offshoots from Great Britain which show a greater contrast”

Western Australia was settled a little before Otago, and was materially closer to Britain (making it cheaper to immigrate to).  The cultural backgrounds of the settlers were very similar, and both operated under British law and institutions.  And yet Otago had prospered and Western Australia had underperformed.  There seems little real doubt that natural resource discoveries –  gold primarily – was the difference at the time.

Natural resources very rarely make a country or region rich forever –  usually only human skills and capability do that.  The South Island gold didn’t last long, on any scale, and in time Western Australia would become a major exporter of mineral products –  which couldn’t readily be exploited with 1860s technology.  Today, partly as a result, Western Australia has around 2.5 million people, and the Otago and Southland regional council areas (roughly the old Otago Province) have around 270000 people.

TPP – are we really going to be better off?

Michael Reddell TPP

As a social conservative, I’m instinctively queasy about an international treaty being signed in a casino complex.  As an economic liberal, I’m almost equally queasy about a major economic treaty, claimed to improve standards of economic policymaking etc, being signed in the flagship building of a company for whom our government not long ago did a constitutionally questionable private deal.

But, of course, the real issues about TPP have nothing to do with the specific place where the agreement will be signed.  What is in the 6000 pages agreement is what matters.

New Zealand –  like other countries –  would, of course, benefit from free trade.  That is now pretty widely accepted, but for a long time it wasn’t.  Oddly, Andrew Little claims that Labour has been a party of free trade since it first formed a government in 1935.  He seems to have forgotten the whole panoply of controls on trade and payments imposed by that very government, and substantially re-imposed by the next Labour government (1957-60).   Savage, Fraser, Nash, Nordmeyer and Kirk –  whatever their other merits –  simply weren’t free traders.

But it is now generally accepted that free trade is economically beneficial  (accepted as rhetoric –  even though we still have self-defeating tariffs in place ourselves which (no doubt very slightly) unnecessarily lower our own living standards). TPP does lower some tariffs, and provides somewhat greater access for some products to some markets.  Those look like worthwhile gains, but this is nothing resembling free trade.  Not only do many of the barriers remain high, but this is a regional deal. It is a standard result in the trade literature that regional deals can end up making countries worse off, rather than better off.   In its report last year on trade agreements, the Australian Productivity Commission –  no haven of economic neanderthals –  made that point very strongly.

Our government recently published its own National Interest Assessment of the TPP deal.  It argues that the trade dimensions of the agreement will make New Zealand materially better off –  nothing transformative to be sure, but on the face of it worthwhile gains.  But how credible is the argument?  I wasn’t persuaded.

The NIA is in the nature of an advertorial –  a piece written by and for those who agreed the deal.  Of course they are going to say that the deal is in the best interests of New Zealand, and no doubt they believe it.    But as others have pointed out, it relies on modelling that was done (a) before the agreement was even reached, (b) assuming that the tariff cuts all benefit New Zealand (rather than those who import the products we sell, and (c) without any detailed analysis of the impact of the liberalisation of the non-tariff measures in the agreement.  And there is no mention of trade diversion, or of the increased complexity of the system as a result of the proliferation of regional trade agreements.  Perhaps the effects are small, but the issues should at least have been addressed.

Others have argued that the overall gains to New Zealand on the trade front are likely to be exceedingly small.  Those arguments look to have some force, but also need expert evaluation.  Any judgement around the likely economic impact of the trade aspects of the TPP agreement would be more credible if they flowed from a detailed analysis undertaken by an independent agency.  I’ve argued previously that the New Zealand Productivity Commission would be a good candidate.

If there are overall gains to New Zealanders from the trade liberalisation dimensions of the deal, they need to be weighed against what is in the rest of the deal.

I’ve touched previously on a couple of concerning, or just puzzling issues (here and here).  In a future financial crisis, the TPP agreement requires countries considering using direct controls to preference all flows associated with foreign investment over any other financial flows (including those relating to an identical asset owned by a resident).  Existing multilateral arrangements still look superior, and more flexible, than what is in the TPP.  And the NIA’s section on the investment chapter of the TPP does not deal with these additional constraints at all.

I wanted to touch on just two other aspects of the agreement, the investor-state dispute settlement provisions, and the labour chapter

When citizens are discontented with their government, they can either lobby to change the government’s mind or vote to change the government.  In some cases, they may have redress through the domestic legal system.  Our courts are –  mostly –  open, impartial and competent.  We have established rules of evidence, bodies of precedent, and appeal processes –  heirs to hundreds of years of British legal development. We even have processes for, in extremis, the removal of judges for serious misconduct.   Individuals and companies can both lobby governments.  Where judicial remedies are open, both can seek to exercise them, regardless of whether the companies are owned by New Zealand or foreign shareholders.   Companies can’t vote of course – whether New Zealand ones or foreign-owned ones.

It seems like a pretty good system.  It seems to have worked.  So why have governments been signing up to arrangements that allow  alternative remedies specifically for foreign investors?  TPP represents a substantial extension of the possible number of such suits (even if some of the procedures appear to have been improved from some of those in earlier agreements). To be clear, a foreign-owned company in New Zealand will have different remedies open to it than a New Zealand owned company operating in exactly the same business in New Zealand (and it is symmetrical: a New Zealand owned firm in the US would have  different remedies available to it than a US-owned firm doing exactly the same business).

The background to these provisions dates back several decades, and related initially to foreign investments in countries with distinctly questionable legal and judicial systems.  Perhaps there might have been a case for recipient countries to agree to such provisions (just as two private parties might agree that a contract will decided under the rules of another country’s law –  English law is a common example).  But even then, only perhaps.  As I noted last year, it wasn’t the way Britain went about things when it was the leading economy and leading capital exporter in the 19th century.  The British approach then was one of caveat emptor.

More to the point, these ISDS provisions have now become prevalent in deals among countries that have good domestic legal and judicial systems, and it is just not apparent what interest of the citizens of TPP countries is being served by having further extended the ambit of such agreements.  From a foreign investor’s perspective, additional options are always more attractive than fewer options, but why would the governments of our countries provide greater rights, and more remedies, to a company simply because it is foreign-owned? A Peruvian-owned grocery chain operating in New Zealand would have different remedies available than a New Zealand owned grocery chain operating in New Zealand.  I can see no good reason –  nor for the reverse favouritism (benefiting New Zealand investors in, say, Peru).  In the process of doing so we undermine the role of our domestic judicial systems, in favour of international bodies where there is little accountability, few or no appeal rights, and no real sense of the domestic environment.

The National Interest Assessment document, perhaps unsurprisingly, dealt with very few of these issues.  In particular, it does not once mention the role of domestic judicial systems, or make the case for different remedies being open to foreign-owned rather than domestic owned firms.  It does, however, note that although the New Zealand government has not yet faced an ISDS suit,  TPP may increase the risk of future such suits.

Unease about the prevalence of ISDS provisions doesn’t seem to be an issue where opinion divides on predictable ideological lines.  In the same report I mentioned earlier, the Australian Productivity Commission expressed its concerns about such provisions, noting among other things that in recent years 40 per cent of all ISDS cases have been taken against governments of advanced countries, presumably countries with fairly well-developed legal and judicial systems.  The Cato Institute, a high profile US think tank    self-described as “libertarian” (rather than promoting specific corporate interests), has been producing material sceptical of ISDS provisions for some time.  As one of their analysts put it quite recently, while noting that changes could be made to deal with some of the more egregious aspects of ISDS arrangements:.

