The tree god again

Some months ago the Governor of the Reserve Bank inaugurated his audacious bid to have his institution –  seen by most as a official agency created by, and accountable to, Parliament –  seen as some sort of local pagan tree god, with him (I assume) as the high priest in the cult of Tane Mahuta.  We’ve been told, by the Governor, that a people –  New Zealanders –  walked in economic darkness until finally the light dawned with the creation of the Reserve Bank.  It is pretty absurd stuff, not even backed by decent history or analysis, and one might be inclined just to ignore it, but the Governor seems serious.  In particular, he keeps returning to his claim. In fact, he was at it again –  claiming the mantle of Tane Mahuta –  yesterday with another little release that poses more questions than it offers answers (and which presumably means we’ll end the year still with no substantive speech from the Governor on anything he actually has statutory responsibility for).

Readers might recall that there was a damning report on the Reserve Bank as financial regulator, drawing on survey results of regulated institutions, released in April by the New Zealand Initiative.    This chart summed it up quite well

partridge 1

It has, presumably, been a priority for the Governor to improve the situation.   After all, even the Bank’s Board –  always reluctant to ever suggest any weaknesses at the Bank, even though their sole role is monitoring and accountability –  was moved to comment on this report, and the issues it raises, in their Annual Report this year.

And thus the Governor begins

In a step toward achieving the best “regulator-regulated” relationships possible, the Reserve Bank (Te Pūtea Matua) has established a Relationship Charter for working effectively with banks. The Charter will also be discussed with insurers and non-bank deposit takers in the near future.

One might question just how “best” is to be defined here –  after all, the public interest is not the same as that of either the Reserve Bank or of the banks, and there have been many examples globally of all too-comfortable relationships between regulators and the regulated.

But it was the next paragraph that started to get interesting.

Reserve Bank Governor Adrian Orr said the Relationship Charter commits the Bank and the financial sector to a mutual understanding of appropriate conduct and culture. “This is underpinned by the principle ‘te hunga tiaki’, the combined stewardship of an efficient system for the benefit of all,” Mr Orr said.

I’m not sure that understanding is necesssarily advanced when an institution operating in English introduces little-known phrases from another language to their press releases.  Here is how Te Ara explains “te hunga tiaki”

Te hunga tiaki

The Te Arawa tribes use the term ‘te hunga tiaki’ instead of kaitiaki, explains Huhana Mihinui.

The prefix ‘hunga’ is more common than ‘kai’ amongst Te Arawa, hence te hunga tiaki rather than kaitiaki. The essence of hunga is a group with common purpose. Hunga may also link with the sense of communal responsibilities. The same meaning is not conveyed with ‘kai’ … te hunga tiaki likewise invokes ideas of obligations to offer hospitality, but also to manage and protect, with the implicit recognition of the group’s mana whenua [customary authority over a traditional territory] role in this respect. 1

Which sounds pretty problematic frankly.  Banks and the Reserve Bank do not have a common purpose or a common set of responsibilities.  The Reserve Bank has legal responsibilities to the people of New Zealand, and the banks have legal responsibilities to their shareholders.  The two won’t always be inconsistent, but at times they will and there is little gained (and some things risked) from trying to pretend otherwise.  In both cases –  but particularly in that of the Reserve Bank –  there are limits on the ability of the principals (citizens and shareholders) to ensure that the boards and/or managers are actually operating according to those responsibilities.   Shareholders can sell.  Citizens are stuck with the Governor.

The statement goes on

“Writing it was the easy part. Operating consistently with the conduct principles is the challenge. We will regularly mutually review behaviours with the industry. Appropriate conduct is critical to the trust and wellbeing of New Zealand’s financial system, and the Reserve Bank – the ‘Tane Mahuta’ of the financial garden,” Mr Orr said. 

It is the tree god again –  a tree god that has some considerable way to go in improving its own conduct, be it around attempting to silence critics or whatever.

But this is also where I started to get puzzled.   In both those last two paragraphs from the statement, there is a suggestion that this document is some sort of agreed position between the banks and the Reserve Bank.   It is there in the charter document itself –  a one pager, complete with cartoonish tree god characters.

RBNZ-Relationships-Charter

(What I didn’t see was, for example, “we will avoid abusing our office and putting pressure on regulated bank CEOs to silence their economists when those economists write things we don’t like”.)

The word “mutual” is there twice, clearly suggesting that the banks have signed on to this.

But, if so, isn’t it a little strange that there are no quotes from any bankers, or the Bankers’ Association, in the press release, just the Governor’s own spin?   And when I checked the Bankers’ Association website, there was no statement from them. In fact, I checked the websites of all the big four banks and there was not a comment or statement from any of them.   Frankly, it doesn’t seem very “mutual”.   It looks a lot like gubernatorial spin.

