New Zealand Initiative

Prescriptions

Michael Reddell Fiscal policy, Monetary policy, New Zealand Initiative

It is the time of the cycle when plenty of groups are keen to have their policy ideas and prescriptions be heard. After all, parties may still be finalising policies and there seems to be a reasonable chance of a new government and different set of ministers before long.

Many are just self-interested (no doubt the authors mostly believe there might be wider benefits, but the fact remains that they are championing policies to help their firm/industry/sector). As an example I found a link in my email this morning to one called a “Blueprint for Growth”. It was this from the covering press release that made me rashly open the handful of slides:

“Today’s announcement is just the beginning, as we know that good, evidence-based, bipartisan policy leads to better outcomes for all New Zealanders. This is part of the key to unlocking the future prosperity and productivity in New Zealand. 

Instead it was a bunch of suggestions from the Financial Services Council, some probably worthy, others purely self-interested, that were primarily going to be good for member firms of the Financial Services Council and which, whatever their merits, were going to do nothing at all for productivity,

Yesterday the New Zealand Initiative released a rather more substantive effort, an 86 page collection of proposals and recommendations across a wide range of areas of government policy (nothing on foreign policy for example, and no references to China at all, except perhaps by allusion when discussing the proposed foreign investment regulatory regime, and no mention at all of company tax). (I wrote about their Manifesto 2017 here.)

In some parts of the left, the New Zealand Initiative is looked on as some sort of lobby group for big business, and anything they say is, accordingly, to be dismissed without further examination. The Initiative would sometimes have you believe that it was the opposite: simply public-spirited disinterested people, focused only the well-being of all New Zealanders, who put up their money (in some cases, although mostly their shareholders’ money) only to produce research and analysis without fear, favour, or predisposition. The truth is probably in the middle, but it really shouldn’t matter because the Initiative is transparent about (a) who their members are, (b) their staff and the views of those staff, and (c) their analysis and research. Their stuff should be taken on its merits, and critically scrutinised in the same way as any other contributions to debates. Topics chosen will presumably reflect, to some extent, members’ interests (in both senses of that word) but that is a different matter than what is said on those topics.

I probably agreed with half the proposals in the latest Prescription. I often find myself agreeing with them on second order issues, while profoundly disagreeing with them on the diagnosis and prescription for New Zealand’s long-running productivity failure. But it is a fairly serious collection of ideas and I was a bit surprised not to have seen any media coverage.

In this post I wanted to comment only on their fiscal and monetary policy recommendations, summarised here (and discussed in a bit more depth on page 20-22 of the PDF.

Take fiscal first.

While I generally agree with the first recommendation (no new or higher taxes) – since there is plenty of room to close the (large) deficit by cutting out low-value spending over several years – some of the arguments adduced in support don’t stand much scrutiny. Take, for example, this paragraph

It is certainly true that Singapore and Taiwan have markedly lower rates of tax to GDP than New Zealand (or other advanced countries). On the other hand, OECD data for taxes and social security contributions as a share of GDP show that these days both Japan and Korea have about the same or higher tax shares than New Zealand does. Switzerland, Australia and the US are certainly lower than New Zealand, but then Canada is higher. And “Europe aside” does tend to rather overlook the fact that most of the world’s advanced economies are in Europe. (The Ireland line was fairly disreputable, it being well-understood that Ireland’s GDP numbers are seriously distorted by international tax factors. Using as a denominator the one the Irish authorities recommend (modified GNI), Ireland’s tax share is much the same as New Zealand’s).

I largely agree with their proposals around retirement income, and was surprised to realise that Kiwisaver subsidies now cost about $1 billion per annum. The text suggests that they envisage a pretty slow increase in the age of NZS eligibility, which does fit with what National is promising but should not be necessary in a first-best set of recommendations. Lift the age of eligibility by one quarter a year and it would be at 67 in eight years’ time.

There is quite a difference between suspending contributions to the New Zealand Superannuation Fund (the headline recommendation) and the alternative they moot in the fuller text of simply winding up the Fund. Do the former and Labour is likely to simply resume contributions again. There is no natural place for the government taking your money and mine (or, worse, borrowing it) to punt in international markets at our risk. The NZSF was initially designed for two things: to keep Michael Cullen’s colleagues’ spending sticky fingers off his early large surpluses, and to help buttress an NZS age of 65. We’ve not now had regular surpluses for a long time, and there is no good reason – with improvements in life expectancy – why the eligibility age for the universal state pension should be the same now as it was set at, for the then means-tested age pension, in 1898. NZSF should be wound up and the government’s gross debt substantially reduced.

The third bullet – comprehensive expenditure review – is fine, even admirable. But specifics, and willingness to actually cut, will matter. I like the idea of getting rid of interest-free student loans (my kids look at me reproachfully) but…..what hope?

I have long favoured a (small) Fiscal Council, or perhaps a slightly wider Macroeconomic Policy Council. This is a quite different thing than the policy costings office National, Labour and the Greens are all keen on (as a public subsidy to political parties). That said, if one were serious about austerity in the next term of government – and for my money the NZI doesn’t give sufficient weight to the scale of the fiscal challenge – I’m not sure I’d be treating new nice-to-have agencies (even very small ones) as any sort of priority. I’d rather focus on replacing the Secretary to the Treasury (whose term is up next year) and revitalising the analytical and advisory capabilities of The Treasury.

What of the monetary policy and Reserve Bank proposals. In several places, they overlap with ideas I’ve pushed here over the years.

I was in favour of something like the change to the statutory monetary policy mandate to the Reserve Bank, and am actually on record (in my submission to FEC in 2018) as having favoured going further. The change to the way the mandate was expressed was never envisaged as materially altering how monetary policy was run (from Robertson’s perspective it mostly seemed to be political product differentiation), and I don’t think there is any evidence it has actually done so. The Reserve Bank has made big mistakes in recent years but they have been analytical and forecasting mistakes, not things that can be sheeted home to the change in the way the mandate was expressed (here I imagine the Governor and I would be at one, although of course he’d be reluctant to get anywhere near the world “mistake”). All that said, since making the change made no substantive difference and was mostly about product differentiation, so would undoing it. We need real change at the Bank (and in how it is held to account) so I won’t argue strongly about symbolic change, a least if it markets/headlines real underlying change.

On the other hand, I have long favoured splitting up the Bank, and leaving a monetary policy and broader macro stability focused central bank, and then a New Zealand Prudential Regulatory Agency (probably comprising the regulatory functions of the Bank and much of the FMA’s responsibilities). That such a model would parallel the Australian system is not a conclusive argument on its own, but it is a real benefit when the biggest banking and insurance players in New Zealand are Australian-based. The Initiative argues that

Separating the functions into two organisations would improve governance and reduce the risk of political interference in the RBNZ’s core mission of price stability.

I agree (strongly) with the former. The current (reformed) Reserve Bank has a dogs’-breakfast of a governance model. I’m (much) less persuaded by the latter argument. I have seen no sign – in my time at the Bank or in recent years – of political interference in the operation of monetary policy. The mistakes have been Orr’s, and if there are valid criticisms of Robertson they are that he has showed little interest in doing anything about holding the Bank (and its key personnel) to account. Monetary policy and financial institution regulation are just two quite different functions, and need different skill-sets in CEOs. It isn’t impossible to make the current combined model work – though it would need big changes, including some legislative overhaul – but it simply isn’t the best model for New Zealand. (Such a reform would, done the right way, also render the Governor’s position redundant, with two new chief executive positions to fill.)

Should the Bank’s budget be cut? Yes, of course (and that comprehensive spending review shouldn’t overlook opportunities there), and since the NZI document was finalised we’ve seen an egregious increase in approved Bank spending without even the courtesy (or statutory obligation) to provide any documentation in support. But the budget is only one lever. As important will be finding expert people to lead the institution and monetary policy function who are really only interested, in their day job, in thinking about macroeconomics and doing and communicating monetary policy excellently, without fear, favour, or suspicion of either partisan allegiance or using a public role for private ideological purposes.

I have written here previously that I favour returning the inflation target to 0 to 2 per cent. That said, I don’t find the Initiative’s reasoning very persuasive

A lower target range would encourage the RBNZ to pursue more prudent monetary policies,
minimising the risk of excessive inflation and promoting sustainable economic growth.

But there is no evidence for these claims. Adrian Orr and his minions would have made more or less exactly the same forecasting mistakes in recent years with a target centred on 1 per cent as with the actual target centred on 2 per cent.

Perhaps more importantly, I don’t think the New Zealand Initiative team has ever taken sufficiently seriously the current (regulatorily-induced) effective lower bound on nominal interest rates. That constraint can and should be fixed but unless it is fixed it would be irresponsible to recommend lowering the inflation target.

On deposit insurance, I have long favoured deposit insurance, as a second-best way of reducing the scale and risk of government bailouts of banks (if no one is protected a failing big bank will almost certainly be bailed out, whereas with (retail) deposit insurance it is more credible to think that wholesale funders might be allowed to lose their money in a failure. That said, my argument was primarily about the big banks, and the deposit insurance regime will not cover only them. I do worry about heightened moral hazard risks around the small institutions. One could, I suppose, argue that capital ratios are now high enough there is very little risk of a large bank failing, to a point where it is credible that depositors could face material losses, but that argument cuts both ways in that with high capital ratios moral hazard risks are much smaller even in the present of deposit insurance.

The second to last item on the monetary policy list is a curious one. The Reserve Bank has run up losses of about $11 billion dollars through an LSAP conducted almost entirely in government bonds. So while I agree with limiting what NZ assets the Bank can buy, I don’t think it gets near the heart of the issue. New Zealand legislation is generally for too lax in allowing huge risks to be assumed with no parliamentary approval (whether the Minister of Finance issuing guarantees, for which there is no limit, or the Reserve Bank – which cannot default on its debts – buying risky assets. While there is a need for some crisis flexibility, the scale of the intervention undertaken (over more than a year) should not again be possible without parliamentary approval. That, incidentally, does not impair monetary policy operational autonomy both because the LSAP is a very weak (just risky) instrument and because (see above) the effective lower bound on the nominal OCR itself can and should be fixed.

I have no particular problem with something like the final item on the list, but as regards the LSAP expansion it would seem to be already there. The Bank’s holdings of government bonds are being slowly but steadily sold back to The Treasury (and others are maturing in RB hands). One can argue that the mix of sales might have been different or that the pace should have been (much) faster, but the domestic monetary policy bit of the balance sheet will shrink a lot. There are debates to be had about how much of an “abundant reserves” approach is taken in future – I’d probably favour not – and there are issues that should have had more scrutiny around increases in foreign reserves that the Minister has approved this year, but they are probably second order in nature.

With only 86 pages and lots of policy areas to get through, the NZI document was never going to cover all the significant issues in any subject area. I have quite a list of others, both as regards fiscal policy and around monetary and financial regulatory policy, but this post was about engaging the debate on the ideas NZI has proposed, not tackling all the ones they didn’t or didn’t have space for. Overall, I’m mostly sympathetic to the direction they suggest, but any incoming government actually interested in change should subject the specifics to some serious critical scrutiny.

New Zealand’s monetary policy mess

Michael Reddell Monetary policy, New Zealand Initiative, Reserve Bank

The New Zealand Initiative has a new report out this morning, written by Bryce Wilkinson, under the heading “Made by Government: New Zealand’s Monetary Policy Mess”. (Full disclosure: I provided fairly extensive detailed comments on an earlier draft.)

It is a curious report. There is a lot of detail that I agree with (and the report draws quite extensively on various criticisms I have made in recent years) but it ends up having the feel of a bit of a muddle.

(It is perhaps not helped by the Foreword from an Otago academic who seems wedded to a fiscal theory of the price level that doesn’t exactly command widespread support anywhere, and which would appear on the face of it to have predicted that New Zealand would have had one of the lowest inflation rates anywhere. His approach appears to absolve the Reserve Bank of responsibility for the high inflation: “the key reason why we have high inflation rates is fiscal policy and not monetary policy” and “even if the RBNZ had not made mistakes, I doubt that it could have avoided high inflation”.)