But more fundamentally, we should rethink the need for the system. These treaties were designed to address a problem from decades ago that is fading from memory. What, if any, problems arise with foreign investment today? The most prominent one is probably lavish subsidies from governments that are regularly given to foreign investors, and international limits on such practices could be of value.

The final area I wanted to touch on is the growing role of international treaties etc in constraining domestic law and regulatory freedom.  As many commentators have pointed out, every international agreement New Zealand signs ties our hands to some extent or other.  But that simply means we should ask hard questions about the details of the treaties we are signing up to.  Again, this isn’t an issue that divides neat on traditional left vs right ideological grounds –  both sides can be equally suspicious of domestic political processes, and as enamoured of constraining governments in international agreements that make it harder to do things their own citizens might favour.  On the sceptical side, I have sitting beside me the January 2016 issue of the “right-wing” political and cultural magazine The New Criterion which has several articles worrying about the implications of the growing number of such agreements.

Much of the local debate around TPP appears to be around issues associated with public health, the environment, and the Treaty.   But I found the labour chapter interesting.  In this chapter we appear to be signing up to an international agreement to constrain countries’ flexibility around labour law across the TPP group of countries. Indeed, the government  –  which has itself done some modest reforms to increase the flexibility of labour markets –  celebrates this: in discussing the labour provisions the NIA begins “The Labour Chapter of TPP constitutes the strongest outcome on trade and labour contained in any FTA negotiated by New Zealand”.

But why should domestic labour laws be subject to constraints in international treaties?

The NIA goes on to note –  recall this is our own government speaking – that “it is inappropriate to encourage trade or investment by weakening or reducing labour laws”.  I was somewhat staggered when I first read those lines –  I seemed to recall that the government had made the case for its own domestic labour market reforms on the basis of promoting the competitiveness of the New Zealand economy.  And sure enough, here was the Prime Minister announcing National’s 2011 employment relations policy.

 “A flexible and fair labour market is critical for building a stronger and more competitive economy, and creating more real jobs,”

Does the government not, for example, recognise that a lower exchange rate improves the competitive position of New Zealand firms by, for a time, lowering the effective real wages of New Zealand workers?  Sometimes that is a vital part of successful economic adjustment.   What conceivable economic logic is the government using to support that idea that ability to amend labour laws play no part in shaping a successful competitive economy?

Similarly, why are we signing a treaty that appears to commit New Zealand to having a minimum wage?  What does it have to do with promoting free trade (or even investment)?   There are arguments to be had around the economic impact of minimum wage provisions, but not all countries appear to have such provisions (not even all advanced countries) and surely it should be a matter of choice for each country’s own domestic political processes?

I’m also a little puzzled how this chapter works. In a unitary state such as New Zealand, all labour law is national, but in federal systems such as the United States and Australia, much labour law is done at the state level –  and the TPP labour chapter appears to cover only federal labour market legislation or regulations in those two countries.

Much in this chapter  seems to represent bad and unnecessary policy – a proliferation of bureaucracy at best, and the totally unnecessary sacrifice of domestic policy flexibility at worst.

At the vacuous end of the spectrum are provisions like “each Party shall endeavour to encourage enterprises to voluntarily adopt corporate social responsibility initiatives on labour issues that have been endorsed or supported by that Party”.  In one sense, it commits each country to almost nothing.    But it will no doubt be used by empire-building (or even just risk averse) officials, and perhaps politicians, to spend more public resources developing “voluntary” codes of “corporate social responsibility” –  after all, if they had no such codes, or firms weren’t sufficiently encouraged to comply with them, it might open New Zealand to a challenge from another government, or firms in other countries.

And then we have provisions for Cooperative Labour Dialogue  and the new Labour Council (and its associated “general work programme”).  It isn’t clear why we would want to enter such arrangements even with other advanced countries, let alone with Vietnam or Peru.  A recipe for small and lean government it is not ( and I won’t bore readers by listing the items  (a to u) which the parties agree they might “caucus and leverage their respective membership in regional and multilateral for a to further their common interest in addressing labour issues –  except to note that “work-life balance” appears on the list, and corporate social responsibility pops up again).  Real resources will devoted to paying for all these new bureaucratic and political overlays.  It seemed laughable to suggest, as the NIA does (p22) that the additional cost of all the TPP institutional arrangements, outreach activities etc will be only $1m per annum, across all areas of government.

Now, I’m sure that the pressure for this labour chapter did not come from the New Zealand government but from the centre-left United States government  –  the front page of the US Trade Representative’s TPP page has always been sobering on that score (the unholy alignment of US labour interests and US-based businesses concerned to undermine the competitiveness of firms in emerging markets).  But what is our own government doing championing this additional overlay of domestic and international bureaucracy?  Perhaps it won’t materially alter anything specific the current government wants to do, but these agreements last a lot longer than the next 18 months, and have a way of evolving obligations and constraints that were not always apparent at the start.

So I’m left, so far, unconvinced by the case for the TPP deal.  The trade benefits seems likely to be small –  but without an authoritative independent assessment it is hard to know –  and set against those possible small gains are certain costs and risks, some in areas (such as our judicial system, and dispute settlement systems in society) that really shouldn’t be up for grabs at all.  Add in the additional overlay of an extension of bureaucracy around the 14 countries –  and the desire to spread those regulations to a widening group of countries –  in areas where regulatory competition seems more desirable than otherwise, and it doesn’t look like a deal that should automatically summon support from all thinking people.

It looks and feels like a deal that would better never have been agreed.  And if it falls over eventually because, for example, it can’t get past the US Congress –  or a future President refuses to even submit it to Congress –  New Zealand and other countries might be better off as a result.

Assuming the agreement does go ahead, our government argues that for New Zealand not to participate would risk isolating New Zealand, contributing to our economic decline.    Perhaps (and there might well be net costs to being outside a ratified agreement) although that argument might be more convincing if the last 70 years had not been a story of barely-interrupted economic decline, or if the government had a credible narrative for how to reverse that decline.  Nothing the current government, or its Labour-led predecessor, have done, looks to have been successful in even beginning to reverse  it.  But the growing burden of the regulatory state –  advancing domestically, and by treaties such as this, certainly doesn’t look like a way to reverse our decline.

Immigration effects and the OIA

Michael Reddell Immigration, OIA, Reserve Bank

The economic impact of immigration received considerable attention in the Reserve Bank’s December Monetary Policy Statement.  That made sense –  the net inflow (a small net outflow of New Zealanders and a large net inflow of foreigners) over the last year or so has been one of the larger net inflows seen for some time, and has led to an estimated population growth rate higher than we’ve experienced for decades.  Changes in immigrant numbers affect the labour market, the housing market, demand for government infrastructure etc.   A forecast-based monetary policy needs a good story about (a) what will happen to net migration, and (b) what the short-term economic effects of those immigration developments will be.  And making sense of what has already happened requires disentangling the various influences –  including those associated with changes in immigration.  It is particularly important in New Zealand, where the level of inward non-citizen migration is larger than in most advanced countries, and where the variability in the net flow of New Zealanders and foreigners is larger than most.  Watching the Republican debate the other day, I heard Marco Rubio argue that the US was the world’s most generous nation because it took around a million legal migrants a year.  That is about 0.3 per cent of the US population.  Our annual non-citizen residence approvals target is around 1 per cent of our population.