And, to be frank, I don’t really see any good reason why there should be such mutual commitments.   Regulated entities don’t owe anything to the regulators.  They may often be intimidated by them, (privately) derisive of them, or even respect them.  But the regulated entities are just private bodies trying to go about their business in a competitive market.  By contrast, the Reserve Bank  –  the Governor personally –  carries a great deal of power over those entities, and they have few formal remedies against the abuse of that power.   What might reasonably be expected is unilateral commitments by the Governor as to how his organisations will operate in its dealings with regulated entities, standards (ideally measurable ones) that they and we can use to hold the regulator to account.      But that is different from what purports to be on offer in yesterday’s statement.

Of the brief specifics in the list of commitments, I don’t have too much to say.  There is a big element of “motherhood and apple pie” to them, and a few notable elements missing.  There is nothing about analytical rigour, nothing about transparency, nothing about remembering that the Bank’s responsibility is primarily to the New Zealand public, nothing about maintaining appropriate distance between the regulator and the regulated.  But I guess those would have been inconsistent with the fallacious claims about all being in it together and working for common goals.

It is at about this point that the Bank’s press release changes tone quite noticeably (not quite sure what happened to “one organisation, one message, one tone”).   Deputy Governor Geoff Bascand takes over and claims

Deputy Governor Geoff Bascand said the Reserve Bank’s recent announcement of a consultation with banks about the appropriate level of bank capital highlights the usefulness of the Relationship Charter.

And even in that one sentence he captures some of the mindset risks.  As I read the announcement the other day, it was a public consultation about the appropriate level of bank capital, and yet the Deputy Governor presents it as a “consultation with banks”.  If the Bank is going to run with this “Relationship Charter” notion, perhaps they could consider one for their relationship with the only people who give them legitimacy, Parliament and the public (having said that, perhaps I should be careful what I wish for).

And then weirdly –  in a press release supposed to highlight a new era of comity, open-mindedness etc –  the Deputy Governor launches into an argumentative spiel about the proposed new capital requirements.

“There is a natural conflict of interest. Banks will want to hold lower levels of capital to maximise returns for their shareholders. However, customers and society wear the full economic and social cost of a bank failure. We represent society’s interests and will naturally insist on higher capital holdings than any one individual shareholder,” Mr Bascand said.

Strange use of the phrase “conflict of interest”, which usually relates to a person or an organisation having two competing loyalties (perhaps personal and institutional), but even if one sets that point to one side for now, the rest is all rather one-dimensional and not terribly compelling.  He seems unaware, for example, that banks often hold capital well above regulatory minima –  creditors and rating agencies have perspectives too –  or that in most industries firms happily determine their own levels of capital, and somehow society manages (and prospers).  And, of course, there is not an iota of recognition of the way in which bureaucrats all too often serve bureaucratic interests (rather than societal ones), of the distinction between loan losses and bank failures, or of how the interventions of official and ministers often create the problems in the first place.

And then there is the final paragraph

“Following our Relationship Charter, we long signalled the purpose of our work and shared our analysis and consultation timetable. We have also committed significant time to engage with banks and provide a sensible transition period to make any changes we decide on. The Charter means what we are looking to achieve can be discussed professionally, while we continue to build appropriate working relationships. Outcomes will be superior and better understood and owned by society,” Mr Bascand said.

Of course, for example, whether the proposed transition period is “sensible” is itself a matter for consultation (one would hope –  and not just with banks).  Given the high probability of a recession in the next five years –  and the limited firepower here and abroad to deal with a severe recession –  some might reasonably wonder at just how wise it would be to compel big increases in capital ratios over that five year period, at a time when the Bank’s own analysis repeatedly suggests the banks are sound with current capital levels.   Credit availability might well be more than usually constrained.

One might go on to note that the level of disclosure in the consultative document is seriously inadequate for such a substantial intervention –  one that would take New Zealand further away from the international mainstream not closer to it.   As I noted in a post a few days ago, back in 2012 the Bank published a fuller cost-benefit analysis of the sorts of capital requirements that were then in place.  There is nothing similar in the consultative document issued last week, not even (I gather) any engagement with the previous cost-benefit analysis.  Given the amounts of money involved, that is simply unacceptable.  I’ve lodged an Official Information Act request for the (any) modelling and analysis they’ve done, but I (and others) shouldn’t have needed to; it should have been released as a matter of course.  In fact, even better they should have published a series of technical background papers over the year, held discussions with a range of interested parties (not just banks) before coming to the decisions they chose to formally consult on.      That is what good regulatory process might have looked like.