The title of the report is clearly supposed to suggest that what has gone on is primarily the government’s responsibility (and specifically that of the Minister of Finance). And there are plenty of things one might reasonably blame the Minister for:

  • changing the Bank’s statutory mandate (if you think this was a mistake, or mattered to macro outcomes, which I don’t)
  • reappointing Orr despite the opposition of the two main opposition political parties, having himself changed the law to explicitly require prior consultation with other parties in Parliament,
  • going along with the Orr/Quigley preference to prevent experts from serving as external MPC members (which still seems incredible, no matter how times one writes it),
  • appointing a weak Board with barely any subject expertise, the same board being primarily responsible for Governor and MPC appointments and for holding the MPC to account,
  • being indifferent to serious conflicts of interest in people he was appointing to the board,
  • prioritising a person’s sex in making key appointments,
  • for bloating the Bank’s budget, and
  • never once have shown any sign of unease about the massive losses the MPC-driven LSAP has run up, about the Orr operating style, or any urgency around better understanding what has gone on (you will search letters of expectation in vain for any suggestions from the Minister that, for example, more/better research capability and output might be appropriate, or that speeches more of the quality seen from other advanced country central banks might be appropriate)

and so on.  Robertson has been both an active and passive party in the serious decline in the quality of our central bank over recent years, and given that Orr has been reappointed and seems disinclined to acknowledge the validity of any criticisms, only the Minister of Finance –  current or future –  can make a start on fixing the institution.  Institutional decline –  and it isn’t just the Reserve Bank –  has been a growing problem in New Zealand, and the current government’s indifference has only seen the situation worsen: one might think too of the Productivity Commission.

But, for better or worse, when most people think of a “monetary mess” at present they probably primarily have in mind inflation.  And the way the report is structured it would seem that both the author and the Foreword writer also put a lot of emphasis on the bad inflation outcomes.  No doubt rightly so.

But there simply isn’t any compelling evidence, or really even any sustained argumentation that would stand scrutiny, that any or all of the many things one can criticise Robertson for really go anywhere towards explaining how badly things have gone with inflation (or even with the massive losses on the LSAP).  I’m not, of course, one of those who believe the Bank should escape blame –  that somehow for example (as per one of the Governor’s ludicrous attempts at distraction) we can blame it all instead on Putin or “supply chain disruptions”, as if they somehow explain the most overheated economy and labour market in decades.

But how confident can we really be that a better Reserve Bank –  on the sorts of dimensions the NZI report rightly draws attention to –  really would have made much macroeconomic difference?   As just a small example (and from a country with a similar pandemic experience) the report rightly draws attention to the better academic qualifications of the Governor and senior figures at the Reserve Bank of Australia.  But nothing about Australian inflation outcomes –  or LSAP losses for that matter –  suggests that the RBA has done even slightly better than the RBNZ in recent years.  If anything, I (the Bank’s “most persistent and prolific” critic, as the report puts it) reckon the RBA has done a little worse, even if there is a better class of people and some more thoughtful speeches.    One could extend the comparisons.  As I’ve highlighted here, New Zealand’s core inflation outcomes have been bad, but about middle of the pack among OECD countries/regions.   Fed Governors do lots of good speeches, the institution does lots of interesting research, experts are allowed to be decisionmakers, but…..core inflation outcomes are little or no better and the Fed was even slower than the RB to get started with serious tightening.  And so on, around most of the OECD.

There is –  as the report notes –  no absolute defence for Orr and the MPC in other countries’ inflation records. We have a floating exchange rate to allow us to set our own path on inflation, and just because other countries’ policymakers messed up should not absolve ours of responsibility.    But to me the evidence very strongly suggests that what happened over the last two to three years was that (a) central banks badly misunderstood what was going on around the macroeconomics of Covid, (b) so did almost all other forecasters, here and abroad, and (c) there isn’t much sign that central banks with better qualified more focused people or more open and contested policy processes did even slightly discernibly better than the others.   I wish it wasn’t so.  With all the many faults in the RBNZ system and personnel, it would be deeply satisfying to be able to tie bad outcomes to those choices (active and passive).  But I just don’t think one really can.    All those governance and style matters etc matter in their own right –  we want well-run, expert, open, engaged, accountable, learning institutions, especially ones so powerful.  And weak institutions are likely over time to produce worse outcomes in some episodes.  But there is little sign yet that this is one of those episodes.

And it is clear when one gets to his conclusion that Wilkinson more or less knows this, as he struggles to connect the very real concerns about the Bank, and what Robertson has initiated or abetted, with the most unfortunate macroeconomic/inflation outcomes.

I was going to say that it isn’t really clear either who the report is written for.  But in fact I think that is wrong, and that the primary intended audience is Nicola Willis, her boss, and her colleagues/advisers.    Thus we find this

Bryce 5

Talk about deferential and accommodating.

And the entire report ends this way

bryce 6

In terms of fixing the institution that seems largely right. It could be fixed, but it will need ministers/governments that care and that are willing to devote sustained attention to using the levers they have to gradually right the ship. As Bryce notes, many of these changes can’t be effected quickly, but mostly because the laws are deliberately (and appropriately) written to make it not easy for new governments of either stripe to make sudden or marked changes. That is helpful when the institution is working well, but quite an obstacle otherwise, and may – if a new government were to care enough – need legislative change.

(I wrote a post here last year with some thoughts on what a new government could and could not do.)

As you watch the interactions between Orr and Nicola Willis at FEC – in which Orr is routinely scornful and dismissive – you wonder how in decency he could possibly continue to serve under a National-led government, But perhaps if he were that sort of person – staying in his lane, acknowledging mistakes, open and engaging etc – the concerns would not exist in the first place. As it is, it would be hard (all but impossible under current law I’d say) to get him out if he wants to stay, and so reform efforts will need to go around him, including progressively replacing the Board with able people and ensuring that the external MPC members are both able and expected to be individually and publicly accountable for their own views and analysis. But do all that and we – and other countries – will still be at risk of really bad macro forecasting errors, and central banks unable to live up to their rhetoric, albeit we might hope for no repeats for another generation or two.

Walking the path?

Michael Reddell New Zealand Initiative

At 11am the New Zealand Initiative released their latest report, by Bryce Wilkinson and Leonard Hong, under the title “Walking the Path to the Next Financial Crisis”. It comes complete with a Foreword from former Reserve Bank chief economist (and former Board chair) Arthur Grimes, under the title “A short walk?”, foretelling doom and repeating his recent attacks on the Reserve Bank’s conduct of monetary policy over the last 20 months, ending with the ominous – and printed in bold – declaration “This time is not different”.

The Initiative was kind enough to send me an embargoed copy yesterday. Perhaps the first thing that rather surprised me – in a document that is really quite critical of both monetary and fiscal policy and aspects of the way the Bank does other things – is that the acknowledgements include thanks to a Reserve Bank MPC member (Bob Buckle) for “valuable feedback and suggestions”, and to a Reserve Bank economist (Andrew Coleman) for “careful comments on a draft version”. Perhaps it is an encouraging sign. Perhaps one day the Governor will also get MPC members to give speeches and openly account for their own thinking and actions. But more likely not.

It is hard to know quite what to make of the report. It probably won’t surprise the authors that my bottom line is that, amid some interesting material, much of it seems a bit overblown. In a way it was captured best in the final paragraph of the authors’ Executive Summary

The less prudent the government, the more prudent individual New Zealanders will need to be. Borrowing heavily to buy property or shares at current prices is like playing Russian roulette with one’s financial future. Portfolios should be
diversified. There are risks of both deflation and inflation.

As an advertisement for inflation-indexed bonds (eg 19 year ones, yielding a real 0.88 per cent yesterday) that final sentence could hardly be bettered, but isn’t it always so? The future is uncertain, diversification is usually prudent, and hedging (in this case against inflation uncertainty) usually is too. As for borrowing at present, well even if the government was running a balanced budget I’d be pretty hesitant myself about taking on lots of debt secured on assets like New Zealand houses but (a) it is much less risky if you are buying a house you intend to live in for 40+ years (hedging etc) and (b) people like me (including successive Governors) having been saying as much on many occasions over the last 30 years. Those with particularly long memories – and I’m sure Bryce is one of them – will recall Don Brash, newly appointed as Governor, refusing to buy a house in Wellington in 1988 given how expensive they were.

As for the government, just how imprudent is it? Well, I’ve been as critical as anyone (well, more than most) of the large structural deficit they chose to run in this year’s Budget, when there was no obvious macro or Covid need for such deficits, but if it is stocks (of debt) you are worried about – which for Wilkinson’s and Hong’s purposes you are – then here is the OECD’s series of net general government liabilities as a percentage of GDP (including the May 2021 forecasts, so there should be an update shortly).

nzi nov 21

Is it more net debt than I’d like to see? Indeed. But on the OECD numbers we’d have the 6th lowest net debt (per cent of GDP) of all the OECD member countries next year, and an absolute level that poses no risk to anyone or anything, even if we were to get a severe recession/crisis in the next few years (the global risk the authors are most focused on).

There are also curiously anachronistic touches to the report. Again from the Executive Summary

The composition of New Zealand’s official overseas reserves should be reviewed, particularly in respect of gold.

For those who aren’t aware the Reserve Bank is among a small number of advanced country central banks that hold no gold at all in their foreign reserves (New Zealand has not done so for decades). What really clear from the report is why the authors think the Bank should do things differently. It can’t be as an inflation hedge, since most of the Bank’s reserves are already hedged (funded with foreign currency liabilities). And since the reserves are held to enable crisis intervention in the foreign exchange market – and thus immediate access to liquidity has always been a priority – it isn’t obvious why we should want our central bank holding a non foreign exchange asset that has a very volatile price. If we must have a New Zealand Superannuation scheme (and I suspect the authors agree with me that we shouldn’t) perhaps that is the place to think about whether gold – or Bitcoins for that matter – have a place in a diversified investment portfolio.

Of the authors’ other recommendations for New Zealand, I’m with them on the idea of a independent fiscal council – although it is hard to see it making much difference given the degraded state of New Zealand government agencies generally. On monetary policy their call is for

The Reserve Bank should have a clear path for reversing its emergency credit creation and lifting its control interest rate.

And I have some sympathy when it comes to the future of that huge stock of bonds the Bank bought in a fit of “look, we are doing something/anything” frenzy but in fairness to the Bank they have (a) stopped increasing the stock of bonds, and (b) were one of the earlier advanced countries to start raising official interest rates. No one really doubts there are more increases to come, but then no one wise will be pre-committing to a particular path for the OCR because no one, but no one, knows what sort of interest rates (real or nominal) will be required a few years from now.

The authors seem quite enamoured of the thesis advanced in a recent book by economists Charles Goodhart and Manoj Pradhan who argue that demographics will drive interest rates much higher in the coming decade. It is an interesting argument – and I’m open to it (if not yet convinced) – but in the same paragraph in which they mention this thesis they cite Germany and Japan (countries with particularly unfavourable demographics). But surely the problem then is that both Germany and Japan have far lower interest rates than New Zealand (or, say, the United States). Sure, asset-buying programmes may influence those rates to some extent, but there is just no sign the market thinks real rates (or nominal actually) are going to go a lot higher, even on a 20 year view. The market could be quite wrong – it has been known – but so could Goodhart, Pradhan, and the NZI authors.

Without trying to caricature the authors I think it would be fair to represent their views in this stylised way:

  • things haven’t been the same since the world moved to fiat money,
  • fiscal discipline has been breaking down globally, but especially in the big Western countries,
  • moral hazard (around government bailouts of failing financial institutions) is an increasing problem

And that, in combination, the way is set that will lead to crisis (globally, even if our financial system itself were to be fine).

There are aspects of the argument I sympathise with. It wouldn’t surprise me if the next serious recession were to see a major euro crisis, and perhaps even the end of the euro. But then that has been my view for a decade now, and yet life goes on. Fiat money has had its downsides – look at how much prices have risen over the last 100 years compared with the previous 100 – and yet the reality of the decade prior to Covid was one of inflation in most of the advanced world repeatedly undershooting targets. And much as I abhor structural fiscal deficits – of the sort established in places like the US, UK, and Japan – it remains true that real interest rates (servicing burden) are extraordinarily low, and have now been low not for a few months but for really rather a long time. Perhaps 3 per cent real interest rates will return and endure, but for now there is little credible sign of such a development anywhere, and quite a bit of what Wilkinson and Hong worry about seems to rest on such a scenario. If I were advising New Zealand’s Minister of Finance today – or his Opposition counterparts – risks around advanced world fiscal debt would not be high on the list of things I’d be worrying about. And I’m not keen on bailouts either, but surely there is at least as credible argument that in much of the world capital ratios are now so much higher than they were that – to some extent at least – the moral hazard argument is less strong than it might have appeared in 2009.