But reverting to the Reserve Bank view, the material in the Monetary Policy Statement and associated press conference wasn’t that convincing.  Here is what I wrote about it then:

I am also puzzled about the Bank’s stance on immigration, and the evidence base that lies behind it. The Governor is clearly at one with New Zealand elite opinion –  he told the news conference that he thought high levels of immigration were “a good thing for New Zealand” and that he did not think there should be any immigration policy changes.  Views differ on the long-term economic impact of immigration, and many certainly agree with him, but why was this a subject the Governor is commenting on at all?  Historically, the Reserve Bank has been studiedly neutral on the long-term issue, and focused (rightly) on the short-term cyclical implications.  Governors who use the platform they have been given to advocate their personal policy preferences in other areas risk further undermining support for the autonomy they enjoy in respect of monetary policy.

But even the Bank’s view on the cyclical impact of the recent high levels of immigration seems confused.  In chapter one (the press release) they assert that high levels of immigration have reduced capacity pressures and contributed to  a lowering of inflation (ie supply effects exceed demand effects).  In chapter 5, they produce a scenario about the impact of immigration staying unexpectedly high over the next year or two.  In that scenario they explicitly articulate what appears to be their latest new view, in which a change in immigration has no net short-term impact on capacity or inflation pressures (short-term demand effects are just matched by short-term supply effects).  There is no analysis in support of any of this.  And there is no engagement with their own past research, or with the consensus view of New Zealand macroeconomists going back decades that whatever the possible long-term gains from immigration, in the short-term the demand effects dominate the supply effects (which shouldn’t be surprising, since the per capita capital stock requirements of each new person are materially greater than one year’s labour supply).  It was only two years ago that they published a research paper which showed these results.

mcdonald rresults

Demand effects exceed supply effects in the short-run (of several years).

The Bank seems all over the place on these issues. Perhaps they have fresh new research on the issue, but they put out two new Analytical Notes this morning, and there was nothing on immigration. I have asked for copies of any analysis they have produced in support of their new view, including how it might relate to the 2013 research.

For decades, the Reserve Bank has been clear that the short-term demand effects of immigration outweigh the short-term supply effects in New Zealand.  That was typically the view of other macro forecasters, and it was also the consensus among New Zealand economists throughout the post-war period.  It isn’t surprising (modern economies need lots of physical capital – and building a house typically takes more than the value of a year’s labour) –  and it says nothing about whether or not large scale immigration is beneficial in the long-run.  But the Reserve Bank has now apparently changed its stance, while providing analysts, commentators, and the public no basis for their new stance.  Perhaps the new stance is correct, but we should be able to evaluate their arguments and evidence.

So on the morning of the MPS release, I lodged a request with the Bank for

Copies of any analysis undertaken by, or discussed by policy committees at, the Reserve Bank since 1 June 2015 about the determinants of net migration in New Zealand and the economic impact of immigration.  I am interested both in any material shedding light on the Bank’s evolving views around the balance between supply and demand effects of immigration (including any reflections on the ongoing relevance, or otherwise, of the results published in Chris McDonald’s 2013 Analytical Note) [from which the chart above is taken], and anything shedding light on the Governor’s comment this morning that the high level of net immigration is a “good thing” for New Zealand.

It wasn’t a “gotcha” request.  I assumed there must be some new modelling or research behind the Bank’s stance, and was keen to see it, and cover it here.  It was also surprising that a Reserve Bank Governor would comment explicitly on longer-term immigration policy so I wondered if they had new evidence, or were influenced by new evidence from others, to justify that stance.  I also drew the request quite narrowly, focusing on the previous two forecast rounds only, and not asking for emails.  I was quite genuinely interested only in either research papers (there just aren’t that many  in any five month period) or analytical pieces discussed at the Monetary Policy Committee (again, it seemed unlikely there would be many –  immigration not having featured in the Statement of Intent as a key aspect of the Bank’s research programme.   Moreover, since immigration had been a prominent aspect in the Monetary Policy Statement released just that morning, it was hard to imagine that any extensive investigation would be required to unearth papers, which had been prepared and discussed in the previous few weeks.  And as I noted the other day, the Reserve Bank has tried to convince us of how transparent it is around its  “policy objectives, policy proposals, economic reasoning, and of our understanding of the economy”, so it seemed reasonable that they would be keen to get any material out as soon as possible.

And since the Official Information Act requires agencies to release material “as soon as reasonably practicable” the naively optimistic strand that lurks within me wondered if I might get something by Christmas.  Silly me.

Instead, I had an email from the Bank just before 5pm last Friday –  the very last day of the 20 working days available to the Reserve Bank to respond.  I was advised that

The Reserve Bank is extending the time limit for a decision on your request to Monday 29 February 2016, as permitted under section 15A of the Act, because the request necessitates a search through a large quantity of information and meeting the original time limit would unreasonably interfere with the operations of the Bank.

That is certainly a statutory ground on which a deadline for dealing with a request can be extended.  But it is highly unlikely to be a legitimate argument in this instance.  As I noted, it is not plausible that there is huge amount of material.  And as for unreasonably interfering with the operations of the Bank, recall that these aren’t ancient historical papers, or about some obscure points of policy; they are recent papers directly relevant to the Bank’s primary function, where it prides itself on transparency.  And the OIA had already given the Bank extra time (since deadlines are automatically extended over the summer holiday period).

Frankly, I’m not sure what the Bank has to hide.

But it feels like deliberate stalling and, accordingly, I have appealed this decision to the Ombudsman.    I am beginning to worry that perhaps there is nothing there at all.

That would be a concern –  and especially from an agency which wants to convince us that its new charging policy is itself in the public interest [1], and indeed supports access to official information.

 

[1]  Somewhat curiously, despite the alleged need to “search through a large quantity of information” and the risk that doing so might “unreasonably interfere with the operations of the Bank”, there has not yet been any suggestion of a charge for meeting this request.

 

 

 

 

Unprecedented…in a sample of four

Michael Reddell Housing, Statistics

The Reserve Bank had an interesting brief issue of the Bulletin out yesterday, reporting the results of some fairly straightforward data analysis as to how house prices (more accurately, house plus land prices) have behaved over the last fifty years or so, and how prices in Auckland relative to those in other parts of the country have behaved going back a few decades.  It is almost wholly a descriptive piece, offering no views on why things happened as they did, and little on what those patterns might mean.

The author –  Liz Kendall –  has done to work to construct a quarterly series for each TLA and a range of regional indices, using QVNZ data.  It would be nice to have those indices generally available, but perhaps restrictions on the use of the QV data precluded that?

The author identifies six distinct upswings in real national house (+land) prices since 1965, and as she notes the recent one has been relatively muted (for the country as a whole) –  despite all the fevered talk of low interest rates driving prices higher, ignoring the fact that interest rates are low for a reason (weak demand at any higher rates).

There wasn’t much of a upward trend in real New Zealand house prices, as far as we can tell, until the last 15 or 20 years.

rb housing 2

There was a huge boom in the early 1970s, as some combination of very low real interest rates and very rapid inward migration drove prices up.  But that increase was fully reversed over the following few years as credit conditions tightened, real incomes came under pressure, and significant net outward migration relieved pressure on the housing (house+land) stock.  The lack of any strong trend is consistent with what we see in the advanced countries that have a much richer longer collection of historical data –  including Australia and the United States.

Kendall illustrates that house prices in Auckland have not always been that highly correlated with those in the rest of the country.  There is clearly a common element to house prices in the country as a whole, but there are times when each region- including Auckland – “does its own thing”.  For example, in the 2002 to 2007 boom real house prices rose by materially less in Auckland than they did in the rest of the country (taken together).  And in the last three or four years, Auckland prices have risen much faster than those in the rest of the country.