And then there is that bold final claim

Outcomes will be superior and better understood and owned by society

I’m all for effective and professional relationships between the Reserve Bank and the banks it regulates.  Perhaps that may even lead to better policy outcomes, but there is no guaranteee of that (after all, at the end of it all the law allows the Governor to make policy pretty much on a personal whim –  which is a lot like what the proposed higher capital ratios feel like).  But quite how a better relationship between the Reserve Bank and the banks will make outcomes “better understood and owned by society” is a complete mystery to me.   There are plenty of examples of regulators and the regulated ganging up against the public interest, and others of the regulators ramming through changes that might –  or might not –  be in society’s interest.  There is simply no easy mapping from a better relationship between the Bank and the banks, and good outcomes for society, let alone ones that –  whatever it means –  are “owned by society”.   Good outcomes rely heavily on very good and searching analysis.  And nothing in the Charter commits the Bank to that.

When one reads the argumentative second half of the press release it is little wonder the banks themselves wanted nothing to do with the statement.   I guess there isn’t much chance of the banks and the Reserve Bank getting too close to each other in the coming months as they (and the bank parents and APRA no doubt too) fight over the billions of additional capital Adrian Orr thinks they should have.

Meanwhile, the Governor can play at tree gods.  But it would be much better for everyone, including most notably citizens, if he were to engage openly and (in particular) more substantively on the issues he has legal responsibility for.   Cartoons and glib statements don’t build confidence where it counts.

 

 

 

The Reserve Bank and financial regulation

Still working my way through the various articles and documents that turned up just before Christmas, I got to a lengthy issue of the Reserve Bank Bulletin, headed “Independence with acccountability: financial system regulation and the Reserve Bank”.   It is, I suspect, designed to fend off calls for any significant reform.

The Bulletin speaks for the Bank, and although as I read through the article I noticed distinct authorial touches and tendencies, when all is boiled down the author was sent into the lists to make the case for how things are done now: powers, governance, and accountability.  He does a pretty good job of presenting the party-line, against significant odds in many areas.    Even where one disagrees with the Bank’s case, it is a useful and accessible addition, in part because the Bank’s powers and responsibilities in regulatory areas have grown like topsy over the years and are scattered across various pieces of legislation.

Much of the first half of the article is designed to make a case for an independent prudential regulator, by reference to the theory and to the writings of the Productivity Commission.  But, for my tastes, it was far too broad-brush to add much value.  Probably no one disputes that we want the rules applied fairly and impartially, with politicians largely kept out of the process.  In the same way, we don’t want politicians deciding which person gets arrested and which not –  we want an operationally independent Police for that –  or who gets convicted  –  independent courts – or which airline passes safety standards and which not, and so on, so we don’t want politicians deciding to look favourably on one bank’s risk models and not on another’s.   There are many independent regulatory agencies –  or even government departments where the chief executive exercises responsibility in independently applying the rules –  but to a very substantial extent they apply and administer the rules, while other people make the policy/rules.

The Reserve Bank wants to make the case that in its area the rules/policy shouldn’t be set by elected people (whether Parliament itself, or ministers by regulation), but by an independent agency, and that the same agency should both make and apply the rules (without any possibility of substantive appeal).  It is the “administrative state” at its most ambitious –  unelected officials (a single one at present, not even directly appointed by a Minister) are lawmakers, prosecutor, judge and jury (and quite possibly the equivalent of the Department of Corrections as well).

The Bank seeks to rest a lot on the notion of time-inconsistency, a notion from the academic literature that is sometimes used to try to explain the high inflation of the 60s and 70s, and to make the case for an independent central bank to make monetary policy.  The idea is that even though one knows what is good in the long-run, the short-term benefits of departing from that strategy (and endless repeats of the short-term) mean that the long-term gains are never realised.  The solution, so it was argued, was to remove the short-term management of the business cycle from politicians.    I’m not particularly persuaded by the model as it applies to monetary policy (a topic for another day), and it is curious to see a central bank putting so much weight on that model after year upon year of inflation below target.  But today’s topic is financial regulation and financial stability, where the Bank would have us believe it is desirable/important to have the rules themselves –  the policy –  set by someone other than politicians.

No doubt it is true that there can be some tension between the short and the long-term around financial stability.  But that is surely so in almost every area of government life and public policy?  Underspending on defence now frees up more resources for other things now, but one might severely regret doing so if an unexpected war happens later.  Skimping on educational spending now won’t make much difference (adversely) to economic performance or the earnings of anyone (teachers aside I suppose) for a decade or two.  Running big fiscal deficits now can offer some short-term benefits, but at the risk of heightened vulnerability etc a decade or two down the track.   But in none of these areas do we outsource policymaking: they are political choices, and we then employ officials and public agencies to administer and deliver those choices.     The Reserve Bank has, as far as I’m aware, never offered any explanation as to what makes their specific area of policy different.   Sometimes they draw on academic authors writing about financial regulation, but many of those specialists fall into the same trap –  they see their own field, but never stand back and think about how democratic societies organise themselves across a wide range of policy.

