Makhlouf on public debt

Gabs Makhlouf has now had his gushy official farewell, even as we await for the SSC report on his conduct and judgement during the Budget leak affair.  His term expires next Thursday (27th) and so with each passing day it looks more likely that the SSC will simply run out the clock, so as to further minimise the risk of an undue embarrassment to them (party to Makhlouf’s choices), to Makhlouf, or to The Treasury.

But, clearly not content with a post-Budget lull and a quiet last few weeks at work, Makhlouf has released a (final?) on-the-record speech, addressing the question “What is prudent debt?” in turn reopening debates, at least on the left, about the government’s approach to fiscal policy.   It is a rather odd affair, as the speech appears to have been given to a bunch of Treasury staff (“the Treasury’s Economic Forum”).

As I’ve written here previously I’m generally not convinced that the Treasury Secretary should be making public speeches.  The primary role of such an official is the administer The Treasury and advise the Minister of Finance (unlike, for example, the Governor of the Reserve Bank who wields independent policymaking power).  And whatever the merit of their views –  and there have been very able Treasury secretaries in other times and other places – in speaking openly they are either constrained to not depart far from current government policy (themselves partisan choices), or they create trouble for the government and undermine the willingness of ministers to engage privately with the free and frank advice officials are paid for.

But on this occasion I don’t have too much problem with the speech being put on-the-record.  It seems to reflect analysis and advice already provided to ministers, in a core area of Treasury’s responsibility, and if that advice itself hasn’t already been published –  and it should have been, pro-actively – it would almost certainly be made available in response to an Official Information Act request.

Moreover, although I have been very critical of numerous of Makhlouf’s speeches over the years (Google “croaking cassandra, makhlouf speeches” if you want examples) this speech was one of the better (not great, not that deep, but not bad) ones I’ve seen.     That doesn’t mean I agree with it all –  that isn’t the relevant criterion –  but that much of it is thoughtful and considered, and doesn’t just parrot glib, but perhaps conventional, cliches.   There is too much reference to “wellbeing” in it for my liking, but that is probably true of every public sector document at present –  please the masters –  and since it is mostly vacuous it is mostly relatively harmless.

Why “prudent” debt.  Because the term is explicitly used in the Public Finance Act –  governments are required to conduct fiscal policy consistent with maintaining a “prudent” level of debt.  They don’t have to tell us what they consider is prudent, but they do have to tell us what debt levels they are aiming at.   Quite what criteria are relevant to determining the prudence or otherwise of a particular level of debt isn’t spelled out, and so although the choices are ultimately for politicians to make, it is appropriate and indeed desirable for The Treasury to offer advice, at least on how best to think about the issue  (I’m less sure it is the place for The Treasury to put a number on prudence, as Makhlouf does, because their values and priorities won’t necessarily be those of the elected politicians.  But so long as they, and we, recognise that, and take their advice for what it is, it is still likely to be a useful contribution to the debate.)

Personally, I found the more persuasive part of the speech to be where he addressed the issue of buffers.   One’s view on how much debt the government should carry in normal times needs to be informed by one’s view of how badly adverse events could throw one off course, in ways that would lead a government to want to carry more debt for a time.  One can think of severe recessions, severe natural disasters, or even things like banking crises. In a severe adverse event, the last thing one wants to find is that one doesn’t have the fiscal flexibility (market or political) to facilitate prudent adjustment and absorption policies.    In a New Zealand context, a buffer of perhaps 20 percentage points of GDP seems sensible and reasonable.   One shouldn’t expect to use it in every downturn, but every few decades something very severe will come along, and one needs to have the flexibility to cope. And, on the other hand, 20 per cent won’t always suffice –  wars happen.

But beyond that, it was less clear how much substance there was to the speech –  or to the, as yet unpublished, supporting analysis.   For example, the Secretary seems (perhaps understandably) hesitant about criticising other countries, but he seemed reduced to trying to argue that there were substantive structural reasons why public debt should (prudently) be lower in New Zealand than it might be in some other countries, rather than just openly saying that levels of public debt in, say, the UK, France, US, Japan, Greece are higher than looks sensible.   His arguments for why debt here should be lower than in other countries don’t amount to much: small size (not clear how this is relevant at all), and exposure to natural disasters.  The latter might have some merit (although Japan’s experience of natural disasters in the last 150 years is much worse than New Zealand’s), but it isn’t exactly integrated to a structured framework.     And one could, quite reasonably, counter that our much more rapid population growth rate would naturally, and all else equal, lead to a higher prudent ratio of debt to GDP than one might observe in most countries (population growth doesn’t really get a mention).  On the other hand, our dismal productivity record might also be relevant, but again it doesn’t rate a mention.  And nor does the distinction between countries with floating and fixed exchange rate (the latter typically need more fiscal flexibility).

It was also a little surprising that, in a speech that bills itself as taking the “long view” there was no mention of how we might best think of past peaks in public debt ratios.  Depending on which measure one uses, thirty years ago public debt as a share of GDP might have been around the peak level Treasury now thinks appropriate.  What should we take from that earlier episode?    And there was no mention at all of the earlier period when, for decades, New Zealand ran public debt to GDP well in excess of 100 per cent of GDP.  How should we think about the prudence, or otherwise, of that record (and wouldn’t, for example, prudent debt levels (share of GDP) for 1913 New Zealand have been considerably higher than those for, say, 1913 United Kingdom?

There were also places where the political strains were showing.    On the one hand, the Secretary to the Treasury is right with the “governments have to ‘invest’ more” line.

And there is certainly an in-principle case for higher investment in New Zealand. The risks I discussed earlier – particularly climate change – will likely need to be managed through major investments. And as we discussed in He Puna Hao Pātiki, many of our social assets – social housing, and the healthcare and education estates – are aged and reaching the end of their useful life. In some places there is a critical under-provision of these essential social assets. High-quality infrastructure investment is needed to support urban growth and the supply of housing. Further investments in this physical capital can support the wellbeing of New Zealanders, and aid the development of our human and social capital.

You might agree or disagree with him, but it certainly reads as if he believes that there are big potential returns (economic and social) to lots more public investment.  And yet he spends the next page walking back from what this seems to imply, arguing (more or less) that it would be better if we had more unemployment so that these projects he favours wouldn’t crowd out private spending.  It is a pretty incoherent stance: if the projects are really as high-yielding as the Secretary makes them sound, we should welcome and embrace them now, even if other spending is crowded out.  And if they aren’t really that attractive, one should be cautious about championing them at any time.  But there is little sign that Treasury has faced or addressed that tension.

There also wasn’t much sign of the Secretary engaging with the record of government failure (perhaps not so surprising in an official more generally, but Treasury are supposed to be the guardians of good spending discipline).    Personally, there are several reasons why I don’t favour higher levels of public debt (and don’t regard the limits of what the market might lend as particularly relevant), including the continued stream of low quality projects governments manage to do even at present.  Wouldn’t a persuasive case for more debt involve, among other things, repeated case studies of the excellent and efficient ways governments spend and invest, with actual economic and social returns coming in at or above estimates generated at the time the relevant project proposal was approved.  This isn’t a benchmark of perfection – any investor, public or private, will get things wrong at times –  but of excellence, including showing how poor projects are recognised early and either remedied or terminated.  Given how weak the governance and accountability are, we should be very wary of letting governments loose with the credit card.

It was also striking that there was no mention in Makhlouf’s lecture of the way in which government social provision is likely to affect private sector savings behaviour.  One can largely agree with the welfare system as it is, and still recognise that without it, it is likely that the private sector as a whole would save more, notably for retirement.  That biases me towards thinking that the appropriate ratio of public debt to GDP in normal circumstances in an advanced country is really quite low.   In fact, for a comprehensive net debt measure, a benchmark of around zero per cent of GDP might be a reasonable starting point, with a resonant round number appeal (a bit like middle-aged people used to look forward to the day they become debt-free –  before governments messed up the housing market).  (As it happens, on the OECD’s broad measure –  general government net financial liabilities –  zero is about where New Zealand is now.)