The punchline of the article appears to be this chart

RB housing 1

For the period since 1981 –   only 35 years –  it shows the ratio between Auckland house+land prices and those in the rest of New Zealand, and a moving average trend in this ratio.  The trend has no economic significance –  it simply smooths through the ups and downs in the actual data, and the more recent observations might end up being quite materially revised (up or down) as new data emerge (there are always “end point problems” with these sorts of filters).  The ratio is currently 22 per cent above this particular trend line, but when we look back 10 years hence who knows how large we will estimate that gap to have been.

I had just a few other thoughts on the article:

First, it was a shame that the authors did not look at Christchurch separately.    They look at an entity called “Greater Wellington” (Wellington, Upper and Lower Hutt, Porirua and Kapiti) but it is puzzling that they don’t even break Christchurch (an urban area of a similar population) out separately (just bunching it with Nelson, Dunedin and Invercargill), let alone look at a combined “Greater Christchurch” entity (Christchurch, Selwyn and Waimakariri).  At least in recent years, it has only made sense to think of the three TLAs together –  and price behaviour in that area has been distinctively different from, say, the rest of the South Island).

Second, it might have been interesting to see whether the differences between prices in other TLAs and the rest of New Zealand (perhaps excluding Auckland) were similar to, or different than, the pattern we observe in Auckland, including whether those patterns have been changing over the relatively short period under study.

Third, I would go easy on the word “unprecedented”.  In a short article, it is stressed several times that the gap between the increase in Auckland house (+land) prices and the increase in prices elsewhere in the country is “unprecedented”.  But they have regional data only since 1981, and in that period there have been a grand total of four upswings.  It is true that there is no precedent in the data, but there isn’t much data.

Relatedly, the article highlights how ill-served New Zealand is with historical economic and financial data.  That isn’t the responsibility of the Reserve Bank –  largely a policy and operational agency –  but it is a limitation that all users face.  Between the continued underinvestment in historical official statistics, and the lack of academic economists working on New Zealand economic history, and doing the leg-work to develop longer-run analytical series (as has been done for house prices in Australia, the US and various other countries), we have a relatively poor sense of what is normal or abnormal.  For example, it would be interested to know whether similar divergences occurred in the early 70s, in the post WW2 house (+land) price boom (when wartime controls were lifted), to be able to see what sort of regional divergences occurred during the Great Depression, and to be able to understand 19th century regional house price shocks (for example, the impact of the gold rushes on Dunedin prices, or of the land wars on Auckland prices).

The subtext in the Reserve Bank article is that what goes up comes down again.  In this article, it isn’t a particularly powerful point (and, in fairness the article doesn’t make much of it directly), since there will always be times when one region or another (even the largest) lags behind house price inflation in the rest of the country.  But there is no natural equilibrium  relationship between Auckland prices and those in the rest of the country –  as experience in the US demonstrates, it is mostly a matter of policy choices.  With weaker immigration and more liberal land-use policy around Auckland, real Auckland house+ land prices could be much lower absolutely, and relative to the rest of the country than they have been in recent years.  Many cities much bigger than Auckland in the US have house prices much cheaper, relative to surrounding areas, than Auckland does (I stayed recently with some friends in a small college city in the middle of the US where house prices were higher than those in the nearest, fairly prosperous, city of a million or more).

Finally, on the housing sector, SNZ released building consent data yesterday, completing the data for 2015.  The authors of the press release pointed out that the number of residential consents was the ninth highest ever –  which isn’t very impressive, since most macro series reach their highest or maybe second highest level each and every year.  What wasn’t pointed out was the way New Zealand’s population has increased –  not only is stock of people living here much higher than it was in previous housing booms, but the population increase over the last year or so has been larger –  even in percentage terms –  than at any time for decades.  Unfortunately, we don’t have an official population series that goes back prior to 1991, but using one of those from the international databases, here are residential building permits per capita since the series the mid 1960s.

residential building permits per capita

 

Last year’s building permits per capita were only just back to the average for the last 35 or so years –  even though the fast rate of population growth might normally have suggested, in a less regulatorily-impeded market, that consents per capita might have been considerably higher than the average over that period.

Which countries have been seeing export growth?

Michael Reddell Exports, New Zealand economic performance

No one really doubts that over the longer term a better performing New Zealand economy –  absolutely or relative to the rest of the advanced world  –  would be likely to involve faster growth in exports.  It isn’t that exports are a special or unique type of product, or that tax breaks or other regulatory distortions should be put in place specifically to target exports.  It is simply that the rest of the world is a big place, and New Zealand is a small one.  The best prospects for high living standards here, at least for any given size of population, involves successfully selling more stuff to the rest of the world (which enables us to consume lots of stuff produced efficiently in other places).  The idea is implicit in the government’s own target to see exports as a share of GDP rise from around 30 per cent to around 40 per cent over the next decade or so.  But the general notion isn’t original to this government –  it has been a feature of New Zealand economic debate, and aspirations, for decades.

New Zealand hasn’t done particularly well on that score – nominal exports as a share of nominal share have barely changed over the last 25 years.

exports to gdp

Nominal export values are, of course, thrown around by fluctuations in export prices –  a particularly important consideration for a commodity exporting country.

But what about export volumes?  I dug out the OECD’s quarterly data on real export volumes.  I had a look at what had happened to export volumes for OECD countries (plus Latvia and Lithuania) since the end of 2007.    There is no ideal starting date, but the end of 2007 is just prior to the widespread recession of 2008/09, and in many countries export volumes slumped during the recession and subsequently recovered and I wanted to avoid those short-term fluctuations..

If we look at total export volume growth since the end of 2007, New Zealand doesn’t look too bad.  Total export volume growth was a little faster than for the G7 countries taken together, although a little slower than the EU countries or the euro area.  When one allows for the rising role of global value chains, which have boosted gross cross-border trade in many European countries (and which aren’t a feature of commodity trade), perhaps New Zealand’s performance doesn’t look too bad.

real exporrt vol growth

But, of course, New Zealand has had much faster population growth than most OECD countries – in some sense then we’ve needed more export growth than, say, a country with no population growth might have needed.  The OECD doesn’t have quarterly per capita data, and tracking down quarterly population estimates for many countries would take more effort than I have time for at present.

Instead, this chart simply subtracts the growth rate of real GDP since 2007 from the growth rate of real exports over the same period.   On this indicator, we are right back towards the bottom of the OECD.

gap between X and GDP growth

It isn’t necessarily a surprising result.  On the one hand, we’ve had to divert real resources from other activities to undertake the repairs and rebuilding in Christchurch. And on the other hand we have chosen –  as a matter of active policy –  to increase the population quite rapidly, which meant that resources that might otherwise have been able to be used to grow export businesses (at a probable lower real exchange rate) have had to be used to build the domestic capital stock (public and private) a higher population needs.

But if it shouldn’t be a surprising result –  just a logical outcome of shocks and choices –   it certainly isn’t one suggesting we’ve made any progress towards positioning New Zealand to begin to close the gap between our productivity and material living standards and those in the rest of the advanced world.

One difference between a transparent central bank and the Reserve Bank

Michael Reddell Reserve Bank, Transparency

The Reserve Bank constantly tries to convince us of how transparent it is.  As Deputy Governor, Geoff Bascand, put it in his first on-the-record speech

The Reserve Bank is deeply committed to transparency – of policy objectives, policy proposals, economic reasoning, and of our understanding of the economy, and of course of our policy actions and intent. Clear communication and strong public understanding make our policy actions more effective.

We are working to enhance the openness and effectiveness of our communications

Just recently, the Bank even had the gall to argue that its new charging regime for official information requests would support this; it “helps the bank fulfil the OIA in making valuable information publically available”.