It is good to be challenged, and there is some interesting material in the report including (at least for those less aware of monetary history) on how the current global system came to be. And I strongly endorse the authors’ scepticism about the self-politicisation of our Reserve Bank (and the tendency of many other central banks to want to weigh on on matters simply not their responsibility). Even that weird new central bank ‘network for indigenous inclusion’ gets a mention (I keep waiting for the day when the Icelandic central bank is signed up, their “indigenous people” having settled Iceland just a few hundred years before Maori first settled New Zealand). And counsels of vigilance rarely go astray when it comes to macro and banking policy. But I wasn’t persuaded we were quite as far along the path to perdition as the author’s fear.

Curiously, there is a launch event going on at present at which former Prime Minister John Key (current chair of the ANZ) is speaking (I didn’t tune in). Aside from the name recognition he offers, it seemed curious to have such an establishment figure, known more for his sunny optimism than for his willingness to make hard calls and choices, to be launching this jeremiad. But if Key is persuaded, I wouldn’t want to be a borrower at the ANZ at the years to come, as presumably materially-tighter lending standards would be a corollary of the Wilkinson/Hong analysis?

Illusions of History

Michael Reddell New Zealand economic performance, New Zealand Initiative

That is the title of a new New Zealand Initiative report out yesterday, with the subtitle “How misunderstanding the past jeopardises our future”.

I’m no fan of this government, including its economic policies, and often lament how little New Zealand economic history is taught (none at all for example in our capital city university), so I should have been favourably predisposed towards such a report, which appears to have been prompted (specifically) by a couple of recent quotes from the Minister of Finance. This is how the report starts

And here is how it ends

You’ll get the drift.

I’m very sympathetic to the story that both Robertson and his boss are keen on a “bigger and more intrusive and directive government”, and it is clear that they have no serious ideas about (and demonstrate little interest in) reversing the decades of relative productivity decline. Most likely, their approach will see New Zealand outcomes worsen relative to those in the rest of the world. I’ve also been quite critical of this year’s Budget and the huge cyclically-adjusted deficits the government was choosing to run at a time when their forecasts suggested the economy was running at pretty much full capacity.

And yet, and yet.

There seem to be two themes or driving concerns to the report. The first is to re-present aspects of New Zealand’s economic (policy) history in ways less sympathetic to Grant Robertson’s rhetoric, and the second is alarm – I would probably call it alarmism – about the current and prospective global situation. On that latter, these paragraphs also come from the last couple of pages of the report.

I’m probably not much more keen on big debt and big deficits than the report’s author – Bryce Wilkinson – is, but this sort of broad-brush rhetoric seems set to discredit useful and important points that could be made, especially in the New Zealand context.

Are there “unresolved fiscal problems that followed the 2008 global financial crisis”? Most probably there are, in some countries anyway, although even in the United States – exemplar of chaotic fiscal policy surely – the problems were evident before 2008, were worsened again by the Trump tax package, and are now being worsened again by what the Democrats are now trying to push through. It is a sorry picture – and the US is still a consequential country – but it isn’t the New Zealand story. We ran into big deficits for a time after 2008 – some mix of a late spend-up by the previous government, poor macro forecasts, the recession itself, and the earthquakes – but we pulled ourselves out of that hole, with (in the main) bipartisan support for doing so. On the OECD’s net general government financial liabilities measure (the broadest and most internationally comparable) we were at zero net debt just prior to Covid (and almost a quarter of OECD countries had positive net general government financial assets).

As Bryce acknowledges, the New Zealand government’s own fiscal projections have debt stablising and then slowly falling as a per cent of GDP. And if the level the socialists are happy to see it stabilise at might be higher than either Bryce or I would prefer…it is hard to get very excited about that level. Whichever measure you prefer, on none of them is there any risk of New Zealand running into a public debt crisis. Of the government’s range of debt indicators, I like the net debt one that includes NZSF assets: Treasury see that being 25 per cent of GDP in 2025.

And what about “monetary excesses”? Well, I’m not fan of QE-type programmes, but mostly because they make little sustained macroeconomic difference, but provide central banks some feeling of “doing something”. And perhaps the world really is about to see a sustained break-out of inflation, but……nowhere in the advanced world, not even in the US, are financial markets (with money at stake) suggesting that is the most likely outcome. Our own central bank, having presided over 10 years of undershooting the inflation target, was actually on the brink of tightening just last month, and may yet do so next month. At the moment, markets think governments will allow central banks to (and central banks will act to) keep any sustained lift in core inflation pressures in check. Markets may be wrong – it has been known – but I’m not sure our Minister of Finance has a strong ground for thinking they are.

And what about the history, the central part of the report’s title?

There is a rather weird reverence in some circles for the first Labour government, at least the period under M J Savage in the late 1930s. Labour seem particularly prone to it, which I suppose is somewhat understandable, but it even infects the other side of politics at times (In this post I unpicked some Todd Muller rhetoric on similar lines, during his brief stint as Leader of the Opposition). It seems to be sentimental rather than rigorous, and the NZ Initiative report is a useful quick canter (albeit with a historical error or two) through material on the macroeconomic mess that Labour government ran us into by 1938/39. At a macro level, we were simply saved by the war, but then lived with the panoply of microeconomic restrictions and controls in one form or another for the next 45 years. But it is rather light on some significant differences from the present: not only was the New Zealand government very highly indebted in the late 1930s (well over 100 per cent of GDP, not primarily the fault of the Labour government), but we were also running a system of fixed exchange rates. And we did not have a monetary policy run consistent with the demands of the exchange rate system

There is more (also with some arguable interpretations/emphases) on the macroeconomic mess New Zealand was in by 1984. That mess can be overstated – partly because inflation itself overstated the severity of (notably) fiscal deficits – but the truth was messy enough. But it wasn’t primarily a fiscal crisis – there was no question of default, no question of lenders being unwilling to lend to us – but a productivity underperformance one and (in the immediate) a monetary policy crisis. We had a fixed exchange rate regime, and we did not have a monetary policy run consistent with the demands of the exchange rate system.

By contrast, at present we have a long-running woeful productivity performance – basically the enduring theme of New Zealand economic history at least since World War Two – but we know (including because we experienced it for the last 25 years) that that isn’t inconsistent with macroeconomic stability.

We have large fiscal deficits for this year and next (on the Treasury’s best interpretation of government policy as communicated to them) but public debt ratios that are low by any standards (cross country or historical) at a time when servicing costs, while not as low as in some countries, are very low by historical standards. The effective duration of the government’s debt portfolio is shorter than desirable – and the LSAP programme is responsible for that – but crisis material it isn’t (and it wouldn’t be even if we had another bad earthquake in the next few years).

And, we do have a central bank that – for all its many weaknesses (mostly the key people) – still operates, by law (and it seems in practice) at arms-length from the government, and (for all its florid rhetoric about other stuff) shows every sign of easing policy when core inflation falls away and tightening policy when core inflation looks like rising. And which has a target, set by the government, that is totally conventional internationally. And if nothing else, having a monetary policy that runs that way – consistent with our exchange rate regime and with the inflation target – makes things utterly different, in macroeconomic stability terms, than in 1938/39 or in 1984.

Having said that, I suspect the real thing that drove the report was the opportunity to litigate Grant Robertson’s take on the 4th Labour government. Personally I tend to take that sort of Robertson rhetoric with a considerable pinch of salt, since a great deal of his style seems to involve the appearance of product differentation from the 4th Labour government even when the substance barely changes (the Reserve Bank Act amendments are a classic examples). Feelings around the late 1980s are clearly still raw, especially in the Labour Party, and it seems to be good politics to pander to that.

But Bryce Wilkinson frames six “myths” about the 1984-93 reforms. He summarises them thus

Personally, I think the truth is probably somewhere in the middle. Take for example, the first one. The Robertson quote emphasises the damage to communities, and even Wilkinson in the report acknowledges the pain of the reforms for many. He might argue it was unavoidable by then, and Robertson would have been better not to have talked about “economic carnage” (especially when the basic economic model now isn’t that different).

Were the reforms “extreme”? I don’t think so, but they were unusually far-reaching, and in places went where few other countries had yet gone. For better or worse (I think mostly better) they positioned us very well in many international policy/institutional comparisons by the 1990s having started well behind. And I recall the time we spent in one OECD review of New Zealand urging them to take out language (which they intended as a compliment) suggesting that our reforms were unusually ambitious.

Were the reforms “undemocratic”? At one level, clearly note. They were undertaken by democratically-elected governments. But Wilkinson’s specific rebuttals risk inviting derision. He suggests that the snap election “gave no time” to Labour to articulate its ideas…..which more or less concedes the platform was never campaigned on. I have a bit more sympathy for the 1987 re-election argument, except…..that Labour’s manifesto that election, with talk of further significant reforms, was published after the election. And the 1990-93 Bolger government story was also a mixed bag – labour market reform was a significant part of their campaign but (for example) benefit cuts were not, let alone the amped-up superannuation surcharge. Call it democratic or undemocratic as you like, perhaps even call it unavoidable, but it wasn’t very transparent ex ante.

Call my overly literal, but “decimated” probably roughly accurately describes the welfare system effect – it was still there and, rightly or wrongly, just quite a bit less generous than it had been before.

And then there is myth 2. Bryce and I have debated this point on many occasions over the years, and I’ve written about it here before. I can’t prove that he, or Roger Kerr, have not been surprised at how poorly the New Zealand economy has performed over the last 30 years, or by the failure to even begin to close the gaps with the OECD leaders, or by the widening productivity gaps to, notably, Australia. But I’m pretty sure most people who supported the reforms don’t think outcomes have lived up to their expectations and hopes. I recall the very first time I ever appeared before a select committee it was with the Bank’s then chief economist to tell MPs our story about how as we emerged from the reforms we would expect multiple years of above-average growth, consistent with closing the gaps to the rest of the world.

But to me the single best illustration of the point was this photo, from 1989 but rerun in the Herald a decade ago

For the younger among you, that is David Caygill, then Minister of Finance and one of the foremost reformers. It is pretty clear he expected the reform programme – which was extended after his time – to pay off in closed productivity/GDP gaps. It is also clear that it didn’t.

Bryce Wilkinson thinks more should have been done, and could have been done. He was a member of the 2025 Taskforce a decade ago on closing the gaps to Australia. But even if he is right on that – and on some specifics I agree with him – I’m not sure what is gained by continuing to run the line that the economic outcomes really weren’t disappointing or unexpected at all.

To close, the New Zealand Initiative’s report ends up being a funny beast. For better or worse, most people probably won’t care about the pre-84 history, and it isn’t clear how much relevance the specifics have to today anyway. And if there is a lot wrong with this government’s economic policy (and there is) this report is too once-over-lightly (and a little florid in places, given our relative macro stability) to add much value or get much traction. Perhaps there is still a place for debates about the 1984-93 period – in fact there definitely is, even granting that to many younger people it is (my daughter’s phrase) “ancient history” – but to do so usefully probably needs more space, more nuance, and more data than is in the relevant section of this report.

More facts

Michael Reddell New Zealand Initiative, NZ politics

I’m not sure that the people at the New Zealand Initiative really have much time for New Zealanders. I was inclined to suggest that perhaps that is why they are always keen to trade us in for more immigrants, but I don’t think their stance is in anyway unique to them or to New Zealanders. Instead, there is a class of geeks, often academics, particularly found in the US, who continually lament, and even deplore, what they regard as the “ignorance” of the general public. The public, you see, don’t know the facts the geeky teenagers (and a whole class of us older versions) know.

And yet somehow they get through life. Somehow, for all its faults, New Zealand is mostly peaceful, and moderately prosperous too. And at least by some benchmarks – those of the liberals at the NZI I imagine – these might even be thought of as the best of times in all human history.

This post is, of course, mostly going to be about the new report the Initiative released overnight, complete with some headline-grabbing opinion poll results about what people knew (or thought) about some questions on New Zealand politics and the political system.