A few other quick points:

  • it was good to see the Secretary specifically address MMT,
  • and it was good to see him refer, late in his speech, to the government’s growing use of Crown entity debt, in ways that erode the significance of the actual core Crown debt targets. Better perhaps for Treasury to encourage as to think about net debt more broadly – to encompass such things, and the NZSF assets –  than to run with putting a number on the variable the current government chooses to target,
  • it is a debate worth having, but I remain as unconvinced as ever – and I used to run the Reserve Bank’s financial markets function –  by the argument Makhlouf repeats that the government needs to have a significant level of gross debt to support (a) market functioning, and (b) optionality around future borrowing capacity.

Overall, not a bad speech, and better than many of Makhlouf’s.  One can’t help thinking that much of the material and many of the ideas might better have been released in a series of working papers or discussion documents –  to encourage expert debate more widely –  before the Secretary put his imprimatur on an official view.  But, in the end, next week  he’ll be gone, heading for Ireland, and we’ll be left to reflect and debate the best longer-term approaches for New Zealand.

Who knows, but by then we might even have a replacement for Makhlouf announced.  It is pretty shambolic that a week from his departure –  date known long ago –  the recruitment and appointment agency (SSC) hasn’t announced an appointment to what should be the most important public service job in New Zealand.

Can anything good come out of the ANZ?

ANZ’s New Zealand operation has had a bad run lately, what with the problems around the version of a model they were using for calculating operational risk capital, and then yesterday’s announcement of the loss of their CEO.    Perhaps it is a failure of imagination on my part, but I can’t claim that either episode greatly bothered me, whether as a customer or more generally.  Yes, both incidents suggest a degree of untidiness that isn’t ideal,  but it is a big organisation and they were pretty small issues.  Perhaps it suggests the local board doesn’t amount to much, but why would that surprise anyone?   Local incorporation is mostly about having (a) some assets that we can be reasonably sure will be available to meet local liabilities in the (very low probability) event of a major bank failure, and (b) having someone to prosecute if governance failures proved to have risen to a prosecutable standard (a reason for the otherwise questionable requirement for some of the directors to be locally resident).   Beyond that, it makes sense for the whole of the ANZ group to be able to be run, as far as possible, as a single entity.

But rather lost amid the headlines yesterday was a very useful new piece from the ANZ’s economics team, “Prospects for unconventional monetary policy in New Zealand”.   It is a very substantial piece of analysis, which gets into quite a lot of detail on how New Zealand might handle a situation in which the conventional limits of monetary policy had been exhausted (ie when the OCR has been cut to some modestly negative level).    I would encourage anyone with even a passing interest in the topic to read it.

Pretty much ever since this blog began in 2015 I have been lamenting the apparent failure of the Reserve Bank to take this issue very seriously.  It never popped up in Statements of Intent or gubernatorial speeches (in the days when we had a Governor who made them), even though many other countries had run into those limits in the last recession, and in most cases the pace of economic recovery had been disconcertingly slow.    Back in 2013 or 2014, perhaps the Bank had some small excuse –  the then management was so convinced the OCR was heading back up (and by a lot) that effective lower bounds just didn’t seem like an issue New Zealand needed to worry about.     But that was five years ago, and the OCR now is 1.5 per cent not the (say) 5 per cent the Bank might have hoped for.

In the last 18 months, there has been some movement by the Bank,  Last year, they published a Bulletin article surveying the experiences of other countries with unconventional monetary policy, and then offering some initial thoughts on options for New Zealand.   I wrote about that article here, welcoming the fact that it had been done, and the survey of other countries’ experiences, but regretting an apparent degree of complacency by the Bank about the New Zealand situation and the likely effectiveness of such policy tools.   That complacent tone characterised various comments the Governor has made at MPS press conferences: lots of handwaving, little hard analysis, and no engagement at all with just how slow the recovery was in most countries that were reduced in unconventional measures.    As I noted, central bank complacency risked coming at a cost –  a cost not to the comfortable central bankers themselves, but to those left unnecessarily unemployed for long periods of time.

The new ANZ piece is valuable for a number of reasons.  First, it will be more widely disseminated than the Reserve Bank article.  Second, it isn’t from the Reserve Bank (we need a wider range of discussion and debate around these isses and risks), and third, it goes into more operational detail (around important features of existing RB liquidity facilities etc) in several places than anything previously in the public domain.

I don’t agree with everything in the ANZ piece, and in particular I was surprised by the number of references to how distortionary or risky unconventional policies have been in other countries.  The rather bigger issue is that they mostly have not achieved much, at least once we got beyond the immediate crisis period (and this is a distinction the ANZ authors make).    As I’ve noted here repeatedly, there is little or no evidence that –  whatever the initial announcement effects –  long-term bond rates have fallen further relative to policy rates in countries that used unconventional policies than in countries that did not.

There was a useful reminder that some official RB interest rates will go negative well before the OCR itself gets to a negative number.    This is from their document


The Bond Lending Facility is a facility whereby market participants can borrow bonds from the Reserve Bank (to support smooth market functioning) and, as the authors note, is little used.

The ANZ authors put more emphasis on the penalty on excess balances in settlement accounts.  I wrote about the Bank’s strange tiering policy in a recent post, but the gist is that the Bank determines for each bank what value of deposits at the Reserve Bank earn the OCR, and anything in excess of that earns 100 points less than the OCR.   Banks manage their settlement cash balances to minimise the extent to which anyone bears that lower return  But if the OCR were at -0.25 per cent, the rate on excess settlement account balances would be -1.25 per cent on current policies.   All else equal, that is a rate low enough that (a) no one else has imposed it, and (b) people might prefer to hold physical cash instead.

I’m a bit sceptical that this is a really important constraint on the ability of the Reserve Bank to use conventional monetary policy down to an OCR of around -0.75 per cent, since there is little reason to suppose the level of settlement cash balances would be rising as the OCR plumbed these new depths (if anything demand might be falling a bit), and banks would –  as the Bank would want –  be aggressively acting to limit the extent anyone bore the additional cost.   But it is an issue that is worth debating further, and which would become salient quite quickly if the Bank went beyond OCR cuts and started using unconcventional measures to boost settlement cash balances materially.  In earlier work, it was recognised that tiering policy would probably need to change if there was aggressive unsterilised asset purchases.

The authors rightly note many of the potential limitations of asset purchase options.  Sure, the Reserve Bank might be able to buy up a substantial portion of the government bonds on issue –  although some holders will be very reluctant sellers, having mandates that specify investment in government bonds –  but even if they could, what would be the channel whereby this would revive demand and economic activity (few borrowers took on long-term fixed rate debt).   And the Bank might be able to intervene heavily in the foreign exchange market –  perhaps on ministerial direction, to ensure the risks fall on the Crown –  but they’d likely be selling the New Zealand dollar when it was already undervalued, and if the OCR can’t go below -0.5 or -0.75 per cent, it isn’t likely that the exchange rate effect would be very large.  Intervening in the interest rate swaps market has been an idea around for a decade, and I’ve never been persuaded it would accomplish much.

But the options and issues really should be more widely debated, and the Reserve Bank and The Treasury should be taking the lead in encouraging open debate and serious scrutiny of the New Zealand specific issues.  As ANZ notes, perhaps interventions can be devised on the fly, but there is no excuse for finding ourselves in that position when we have had 10 years advance notice of the problem.  Adrian Orr’s tree god won’t offer the answers, no matter much Orr invokes Tane Mahuta.

My frustration is that thinking doesn’t seem to have advanced much at all in the ten years. I dug through some old files this morning, and among them I found a paper I’d written at Treasury in 2009 (benefiting from discussion with Reserve Bank staff)  on options if we reached the limits of conventional monetary policy.  I also found a discussion note I’d written in 2011 trying to engender some debate around the legislative provisions that support the near-zero lower bound on nominal interest rates, and was reminded of the report of a Bank working group I lead in 2012 on options if we faced near-zero interest rates (sparked by the intensity of the euro crisis then).  But nothing from either the Reserve Bank or The Treasury that has found its way into the public represents any advance on that thinking and work done up to a decade ago.  It really is pretty inexcusable.  It is almost as if our officials and minister think everything worked just fine in other countries after 2009 –  it clearly didn’t –  or they just don’t care.