I’ve illustrated on numerous occasions just how relatively un-transparent the Bank now is, whether in respect of monetary policy, financial regulation, or indeed its own corporate and governance activities.  In some ways and some areas the Bank has got worse, while in others it has just not kept up with best practice –  whether in other government agencies (especially those exercising regulatory functions), or in international central banking.

This won’t be a lengthy post.  It was prompted by reading a recent blog post by Dan Thornton, a former senior researcher at the Federal Reserve Bank of St Louis (and a very stimulating visitor to the Reserve Bank).    One of the features of the Federal Reserve system is that minutes of the FOMC meetings are released, and in addition full transcripts of those meetings (whether in person, or by conference call) are released five years after end of the relevant year.  You can see all the 2010 material the Federal Reserve has released here,  all readily accessible and nicely laid out.

Researchers and commentators use this stuff.  Here is the link to the post I was reading.  Thornton looks at one aspect of March 2009 FOMC meeting, a discussion around the wording of the statement that would be released.    For anyone interested, here is the heart of his discussion.

thornton

My point is not to take one side or other of the debate at the FOMC, but simply to illustrate the sort of openness that exists in the US, even with a lag, and contrast it with the situation in New Zealand.   It took me months last year to get the Reserve Bank to release the background papers to a ten year old Monetary Policy Statement – and I didn’t even bother asking for the minutes of the meetings, or the written advice to the Governor on the OCR, or any records of debate over the press release (all of which is official information, with a statutory presumption in favour of release).  Even that didn’t prompt a change in regular practice –  and if someone asked again now, for 10 year old papers, they would no doubt face a substantial charge.   Citizens and researchers, and even MPs, have no insights into the Reserve Bank’s processes or internal debates, beyond what (very little) the Governor chooses to publish in the MPS.  And the level of transparency around other Bank activities is even worse.  

The Federal Reserve isn’t perfect by any means –  and has fought transparency around, eg, its lending activities during the crisis –  but the contrast with the Reserve Bank of New Zealand is striking.

Grudging adjustment – yet again

Michael Reddell Monetary policy, OCR

Once again the Reserve Bank and its Governor have started backing away from a view that interest rates are low enough to get inflation back fluctuating around the 2 per cent midpoint of the target range –  the focus the Governor and the Minister agreed on just over three years ago.

Two years ago, with the OCR at 2.5 per cent, they were gung-ho on the need to raise the OCR – quite openly asserting that they expected to raise the OCR by 200 basis points.  From the January 2014 review:

The Bank remains committed to increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point.

As late as December 2014, with the OCR now at 3.5 per cent they still thought

Some further increase in the OCR is expected to be required

By June last year, they had belatedly started cutting the OCR, and then thought only perhaps 50 basis points of cuts would be required.

By last month, they had got to 100 basis points of cuts, fully reversing (at least in nominal terms) the 2014 increases.   While not totally ruling out the possibility of further cuts they observed of the target midpoint that

We expect to achieve this at current interest rate settings

Today, that optimism has gone and we are back to

Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range.

I guess that is their bottom line, and I suspect the forecasters are giving the Governor little reason for much optimism.  No doubt the “over the coming year” is designed to discourage people from focusing on the March Monetary Policy Statement, but as ever the data flow will determine that.  Most likely, the Governor will have to shift his ground yet again – as he continues, for year after grinding year, to be over-optimistic about the likely rebound in inflation and (indeed) about the strength of the (per capita) economy.

But he must be a bit torn.  Almost everything in today’s statement that deals with what has already happened would be pointing towards further OCR cuts (weaker global growth and rising uncertainty about it, falling international commodity prices, continuing weak New Zealand export prices, and weak inflation here and abroad).  Add to that the Governor’s continuing unease about the exchange rate –  when it weakens it is usually a sign of weakening economic prospects, but the Governor still thinks it is too high.

So he seems to rest his case on two arguments.

The first is that New Zealand’s inflation rate isn’t very low after all.

 Headline CPI inflation remains low, mainly due to falling fuel prices

But that just isn’t even factually accurate.  The target inflation rate is 2 per cent, and the latest headline inflation rate was 0.1 per cent.   But the inflation rate excluding petrol prices was 0.5 per cent.  Excluding all vehicle fuels and household energy costs it was 0.6 per cent.  And if we take something like the common international ex food and energy measure, SNZ tells us that inflation excluding food, household energy and vehicle fuels was still only 0.9 per cent last year.

And it isn’t government charges or tobacco taxes either –  as I noted last week, in highlighting that the inflation rate is the lowest in 70 years –  the impact of higher tobacco excise taxes and cuts in government charges totally offset each other in the last year.

Everything seems to rest on the Bank’s sectoral factor model measure of inflation –  which, as I noted last week, has increased somewhat to 1.6 per cent for 2015.   This has been the Bank’s preferred measure of core inflation over the last few years,  but it is quite unusual for a model estimate measure of core inflation to make it into the OCR press release.  Indeed, I went back quickly and looked at the OCR press releases since the start of 2013, and not a single one of them referred to a core inflation measure, let alone quoted a specific number.

The idea behind the sectoral factor model is sound, but it seems rather bold for the Governor to put so much weight on this particular measure when it seems to be at odds with the other indicators of underlying or core inflation.  I’ve already quoted some of the exclusion measures (the CPI ex petrol, or whatever), but the other core inflation measures on the Bank’s website have also been flat or falling.  At the other extreme, the trimmed mean measure of inflation was only 0.4 per cent last year.  Oh, and inflation expectations –  survey measures and market ones –  have been low and falling.

I’m not sure what the “true” measure of underlying inflation is –  and neither is the Governor –  but I don’t think the overall balance of indicators should be giving the Governor any reason for confidence about the current situation of the inflation rate relative to target.  It certainly isn’t all about petrol.

The Governor also apparently remains optimistic about a re-acceleration in economic growth in New Zealand:

growth is expected to increase in 2016 as a result of continued strong net immigration, tourism, a solid pipeline of construction activity, and the lift in business and consumer confidence.

But….even if immigration remains high, that only maintains growth  rates and doesn’t provide a basis for any acceleration (especially as the Bank in its most recent MPS announced its conversion to a view that immigration did not put any net pressures on demand, even in the short-term –  a change of heart which they have still not justified, or released any supporting papers for).  When I last looked, international guest nights growth looked to have levelled off quite markedly in the second half of 2015, and any lift in business and consumer confidence still looks quite modest (and certainly hasn’t taken any of the measures back above where they were earlier last year).  And all that is before we take into account the continuing weak international dairy prices (weaker than the Bank, and most producers will have been expecting), and the increasingly difficult international environment.    There is plenty of volatility in quarter to quarter GDP growth rates, and plenty of revisions too, but there doesn’t seem to be much there to give us confidence that economic growth in New Zealand will pick up materially, if at all, this year.   And inflation was already weak, and weakening, even when the economy seemed stronger, and income growth higher, 12 to 18 months ago.

Yet again, the Governor is behind the game –  grudgingly adjusting his line to barely keep up with the deteriorating flow of domestic and international data.  We might worry less if the weak inflation was the result of strong and resurgent productivity growth, but there is no sign of that either.  Instead, we’ve been left with an anaemic recovery and a high unemployment rate (rising over the last year).  Not everything is down to the Reserve Bank’s failures, but the Governor’s choices haven’t helped –  monetary policy is designed to deal with demand shortfalls.   The Bank should be held more forcefully to account for those choices.

In closing, I was sobered to look at the inflation rate ex food and energy.  New Zealand’s is 0.9 per cent.  That for the euro-area is 1 per cent.  The gap isn’t large, but with plenty of policy room at the Reserve Bank’s disposal, they really should have been able to keep inflation a lot closer to the target midpoint than the ECB –  grappling with the zero bound, and all the existential issues weighing on activity, demand and investment in much of the euro area.