But it was only a few months ago that the Initiative used a similar approach – headline-grabbing poll, illustrating the “ignorance” of the public – to back their report calling for more of a knowledge focus in our education system. It was a cause I was fairly sympathetic to – and probably only get more so as my children progress through NCEA – but I wrote a fairly sceptical (perhaps even scathing) post about what weight we might reasonably put on their survey results.

facts

Or

And is it particularly useful to know the antibiotics are about bacteria not viruses?  I did know that, but it isn’t particularly useful to me.  Instead, when I go to the doctor I typically take his advice, and when he prescribes something I try to follow the prescribed instructions.  It probably matters rather more –  in term of keeping antibiotics useful – that (a) doctors don’t over-prescribe and (b) patients follow instructions.  Or so I’ve been told, and I’ll operate of those rules of thumbs (especially the latter) for now.

But this time the Initiative has turned to our political etc system, with a slightly odd mix of 13 questions, in a public opinion survey conducted in January. To establish my geek bona fides, I would have answered – with the odd caveat (and even the Initiative had one in its footnotes) – all the questions the approved way. I tried it on two of my teenage kids: the younger one got about three-quarters right and the older one – not yet eligible to vote – got them all right but posed caveats I hadn’t initially thought of, but each of which was quite fair (and he’d done no civics classes at school).

I’m going to step through the questions quickly.

facts 2

I thought the results for the first question were pretty good. Recall that these surveys are presumably done over the phone, out of the blue, not giving people half an hour with pen and paper. It is easy to miss one item in a instant-recall quiz. Note that geeks will have noted the presence in Parliament of Jami-Lee Ross who does now lead/represent the Advance NZ party, although (a) in Parliament he was formally an independent, and (b) the survey was done in January and Advance NZ appears only to have been launched in April. Also, I presume I would have been marked incorrect had I listed the CCP among my answers, even though in some respects it was certainly true.

As for the second question, you’ll see that even the Initiative has a footnote to some other technically correct answers. But even though the Initiative whips the public for not understanding MMP, isn’t it plausible that at least some people had in mind “well, it asks about parties gaining seats, but actually constituency MPs are elected as individuals?” Quite possibly some respondents – perhaps new migrants, unlikely to vote – just weren’t familiar with “MMP” as a label. The answers might have been a little different if the question was “in the New Zealand electoral system…”?

facts 3

To be honest, I was really surprised by the David Parker result. Then again, I’ve been a political junkie for 45+ years, was a public servant for 30+ years, am married to a senior public servant, and devote a fair chunk of my time to writing about New Zealand public policy issues. We ran a little poll last night on a wider family group, and not one of them knew who the Minister for the Environment was – a PSA delegate, an academic, the owner of a provincial law firm, a couple of housewives, and a semi-retired national administrator and director. And as I reflected on that I thought “why would they need to, or want to, know?” In what way, if any, does it affect their individual lives, or probably even their vote (Parker being a list MP and votes primarily being for parties). Nerds remember the difference between Environment and Conservation, but to many “Environment” will sound like something Eugenie Sage might have been minister of.

As for Hipkins, yes lots of people have kids in school, but why would most people pay any particular attention to who happens to be Minister at the time. If you have concerns about schooling for most people the presenting face is likely to be the child’s teacher, the Principal, and perhaps – at a pinch – the chair of the board of trustees (I could not name chairs of trustees of either school my kids attend, but I could find out easily enough).

I guess the survey was run in January, but looking at this question yesterday I paused for a moment before answering.

facts 4

But for most people I imagine a more honest answer would have been “who cares?” (there were zealots on either side, and many of the zealots on the left actually suggest the bill doesn’t amount to much of substance – but geeks like process systems and bills).

Then we get some odd questions, to which (surely) there are not right or wrong answers – even if one’s own views happen to align with the Initiative (and the majority).

facts 5

After all, on the second of those questions, as the report notes Pharmac does make independent decisions. The NZI is keen on Pharmac (as am I) and also notes – carefully avoiding expressing any opinion on it – the Reserve Bank. But it is quite a complex question, and since we all know that even if independent decisionmakers are given criteria against which to decide, individual preferences enter into their decisionmaking, I can imagine those who generally favour a bit more of a role for “experts” (reasonably) giving a non-approved answer to this question.

As for the final sentence in that block, there is a small minority of CCP-linked very-politically-aware people in New Zealand who probably think Xi Jinping is just the thing, and really a pretty good model. I don’t agree, but it is a value not a fact.

Then back to something closer to factual.

facts 6

To the first, of course I can trot out the “correct” answer to the first question, but it is a US-framed question (and there is even some dispute among geeky people in the US as to whether it is the best framing). But what of New Zealand? Is the New Zealand Parliament really a “branch of government”? Personally, I think “the government” is accountable to Parliament. And what if someone had said “the Queen (or Governor-General), the Cabinet, and the public service”? NZI would have scored them incorrectly, but as “government” is used here it is arguably more accurate. And are courts part of “government”? Well, our courts have a different role than, say, the US Supreme Court – which really is the final arbiter of law in the US – and the courts guard very jealously their independence from the government. More generally, the very question is a geeky political science type question that – framed that way – hardly anyone needs to know.

(Oh, overlooked the courts question. Most people got the “right” answer, and yet some people will be aware that courts will often look to the intentions of Parliament in passing a law, and others will be aware that courts – on matters of judicial review etc – tend to be highly deferential to the preferences and judgements of the executive.)

And finally, foreign relations

facts 7

I was pretty impressed – well, surprised – that 38 per cent of people answered the Five Eyes question correctly. Pretty much no one had even heard of the Five Eyes (a colloquial term, even though here it is capitalised, and isn’t “agreement” or arrangement” more accurate than “alliance” anyway – and they describe it more accurately in their own text?) for decades, and if it has had a bit more coverage in recent years it impinges directly not at all on the life of almost anyone in New Zealand.

But the Initiative had fun – lets laugh at the plebs – with the question about the UK, jeering that perhaps the UK government may want to know about, as it were, the invincible ignorance of the colonial peasants, And yet, and yet….

When I posed this question to my son, who is planning to study international relations next year, he said “but don’t we have some sort of partnership agreement with NATO, and the UK is part of NATO?” Personally, I didn’t think that really counted – even if the NATO Secretary-General not long ago described New Zealand as one of NATO’s closest partners, and we have worked under NATO auspices in Afghanistan where the UK had a significant presence. But he dug a bit further, and pointed out to me something called AUSCANNZUKUS which led us on to ABCANZ, to AFIC, and to the CCEB (all described here – I think the army version of this we only joined formally in 2006).

Perhaps more tellingly, there was the Five Power Defence Arrangements between New Zealand, Australia, the UK, Singapore and Malaysia,

whereby the five powers are to consult each other “immediately” in the event or threat of an armed attack on any of these five countries for the purpose of deciding what measures should be taken jointly or separately in response.

People can stand on precise points about what “alliance” means – does it mean a binding commitment or not? – but frankly anyone who answered “yes” to that question – whatever they had in mind – can’t really be judged to have been incorrect.

The other weird aspect about the NZI treatment of this question is that it assumed that any such “alliance” was about UK aid to New Zealand, and that stupid New Zealanders think the UK will defend us. That seemed odd to me. Every New Zealand military involvement post- World War Two – whether under formal alliances, under UN auspices, or whatever – has been about us helping out others, typically much larger and more powerful countries, partly because it is “the right thing to do”, partly to buttress multi-dimensional relations with these countries. Those countries have often included the UK. I have fond memories of our assistance to the UK during the Falklands War – not under any formal military alliance, but because it was a good thing to do, to help out our friends in a time of need (and, at the margin, may have helped keep the UK onside in EU access dealings). So that even if you (correctly) think there is no more-formal mutual and reciprocal security guarantees between the UK and New Zealand – neither were there in 1939 – many people probably have in mind a relationship richer and deeper.

So that was all rather picky, warranted really only by the fairly dismissive tone the Initiative took to the public’s answers to their quite specific questions. In the end I’m not really going to disagree with them that the level of general public knowledge of details of our political etc system is pretty low. And one can be endlessly picky: in an exchange on Twitter this morning with Matthew Hooton he posed the question of who scored the first try in the 1987 Rugby World Cup. Apparently the first individual (“who”) to score a try was Michael Jones, and yet the first try was actually a penalty try.

But, as regards our political system, I’m still in the “in what way does any of this really matter?” camp. The people who really care about the Zero Carbon Bill will know the answer and – political geeks aside – most other people won’t, at least with any great accuracy. I think of my family members who didn’t know that David Parker was Minister for the Environment. I have absolute confidence in all of them as citizens and voters, and people who contribute to making families and societies what they are.

And was the level of “ignorance” of these details not ever thus? In the end, we mostly elect governments, and then – in time – we toss them out again. If I look back over 100 years of New Zealand history, it is hard to see too many times when the public acting collectively got it wrong (even though many of those times personally I might have voted with the minority). It is impossible to know counterfactuals, but the collective (as if) decision that it was time for Muldoon or Clark to go wasn’t ever likely to be dependent on a detailed sense of statutory interpretation or which parties voted for what specific piece of legislation (how many acts of Parliament could most people even name).

In their report the NZI make much of the importance of knowing who is to blame for what. It is a point that has some force in the United States – federal system, enumerated powers, written constitutions etc – but much less so in New Zealand. Here, to all intents and purposes, all powers rests with the executive or Parliament and – given the financial veto – no legislation can be passed without the consent of the executive. Even local bodies exercise only powers delegated to them from the centre. Events are either bad luck – exogenous – in which case we react partly to how governments handle them, or they are the direct responsibility of some or other branch of the executive. So mostly we vote “keep them in” or “toss them out” on some mix of judgements of competence, judgements of character/conduct (NZI doesn’t seem to approve of them), values, ideological branding, and so on. Most people don’t need much very specific factual knowledge – of the political geek variety – to make those choices.

And, on the other hand, as someone who answered all the questions “correctly”, who knows a fair amount about policies (and attribution of responsibility), I’m sitting here still currently planning to not cast a party vote at all. A fair chunk of factual knowledge doesn’t, in the end, help much – at least among those for whom a core value seems to be “but you have to vote; it is the only right thing to do”.

Of the specific NZI proposals, I’m all in favour of the regulatory structure being changed in ways that allow the return of ipredict, killed off by the Ministry of Justice and Simon Bridges. It was great….for political geeks and junkies. I’m sceptical – as they mostly seem to be – of civics classes in schools (in addition to their reasons, one would expect them to become a platform – another one – for teachers to engage in mild politicial indoctrination of their students). And I’m not convinced at all by the argument for putting financial incentives in place for factual political knowledge – rewarding kids for passing tests is generally regarded as a bad idea and I’m not convinced political system tests would really be much different. Same goes for offering big prizes to the knowledgeable listener when a radio station calls out of the blue with a political knowledge question: it would be great for introverted teenage political geeks, but would make almost no difference among the populations where (I presume) NZI thinks it would matter.

For all this, I’m not some starry-eyed optimist about New Zealand, democracy or whatever – in fact, I’m much more negative on New Zealand outcomes than the Initiative’s authors seem to be. But I think the issues and challenges run much deeper, and reflect more poorly on the “elites” and “establishment” of society than on the wider public.

I’m often reminded of these words of (later) US President John Adams written in 1798

Because we have no government, armed with power, capable of contending with human passions, unbridled by morality and religion.  Avarice, ambition, revenge and licentiousness would break the strongest cords of our Constitution, as a whale goes through a net.  Our Constitution was made only for a moral and religious people.  It is wholly inadequate to the government of any other.

Many readers won’t necessarily agree (including with the wider claim that successful stable democracies probably need an enduring shared worldview, morality, religion –  not just weak agreement on procedural matters – but as I ended my post on the previous NZI report

The (narrow) facts just don’t get you far.  I’d rather people “knew” that Communism has been, and is, a great evil than that, say, they knew the geography of Hong Kong or the biochemistry of plastic.

Or, right now, a sense that CCP interests are so much deferred to in New Zealand politics –  even if some will dispute this –  matters much more, including to the enduring strength of our system, than answers to most of the NZI’s latest specific questions.