Specifically –  and this is a criticism of the ANZ note as well (not even mentioning the issue) – there has been nothing done, no debate held, no analysis published, on dealing with fact that at present people can convert limitless amounts into hard currency, and will do so at some point once interest rates on other instruments (wholesale ones in particular) are substantially negative.   Here was what I wrote on that point in my post last year on the Reserve Bank’s article.

It is striking that the article does not engage at all with either of the two more radical options debated in other places and other countries:

  • reconfiguring the target for monetary policy.   This could take the form of a higher inflation target or, for example, the use of a price level or nominal GDP level target.  Each approach has its weaknesses, but either –  done in advance of the next serious downturn, not in midst when much of the opportunity is lost –  could help raise, and hold up, expectations about the path of the nominal economy, including inflation.
  • taking steps to material reduce the extent of the effective lower bound on nominal interest rates.

The latter remains my preference, for a number of reasons (including that the existing problem arises largely because central banks have  –  by law – monopolised note issue, and then not proved responsive to changing circumstances and technologies. Problems are usually best fixed at source.

If there is still a useful role for physical currency (I discussed some of these issues here), the ability to convert huge amounts of financial assets into physical currency, on demand, without pushing the price against you, is now a material obstacle to monetary policy doing its job in the next recession.    There is a good case for looking seriously at a variety of reform options, such as:

  • phasing out large denomination Reserve Bank notes (while perhaps again allowing private banks to offer them, on their own terms, conditions and technologies),
  • capping the physical Reserve Bank note issue, scaled to growth in, say, nominal GDP (perhaps with provision for overrides in the case of financial crisis runs),
  • putting a spread (between buy and sell prices) on Reserve Bank dealing in bank notes, or
  • auctioning a fixed quota of bank notes, and thus allowing the price to adjust semi-automatically  (when currency demand rises, as when the OCR goes materially negative) the cost of conversion rises.

These sorts of ideas are not new.  They do not get rid of the entire issue –  at an OCR of, say, -10 per cent, even transaction demand for bank deposits might dry up –  but they would go an awfully long way to ensuring that the next recession can be dealt with more effectively than the last.

If, for example, you thought the OCR was going to be set at -3 per cent for two years, then once storage and insurance costs are taken into account (the things that allow the OCR to be cut to around -0.75 per cent now), even a lump sum conversion cost (deposits into physical cash) of 5 per cent would be enough to keep almost everyone in deposits and bonds (even at negative yields) rather than physical cash.  That is a great deal leeway than the Reserve Bank has now.   Having that leeway –  and being willing to use it – helps ensure nominal rates don’t need to stay extremely low for too long.

In principle, many of these sorts of initiatives probably could be done in short order in the midst of the next serious downturn.  But we shouldn’t have to count on unknown crisis responses, the tenor of which have not been consulted on, socialised, and tested in advance.  It may even be that some legislative amendments might be required.

There is no excuse for not having these issue all sorted out well in advance, and having communicated clearly to the public (and ministers and markets) how they will be handled, secure in the knowledge that rigorous planning and risk identification has occurred.

In part, that is because of one other issue that ANZ piece doesn’t touch on (neither did the Reserve Bank article).  Once a new severe recession is upon us, people will fairly quickly begin to appreciate how few effective and credible options central banks and governments have, and react –  eg adjusting inflation expectations –  accordingly.  In 2009, the typical reaction was to expect a quick rebound, partly because that was how economies were perceived to have usually behaved, and partly because so many interventions were being thrown into the mix. Next time, people (markets) will go into a severe downturn with the memory of post-2009, an awareness of the unpropitious starting point, and an awareness of the distinct limitations of unconventional policy. All that is likely to exacerbate the downturn and further complicate effects at countercyclical stabilisation.  People will suffer as a result.

We need some leadership on these issues. If the Reserve Bank won’t or can’t provide it, the Minister of Finance –  who will bear responsibility before the voters –  needs to lead himself, and insist that his agencies do more and better, more openly, than they have done so far.

In the meantime, well done ANZ for a substantial piece of work. Once again, I’d encourage people to read it and think about the issues and constraints it raises.

A NZ central banker speaks

Next week Adrian Orr will have completed the first quarter of his five year term as Governor of the Reserve Bank.    In that time, he has given no substantive on-the-record speeches on either of his main areas of policy responsibility: monetary policy, or financial stability/supervision/regulation.     That would be highly unusual at any time, but these haven’t been normal settled periods.  On the monetary policy front, the statutory goal of monetary policy has been changed for the first time in 30 years, and the governance structure has also changed, all that amid a backdrop in which the Bank has had to once again change its policy stance, from looking towards OCR increases (in Orr’s first MPS, the interest rate track started rising from about now) towards cutting the OCR yet again.   And on the financial regulatory front, the Governor has proposed what appears to be the largest and most costly discretionary regulatory intervention (the bank capital proposals) since governors were first given prudential regulatory powers.  And the Governor wields all those regulatory powers personally; unlike monetary policy now, decisions aren’t the shared responsibility of a committee.  So it might have been reasonable to have expected several serious speeches from the Governor –  who is, after all, often lauded for his communications skills.

As one benchmark, the Reserve Bank of Australia’s 2019 speeches page already has 23 entries, including four substantive speeches from the Governor.    And the Reserve Bank of New Zealand?    Three speeches this year to date, only one from the Governor, and that was not a substantive contribution on either monetary policy or financial stability.   For the record, the RBA has a narrower range of responsibilities than the Reserve Bank of New Zealand.

But there was a recent speech –  given in Japan –  from one of his deputies, Assistant Governor and General Manager of Economics, Financial Markets and Banking, Christian Hawkesby.   Hawkesby recently rejoined the Bank after stints at the Bank of England and then in the local funds management sector.  He is a direct report to the Governor, and if he doesn’t have the official title of Deputy Governor (for some strange reason –  Wellington government agencies typically being awash with multiple people carrying ‘deputy’ titles), he is the most senior person below the Governor on the monetary policy side of the Bank.  He is a full voting member of the Monetary Policy Committee, so in additional to his staff appointment he is now a statutory officeholder.  His counterparts are people like (Deputy Governors) Guy Debelle at the RBA or Ben Broadbent at the Bank of England.   He is an able and amiable guy, and when he speaks we should be able to expect something pretty substantial and authoritative.   And in his first public speech, on the monetary policy legislative changes, we can be sure he isn’t saying anything the Governor would be unhappy with.

And so it was disappointing, to say the very least, how much political spin suffused the speech, and how lacking in analytical substance it was.  Recall that this wasn’t a speech to (say) a provincial Rotary Club, but to a Bank of Japan conference of economists and central bankers.

The Reserve Bank’s press release for the speech was, however, presumably aimed squarely at New Zealand audiences.    It is full of spin as well.

It begins

The Reserve Bank has significantly changed the way it makes monetary policy decisions, keeping itself in step with public expectations.

There are two problems with this.  The first is that, until rather recently, the Bank was telling us regularly and repeatedly, that the statutory changes (goal and governance) weren’t that significant at all, and really only wrote into legislation the way the Bank has been doing things for a long time (and perhaps built resilience against rare very bad Governors).   Hawkesby’s predecessor told us (and his audience) that when he ventured offshore for a speech last April (after Orr had taken office).

And the second is that the implication is that the Reserve Bank itself made these changes. It didn’t.  Parliament did, at the initiative of an elected government.    The difference isn’t trivial, because the entire press release continues in this vein, suggesting that the Reserve Bank is a principal, not an agent mandated by Parliament for very specific purposes.   Thus

“We maintain our legitimacy as an institution by serving the public interest and fulfilling our social obligations. Keeping our ‘social licence’ to operate depends on maintaining the public’s trust that we are improving wellbeing,” Mr Hawkesby said.

Nowhere does the Act charge the Bank with identifying what is in the “public interest”, or with “social obligations”.  Rather it gives specific responsibilities and powers to the Bank, subject to numerous other laws, and expects the law to be followed.  Parliament might make wise choices, daft choices, or some mix of the two, but the Bank’s job is to follow the law (and, perhaps, to offer advice to Ministers on how the law should be worded).  Oh, and “wellbeing” does now appear in the Act, but not as goal for the Bank to pursue directly but rather as the expected outcome (together with “prosperity” – never mentioned) of the Bank exercising its specific powers for the specific purposes outlined in statute.