An independent Policy Costings Unit?

Michael Reddell Fiscal policy

The Green Party co-leader Metiria Turei yesterday called for the establishment of an independent Policy Costings Unit within The Treasury.

Today, the Green Party has sent a letter to each party leader, asking for support from across the House to establish an independent unit in the Treasury to cost policy promises.

Political parties could submit their policies for costing to this independent unit, which would then produce a report with information on both the fiscal and wider economic implications of the policy.

Instead of New Zealanders making their decisions based on spin and who can shout the loudest, they will have meaningful, independently verified information instead.

And here are some of the details of what the Greens are proposing.

greens pcu
I don’t think this is an ideological issue at all.  The National Party is opposed, but the Taxpayer’s Union –  generally sceptical of any proposals to spend more public money, and generally a bit more towards the right of politics than the left – has come out in support of the proposal.

 Taxpayers’ Union Executive Director, Jordan Williams, says “We agree with the Greens that an independent office to cost political promises would be good for democracy and public policy debates. While our preference is to have the office as one of Parliament, rather than Treasury, the Green’s policy has real merit.”

“Seldom does the Taxpayers’ Union call for new spending of taxpayers’ money but here we think the benefits to transparency and democracy far outweigh the cost.”

“This tool would make it harder for politicians to make up expensive policy on the hoof with taxpayers bearing the costs of the wish-lists. It would likely prevent the fiasco we saw with the Northland by-election bribes.”

Like the Taxpayer’s Union, I reckon that if New Zealand is going to establish such a unit it should be done as an office of Parliament, and I wonder why the Greens chose not to take that option.  Perhaps they took the view that such a unit would be cheaper if it operated within Treasury (drawing on the corporate functions of a larger organization).  But even if that were true, I suspect it would be a false economy.

If it is worth establishing such a body at all, it is worth doing it properly.  That means establishing a body with its own mission and esprit de corps, and staffing the organization with people who sense that their primary responsibility is to Parliament and to the political process, not with people whose career is advanced primarily by their performance within Treasury –  a line department that answers to the government of the day.  I’m not suggesting that people in a quasi-independent unit in Treasury could not do the job with integrity –  after all, Treasury at times provides secondees to the office of the Leader of the Opposition, and it hasn’t obviously tended to hurt those individuals’ careers on their return to the Treasury (one is now the State Services Commissioner, and another was the previous Secretary to the Treasury).  But the role would be better done by a properly independent body, able to attract someone of sufficient standing and authority to lead it (heading this sort of unit is not just a section manager’s job).  And if it were to established as an adjunct to any existing agency, I would probably suggest the Productivity Commission –  at arms-length from day-to-day politics –  rather than Treasury.

But is it worth going down this track?  I’m still ambivalent.  I don’t think there is enough thoughtful scrutiny of macroeconomic policy issues in New Zealand (and touched on some of that here), and before the Greens proposal goes any further it would be worth looking carefully at what is done in other countries.

I can think of two highly-regarded examples, from two quite different political systems.  In the Netherlands, the CPB has, for decades, provided costings for political party proposals.  Although it is not compulsory for parties to seek such costings, I understand that it has become the norm for them to do so –  an equilibrium, which looks (on the whole) like a good one.  The CPB is very highly-regarded and does a wide range of other work (not just electoral costings).  It is administratively a part of the Dutch Ministry of Economics Affairs (but with protections for its independence).  The CPB was founded in 1945 and had already functioned at arms-length from the government for decades before it began providing political party costings.  The CPB has more than 100 staff (not all doing political costings).

And in the United States, the Congressional Budget Office also plays a highly-regarded role as non-partisan “scorer”.  It is a quite different political system, and the role is not about scoring party promises doing into an election campaign, but in evaluating the fiscal implications of legislative proposals.

Both the CPB and CBO are highly-regarded.  I’m not sufficiently familiar with Dutch politics to offer any thoughts on how much impact the CPB costings have on retail politics in the Netherlands –  and I imagine that views differ anyway.  But regardless of technical capability and impartiality of the CBO, US fiscal policy and legislative processes don’t look overly attractive.  Of course, in a huge country there is cacophony of voices –  more or less expert –  and so it might be unreasonable to think that any publically-funded independent agency would make much difference to the debate.

What about the other Anglo countries –  the UK, Ireland, Australia and Canada?

The UK and Ireland have both established fiscal councils in recent years, and there have been calls for those agencies to be given a mandate to cost political party promises.  To date, neither country has altered the mandates of the fiscal councils (which are more macro in their focus).

Canada and Australia have each relatively recently established a Parliamentary Budget Officer.  The (fairly small) Canadian office does not appear to do political party costings (but can, on request of an MP, evaluate the cost of a proposal before Parliament), but the Australian PBO  (with about 40 staff) does make that facility available.  But here is the important thing –  politicians have been reluctant to use the facility, and there has been no obvious public backlash more or less compelling parties to have their policies evaluated by the PBO.   I’m not entirely sure why, but it is an alternative equilibrium to the Dutch one.  Which model would hold in New Zealand?  Perhaps, given resourcing constraints, smaller parties might use the Treasury office the Greens propose, but the proposals of the smaller parties generally matter less than those of the major parties.  Would Labour, or National in future when it is in Opposition, use the facility?  I don’t know.

Why might politicians be reluctant to have such a agency evaluate their policies?  Yes, there might be cynical reasons –  the proposals are just too expensive and parties don’t want that cost authoritatively exposed.    But there might be other reasons.    In the end, people often don’t vote for one party or another on the basis of detailed costings, but on “mood affiliation” –  a sense that the party’s general ideas are sympathetic to the broad direction one favours.  And I can’t think of a New Zealand election in my time when the results have been materially determined by the costings (accurate or inaccurate) of party promises  – perhaps in 1975 National might have won a smaller majority if the cost of National Superannuation had been better, and more openly, costed, but I doubt it would have changed the overall result.

And then, of course, there is the fact that economists, and public agencies largely made up of economists, have their own predispositions and biases.    The Economist touched on this issue quite recently.  It isn’t that economists are necessarily worse than other “experts”, or that people consciously set out to favour one side or another in politics, but (say) whatever the merits of the sorts of policies the Greens have favoured, it is unlikely that the New Zealand Treasury (1984-90) would have evaluated them in ways that the Greens would have found fair and balanced.  Perhaps ACT might have the same reaction to today’s Treasury?  If it were only narrow fiscal costings an agency was being asked to evaluate, perhaps these predispositions of the analysts would not matter unduly (although even there, much depends on the behavioural assumptions one makes), but the Greens’ proposal includes analysis of the “wider economic implications” of policy proposals.

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

At very least, though, if this interesting proposal is going to go anywhere, it should be underpinned by a more in-depth analysis of the experiences, and contexts, of other countries.

 

Charging for official information

Michael Reddell OIA

Debate over the Reserve Bank’s new charging policy has continued.  Under a heading “The perils of user-pays democracy” Bryce Edwards had a nice summary of the articles and commentaries that had appeared by late last week.  And since then the flow has continued –  including a Rob Hosking piece in NBR, a Dominion-Post article about, and interview with, the new Chief Ombudsman, and an op-ed this morning from Bronwyn Howell at Victoria University, run alongside the hard-copy version of Geoff Bascand’s defence (that first appeared last week).