Interest rates

Michael Reddell Interest rates, New Zealand Initiative

There was a quite odd paper released yesterday by the New Zealand Initiative –  the business-funded think tank, that has done quite a range of work on coronavirus-related policy issues –  on monetary policy, fiscal policy, interest rates, and asset prices.  I know some of my readers will agree with at least some of Bryce Wilkinson’s paper.  I disagree with it almost entirely, unlike the previous paper on some related macro issues the Initiative released under Bryce’s name (where my reaction was my along the lines of “yes, but…” or “perhaps, but that isn’t the whole story”.  On Bryce’s telling in this latest paper, central banks appear to be little more than wreckers and debauchers, driving the world inexorably towards its next (real) economic and financial crisis.

If I were fully well, I would devote a lengthy post (or two) to the paper.   Bryce is a smart guy and there is a range of material there that really should be carefully unpicked and scrutinised.  As it is, for today there will be just something brief.

Bryce seems to hold it against our Reserve Bank that it has cut the OCR to 0.25 per cent.  This is from pages 7 and 8

First, the sharp reductions in policy discount rates are an active response to hurtful economic shocks rather than a passive response to secular trends. Think of it as a response to signs of financial market stress – falling share prices, rising bond yields, a ‘dash for cash’ and market turnover drying up – causing step reductions in policy discount rates, with limited reversals for fear of triggering renewed signs of stress.

Second, policy discount rates still differ considerably around the world. They are the lowest by far amongst European and Scandinavian countries, Japan, the UK and the US. Outside that group, the Bank of International Settlements shows only Israel has a policy interest rate lower than New Zealand and Australia’s 0.25%. Of the 38 central banks in its dataset, half had policy discount rates in April of 1% or more.

and this footnote appears a page or so earlier

The Bank of International Settlements database shows that in April 2020 the policy rates of 29 of 38 central banks around the world were higher than for these four central banks. Israel, with a policy rate of 0.1%, was the only non-European central bank to be below New Zealand and Australia’s 0.25%. Almost one third of the central banks had policy rates of 2.5% or higher in April.

The first paragraph is mostly just out of step with the actual historical record.  Policy rates around the world have not been cut this year mostly because of financial market stresses –  which didn’t even really appear until mid-March –  but in response to rapidly deteriorating economic situations and emerging downside risks to inflation.

But what of those policy rates?  Here is the chart of nominal policy interest rates from the BIS.

policy rates BIS

(I capped the scale at 10 per cent –  Argentina actually has a policy rate of 38 per cent, but I guess Bryce won’t be commending their example to us.)

One can quibble about precisely which policy rate to use –  most reckonings for the ECB would probably use the deposit rate of -0.5 per cent, and although New Zealand and Australia are shown here as having the same rate in fact the effective rate in Australia is 15 basis points lower than it is here.   One could reasonably delete a couple of entries from the chart altogether –  Hong Kong and Denmark have long-term fixed exchange rates, and Croatia describes its monetary policy as keeping the exchange rate to the euro stable.  Korea cut by another 25 basis points last month.   But these are small institutional details: the main point is that pretty much the entire group of advanced economies have nominal interest rates of less than 1 per cent.  In almost all those cases, real interest rates –  which central banks do not control –  are negative.

On the other hand, Bryce is right to note that there are still countries with higher rates.  In fact, I could link to a longer list with many more countries with higher interest rates (Pakistan 8 per cent, Uzbekistan 15 per cent, Ukraine 6 per cent, Zambia 9.25 per cent).

But it is hard to see what is appealing about almost any of those countries’ macro management.    Quite a few have higher inflation targets (Turkey, for example, has a notional target of 5 per cent, and actual outcomes last year of almost 12 per cent).  Of all those higher interest rate countries,  only Iceland really counts as an advanced economy and it is the country in the chart with (by far) the largest cumulative fall in its policy interest rate since just prior to the 2008/09 recession (where, on the Wilkinson telling, the rot really began to set in).    There’s China of course, but (a) interest rates aren’t a key part of the transmission mechanism in the PRC, and (b) whether it is public or private credit one worried about, China took the great-debauch path more than most.

I don’t know all those countries to the right of the chart at all well, but I can’t think of a single one that I’d exchange for most of the countries on the left of the chart, New Zealand included, whether it was macro management or political stability (often somewhat connected) that I had in view.  In fact, even Japan and the US –  for all their faults and all their debt –  easily look a better (nominal) bet than any of those on the right of the chart.

And although one wouldn’t really know it from the New Zealand Initiative piece all the OECD countries with the lowest net government debt are also bunched towards the left hand end of the chart.

2019 govt net debt (% of GDP)  (OECD)
Finland -48.9
Luxembourg -47.6
Sweden -33.5
Estonia -24.2
Switzerland -12.4
Australia -11.5
New Zealand -2.8
Denmark -2.5
Czech Republic 8.8
Latvia 9.9
Lithuania 12.4

Plus Norway of course, with huge net financial assets.   Any of them could readily borrow more –  much more –  with no central bank hand on the scale, but they (probably responsibly) chose not to.

Two final brief thoughts.

First, what I always find striking among the critics of central banks from the side Bryce comes from is how powerful they seem to think central banks are over very long-term real interest rates.  I think central banks have quite a degree of influence over economic activity over perhaps a 1-3 year horizon, but beyond that their only real influence is on inflation.  I’m pretty sure that would probably have been the view of a younger Wilkinson –  Muldoon might, as the story went, juice the economy in the short-run for electoral purposes, but before long all we’d be left with was higher inflation.  Thus, Bryce declares himself scandalised that in its LSAP programme the Reserve Bank bought long-term inflation-indexed bonds at negative real interest rates but (a) long-term real interest rates have been falling for decades (I always recall the funds manager who for years afterwards proudly boasted of having bought New Zealand inflation indexed bonds at a real yield of 6 per cent) and (b) market real yields for New Zealand indexed linked bonds first went negative in August last year, way before there was any talk of RB asset purchases.   There are deeper forces at work –  real savings and investment preferences –  which Wilkinson’s paper seems not to address at all.

Second, related to this Wilkinson appears to have a hankering for deflation.  I’m not unsympathetic –  although not wholly persuaded –  by the case that if there was rapid trend productivity growth it could be attractive to take the gains in a lower general price level rather than higher nominal wages.   But that bears no resemblance to the world in which we actually live today.    Productivity growth in the frontier economies has slowed materially – and on many reckonings was slowing even before 2008/09 –  and, of course, the New Zealand productivity record has been particularly dire.   And there tends not to be a huge demand for investment when firms don’t perceive substantial profitable –  often productivity-enhancing –  investment opportunities.   When investment demand is weak and savings preferences are relatively strong, real interest rates will be very low, perhaps even negative.  There is no iron-law of nature that says that the market-clearing price for using savings need be positive (in nominal or real terms).  That doesn’t saving unwise or imprudent at an individual level –  one of Wilkinson’s concerns –   but does suggest you can’t expect much, if any, of a low-risk return to such savings.  That is, of course, true of many prudent things we do in life (insurance most notably).

 

Pondering localism

Michael Reddell Housing, local government, New Zealand Initiative, Productivity, Uncategorized

I’m spending much of the day at Local Government New Zealand’s Localism Symposium

When it comes to centralisation, New Zealand is an outlier amongst developed countries, with decision making heavily concentrated in central government politicians and officials. For every tax dollar spent by local authorities, Wellington spends $7.30.

This is not a record to be proud of. Comparisons with OECD countries show that productivity per capita and decentralised decision making are correlated, and on both measures New Zealand ranks back of the developed world pack. More practically, New Zealand’s diverse communities have long outgrown one-size-fits-all policy making, and there is a growing acceptance that we need to devolve and decentralise decision making to celebrate and leverage our differences.

The challenge is how do we do it?

Local Government New Zealand and The New Zealand Initiative have joined up to develop a policy roadmap on just how to devolve and deconcentrate power through our Localism Project.

On 28 February 2019, LGNZ and the Initiative will present the first cut of this work at the Localism Symposium. We invite interested parties to come and critique our work in a workshop session in Wellington to help develop a robust framework through which communities can have their decision making powers restored, and share insights into public perceptions of localism and local government.

Count me sceptical.  I’m unpersuaded the local authorities should get more power.  Given the choice between the New Zealand government –  of whatever stripe –  and Wellington City Council, I’ll take the former any day.  Not only are they generally more competent (and regular readers will know I’m no fan of any recent government) but it is a great deal easier to monitor them and hold them to account.   Then again, perhaps I’m just a died-in-the-wool central government bureaucrat (“you can take the boy out of the bureaucracy, but not the bureaucracy out of the boy”).   But what could one reasonably expect of the council of one of my old haunts, Kawerau (population <7000)?

And I’m more than a little sceptical about whether there is any meaning in that reported correlation: after all, the United States has plenty of fiscal decentralisation, but New Zealand is about the same size (population) as the median US state.

The New Zealand Initiative has been championing varieties of decentralisation models for some time.    I wrote, sceptically, here about one of their earlier reports.   As I noted, among various other points

I’m a South Islander by birth and inclination, and if someone proposed a genuine federal model for New Zealand –  South Island, lower North Island, and Upper North Island –  I’d probably be emotionally sympathetic to it.  But even then I’d refer supporters to the Australian experience, and wonder just how much genuine decentralisation would occur and for how long. 

Australia struggles to maintain effective federalism.

In the material they’ve sent out for the workshop today, there are some interesting ideas I could probably support and even champion.  For the rest, I guess I’ll be a voice of critique…..and open to being persuaded that more of the case is persuasive than I think now.  I suspect a really compelling case for decentralisation relies either on geography, strong and settled regional identity, or history.  We are a small country, fairly recently settled, and there will be few people for whom (say) the sense of being a Taranaki-ite is at least as important as being a New Zealander (unlike, say, the situation in Scotland or Texas).    To that point, US state boundaries haven’t changed in a very very long time, while two of the four local government areas I lived in while growing up simply don’t exist any more – abolished at the stroke of a ministerial pen.

Had we kept the provincial government system  –  avoided the Vogel money grab –  perhaps we’d now have a similarly long tradition of decentralised government. In days of easy travel and easier technology it is hard to create a stable and enduring constituency –  other than local government politicians and officials –  for trying to create it de novo.   And –  although we can’t run the experiment –  I’d bet against it having made much difference to things that ail us, like house prices or productivity.

I did notice however that the New Zealand Initiative’s enthusiasm for Switzerland –  which really does have lots of decentralisation –  carries over into the material.  The Initiative has long been keen on singing the praises of Switzerland, which is much richer than we are.  But, as a reminder to people, here are the productivity growth performances of the OECD countries since 1970 (when the OECD databases start).  This is total growth in real GDP per hour worked from 1970 to 2017.

Switz

Bad as New Zealand’s productivity growth performance has been over this period, Switzerland is still the only OECD country to have had (slightly) less productivity growth.    And it isn’t just the early part of the period: for the period since 2000 you need to go to two decimal places to separate the (lower quartile) productivity growth rates of the two countries.

Switzerland is rich, and pleasant in many respects.  But relative to the rest of the OECD it used to be much richer.  Appealing as the Swiss decentralisation seems in some ways –  and much of that reflects deeply rooted histories of separate distinct communities, including linguistic and religious differences –  it isn’t obvious why it offers some path to better productivity growth in New Zealand.

Fixing the housing mess is also claimed as one of the possibilities of the sort of reforms LGNZ and the New Zealand Initiative are suggesting.  Did I ever mention –  why, yes I think I did – that Switzerland not only has very high house prices, very high levels of household debt, and very low levels of home ownership?    Not outcomes to envy.   They aren’t (I presume) because of decentralisation, but they’ve happened despite it.

 

A British visitor championing free trade and open borders

Michael Reddell Immigration, New Zealand economic performance, New Zealand Initiative

Last Thursday British journalist and economist Philippe Legrain gave a lunchtime address at Victoria University (of Wellington).   Legrain was apparently in the country mainly to talk about some work he does on refugees and employment, but this particular event (hosted by the New Zealand Initiative) was on the topic “How our open world is under threat, and why it matters”.   He is a Blairite (ie active government)  globalist (a term I don’t mean in any pejorative sense) –  favouring, it appears, as much open trade, open investment, and open migration as possible, and then some.   For anyone sufficiently interested, the Initiative has now posted a video of Legrain’s talk.