The spin continues

“Thirty years ago New Zealand was prepared to accept a single expert – the Governor – making decisions about how to fight inflation. People now expect to see how and why decisions are made, expect that decision makers reflect wider society, and that current issues and concerns are factored into the decision making. By meeting these expectations, we can improve public trust in the legitimacy of the Reserve Bank’s work,” he said.

This is, frankly, pretty bizarre.  For a start, the old Act never required the appointment of an “expert” (and none of those who held office under that legislation really were monetary policy experts).  But, more importantly, as the Bank told us for the previous 30 years –  and as documents at the time the Act was introduced make clear  –  the focus of the earlier legislation was squarely on transparency and accountability.    (I happen to think the new legislation is an improvement, but not on the “how and why decisions are made” front.)

And then we get the burble about “decision makers reflect wider society”.   I’m not sure quite how a committee of seven middle-aged economists  –  and if these things matter to you, not one Maori –  quite meet that criterion, but perhaps one day the Bank will explain.

But what worried me more was the claim that “people” (who, specifically?) “expect…that current issues and concerns are factored into the decision making”.    Personally, I hope that all decisionmakers in all statutory bodies exercise their powers under the law, taking into account factors they are supposed to consider, and not bringing extraneous personal agendas to the table, hijacking public office as a platform for personal political causes.

I largely agree with the next paragraph

Mr Hawkesby outlined the new committee process that the Reserve Bank uses for deciding the official cash rate, noting that diversity among decision makers improves the pool of knowledge, insures against extreme views, and reduces groupthink.

(which is why I was championing a committee model, including outsiders, when the Reserve Bank was – until quite recently – opposed).  But this is what Hawkesby – and presumably Orr –  think we need a monetary policy committee for

“This diversity is needed to confront issues such as climate, technological, and other structural and social changes,” he said.

If you think –  as I do – that climate change is, at most, of peripheral relevance to the Bank’s financial stability functions, it is of no real relevance at all to monetary policy at all.  One could say much the same of “social changes” (what did he have in mind?) or even “technological changes”.  Now, to be sure, there is an old line of argument that the Reserve Bank needs to be aware of anything that might materially alter neutral interest rates or the neutral unemployment rate, but even to the extent that is so, the issues and challenges are no different than they have ever been –  in fact, the issues the Bank currently has to be aware of (around monetary policy) are almost certainly much less broad in scope than those it faced 30 years ago, when the Act came into force, in the midst of successive waves of extensive waves of micro reform.

The press release ends with this piece of politics.

He also said that collaboration with government can be undertaken in a way that maintains the Reserve Bank’s political independence while working on the broader objective of improving wellbeing.

It is simply not the Reserve Bank’s job to range more broadly, assisting the government with its partisan agendas, even if the individuals involved happen to be left-wing themselves.  To repeat, the Act is very clear that the Bank does not have an all-embracing goal of pursuing “wellbeing”, but is specifically charged with using its monetary policy powers to achieve and maintain price stability and “support” maximum sustainable employment.

The body of the speech –  with much more space for qualification –  is no better, and is arguably worse.  There are ahistorical claims (notably, that the previous Act brought down inflation from “around 20 per cent” –  inflation was about 5 per cent when the law was enacted).    And the nonsense suggestion that only now do people realise that low inflation is not an “end it itself”.

And never once do you see any reference (even politely) to the fact that the law was amended by Parliament as the outcome of a political process –  notably, a Minister of Finance who, in Opposition, needed some product differentiation (both from his National opponents, and from the ideological enemies formerly in his own party –  the reformers of the late 80s) but who always seemed more interested in cosmetics than in substance.  In fact, one never even sees the point the Minister often made –  and which Hawkesby’s audience of central bankers must have been well aware – that the recent legislative changes just bring the New Zealand legislation a bit closer to the (very longstanding) legislation in the US and Australia.    Instead we get this vacuity

Our policy framework changed because times are changing. For the Reserve Bank to maintain its credibility and relevance, we must change too.

And there is the incoherence of championing the record of the last 30 years, all while claiming that “a sole decisionmaker or uniform committee cannot possibly hope to possess the broad range of insights necessary to consider these issues” (climate change and social change again).    And the seeming blind spot about the utterly crucial nature of what a committee can bring…..and yet at the same time, the bank capital proposals rely wholly on a decision by one individual, the same individual championing the change.

There is questionable stuff throughout the speech, but this one near the end caught my eye,

There is emerging consensus that coordination is necessary for an optimal response of broader macroeconomic policy.16 For central banks, operational independence does not have to mean operational isolation. Rather, collaboration with government can be done in a way that builds and reinforces the social licence to operate, by showing a willingness to work with other partners to do whatever is necessary to achieve the broader objective—improving public wellbeing.

More politics, more wellbeing spin, but it was that footnote that I lighted on, apparently supporting the surprising claims of an “emerging consensus the coordination is necessary” for macro policy. I was intrigued and wondered what I’d missed.  When I looked more closely, the reference was to a short recent comment by economic historian Barry Eichengreen and it wasn’t an argument for more coordination at all.  Instead, it simply observed that in many countries monetary policy appeared to have more or less reached its limits and thus that fiscal policy might be much more important in future.

But nominal interest rates can’t be forced much below zero. And monetary policymakers, for their part, seem unable to push inflation above 1-2% in order to drive down real interest rates. Investment demand therefore tends to fall short of saving, creating a risk of chronic underemployment.

In this case, the argument for additional deficit spending to supplement deficient private spending is stronger, because there is less risk of crowding out productive private investment. This does not mean that the scope for running deficits is unlimited, because at some point safe government debt could be re-rated as risky, causing interest rates to rise. That said, these arguments lead to a straightforward conclusion: in the future, we will have to rely more on fiscal policy and less on monetary policy to achieve stable and equitable growth.

You might or might not agree with Eichengreen, but you simply cannot read him –  as Hawkesby attempted to represent him –  as making a case for more coordination of policy.  If anything, it is more a case for the growing irrelevance of central banks (a claim one can agree with or not).   It was either careless or dishonest to present it otherwise. I prefer to believe careless, but the Bank should be better than that.

And who knows what Hawkesby’s expert audience made of the final couple of paragraphs of the speech

And it is not enough to grudgingly adapt. In order to maintain credibility, central banks must embrace change and prove to the public that they are capable of delivering on their objectives. To remain credible is to remain relevant. Central banks should keep their eyes open, and be ready to change tack. Our destination—a world with improved wellbeing for our citizens—may not change, but the best route for getting there may.

We must adapt. We must continue to improve the wellbeing of our citizens. We must remain credible.

Rhetorical burble that was really a substance-free zone.

Speeches by good (economics) deputy governors of advanced country central banks –  eg Debelle and Broadbent, and their Canadian counterparts, or some of the economist heads of regional US Federal Reserves –  are often well-worth reading.  They typically contain and reflect serious economic analysis, and help create confidence in the robustness and depth of the institution itself.  Sadly, this first speech by Hawkesby fells well short of that standard –  and the gap is the more noticeable given the stature of the audience he was speaking to.   Credibility does matter, but if they are to be taken seriously the MPC (Orr, Hawkesby and the rest) will need to be making rather more serious and substantive –  occasional –  speeches than what was on offer this time round.

One can mount an argument that in the last year or two the Reserve Bank of New Zealand’s actual monetary policy calls have been a bit better than those of the Reserve Bank of Australia, but without a sense of a robust underpinning –  serious sustained analysis, and articulation of that reasoning, and of how they understand the economy –  we can’t have any confidence in the robustness of the institution, or that better calls have been any more than dumb luck.




Governing well, or just slowly making us poorer?

I noticed in the Herald this morning Audrey Young’s article running the line that (a) it had been a good  –  in fact, exceptional – week for the government, which had (she claimed) been governing well, and (b) that one example of this was yesterday’s reopening of the Wairoa-Napier railway line.   There was a celebratory article on the reopening in this morning’s Dominion-Post, which might better have been labelled as advertorial, and could easily have been taken straight from Shane Jones’s press secretaries.  It was, after all, only reopened with the (as yet) rather small amount of the Provincial Growth Fund that has actually been spent.  For this particular project, $6.2 million of taxpayers’ money, given to a loss-making SOE that, even running losses, had not itself considered the project viable.