If the Reserve Bank is monitoring the reaction and debate, which I’m sure it is, it can only conclude that it is losing in the court of public opinion.    It isn’t just about journalists, bloggers, academics etc, but in the comments sections to the various articles the balance of opinion seems to tilt quite clearly away from the Reserve Bank’s stance.

Losing in the court of public opinion should concern the Governor –  and those charged with holding him to account (the Board, the Minister, Parliament’s Finance and Expenditure Committee).  Democracy rests on the consent of the governed, and although formal laws play a vitally important part in expressing that consent, and securing compliance, it is buttressed by a sense that the decisions of the powerful (elected or otherwise) are fair and consistent with the values of the society.  I don’t get the sense that many people who have thought about the issue at all think that blanket charging, for any OIA requests that are at all complex or awkward, is consistent with the way in which this country should be run.  All the more so perhaps when the agency concerned wields so much power – the Governor has more discretionary policy freedom than even most elected officials –  with so little effective formal accountability.

It is, however, somewhat troubling that in his interview the other day with the Dominion-Post the new chief ombudsman, Peter Boshier, declares that the Reserve Bank’s policy is just fine:

“I think the Reserve Bank’s response is actually very fair.  When I looked at it I couldn’t fault it.  As a statement of principle it was perfectly fair and it’s one to which I subscribe”

I was surprised that the new Ombudsman was so upfront in his defence of officials, but it is consistent with the point I made last week, that the charging provisions of the Official Information Act itself are quite permissive, putting few constraints on agencies (other than that any charge be “reasonable”).  The government’s charging guidelines are considerably less permissive (and the Reserve Bank’s policy is not consistent with those guidelines), but those are guidelines to government agencies, not the law that the Ombudsman is required to interpret.

As a commenter on my earlier post has pointed out, in the end the only final and binding ruling on how the relevant provisions of the Act should be interpreted would be those of the courts, should anyone seek a judicial remedy.  I’m not aware that there has ever been a case on the charging provisions.   Last year, the courts heard Jane Kelsey’s case, but in largely upholding her argument that the Minister of Trade, and the then Ombudsman, had misapplied the law, by blanket refusals to release information, but the judge in that case did point to the option the Minister had had to charge for collation/ scrutiny etc of the information.  Perhaps at some point a court might rule that a fairly extensive charging policy, like that adopted by the Reserve Bank, was impermissible under the Act – ie unreasonable, because the effect was inconsistent with the whole purpose of the Act, to make official information more readily available.  But frankly, I’m old-fashioned enough to hope that no court would do so: Parliament put the charging provisions in the Act, and Parliament should refine or remove it, not (in Professor James Allan’s words), a committee of ex-lawyers.

Bronwyn Howell’s article this morning is a curiously “on the one hand, on the other hand” academic economist’s piece.

Inevitably, there are trade-offs to be made between the costs of acquiring information and the costs and incentives of concealing it.  There are economic arguments both for and against explicit fees.

The only certainty is that when it comes to the costs of Official Information, democracy itself doesn’t come cheap.

Yes, of course there are potential trade-offs, but they aren’t typically very large ones.  And, yes, open government and democracy carry some direct costs (even elections cost), but not typically very large ones –  and the costs of a not-very-open government (harder to put a dollar price on perhaps) are considerably greater.  And if the potential dollar costs are upfront, the benefits often flow over the longer-term.  Open and transparent government helps provide citizens with the confidence to allow governments, and government agencies, to act –  knowing that we can later scrutinize the choices made, and the evidence and arguments used in support of those choices.  When people don’t trust governments, they eventually take away the powers, and the flexibility those agencies have –  and sometimes need.

What of the Reserve Bank?  In his op-ed last week, the Deputy Governor argues that the Bank will only be charging for requests that are “large, complex or frequent”, suggesting that ordinary people have nothing to worry about.  But the case he cites –  a Fairfax’s reporter’s series of requests – involved 8.5 hours of time.  I’ve been asked to pay for a couple of requests that they estimate would, they estimate, have involved a similar amount of time.  But any serious request for information on policy matters is typically going to take, at least, several hours of work by officials, and that is partly because it is difficult to be sure where the information a requester is looking for might be found (ie which specific document), and agencies are not inclined to assist requesters.  In practice,  the requests the Deputy Governor appears happy not to charge for seem to be mostly the ones that involve no threat or risk to the Bank (in other words, no serious scrutiny).  It is way of fending off serious questions or investigations by the media and commentators.

Here are some of my experiences with the Bank and OIA charges.  The first two date from before the current policy was adopted in November/December last year.

oia

If it were an agency committed to open government, it would have been very easy, with no direct cost to the Bank at all, to have simply responded to the initial request with a general authorization to use any of the older papers, and perhaps asking for a discussion about refining the request for the more recent ones.  But that isn’t the Reserve Bank’s way.

A bit later I asked for background papers to the 2012 Policy Targets Agreement.  The PTA is the key document governing the conduct of monetary policy, and no background papers to it were released at all when the Governor and the Minister of Finance agreed the PTA in 2012.  I was threatened with a large bill, and invited to refine the request.  A Bank official prompted me to narrow my request to a particular file which, when the Bank eventually finally responded to the revised request, proved to have almost nothing in it that shed any light on the background to the Policy Targets Agreement.

What of the more recent episodes?

I asked for copies of some old Board minutes.  Those papers are well filed, and nicely bound at the Bank.  The Bank knows there is nothing problematic in them as a year or so ago, I had made a request for a slightly more recent set of minutes, and was quickly told I could copy them myself.  And yet they wanted to charge hundreds of dollars for these readily accessible uncontroversial historical papers.

I also asked the Bank for papers relevant to the post-TPP Joint Macroeconomic Declaration to which the Reserve Bank has become a party.  I’ve been told that meeting that request is also likely to cost hundreds of dollars.  It isn’t a large or complex request either: the Bank tells me that they have identified seven papers and 26 pages of emails; if anything, I was a little surprised at how little material they had.

With a track record like this, it is not surprising that people are uncomfortable with the Reserve Bank’s new policy.  It seems designed to obstruct, not to inform, and particularly to obstruct any awkward questions about the activities of a very powerful agency.   I’m not sure what specific topics Richard Meadows’ requests were about, but it seems unlikely that they were very large or complex either.

In passing, I would note that one of the aspects of the Reserve Bank’s involvement in the post-TPP Joint Declaration that I was curious about was the additional costs they were committing to (with no new funding), and what they were proposing to displace to cover these costs.   The agreement committed the agencies involved to (at least) annual macroeconomic consultations between the parties to the agreement, which will involve additional travel costs, and additional analytical work in preparation for such meetings.   An additional business class airfare to Washington alone appears to be another $7000 or so, with additional costs (and lost other productive opportunities for a senior official) as well.    It would be surprising if the involvement in the Joint Declaration did not cost the Bank at least another $15000 a year.  And it would be surprising if all their OIA requests, trivial and substantive, cost much more than that.  Recall, that the Joint Declaration was developed only at the insistence of the US Congress (and even then the Federal Reserve refused to be party to it).  I’m not necessarily suggesting there is anything inappropriate about our Reserve Bank and Treasury being party to the declaration, although it does carry some risks.   But we should be able to see how the Bank has thought about those risks (and the additional costs).

In concluding, here is a link to the more radically open approach adopted in Norway.    The Reserve Bank should be reconsidering its policy on charging for information, but the more general issue really requires some political leadership from some party or another that believes seriously in open government, even recognizing that genuinely open government will sometimes be uncomfortable for the powerful.  Indeed, that discomfort is more or less the point.