I found it a strangely unsatisfying talk on a number of counts.   Perhaps it worked for those already converted to his cause, but even then there wasn’t anything new, or any fresh arguments or evidence.   And it didn’t greatly help that despite being an obvious fan of New Zealand (or at least of the fourth Labour government) he didn’t know much about it, despite speaking to a central Wellington audience probably largely made up of policy wonks and junkies.

In his younger days, Legrain had worked as an adviser to Mike Moore in his time as head of the WTO.  There, I presume, he had picked up stories about the sheer dreadfulness of New Zealand 35 years ago, and heard tales of the subsequent reforms.  We were, he claimed, in some respects the “birthplace of globalisation”, which still – reflecting on it days later –  seems a very odd claim.  The reformers of the 1980s mostly saw the reforms as being about bringing New Zealand policy back more into line with the mainstream  of advanced country practice (even if, with a small single chamber parliament, some reforms could be pushed through in more elegant and intellectually appealing ways than some other countries managed).   Lamenting (quite rightly) the insanity of the days when New Zealand assembled television sets (and cars) here from disassembled kits, Legrain (again, fairly enough) observed that New Zealand needed to do more international trade.

But then his tale became rather more detached from reality.  We were told that New Zealand had “flourished” since the early 1980s, we were “richer, freer, more diverse, better connected”, we’d found niches in world markets (he mentioned film-making, apparently oblivious to the subsidies so generous they’d have made an early 80s sheep farmer blanch), had better economic growth, and higher living standards.  All because we’d opened to the world.

All of which would have been a good story.  It was, after all, the way things were supposed to be.   But what of the evidence?

Foreign trade for example?  Successful small economies tend to do a great deal of it, and there is no doubt that the protective structures we wrapped around the economy for 40 years or so tended to reduce both exports and imports as a share of GDP.  But here is how the export and import shares of the New Zealand economy look, for the first four years of the 1980s and for the last four years.

foreign trade

I think I am pretty safe in saying that no one involved in the reform process 30 years ago envisaged our foreign trade shares shrinking.

And what of the “richer” claim?  Well, certainly real GDP per capita and real productivity measures are higher than they were, but that is true almost everywhere (Venezuela perhaps excepted): there are common global forces, technological innovation etc, at work.    What matters, in assessing the success of New Zealand policy, is how New Zealand has done relative to the rest of the world, and in particular to the other advanced economies we’d been falling behind for several decades.   Since 1983, New Zealand’s productivity growth (real GDP per hour worked) has been in bottom quartile of the 25 countries the OECD has complete data for.  If you prefer simple GDP per capita comparisons, then despite a big sustained gain in New Zealand’s terms of trade  –  almost totally beyond our control –  we’ve fallen further behind the G7 industralised countries on that score over the same period.

It isn’t even as if things went badly worse for a few years and are now coming right: trade shares are still trending down, we’ve had almost no productivity growth in recent years, and so on.   If New Zealand really was the “birthplace” of globalisation, advocates such as Legrain should be looking to bury the evidence –  or, more to the point, think more deeply about what aspects haven’t worked well, and whether some things matter here in ways they mightn’t matter elsewhere.

He was a bit hazy on his geography too.  In (fairly) noting that trade deals between a post-Brexit Britain and New Zealand won’t make much difference for either country, he launched into the old line about New Zealand’s future being in Asia, and our great good fortune in being on the doorstep of the fastest-growing part of the world.  It probably escaped his attention but Wellington and London are each about the same distance from Shanghai, and London is much closer to Delhi or Mumbai than Wellington is.

Legrain’s misconceptions about New Zealand continued to the present.  He is a big fan of immigration –  having written a whole book about it under the heading Immigrants: Your Country Needs Them – and lamented that New Zealand was slashing its immigration numbers by a third.   I presume this was an allusion to the Labour Party’s policies in last year’s campaign, which might (on their estimates) have reduced the net inflow by about a third for one year.  But perhaps he hadn’t caught up with the fact that the government seems to be following through on very little of that, and (more importantly) that they never promised, or even suggested, any reduction in the annual target for new permanent migrants.  That target remains probably the highest, per capita, anywhere in the world.  But never mind; don’t let troublesome details get in the way of a rhetorical flourish.

Perhaps my description of Legrain as a “globalist” was best-exemplified by one of the items on his list as to how the world is going to pot.  He was, he noted, disturbed that New Zealand had a party in government whose name was “New Zealand First”.    I’m no fan of the party itself –  any more than any of our parliamentary parties –  but precisely whose interests does he suggest that governments should govern in?    He didn’t elaborate, but pursuing first and foremost the interests of your own citizens (or even residents) seems pretty basic to me.  And not very contentious among most citizens –  here or abroad.    Quite often, of course, what is good for us is good them (and vice versa)  –  free trade in goods and services is generally the prime example –  but the case for any New Zealand government action should be that it advances the interests, attitudes and values of New Zealanders.  Sometimes those decisions will be altruistic in nature –  taking in refugees for example  – reflecting the values of New Zealanders.  But most of us want our governments to respond to, and promote, the best interests of New Zealanders.  Legrain clearly doesn’t.

Now, I should make clear that I am a strong supporter of free trade in goods and services.  I’ve long argued, for example, that we should remove all our remaining tariffs unilaterally.  Legrain hates Brexit, but the fact remains that the current difficulties are mostly arising because the EU does not believe in, or practice, that sort of free trade.    I’m also a supporter of a pretty open approach to foreign investment, at least when it doesn’t involve state actors (and even Legrain noted that, thus, China should be something of an exception).   Actually we also apparently share a view that trade agreements among advanced countries –  if we must have them at all –  are not a place for things like ISDS agreements or intellectual property rules.

Where we differ quite strongly –  and this would be particularly so on New Zealand, although the point generalises –  is probably around immigration.    Because in his paean to globalisation he draws no distinction between free movement of goods, of capital, and of people.    But voters appear to, and often for good reason.  Legrain, unlike many voters, doesn’t appear to have much time for concepts of nationhood, or cultures which bind societies together.   As the child of immigrants (French and Estonian) himself, perhaps that isn’t overly surprising, but most people have a different, more localised, background.

10 years or so ago, Legrain wrote a book in praise of immigration, an excerpt from which is available on the web. In it he declares himself scandalised that a politician can win an election on the promise that “we will decide, and no one else, who comes to this country” or that people would think it “normal and reasonable” to control migration flows.  He laments the fact that migration policy is largely decided on national grounds.

It was a book written just before the 2008/09 recession, when Blairite globalists of his sort were in the ascendant –  things felt rather good, especially if you were a successful middle class person in a major financial centre like London.   He captures some of that in this extract

the debate that is at the heart of this book: should we welcome or seek to prevent the unprecedented wave of international migration that is bringing ever greater numbers of people from poor countries to rich countries like Britain, Spain and the United States? Fear of foreigners versus the dynamism of multicultural London: a microcosm of the wider debate about immigration that is raging around the world.

As if these are the only choices; the only (or best) way of framing any debate.

He didn’t actually use the word “xenophobia” there, but that is what “fear of foreigners” is: apparently the only grounds why anyone might be sceptical of large scale permanent immigration.  But however things might have looked in 2007 –  when the UK and Spanish economies were indeed booming –  the subsequent decade isn’t necessarily such an advert for Legrain’s open border approach (the UK, for example, having had almost no productivity growth at all since then).

And although Legrain continues, as he did in his lecture the other day, to champion the view that countries need migrants, he offered very little in support of such a view.   The potential for relative prices to change –  whether to attract aged care workers or strawberry pickers, or substitute technology –  never seems to enter his calculus.  You might suppose his own country would be a prime illustration of his point: if relatively open immigration really offered the large gains to recipient countries’ own nationals as Legrain claims, a country that had very little immigration for a long time, and then opened up quite a lot should be a great case study.  That was the UK experience after 1997.  And yet, a couple of decades on, where can people like Legrain find the whole-economy evidence of how Britons have benefited to any great extent (and this in a country in a very favourable geographic location, with foreign trade heavily dominated by services and other intangibles)?  If there are macroeconomic gains, they look pretty hard to find even there (and even if one simply abstracts from the house price disaster –  as Legrain does with an wave of the hand, and a simple “well just build more houses”.  Would that it were politically that easy, there or here.)

And New Zealand, of course, should be able to be his other showcase economy.  After all, we’ve had high levels of target non-citizen immigration –  much higher per capita than the US and the UK –  for a long time now.  But, beyond the handwaving and the pretty trivial (Legrain mentioned an apparent choice of Cambodian restaurants in Wellington), even the defenders of the current policy approach find it difficult to demonstrate the economic benefits to natives, and often seem left falling back on a “well, it would have been even worse otherwise” type of assertion.   Legrain’s world doesn’t seem to have much place for geography or natural resources –  perhaps not that surprisingly when you come from London – and, as already noted, he seemed oblivious to the failure to grow the trade sector of the economy, or the continued heavy dependence on natural resources, not obviously enhanced by simply bringing in lots more people to one of the most remote places on earth.

I think the New Zealand arguments are, or should be, different from those in countries nearer the centre of affairs.  But even in those countries, the advocates of relatively large-scale migration –  and actually in all European countries the numbers (per capita) are modest by New Zealand, Australian or Canadian standards –  struggle to demonstrate that citizens of recipient countries are benefiting.  Perhaps some of the middle classes do so –  cheaper nannies or strawberry pickers (the sort of complementarity story Legrain advances) –  but as I’ve noted before, to the extent this argument has force, it explicitly involves a redistribution in which poorer or less skilled natives are further disadvantaged.  If we should expect our governments to govern first and foremost in the interests of their own people, I’d argue that it is also important that governments govern with a particular eye on the interests of the most vulnerable or disadvantaged of their own people.   And there is no real evidence of the sorts of economic gains people like Legrain, or international agencies like the IMF have touted.  Of the IMF modelling, as I wrote a while ago

…the model also implies that if 20 per cent of New Zealanders moved to Australia (oh, they already have) and an equivalent number of Australians moved to New Zealand, we could soon be as wealthy as Australia is now, simply by exchanging populations.   Believe that, as they say, and you’ll believe anything.

As it is, large-scale non-citizen migration has skewed the entire structure of the New Zealand economy against producing competitively with the rest of the world (the real exchange rate has got quite out of line with the productivity performance and opportunities here).   We are reduced to living with sustained underperformance (often while our leaders pretend otherwise), with subsidies for trees (lots of them), trains, and other provincial baubles to attempt to buy off simmering discontent in parts of the country that should be doing really well.

Globalists like Legrain seem reluctant to accept that large scale immigration is mostly oversold as an economic instrument (if there are gains to natives, even in the North Atlantic countries, they appear small) or that the angst that he worries about (in lamenting Trump, Brexit etc) about it is often cultural and national in nature at least as much as it is economic.  For people like him, the world is made up of autonomous individuals, in which people of a country are united by, if anything, only a common passport and the authority of a common government.   Most voters in most countries see it as more than that –  they put a value, not just sentimental but practical, on common cultures, shared history and experiences and so on.  My own arguments about New Zealand immigration don’t really go along those lines –  I’ve repeatedly made the point that all our migrants could be from Bournemouth, Brisbane, Buffalo or Banff and the economics still wouldn’t work out well –  but people who champion an open economy, and the real gains on offer from foreign trade, risk losing that battle if they don’t wake up to the fact that people movements are different in all sorts of ways, and support for free trade has no natural or inevitable implications for a view on appropriate immigration policy.

 

Scathing feedback on the Reserve Bank

Michael Reddell Financial stabilty, New Zealand Initiative, Reserve Bank Act reforms, Uncategorized

Late last week the New Zealand Initiative released its report Who Guards the Guards? Regulatory Governance in New Zealand which has a particular focus on the Financial Markets Authoritiy, the Commerce Commission, and (in its financial regulatory/supervisory roles only) the Reserve Bank.  All three are important economic regulators and, if we are going to have such entities, it is important that they are well-governed, and performing excellently (with associated accountability and transparency) the roles Parliament assigned to them.

As part of putting together the report, the New Zealand Initiative undertook a survey

To assess how well our regulators are respected, we surveyed New Zealand’s 200 largest businesses by revenue, together with those members of The New Zealand Initiative not otherwise included as members of the ‘top 200’. In practical terms, this approach allowed adding a sample of New Zealand’s leading professional services firms – accountants, lawyers and investment bankers – into the pool of businesses covered by our survey.   Only one response per organisation was permitted.