This project was first announced in February 2018 and then I wrote a post about it, under the heading “The boondoggle”.   Here I’m repeating the bulk of that post.

Earlier this week, Kiwirail released its most recent half-yearly financial result. Once again, the taxpayer was poorer for their operations. They make great play of a modest “operating surplus” but I rather liked this summary table from their latest Annual Report


In other words, no returns to shareholders at all; in fact, losses in one year of a third of the (periodically replenished) shareholders’ funds

Last year, they had operating revenues of $595 million, and an overall loss of $197 million (much the same as the year before). So roughly a quarter of their overall costs are not covered by income. As an organisation – and with all due respect to the energies of individual employees (including the five earning in excess of $500000 per annum) – it has all the appearance of being a sinkhole, absorbing more of the scarce resources of taxpayers each year.

And before people start objecting that roads don’t make a profit, it is worth remembering that airlines do and coastal shipping operations do – and, if they don’t, they usually go out of business.

An organisation that operates such large losses (acquiesced in by successive shareholder governments) clearly isn’t one that applies the most demanding tests possible to the question of whether individual lines should be opened or closed. Occasionally people attempt to justify government intervention in this or that activity on (questionable) grounds that the private sector is applying too high a cost of capital. But in this case, the state operator’s average return on capital (ie over all its operations) is substantially negative, and it has no expectation of changing that.

A few years ago, Kiwirail closed the Gisborne to Napier line. Rail volumes had been low and falling – some trivial portion of the volume that Kiwirail estimated would have been required to make the line viable. But ever since, there have been people hankering for the line to be reopened.

And yesterday, as part of the first wave of projects approved under the new Provincial Growth Fund, the Minister of Regional Development announced that

“We’re also providing $5 million to Kiwirail to reopen the Wairoa-Napier line for logging trains, taking more than 5700 trucks off the road each year.”

In the more detailed material released with the announcement there is a suggestion that the Hawkes Bay Regional Council may also be putting in money.

There is no sign of any cost-benefit analysis of this proposal having been released at all. But we can assume that the proposal wouldn’t pass any standard (weak) Kiwirail commercial test since otherwise Kiwirail would have reopened the line without taxpayers’ having to chip in more money directly.

There used to be some logs/timber carried on the Gisborne-Napier line, but a reader pointed me to the numbers: in the final full three years of operation, a total of 327 tonnes of it. There are, apparently, going to be a lot more logs to move in the coming years. In the Minister’s words

“The wall of wood is expected to reach peak harvest by 2032 so reopening this line will get logging trucks off the road and give those exporting timber options that they currently do not have,” Mr Jones says.
“It makes sense to consolidate that timber in Wairoa and use rail to take it to the Port of Napier.

Except that apparently officials and Kiwrail had already looked at this option a few years ago. In a report released only a few year ago it was noted that

“We note that Kiwirail was not convinced this would be finanically viable for users given the relatively short distance involved and the need to double-handle the logs. Industry feedback has also indicated that transport of logs on rail across the study area was unlikely to be economic.”

Perhaps the economics has suddenly changed? But, if so, where is evidence? None was published yesterday. We aren’t even told what assumptions are being made about how much of the logging business will be captured.

The Minister’s release also argued that there were climate change benefits from this move

“It will also mean 1,292 fewer tonnes of carbon dioxide released into the atmosphere each year.”

Even if this were relevant – don’t we have an ETS supposed to deal directly with pricing emissions? – and accurate (what assumptions are being made, including about the carbon costs of the double-handling?), it sound doesn’t terribly impressive. A single 747 flying to London and back once apparently emits 1100 tonnes of carbon dioxide.

This is just one of the numerous projects the government is going to spend money on in the next few years.

A couple of weeks ago, I commented on the Minister of Finance’s underwhelming exposition of what the government was going to do to transform the productivity outlook in New Zealand. The Minister noted

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First. This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

To which my response was

If it ends up less bad than a boondoggle we should probably be grateful. It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister – with a vote base to maintain – is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.

Sometimes economic policy in this country seems almost designed to defy reason and evidence in an effort to make us poorer, to hold back national productivity prospects. Spraying around $5m here and $5m there – $3 billion over three years, in some scheme reminscent of congressional earmarks in the United States – not backed, it seems, by any robust supporting analysis, seems just another step along that path.

But at least one senior journalist thinks this is an example of governing exceptionally well, making us poorer one earmark and subsidy after another.

There was an interesting range of comments on the earlier post, including some from champions of rail.  Not one attempted to defend the economics of the Wairoa-Napier line, and to anticipate some similar comments this time round here was my response to one commenter, focusing on my key points.

My specific point was two-fold:

1. Even allowing for arguments about the extent to which road use isn’t fully priced (on average – it clearly isn’t fully priced at the margins) other competing transport operators successfully meet the market test (air, coastal shipping). It isn’t immediately obvious why rail freight (the issue here) shouldn’t be held to the same standard

2. Successive govts have been happy for Kiwirail to operate in very low (negative) returns to shareholders – perhaps partly to reflect presumptions around road pricing etc – but even by that undemanding standard, Napier-Wairoa doesn’t appear to be have been viable.

There are various interesting comments to my post. But I haven’t seen any that suggest Napier-Wairoa is an economic proposition. It is still possible, of course, that in fact it is, but then one might have hoped for a cost-benefit analysis to have been (a) done, and (b) published.

And don’t suppose this is the end: in that Dominion-Post article we read this

On whether there was a possibility of extending the line to Gisborne, Jones said any business case would be pushing on an open door.

That might rival light-rail in Wellington for the most uneconomic transport proposal the government could fund.

Farewelling Makhlouf

I saw three reports of last night’s Beehive function to farewell the outgoing Secretary to the Treasury.  There was Barry Soper’s piece on the Herald website, and Herald political editor Audrey Young’s account, as well as Richard Harman’s Politik column (the latter is subscriber-only, but with one free article a month for non-subscribers).

Soper’s is the more hard-edged take

The atmosphere in the cavernous Beehive Banquet Hall last night was about the same as it would have been if Donald Trump walked into a Democrat’s convention.


It’s surprising the inquiry wasn’t done and dusted in time for the farewell given all the statements so far point to the fact that the Secretary knew full well when he claimed there’d been a hack attack that it hadn’t taken place, the GCSB spies had made that clear the night before.


But if last night was uncomfortable they were doing their best not to show it.

Across the three accounts, we learn that – Grant Robertson aside, as host –  no Labour ministers were present, but that a phalanx of New Zealand First ministers  and MPs were, including Shane Jones, whose (lack of) regard for the proprieties of public office is well-known.

I suppose that when it was decided to push ahead with this nauseating function, people had to at least go through the motions, but it sounds as if it was worse than that.    Audrey Young talks of the “glowing tributes” Makhlouf received (Harman talks twice of “fulsome praise” –  when I was growing up that meant (eg OED) “offensive to good taste, from excess or want of measure”, so perhaps Harman was deliberately being a bit double-edged.)    Reports suggest that at least Robertson was somewhat honest, since his praise seemed to involve the things that had seen a dumbing-down of The Treasury, and a lowering of its standing and capability to offer rigorous economic analysis and advice.  I guess when your government has no economic ambition, you don’t need much analysis.

But what seemed wildly inappropriate was the account of the State Services Commissioner Peter Hughes’s address.  You will recall that the State Services Commission is investigating Makhlouf’s personal conduct in and around the Budget affair.

“Thank you from the people of New Zealand. Our country is a better place for your work.”

He said Makhlouf had brought “strong leadership and a great deal of personal integrity” to Treasury.

He had been “authentic and straight up” and had been calm and unflappable.

“I will certainly miss your calm authority,” Hughes said.

In no conceivable universe (except perhaps some parallel one inhabited by SSC) could Makhlouf during that Budget episode be said to have displayed “calm and unflappable” leadership.  Had he done so, there’d have been no inquiry.

But, more importantly, how are supposed to take seriously (supposing anyone was inclined to) an inquiry into very recent conduct, when the person responsible for the inquiry gushes like this, and apparently went on to praise the collegiality of the public service chief executive “club”.   Looking out for each other no doubt (even if, privately, they must all be thinking “Gabs, how could you have?”)