 

 

 

 

 

Grant Robertson, the Reserve Bank, and the end of the Governor’s term

Michael Reddell labour party, Monetary policy, Reserve Bank

Further to my post the other day on Grant Robertson’s latest statement on monetary policy, Bernard Hickey has posted a substantial article about his interview with Robertson on these matters.  It is a useful piece to have –  certainly the most sustained discussion of monetary policy and Reserve Bank issues from Robertson since he became Labour’s finance spokesperson.

And yet it still poses more questions than answers, and still leaves Labour looking as though it has not really thought hard about either monetary policy or the reasons for New Zealand’s continuing economic underperformance (including the continuing large gap between New Zealand and “world” real interest rates).  As a voter and an interested observer/commentator, I found that pretty disappointing.   There is certainly space for a different approach to economic policy in New Zealand –  it is not as if either recent Labour or National led governments have managed to do anything that begins to reverse New Zealand’s relative economic decline.

But it is still looks as though they are more interested –  at least at this stage of the electoral cycle – in positioning (with their party base, and with the business community), and being seen to be different, than in the harder aspects of substantive economic analysis and concrete alternative policies (and the connection between the two of them).

Thus he says “the lowest inflation since last century combined with rising unemployment…is making a farce of monetary policy”, and “when you reach 15 quarters outside of the mid-point we do have to ask ourselves what we’re doing with monetary policy”.  And yet Robertson is very reluctant to criticize the Reserve Bank, and the Governor (formally the single decision-maker) in particular.  Indeed, he goes out of his way to praise the Governor and –  despite the single decision-maker model  – says “the targets agreement has not been met, but I wouldn’t want to bring that down to him personally at this time”.  Certainly, the Governor has advisers, but they are all employed by, and accountable to, him.

Instead, Robertson repeatedly argues for changing the framework.  He isn’t very specific about what he wants –  and it is still 20 months from the election – but the only point that keeps recurring in all his statements is a desire to have the Reserve Bank actively promote higher employment.  But he adduces no evidence whatever to suggest the reframing the wording of the Bank’s goal, along the lines of the Fed or RBA objectives, would make the slightest bit of difference to how the Reserve Bank actually runs monetary policy.  Past Reserve Bank research suggests that, on average over time, the Reserve Bank of New Zealand has reacted to incoming data in much the same way as the RBA or Fed have done.  Robertson either knows that, or should do, so the onus is on him to explain how his approach would make a difference, in substance rather than rhetoric.

And there is still nothing on the “new tools” Robertson has talked of needing.  When Hickey asked him about the variable Kiwisaver rate proposal Labour took into the last election, all he would say was that it was under review, and “that wasn’t mentioned today and won’t be in the foreseeable future”, adding (Hickey’s words) that “Labour preferred to have a simple policy that gave voters certainty”.  Which is all fine no doubt, but doesn’t give hardheaded observers reason to think Labour actually has serious alternative tools in mind.  That shouldn’t be surprising, as the tool the Reserve Bank does use is the tool other central banks use –  at least until they exhaust its potential when policy rates get to or just below zero.

It seems to me that there are two quite important separable issues:

  • the Reserve Bank has not done a particularly good job in the last few years of carrying out the Policy Targets Agreement.  That failure has been particularly stark since the 2 per cent midpoint reference was added in 2012.  With (as Robertson notes) inflation very low and unemployment high and rising, it is a pretty clear-cut case of a shortfall of demand, and a lower OCR is the best tool for stimulating additional demand.    The Reserve Bank can do something about that, but has failed to do so –  as Robertson notes, he was among those uneasy about the OCR increases in 2014, which were unnecessary, and the Bank (the Governor) has been slow to lower rates since.  Real interest rates now remain higher than were two years ago, when dairy prices were at their peak.
  • the disappointingly poor economic performance of New Zealand over recent decades, including such symptoms as the large gap between New Zealand real interest rates and those abroad, and the persistently high average real exchange rate.    As it has abandoned support for the existing monetary policy framework over the last few years, Labour has tried to imply (perhaps especially to its base) that there is something about the monetary policy framework that Labour could fix, offering some material improvement in our economic performance.  Neither Phil Goff, David Cunliffe nor David Parker ever quite managed to explain the connection.  Robertson has done no better.  That isn’t surprising, because it really isn’t there.  There might be better ways of articulating the objective, and there are better ways of running/governing the Reserve Bank etc, but none of them offer anything much in addressing the structural underperformance of the New Zealand economy.

Veteran commentator and analyst of left-wing politics, Chris Trotter wrote a piece the other day suggesting that Labour and the Greens were adopting an approach, akin to that in the early 1980s, of getting alongside the business community  –  getting them to the point where business was comfortable that an alternative government would not “scare the horses”.  I’ve no idea if that is an accurate description, but Robertson’s comments don’t look inconsistent with Trotter’s story.  I was interested, for example, in Robertson’s reaction to the question of whether Graeme Wheeler should be reappointed next year: Wheeler’s term expires almost three years to day from the date of the last election. Robertson doesn’t refuse to comment, but goes on to express his regard for Wheeler (twice), only then concluding that “ultimately it won’t be a decision I’ll be involved in”.

I have no idea, of course, whether Graeme Wheeler will even seek a second term, but whether he does or not, I think there should be some disquiet about the fact that his term expires in late September next year.  Monetary policy is now hardly something that the main political parties are united on (unlike the situation from 1990 until 2008, when any differences were about details, and the statutory goal united National and Labour), and it doesn’t seem very satisfactory that, for example, the current government could appoint someone to the office of Governor (single decisionmaker across a range of policy areas), taking office perhaps in the middle of an election campaign, or indeed just as a new government was taking office.  It isn’t a problem if the current government is re-elected, but (say) a Labour-led government supported by the Greens and/or New Zealand First might have a rather different view about priorities and emphases for the Bank.  The Governor has a degree of personal policy autonomy not shared, for example, by heads of core government departments (eg the Secretary to the Treasury).

The last time a Governor’s term expired in an election year was in 1993 (2002 was different –  Don Brash resigned just before the election campaign, and a new permanent appointment was not made until after the election result was determined).  But, as I noted, on that occasion National and Labour went into the election with no real difference on the Reserve Bank Act.  On that occasion, the Reserve Bank’s Board and the then Minister agreed to reappoint Don Brash in December 1992, well before any election year market uncertainty  (or campaigning) took hold.  And the first Brash term was due to expire a couple of months before the election would normally be due.

The situation next year seems much less tractable.    Wheeler’s term expires more than three years after the date of the last election.  And Labour seems sure to campaign for material changes to the Act (as would its potential future support parties).   And if Graeme Wheeler does not seek another term, any capable person pondering applying for the job in early to mid 2017 might be more than slightly uneasy –  it not being clear what the substance of the role might actually be.    I hope the Board –  and perhaps the Minister  – have already begun to think about the issue.  I’m not sure what the best way ahead is.  These clashes don’t happen often, but perhaps one option for the longer-term might be six year terms for the Governor, rather than five –  so that a new gubernatorial appointment was always in the middle of an electoral cycle.  For now, I wonder if it might be wise to consider extending the Governor’s term for another year. to allow longer-term decisions to be made with greater clarity about the longer-term direction of the Reserve Bank and New Zealand’s monetary policy regime.  As longerstanding readers might imagine, I’m hesitant about that option for a number of reasons, but none of the alternatives look ideal either.

In this post I haven’t touched at all on Robertson’s comments on immigration –  with which I am generally sympathetic, although sceptical about the extent to which immigration policy can be managed in a countercyclical way.  And countercyclical issues are not where the real debates about the economics of New Zealand’s large scale inward migration programme should be centred.