And this is what the survey covered

We asked survey respondents both to:
a. rank the regulators they interact with based on their overall respect for them; and
b. rate the performance of the three regulators most important to their respective businesses against a range of KPIs.

The KPIs were based on a combination of the best practice principles identified by the Australian Productivity Commission’s Regulator Audit Framework, and from a similar survey to our own commissioned by the New Zealand Productivity Commission for its 2014 report. The questions were designed to obtain a broad view of regulatory performance, and as such did not enquire into the merits of individual regulatory decisions or the fitness-for-purpose of individual regulators.

Rather, the KPIs cover issues like commerciality, communications, consistency, predictability, accountability, and so on.

For some regulatory agencies –  there were 20+ covered –  there were lots of responses: some regulation is pretty pervasive.  For others with a very sector-specific role, including the Reserve Bank, there were only a relatively small number of responses (8) –  but it seems likely that all the major banks and some other smaller institutions will have responded.

The Initiative is clear that it is a survey of the regulated.  That is not the only, or even the most important, perspective in assessing a regulatory agency.  Regulatory agencies are supposed to work in the public interest, as defined by Parliament, and that means constraining the actions/choices of individuals and firms.  Regulation is intended to prevent people doing stuff they would otherwise choose to do, or compel them to do stuff they would otherwise not choose to do.  In other words, one should worry if a regulator is popular with those it regulates.  Indeed, one of the big risks in any regulatory system is that the regulator and the regulated form too cozy a relationship  –  in which there is some mix of regulators making life easy for the the regulated (eg coming to identify more with the interests and perspectives of the regulators) or regulators in effect working with the bigger and more connected/established of the regulated entities to make new entry and competition less easy than it should be.

The Initiative acknowledges the point to some extent

Of course, we can expect regulators to be unpopular at times with the businesses they regulate. It is, after all, their job to place boundaries on what businesses can and cannot do. But just as we expect communities to respect the police, we should also expect the regulators of commerce to have the respect of the businesses they regulate.

Personally, I’m not sure I’d go that far. I don’t expect “communities to respect the police”, but expect (well, vainly wish) the Police to earn the trust and respect of the community.  But whether or not “respect” is quite the right word, regulated entities should be able to offer some insights that are useful in evaluating regulatory institutions.  And that is perhaps particularly so when, as in this exercise, the survey covers a wide range of regulatory institutions at the same time.   If one institution scores particularly badly relative to others –  particularly others in somewhat similar fields –  it should at least provide the basis for asking some pretty hard questions about the performance of that agency, and of those responsible for it (officials, Boards, Ministers etc).

In this survey, the Reserve Bank’s financial regulatory areas scores astonishingly badly.   I first saw the results months ago when I was asked for comments on the draft report, but even with that memory in mind, rereading the Reserve Bank results (from p 60) over the weekend made pretty shocking reading.

Here is one chart from the report, comparing Reserve Bank and FMA results for the KPIs where the Reserve Bank scores worst.

partridge 1

In summary

In the ratings, the RBNZ’s overall performance across the 23 KPIs was poor. On average, just 28.6% of respondents ‘agreed’ or ‘strongly agreed’ that the RBNZ met the KPIs and 36% ‘disagreed’ or ‘strongly disagreed’. These figures compare very unfavourably with the FMA’s average scores of 60.8% and 10.3%, respectively.  They also compare unfavourably (though less so) with the Commerce Commission’s averages of 39.9% and 25.8%, respectively.

There simply isn’t much positive to say.

One of my consistent themes has been the lack of accountability of the Reserve Bank, across all its functions.  The regulated entities seem to share those concerns.

partridge 2

As part of the survey, interviews were also conducted to fill out the picture the data themselves provided.

Like the survey results, the views of interviewees were also largely [although not exclusively] negative.

The criticisms related both to the RBNZ’s capabilities and processes, and the substance of its regulatory decision-making.
In relation to process and capability, criticisms included the following issues:
a. Lack of consistency in process: One respondent noted that the internal processes of the RBNZ’s prudential supervision department, which is responsible for prudential supervision, can be ‘random’. The respondent referred to long delays between steps in a process involving regulated entities, followed by the imposition of requirements for more-or-less immediate action from them.
b. Lack of relevant financial markets expertise among staff: This was a common
theme. One respondent noted that until the 2000s, there was “regular interchange
of staff between the banks and RBNZ,” meaning RBNZ regulatory staff had firsthand finance industry expertise. But this has changed with the banks moving their head offices to Auckland and the RBNZ based in Wellington. As one respondent said, “They will always struggle to get good people [with financial markets expertise] in Wellington, especially with the banks now in Auckland… this makes interchange impossible.” Another said, “RBNZ [staff are] completely divorced from the reality of how things are done.”  More colourfully, another said, “[RBNZ] is all a little archaic… Entrenched people don’t get challenged.” Another said, “On the insurance side, the level of capability is less than with the banks. There is a potential risk to policyholder protection. RBNZ ends up just focussing on the minutiae.”
c. Lack of commerciality: This concern is allied to both the expertise issue noted above, and the materiality issue noted below. As one respondent said about the RBNZ’s ‘deafness’ to the need for a materiality threshold before a matter becomes a breach of a bank’s conditions of registration, “RBNZ says, ‘If it’s not material just disclose it’. But that’s a regulator way of thinking. They don’t understand the commercial, reputational implications.”
d. Unwillingness to consult or engage: As one respondent said, “I would call them out for not truly consulting.” Another said, “The RBNZ upholds independence to the point that it precludes constructive dialogue.” Several respondents drew a contrast with the FMA, noting that the RBNZ was happy to issue hundreds of pages of “prescriptive, black letter requirements,” but “without much or any guidance” for the banks on their application. One respondent did note, however, that the RBNZ “isn’t resourced to spend time doing this [issuing guidance].”
e. Lack of internal accountability: Several respondents perceived a lack of oversight from the most immediate past Governor, Alan Bollard, in either engaging with the banks over concerns about prudential regulation or trying to resolve them. One respondent noted, “Staff are often running around doing things without serious scrutiny from above.” Another said there is a group “with no accountability within the RBNZ… They favour form over substance and seem to enjoy exercising power.” Another commented it was “unclear how much information flowed up to the RBNZ Board,” but that if the Governor were accountable to the board for prudential regulation, then the board “could be useful in pulling up entrenched behaviour.” Another noted that the RBNZ’s  governance structure meant it did not benefit from outside perspectives: “[t]he value of diverse thinking is to challenge, so you don’t get capture by one person’s view.”

Two main criticisms were made in relation to substance:
a. Materiality thresholds: Several respondents highlighted the lack of a ‘materiality
threshold’ before RBNZ approval is needed either for:
• changes to banks’ internal risk models in the Conditions for Registration of
banks; or
• changes to functions outsourced to related parties.
One respondent noted that without a materiality threshold, the new requirement
for a compendium of outsourced functions – and for approval of any change to
outsourcing arrangements with a related entity – could lead the Australian-owned
banks to cease outsourcing functions to related entities, thereby increasing costs and
harming customers.  Several respondents noted that the lack of a materiality threshold could be attributed to a lack of trust in the banks by the RBNZ staff responsible for prudential regulatory decisions. As one respondent put it, this led the RBNZ to “insist on approving absolutely everything.”

Although this view was not shared by all banks, one respondent noted that even
APRA – long regarded as a more heavyhanded, intrusive regulator than the RBNZ
– was “now more reasonable to deal with than the RBNZ.”

b. Black letter approach: Along with the lack of a materiality threshold in the RBNZ’s
regulatory regime, several respondents commented on the RBNZ’s “black letter”
approach to interpreting its rules: “If RBNZ had two or three public policy experts
who could bring a ‘purposive approach’ to interpretation, that would be hugely positive.”   Another said, “[The RBNZ] has an overly legalistic approach which ignores the purpose of the legislation,” and that “what they’re doing undermines [public] confidence over things that are of no risk.” Several survey recipients noted that this was in stark contrast to APRA’s approach to public disclosure in Australia.

Another respondent put the concern differently, saying the problem was less
about the RBNZ’s ‘black letter’ approach to its rules, and the opaqueness of the rules,
and more about the lack of guidelines from the RBNZ explaining them, an issue the
respondent put down to a lack of resources.

There is more detail there than most readers will be interested in. I include it because the overall effect builds from the relentness of the critical comment.   I’m not even sure I agree with everything in those comments –  but they are clearly perspectives held by regulated entities –  and I suspect that reference to Alan Bollard is really intended to refer to Graeme Wheeler.  But taken as a whole, it is an astonishingly critical set of comments and survey results, that most reflect very poorly on:

  • former Governor, Graeme Wheeler,
  • former Head of Financial Stability (and Deputy Governor and “acting Governor” Grant Spencer),
  • longserving head of prudential supervision, Toby Fiennes
  • the Reserve Bank’s Board, including particularly the past and present chairs, Rod Carr (who had had a commercial and banking background) and Neil Quigley.

And given the enthusiasm of the Bank to emphasis the role of the Governing Committee in recent years, it probably isn’t a great look for the new Head of Financial Stability, and Deputy Governor, Geoff Bascand – he of no banking/markets experience, no commercial perspective, and little regulatory experience – who sat with Wheeler and Spencer on the Governing Committee over the previous four years.

One would hope that the new Governor, the new Minister, and the Treasury and the Board, are taking these results very seriously, and using them to, inter alia inform the shaping of Stage 2 of the review of the Reserve Bank Act.  I’ve not heard any journalist report that they’ve approached the Reserve Bank  –  or the Board or the Minister – for comment on the report and the Bank-specific results.   But such questions need to be asked, and if the Bank simply refuses to respond or engage that in itself would be (sadly)telling.

In the report the New Zealand Initiative authors make much of comparisons with the FMA.  In respect of the survey results, that seems largely fair.  The data are as they are.  But as I’ve noted in commenting a while ago on an op-ed Roger Partridge did foreshadowing this report, I’m not entirely convinced (nor am I fully convinced about the criticisms of the FMA’s predecessor the Securities Commission, which was asked to do a different job).

Partridge cites the Financial Markets Authority as a better model.  In many respects, the FMA is structured like a corporate: the Minister appoints (and can dismiss) part-time Board members, and the Board hires a chief executive.  But it is worth remembering that the FMA has quite limited policymaking powers: most policy is made by the Minister, whose primary advisers on those matters are MBIE.   The FMA is largely an implementation and enforcement agency.  That is a quite different assignment of powers than currently exists for the Reserve Bank’s regulatory functions (especially around banks).  Also unaddressed are the potentially serious conflict of interest issues around the FMA Board, in its decisionmaking role. More than half the Board members appear to be actively involved in financial markets type activities (directly or as advisers), and even if (as I’m sure happens) individuals recuse themselves from individual cases in which they may have direct associations) it is, nonetheless, a governance body made up largely of those with direct interests that won’t necessarily always align well with the public interest.

Reasonable people can reach different views on the performance of the FMA. I gather many people are currently quite pleased with it, although my own limited exposure –  as a superannuation fund trustee dealing with some egregious historical abuses of power and breaches of trust deeds – leaves me underwhelmed.  It is certainly a model that should be looked at in reforming Reserve Bank governance –  it is, after all, the other key financial system regulator –  but I’m less sure that it is a readily workable model for the prudential functions, even with big changes in the overall structure of the Reserve Bank, and some reassignment of powers.  It certainly couldn’t operate well if both monetary policy and the regulatory functions are left in the same institution.  It doesn’t seem to be a model followed in any other country.  And it isn’t necessary to deal with the core problem in the current system: too much power is concentrated in a single person’s hands.  In a standalone regulatory agency, I suspect an executive board –  akin to the APRA model –  is likely to be an (inevitably imperfect) better model.

Whatever the precise model chosen, significant reform is needed at the Reserve Bank.  Some of that is about organisational structure and governance –  I’ve made the case for a standalone new Prudential Regulatory Agency –  but much of it is about organisational culture, and that sort of change is harder to achieve.  I hope Adrian Orr has the mandate, and the desire, to bring about such change.  I hope Grant Robertson insists on it.