And after all that attendees had to listen to Makhouf “at length” (is there anything worse at a farewell than long speeches?).  The sheer vacuity of it all was captured in this piece of (delusional) political pandering.

“I have to say, Grant, that one of my proudest moments was listening to the Budget speech and hearing the living Standards’ Framework come alive,’ he said.

While serious analysts struggle to identify any real difference the soft-centred feel-good rhetoric made.

The other thing that caught my eye in the Harman column was the photo at the top of it, showing Makhlouf and Grant Robertson chatting pleasantly with the PRC Ambassador, Madame Wu.  Pretty nauseating in the wake of the repression this very week of the Hong Kong protests –  but no doubt Madame Wu is delighted that our government, unlike Australia, the UK, the EU, and senior US figures, has said nothing at all.

But in particular the photo brought to mind Gabs’s shameless (and not even well-grounded) pandering to the PRC.   There is, for example, this

Secretary to the Treasury Gabriel Makhlouf has welcomed a new Memorandum of Arrangement formalising a financial dialogue between the New Zealand Treasury and the Ministry of Finance of the People’s Republic of China.

signed on the Prime Minister’s recent tributary visit to Beijing.  Of it, Makhlouf noted

There are fiscal, financial and economic issues of mutual importance to our two countries and there is much we can learn from each other

Quite what he thought the New Zealand Treasury could learn from economic policy etc in a middle income highly repressive state without the benefit of the rule of law or a genuine and open contest of ideas was never made clear.  You might excuse that bumpf on the grounds of “well, it is meaningless, and just the stuff officials sometimes have to do”. But the same can’t be said for the dreadful speech he gave in Beijing last year.  I wrote about it here.   An excerpt

What appalled in this particular speech was the craven grovelling to the PRC, the total relativisation of our two countries in ways which suggest that he thinks their system, their government, is just as good as ours.  (I don’t suppose he really does, but when you are a senior official, backing your government, what you say counts  –  including no doubt to the PRC authorities. He does the kow-tow)

He begins his speech with the rather empty claim that

Yet there is so much that we have in common.

We are all human beings I guess, but it wasn’t clear what else he had in mind.   He tries, not very convincingly, to elaborate.

All of us here want open trade, thriving business, and economic growth. Those things matter for our material wellbeing. But they are only a subset of what contributes to the quality of our lives. I’m sure we share a belief in the importance of good health and education, decent housing, the support of family and friends, a clean natural environment, a safe and peaceful society. We seek that for ourselves and for future generations.

As the Secretary surely knows, the People’s Republic of China has no commitment to open trade, having a highly regulated economy, and tight restrictions on international services trade in particular, and on investment.    But what of that broader list of things he thinks we have in common?  Perhaps it is fine as far it goes, but he is talking to people in a country whose government has a million people from Xinjiang in concentration and re-indoctrination camps.  And for all the Secretary’s talk about wellbeing –  and even “social capital” –  it is notable that things like free speech, free expression, the ability to change your government, freedom of religion, and even the rule of law – explicitly disavowed not long ago by the PRC Chief Justice –  are totally absent from his list.  The things that divide free and democratic countries from the PRC regime are huge and important.  Perhaps even the sorts of things that might appear in a typical New Zealand assessment of wellbeing?  But they, apparently, don’t matter much to the Secretary to the Treasury.  He goes on the praise the Belt and Road Initiative –  under the aegis of which the previous New Zealand government committed to the (rather frightening) aspiration of “the fusion of civilisations” with the PRC.

In all that he was just warming up.  There is later a substantial section of the “NZ-China relationship”, which is almost nauseating in places.  Thus

It is a relationship that goes beyond diplomacy and trade. It’s also about the links between people, about investing in our mutual success, and about recognising our shared interests in the world.

Liberty, democracy, the rule of law for example?  I guess not.  Respect for established international borders?  I guess not.    Then again, there is this in common, that both China and New Zealand have dramatically (economically) underperformed their near neighbours over the last century of so: in China’s case, Japan, South Korea and Taiwan, and in New Zealand’s case Australia.

Then we get this

It hasn’t all been one-way traffic. New Zealander Rewi Alley helped establish the Gung Ho movement in the 1930s and dedicated 60 years of his life to improving the living standards of Chinese workers.

You mean the active member of the Chinese Communist Party and unashamed apologist for its evils  (I have one of his books sitting on my desk, co-authored with the dreadful Communist fellow-traveller Wilfred Burchett, written towards the end of the Cultural Revolution celebrating the quality of life in the PRC).    Then again, when we have a Chinese Communist Party member in our Parliament what might one expect from our elites?

The Secretary moves on to celebrate PRC foreign investment in New Zealand.  He notes, without further comment, that

Over half of the 25 largest Chinese investors in New Zealand are state owned enterprises including Huawei, Yili and Haier.

as if this is a good thing (Treasury not being known for its enthusiasm for SOEs in New Zealand), as if he cares not about the national security threat various allied governments have determined Huawei represents –  and note that Huawei likes to represent itself as a private company –  and as if he is unaware (or cares not a bit) about the PRC law under which companies (private and public) are required to operate in the interests of the party-State, at home or abroad.  In the best of circumstances, state ownership (and murky ownership) is a recipe for weakened capital allocation disciplines etc, and the Secretary to the Treasury really should know that.

That is the sort of leadership our Treasury has had for the past eight years.  But I guess you can see why he probably mostly went over okay in the Beehive.   And why Madame Wu was so keen to chat.

My trains anecdote yesterday prompted a former Treasury official to get in touch with another farewell story.

I recall him also saying, in the context of the Christchurch earthquakes, that what was needed was a “Canary Wharf” kind of initiative in Christchurch. I recall his total absence of any reference to cost/benefit or evidence leaving us all looking at the floor – we were trying to imagine what a Canary Wharf in Christchurch might consist of, aside from being mystified about what it was about Canary Wharf that he was seeing as welfare-enhancing.

No doubt we all say dumb things at times, and perhaps especially people who think aloud.   But not all of us, having already risen to such giddy heights – albeit by leaving home and coming to a small and remote country – say things of quite such economic illiteracy in formal work contexts, and then get promoted further, to be chief economic adviser to successive governments for eight years.

It isn’t Makhlouf’s fault New Zealand has drifted further backwards, in economic terms, over the last eight years.  But over that time he led an institution that could have played a powerful role in shaping and influencing for the better debate about how best to respond to our longstanding continuing relative decline.  Instead he chose to shift the focus to feel-good distractions.  He –  and those who appointed and reappointed him –  bear responsibly for that, for what is in many respects a betrayal of our people, perhaps especially the poorest and most vulnerable, who can’t just flit in and when their term ends flit off to another high-paying job in yet another country.

Makhlouf again

This evening, so we are told, the official government farewell is to be held at the Beehive for outgoing Secretary to the Treasury Gabs Makhlouf whose eight year term expires in two weeks’ time.  It should really be a rather awkward occasion, even allowing for the likelihood that the people who turn up to the farewell will mostly be those either not bothered by serious misjudgements in public office (and a multi-year record of underperformance) or who feel that they have little choice but to attend (the host –  the Minister of Finance –  and, for example, ambitious careerists in the upper levels of the public sector).   The Leader of the Opposition and National’s Finance spokesperson are reported to be boycotting the event.

I’ve long been something of a sceptic of Makhlouf, having first observed him when I was working at Treasury a decade ago.  I was surprised –  and not exactly positive about –  him being appointed Secretary, and more surprised and seriously disappointed by Bill English’s decision to approve his reappointment.   The gradual decline in the quality and standing of The Treasury continued on his watch –  Eric Crampton argues it accelerated –  with a growing sense that The Treasury had become less interested in, and capable of, rigorous economic analysis, and more about bending with the wind to (indeed championing) all manner of trendy causes.   Makhlouf gave many published speeches, and they too were remarkable mainly for platitudes, politically-driven pandering (eg on the PRC), and conventional centre-left tropes, rather than for any distinctive insight.  He was particularly fond of talking up the idea of New Zealand being close to Asia, to which I’ve several times pointed out that when he was home in London he was closer to Shanghai or Mumbai than when he was in the office in Wellington.

Which is not to suggest that he was without his merits.  There were policy and organisational issues where I thought his instincts were sound, under his leadership Treasury continued to be better around the OIA than most agencies, he was/is a pleasant person, and he must have something of a thick skin.  Having been quite critical of him and The Treasury, I was a bit surprised a few months ago when he followed through on one of those polite “we must get together for a coffee” comments people sometimes make, and we had a long, pleasant, and productive discussion on all manner of things.

And so until a couple of weeks ago I’d assumed his term would end quietly and conventionally, with the hope (against hope, given the SSC –  and, frankly, the pool of credible contenders) that someone better might replace him.

But his conduct in the Budget “leak” affair –  much of it directly visible to, and aimed at, the public –  descended to a whole new level.   And simply should not have been allowed to stand.   I wrote about this in a post last week.    Quite a lot of additional information has emerged since then, including from the GCSB. the Prime Minister, and the head of the Department of Prime Minister and Cabinet.  None of it puts Gabs Makhlouf’s conduct in a better light, or offers any mitigating circumstances to explain his words, his actions, and his demeanour.    In such a serious matter he fell far short of acceptable standards.  An honourable and self-aware person in his position would have resigned by now (which might have been made a little easier knowing that he was leaving in a few weeks anyway). But then such a person would not have found themselves in such a position, because having realised that they had made a succession of mistakes –  perhaps unused to the glare of the public spotlight in an intensely political controversy – they’d have apologised and adopted an attitude of contrition.

Where did he go wrong?

Well, first, there was the not-insignificant matter that he was chief executive of an agency charged with maintaining Budget secrecy, and yet systems were such that some material found its way into the public domain anyway without too much difficulty.   Not a hanging offence in its own right, but not a good start.  And there hasn’t even been an expression of regret or apology for that –  not in the public statements anyway, but perhaps he has apologised to the Minister of Finance.

Then there was the rather melodramatic statement Makhlouf issued on the Tuesday evening  (this was the “deliberately and systematically hacked” statement).    It was made when, as is now clear, the GCSB had already told Treasury that nothing of the sort that most people think of when the word “hack” is used had occurred.  At best, it was loose and flamboyant language.  Makhlouf will have had the benefit of advice from his comms, legal, and IT people, and (we presume) his senior deputies.  His staff had had the advice from GCSB, and yet he still put out this statement.  He could, quite easily, have put out an alternative version along the lines of “GCSB has advised us that there has not been a hack, but as we continue to investigate ourselves, we have referred the matter to Police.”

In all the timelines that have emerged to date, none has documented the (likely frequent) contacts between Treasury staff and staff in the office of the Minister of Finance (or of the Prime Minister).  But even if you subscribe to the idea that the Minister was putting pressure on the Secretary, the fact remains that the statement was Makhlouf’s responsibility, and his alone.  As I’ve noted previously, when you are leaving in a few weeks, and then leaving the country, the Minister of Finance has little no leverage over you – but even if he had some leverage, your legal responsibility is still to act responsibly, calmly and independently.

We now have confirmation that the head of the GSCB had alerted his minister to concerns about Makhouf’s statement that evening (after the statement had gone out).  We know too that Andrew Little passed those concerns on to the Prime Minister and the Minister of Finance.  So even if Makhlouf did not know the full extent of GCSB’s concern prior to his statement going out, he must have been made aware of those concerns by late that same evening. (If Andrew Hampton was concerned enough to call his minister, are we to suppose he would not have first rung his fellow public service CE, Makhlouf, to put his concerns on record?)

And yet in his round of media interviews the next morning,  not only did Makhlouf not ease back the rhetoric, he amplified it –  both directly (his use of the “iron bolt” image) and in lines from interviewers to which he did not object.   We also don’t know precisely when Treasury IT staff formally advised Makhlouf what had actually happened, but even by this stage he must have had ample material and perspectives that should have led him to reconsider.  His rhetoric was out of step with whole-of-government action (no ODESC meeting, no early release of market-sensitive bits of the Budget etc,).   Whether or not his intent was partisan (I presume not), his rhetoric in turn provided cover for, for example, pretty inflammatory statements from the Deputy Prime Minister.  He must have realised  –  and if he didn’t it reflects more poorly still –  that he was misleading the New Zealand public.

By later on the Wednesday afternoon, even the Police were washing their hands of the affair (presumably after talking to Treasury IT staff earlier in the day) and yet there was still no clarification or withdrawal from Makhlouf.  Instead, we finally got a statement from Makhlouf at 5am the next morning, in parallel with one he had managed to get out of SSC.    I don’t suppose anyone thinks Treasury staff were at work at 4:30am finalising the press release –  there was no obvious reason why the statement could not have been released hours earlier –  but even then it was the content of the statement that was even more problematic than the timing.

There was no apology (either for the systems allowing the breach, or for his actions words over the previous 36 hours) and renewed attempts to muddy the waters with unsupportable claims that the release of the data had been a breach of some (non-existent) convention around Budget secrecy.  And then nothing more: no media appearances, no nothing.  And there has been nothing since, whether before or after the (belated) announcement of an SSC inquiry into Makhlouf’s words and actions, complete with (irrelevant) report from the State Services Commissioner that Makhlouf believed he had been acting in good faith throughout.  Quite probably, but good faith doesn’t excuse shockingly poor judgement (especially not in one of the most senior officeholders in the land).

My own view remains that had Makhlouf issued a genuinely contrite statement that Thursday morning, the issue would have died off pretty quickly.  New Zealanders seem mostly pretty forgiving, when someone owns up.  But Makhlouf appears to have dug in.  He could have apologised.  He could have taken leave while the investigation is going on (especially as it will involve a lot of questioning of his own staff). He could have resigned.  He could have arranged for tonight’s farewell to have been quietly postponed (I’m sure Treasury will have its own farewell).   But he did none of these things.  And now it appears to be in the joint interests of Makhlouf, the SSC, and the government for the inquiry – undertaken by people with specific conflicts (the SSC statement on the Thursday) and who are in any case too close to those they are investigating – to take just long enough to run out the clock.   That is a sad commentary on the people involved and on the system, and tonight’s farewell does look quite a bit like cocking a snook at New Zealanders, and robust standards of governance (which includes sweating the small –  and not so small – stuff), as the elite –  perhaps barely conscious of what they are doing –  look after their own.

What of the Irish?  I was among plenty of people surprised by Makhlouf’s appointment as Governor of the Irish central bank (I recall a flippant remark the day the appointment was announced about needing to check that it wasn’t April Fool’s Day).  He has no strong background in monetary policy, banking supervision, financial markets, or financial stability.  And he was male, (there was a strong female local contender) and he was – not to put too fine a point on it –  British, and Irish independence hadn’t exactly come about in the peaceful and evolutionary way New Zealand and Australian independence had.   “Hated imperialist overlords” and all that, even allowing for the fact that some time has now passed since then.  To the outsider, it seemed that what Makhlouf had going for him was mostly the conventional centre-left platitudes (appealing to the current Irish government) and a strong emphasis – beyond the facts and evidence –  on “diversity and inclusion”.  He hardly seemed likely to add brilliance or gravitas to the deliberations of the European Central Bank’s governing bodies: as a policy person and economist he was not a patch on the outgoing Governor, Ireland’s own Philip Lane.

The Irish central bank’s reputation took a hit in the wake of the 2008/09  financial crisis.  Much of that appeared to be very well-deserved (with the caveat that the political classes were so invested in the success narrative pre-2008 that a central banker who had tried to be much better might not have lasted long).    They’ve done a lot of rebuilding in the last decade, including having had some foreign appointees in senior roles.  The economist Stefan Gerlach served as Deputy Governor for several years.  He was sceptical when the Makhlouf appointment was first announced.  Here was his take on the news of the SSC inquiry

and on Eric Crampton’s piece on The Treasury under Makhlouf late last week

Radio New Zealand yesterday reported the Irish Minister of Finance saying that Makhlouf’s appointment was secure unless there was “very very grave misconduct” uncovered.

If the appointment has already been lawfully made, a quick check of the Irish central banking act suggests that government may have few options.  The initial appointment will have been solely at the discretion of the Irish cabinet.