Readers will that early last year, Steven Joyce – as Minister of Finance –  had Treasury employ a consultant to review aspects of the governance of the Reserve Bank, particularly around monetary policy.  Extracting details of the review, undertaken by Iain Rennie, from The Treasury proved very difficult.  It took almost a year for the report to be released.  I’ve had various Official Information Act requests in, including for the file notes taken from the (rather limited) group of people outside The Treasury that Iain Rennie engaged with (within New Zealand it turns out that he talked to no one outside the public sector).  That one ended up with the Ombudsman.  A week or so ago I finally got an offer via the Ombudsman’s office –  Treasury would release a document summarising those meetings if I discontinued my request for the full file notes.  Somewhat reluctantly –  balancing the point of principle, against getting something now – I agreed, and last Friday Treasury released that summary to me.  For anyone interested it is here.

Rennie review Summary of discussions with External Stakeholders

There is some interesting material there, including on meetings with the Reserve Bank Board –  where he showed no sign of having grilled the Board on what it accomplishes or adds –  and with some overseas people Rennie talked to.  But what caught my eye was the record of a meeting Rennie (and Treasury) held with the Reserve Bank management (Wheeler, Spencer, McDermott and a couple of others) on 14 March last year.  At the meeting, the Bank seems to have set out to minimise any change and sell Rennie on the virtues of the current informal advisory Governing Committee.

Here are relevant bits of the record (as summarised now by Treasury)

Current Governing Committee (GC)
o The GC reflects public sector reforms, there are checks and balances, which help with accountability.
o It has become important to focus more on the Reserve Bank as an institution, rather than just on the Governor, as the Reserve Bank has taken on more and more responsibilities over time.
o Discussed different overseas models, including strengths and weaknesses of different approaches.
o The approach to decision-making and communications needed to be consistent with the Reserve Bank’s approach (e.g. must be appropriate in the context of forward guidance).

Codification of the Committee Structure
o Codification’s advantage was that it could prevent a future Governor from moving back to a single decision-maker. However, that hasn’t been a problem in Canada, and it would be difficult for a Governor to roll the current committee approach back.

Effectiveness
o The cohesion of the GC and the cooperative nature were identified as the most important factors in its success. The GC was relatively informal with collective responsibility, and that worked well.
o Discussed how the current committee operated, and some strengths and weaknesses of the approach.
o Discussed the effectiveness of different options for decision-making and communications design, such as voting and minutes (neither supported).

Some of this is almost laughable, a try-on that surely they should not have expected anyone to take very seriously (and, to Rennie’s credit, he came out with recommendations that went far further than the Bank liked, earning him soe quite critical comment from the Bank).

Take that very first bullet, the claim that the Governing Committee model “reflects public sector reforms”.  I’m not sure how.  It has no basis in statute, the members are all appointed by and accountable to the Governor, and there is no transparency, and no accountability.  The Bank has, for example, consistently refused to release any minutes of the Governing Committee –  on any topic –  if indeed, substantive minutes are even kept.

Or the fourth bullet, the suggestion that “the approach to decision-making and communications needed to be consistent with the Reserve Bank’s approach”, which is a typical bureaucrat’s attempt to reverse the proper order of things.  The Reserve Bank is a powerful public agency, created by Parliament and publically accountable (well, in principle).  The design of the governance and accountability arrangements should reflect the interests and imperatives of the principal (public and Parliament), not those of the agent (the Bank itself).  Officials work within the constraints Parliament establishes.

Or the third to last bullet, about the cohesion of the Governing Committee, collective responsibility etc.  Again, I’m sure they believed it, but on the one hand, we build public institutions to provide resilience in bad times (or bad people) not so much for good times, and on the other there is no collective responsibility –  the Governor alone has legal responsibility, and there is no documentation at all on the Governing Committee processes.  And legislating to entrench a committee in which the Governor appoints all the members, might be a recipe for cohesion, but it is also a high risk of a lack of challenge, debate and serious scrutiny.

And, finally, just to confirm that consistent opposition to anything approaching serious scrutiny, in that final bullet, the Bank reaffirms its opposition to published minutes –  something most of central banks now manage to live with, in some cases with considerable detail.

At one level, these comments no longer matter much.  Graeme Wheeler and Grant Spencer have moved on, and the new government has made decisisions on the future governance of monetary policy.  But they nonetheless highlight the sort of closed culture fostered at the Reserve Bank over the past decade or more, whether on the monetary policy side or on the regulatory side (the latter vividly illustrated in the NZI report).  Comprehensive reform is overdue.  It would make for a better Reserve Bank internally – and/or a better Prudential Regulatory Agency –  and one more consistently open to scrutiny, challenge, and debate, which in turn will reinforce the impetus towards better policy, better analysis, and better communications.

 

Switzerland as our example – again

Michael Reddell New Zealand economic performance, New Zealand Initiative, Productivity, Switzerland

A month or two back, the New Zealand Initiative arranged a study tour (Go Swiss) for members (and a friendly journalist), “to learn more about their success story”.

I’ve written about this a few times, mostly because I’m genuinely perplexed that the smart people who run the Initiative really seem to think that Switzerland is much of an example for us, or even these days that much of a “success story”.

Sure, Switzerland is richer and more productive than we are.  Most advanced countries are.  But productivity levels in Switzerland now lag behind those of the leading OECD countries.  And over the last 45 years or so, Switzerland has had the lowest rate of productivity growth of any of the OECD countries for which there is a full run of data.  Just a little worse even than New Zealand.

switz 70 to 15

If I were sponsoring a study tour to places that had put in really strong performances in recent times, the Czech Republic, Slovenia or Slovakia look like they might be rather stronger contenders.     They’ve been catching up quite rapidly, not drifting back in the pack.       The Slovakia picture looks particularly impressive.  Here is the Conference Board data on real GDP per hour worked for each of New Zealand, Switzerland and Slovakia, relative to the average for France, Germany, Netherlands, and the United States (four of the higher productivity large OECD countries).

slovakia

Of course, New Zealand Initiative members are free to take their holidays wherever they like.   But it becomes of somewhat wider interest when they return trying to proselytise.

A few weeks ago the Herald’s Fran O’Sullivan provided a vehicle for some of that, relaying some rather questionable stories about the Swiss labour market (which does, among other things, feature a low youth unemployment rate), while ignoring such potentially relevant features as the absence of a generalised minimum wage in Switzerland.   Somewhat surprisingly, from a bunch of leading business people, Switzerland’s much lower company tax rate also wasn’t mentioned.  Then again, neither was its poor long-term productivity growth performance.

Sometimes the Initiative has been directly purveying the material.  Their chairman, Roger Partridge, had a piece in the Initiative’s newsletter recently extolling the contrasts between Italy and the Ticino, the Italian region of Switzerland.  “The secret to Swiss success”, so we are told, is down to “can solve”, reputedly the approach adopted by Swiss officials and politicians.    Now doing better than Italy isn’t such a great boast these days, but actually as the chart above shows, over the last 45 years Switzerland has done worse than Italy –  at least on productivity.  And then there are some of the summary indicators: on the World Bank’s ease of doing business index (not, of course, a perfect indicator of the state of regulation), Switzerland beats Italy by a substantial margin.  But Switzerland comes in at number 31.  New Zealand is number 1.

But what prompted this post was the editorial in the business section of this week’s Sunday Star-Times.   It doesn’t appear to be on the Stuff website, but if you go to this link to one of Initiative director Oliver Hartwich’s tweets, you can read an image of the whole piece.

Do you fancy living your lives more like the Swiss?…..It means entering into a radical experiment which could turn this country into another Switzerland.  A country with a high wage economy that manufactures and exports quality products, welcomes thousands of immigrants without any problems and has a fast and efficient public transport system

And, once again, we are told that

the ‘big picture” answer, according to the NZI, is in Switzerland’s decentralisation, where more than 2000 local councils have their own tax-raising powers.  Their argument is that it leads to greater pro-activity in devising strategies to attract business investment and power growth.

So, again, that would be the OECD country with the worst long-term productivity growth record?

And the other strand of the answer is, it is claimed, the education system.

Education is a dual system, which sees 80 per cent of young people enter vocational training, with only the remainder going to university.  But there is no stigma in that,

Then again, this is the OECD country with the worst productivity growth record over the last 45 years.  And, as OECD data I highlighted in the earlier post showed, actually a larger proportion of Swss 25-34 year olds have completed tertiary qualifications than in (a) most OECD countries, and (b) New Zealand.

One business leader is quoting waxing lyrical

As Fraser Whineray, boss of Mercury, said:  “an aluminium welder can be earning $150000 a year and living in a village like Queenstown”

I had no idea how much aluminium welders earn here, but this website suggests about $22.75 an hour.  That’s a bit under $50000 a year and given that Swiss GDP per capita is not even double New Zealand’s you’d have to be a little sceptical about that $150000 number (and this site offers some Swiss numbers).

But, picturesque as Switzerland is, what about the housing situation?

According to the New Zealand Initiative, as channelled by the Sunday Star-Times

Swiss house prices haven’t changed for three decades (inflation included) –  houses are still affordable compared to salaries.

The first part of that sentence is quite correct.    Real house prices (having had various ups and downs) haven’t changed much in 30 years.    But they were eye-wateringly expensive 30 years ago, and they still are today.   At the level of anecdote, I recall doing a course at the Swiss National Bank in 1990 and being told by our guides that prices in the capital Berne were so high that only senior managers at the central bank owned their own houses.

Good statistical data appears to be harder to come by: Switzerland is not, for example, in Demographia’s annual collection of house prices to median income data.   I stumbled across one website that offers data (of what quality I”m not sure) on rents and house prices in all sorts of cities.   Here is what they suggested for price to income ratios in various Swiss cities.

Zurich                                         9.5

Basle                                            9.2

Geneva                                       10.5

Lucerne                                      9.0

Berne                                        12.3

Whole country                       10.4

From what I could see, actual house prices don’t look any more “affordable” than those here (although, of course, interest rates are lower).  And, consistent with that, residential mortgage debt as a share of GDP is materially higher than that in New Zealand, in fact one of the highest ratios anywhere.

Oh, and how about home ownership rates?  Ours have been slipping, something that makes a lot of people uncomfortable (except a few –  economists mostly? –  who seem to have a vision that we’d be somehow better off if even more of us rented).  This chart is a subset of a table I found.  I’m sure not all the numbers are strictly comparable, and they are all for slightly different years, but I think most people will take New Zealand’s poor outcome over Switzerland’s any day.

home ownership

And, of course, none of this New Zealand Initiative material ever mentions the rather considerable advantages of location Switzerland enjoys –  at the heart of one of the wealthiest and most productive regions on earth, in an age when proximity and location seem to matter more than ever.    Or that, when international agencies look at Switzerland, one of the things they highlight most is the need for reforms to lift productivity growth.  The latest OECD report on Switzerland highlighted how relatively poor Switzerland’s productivity growth had been.  The press release for that report was headed “Focus on lifting productivity to guarantee future prosperity”, and part of the text read

The main objective has to be raising productivity, which will remain the key to boosting growth and maintaining a high quality of life and well-being.  The Survey suggests that Switzerland launch a new reform agenda to boost productivity, including renewed efforts to add flexibility to labour and product markets, improve public-sector efficiency, education and the business environment, and boost competition.  Increasing competition in the telecoms and energy sectors, including the privatisation of Swisscom, will be critical.

As I’ve said repeatedly, in many respects it would be nice to enjoy the material living standards the Swiss do, but……they are slipping backwards, and there is little sign that there is anything very systematic about how Switzerland does things that offers positive lessons for us, whether in beginning to reverse our dreadful productivity performance, or reverse our housing market disaster.

The mystery is why the New Zealand Initiative thinks otherwise.

But on a lighter note, I did find something from Switzerland that New Zealand could emulate.    I know Eric Crampton was one of those a bit upset about the loss of the rugby sevens tournament from Wellington.  Well, how about replacing it with office chair racing?  We spotted this on the BBC news the other night, and there is video footage here.  As the New Zealand capital of office workers, what better place than Wellington for a New Zealand leg of this sport.   Bowen Street looks as though it would offer a nice gradient, ending right in front of Parliament perhaps.  Think of the promotional opportunities.   It probably wouldn’t even take $5m of public money to get it going.