19.—(1) The Governor shall be appointed by the President on the advice of the Government and shall receive such remuneration and allowances and be subject to such conditions of service as the Board shall from time to time determine.

A person serving as Governor is automatically ousted in exceptionally extreme circumstances

d) if and whenever he is adjudged bankrupt (whether in the State or in any other country) or makes a composition or arrangement with his creditors or is sentenced by a court of competent jurisdiction to suffer imprisonment or penal servitude, he shall forth-with become and be disqualified from holding the office of Governor.

There is a separate section on removing a Governor.  There is a health ground

21.—(1) If the Governor becomes by ill-health permanently incapacitated for performing his duties as Governor he may be removed from office by the President on the advice of the Government.

and a residual catch-all, which has to be initiated by the Bank’s Board and has to be unanimous.

(2) If the Board, by unanimous vote of all the Directors, requests the President to remove the Governor from office for cause stated, it shall be lawful for the President on the advice of the Government to remove the Governor from office.

It should be very hard to remove a serving Governor from office.  But Makhlouf doesn’t take office for another three months, where the standards really should be lower.  Embarrassing as it might be for the Minister of Finance to do so –  having initiated the appointment and lauded Makhlouf to the skies – it is a bit hard to see how anyone would have so thick a skin as to resist an approach from the Minister of Finance making it clear that he would no longer be welcome as Governor, and could not credibly serve as Ireland’s person in the governing halls of the European Central Bank, at a time when the ECB and European institutions will need all the credibility, and expertise, they can muster.   In the private sector, a payout might be involved.  Those don’t go down well in the public sector, but it isn’t as if Makhlouf resigned another job to accept the Irish appointment –  his term here was expiring and he wasn’t eligible for reappointment.

Time will tell, and that is Ireland’s problem.

On the occasion of farewells, people often go round looking for stories about the person departing.   I’d have met Gabs before this, but the first encounter that really sticks in my mind was a policy forum at The Treasury on aspects of overall economic performance, productivity etc.  If I recall rightly it was held in The Treasury’s wharenui, so we were all there in our socks/stockings.  At some point in the meeting Gabs piped up, opining that New Zealand’s real problem had been that we hadn’t invested heavily enough in rail, and went on to note that one of the best aspects of the British Empire had been its emphasis on rail.  The economists among us didn’t know where to look –  the floor mostly –  or what to say, but I still recall the conversation afterwards along the lines of “thank goodness he is only the Deputy Secretary for the operational side of The Treasury, and doesn’t have a policy role”.

Sadly, little did we know.

It is the sort of experience that leaves me cautious, at best, about what sort of appointment SSC will make this time, when they finally get round to filling the vacancy that has been known for three years and which was advertised six months ago….and which will be vacant in, at most, two weeks from now.




As obstructive as ever

Late last week I suggested that Pattrick Smellie of BusinessDesk was being more than a little generous to the Reserve Bank when he suggested that, even though the Governor was now displaying some of the same bunker mentality as was on display late in the Wheeler years, more generally

The RBNZ is now more open and transparent.

There was no evidence then for that proposition.  As I noted

it just isn’t so –  the capital review is only the latest example, but nothing material has changed about monetary policy, we’ve had no serious speeeches from the Governor on his core responsibilities, and they play OIA games just as much as ever

And today I’ve had another couple of fresh examples illustrating my point, and a reminder of a third.

The reminder?  Contact from the Ombudsman’s office about a complaint I lodged some time ago when the Bank took a grossly excessive amount of time to release material I’d requested –  relevant to bank capital review – all of which, in turned out, had already been given to other people (and thus should have been able to be released almost immediately).

And the new examples?    More than two months ago I asked both the Bank’s Board and the Minister of Finance for papers relevant to the appointment of members of the new Monetary Policy Committee.    After a while, both parties extended my request.  I wasn’t unduly bothered, although even then the notion ran around in my head that a pro-active release might have been a good idea, around the first appointments to a powerful new body.    Today, the Minister of Finance did release a fair amount of material (I haven’t read it yet), but what about the Bank’s Board?   Well, they just sent me a note extending the request yet again, using as their justification –  after having had 2.5 months already

because of the consultations necessary to make a decision on the request such that a proper response to the request cannot be made within the original time period.

And this is what Pattrick Smellie thinks is a “more open and transparent bank” (bear in mind that the Governor sits on the Board, and the Governor’s staff will do doing all the actual work).

Quite possibly the request for information around the MPC appointments could have taken a bit of effort.   But my other example of the Bank continuing on as ever, playing games outside both the letter and the spirit of the OIA, is one where they could easily have responded fully and openly within a day or two of the original request.

On 11 May, I lodged the following request

nzi oia

I was pretty sure he would have been speaking without notes or slides (but if there had been any they’d have been easy to send on –  after all, the material had already been provided to private sector people).   And since the request was made just a day after the presentation, it should have been very easy for the Governor to have jotted down a quick summary of what he had said, and how he had answered questions on two specific topics.

But 20 working days have now passed –  and recall that under the law the requirement is to respond “as soon as reasonably practicable, but no later than 20 working days” –  and this afternoon this request was also extended for another couple of weeks, again allegedly because the consultations necessary to make a decision could not be made within the original timeframe.  Yeah right.   (In fact, there shouldn’t need to be any consultations at all.  I asked only for the Governor’s words, which are official information.)

Why did I frame the request around those specific points?  It was easy to anticipate that the Governor would get lots of questions about his bank capital proposals, probably not (from that audience, which includes both private businesses and banks) sympathetic ones.  And about the Bank’s research capability?  That reflected a post here on the morning the Governor was to meet the New Zealand Initiative over lunch.

On which note, one hears that the Reserve Bank’s research function has been  substantially gutted, with several recent resignations in recent months from among their best-regarded and most productive researchers (and the manager of the team left this week and is reportedly not being replaced).    The Bank’s research function once played a very influential part in policy and related thinking, but that is going back decades now.   Even with a Chief Economist who himself had a strong research background, the research team never quite found a sustained and valuable niche in recent years, even as some individual researchers have generated some interesting papers, often on topics of little direct relevance to New Zealand.  One of the most notable gaps is that the Bank has become increasingly focused on financial stability and financial regulation, and yet little or no serious research has been published in those areas of responsibility (a senior management choice).  That weakness has been evident in the recent consultation document(s) on bank capital.

One can always question the marginal value of any individual research paper, but we should be seriously concerned if the Reserve Bank under the new wave of management is further degrading the emphasis on high quality and rigorous analysis.  Apart from anything else, a good grounding in research has often been the path through which major long-term contributors to the Bank have emerged, including former chief economists (and roles more eminent still) Arthur Grimes and Grant Spencer.   I see that the Governor is delivering an (off the record) talk at the New Zealand Initiative today: perhaps someone there might like to ask just what is going on, and what place the Governor sees for a research function in a strongly-performing advanced country central bank.  Not even he, surely, can count on Tane Mahuta for all the answers.

So I was interested to see if anyone with the opportunity had asked the question.

(As it is, I heard on the grapevine that at this event the Governor may have attempted to fend off any criticisms of his tree god nonsense with the allegation that criticism was simply “racist”.)

I’m more amused than outraged.  Because the Bank’s –  the Governor’s –  conduct is simply par for the course: obstructive whenever they can get away with it, as they have been for a very long time.   There is no sign –  none –  that in this regard the Orr regime is any better than what went before.  You might now get cartoons with your MPS or FSR, but what you won’t get is an open, transparent, and accountable Reserve Bank, seriously interested in substantive engagement or searching scrutiny.  That’s a shame.  And it is something the Board and the Minister should take a lot more seriously, including when the Minister exercises his new statutory power to appoint the chair and deputy chair of the Bank’s Board –  finally making it clear that the Board work for the Minister and the public, not for the Governor or their own quiet lives.

UPDATE: A commenter points out that a second extension, made outside the initial 20 day window, is itself in breach of the OIA.  Even the SSC agrees with that interpretation.

MULTIPLE EXTENSIONS You can extend the time limits for a request more than once, providing all extensions are made within the original 20 working day time period after receiving the request (see section 15A(3)).