As it happens, the current system around the Reserve Bank and financial regulation is a bit ad hoc and inconsistent to say the least, a point that the article more or less acknowledges.     Thus, for banks the Reserve Bank can vary the “conditions of registration” to change all sorts of big policy parameters, without any formal involvement from elected politicians at all (all the variants of LVR policy, from the first Wheeler whim were done this way).  But even for banks rules around disclosure have to be done by Order-in-Council, and thus require ministerial approval.  No one would write the law that way –  such different regimes for two different aspects of  bank regulation –  if starting from scratch (the actual legislation has evolved since 1986).

For insurance companies, the Reserve Bank itself can issues solvency standards (effectively, capital requirements for insurers), but for non-bank deposit-takers capital rules (and other main prudential controls) can only be set by regulation, again requiring the involvement and approval of the Minister of Finance.   (Incidentally, this is why LVR rules apply to banks but not non-bank deposit-takers: Wheeler could regulated banks directly, but couldn’t do the same for non-bank deposit-takers.

(And, as the Bank notes, it has “no direct role in developing rules associated with AMLCFT”, even though it administers and applies those rules for banks.)

At very least, there would appear to be a case for streamlining and standardising the procedures for setting the rules.     It isn’t clear why the Reserve Bank Governor should have almost a free hand when it comes to banks, but such limited scope to set policy when it comes to non-bank deposit-takers.   And, if anything, the case for ministerial involvement in settting the rules for banks is greater than that for the other types of institutions because (as the Bank acknowledges) bailouts and recessions associated with financial crises etc have major fiscal implications, and one might reasonably expect elected ministers to have a key role in setting parameters that influence the risk of systemic bank failures.   And, again as the Bank acknowledges, it isn’t easy to pre-specifiy a charter –  akin to say the Policy Targets Agreement –  for financial stability policy.

The Bank attempts to cover itself against suggestions that it might be, in some sense and in some areas, a law unto itself, by highlighting various ways in which the Minister of Finance might have some say.   There are, for example, the (non-binding) letters of expectation, the need to consult on Statements of Intent, and the potential for the Minister to issue directions requiring the Bank to “have regard” for or other area of government policy.     These aren’t nothing, but they aren’t much either –  and as the Rennie report noted, the power to issue “have regard” directions has never been used.    Even budgetary discipline is so weak as to be almost non-existent: there is a five-yearly funding agreement, but it isn’t mandatory  (something that needs fixing in the current review), isn’t particularly binding, and doesn’t control the allocation of spending across the Bank’s various functions.   The Minister of Finance doesn’t even get to make his own choice of Governor –  and all Bank powers still rest with the Governor personally.

The contrast with the other main New Zealand financial regulatory agency, the FMA, is pretty striking.   Policy is mostly set by the Minister (by regulation), advised by MBIE (to whom the FMA is accountable), and the powers of the organisation itself rest with the FMA’s Board, all the members of which are appointed directly by a Minister, and all of whom –  under standard Crown entity rules – can be removed, for cause, by the Minister.  Employees, including the chief executive, only have powers as delegated by the Board.    The FMA model is now a pretty standard New Zealand regulatory model, and an obvious point of comparison with the Reserve Bank.

Somewhat cheekily, the Reserve Bank attempts to present their own model as providing more scope for ministerial input than for the FMA  (see footnote 16, in which they note that for the FMA there is no power of government direction).   As regards policy, it isn’t necessary, since the government sets policy and appoints (or dismisses) the Board.   As regards the application of rules, one wouldn’t want –  and doesn’t have –  powers of government direction in either case.   As regards the banking system, mostly ministers can’t set policy, can’t hire their own Governor, and can’t fire him (re financial system policy) either.   The Governor and the Bank have far more policy power than is typical –  across other regulatory agencies –  appropriate, or safe.

The second half of the article is about accountability.  As they reasonably note, when considerable power is delegated to unelected agencies, effective accountability needs to provided for.    In their words “accountability therefore generates legitimacy and legitimacy in turn supports independence”.

It is, therefore, unfortunate that the Bank’s very considerable powers are matched, in this area in particular, by such weak accountability.   After pages of attempting to explain themselves and what they see as the various aspects of accountability, even they end up largely conceding the point.     These sentences are from the last page of the article

the BIS (2011) argues that financial sector accountability mechanisms should be focussed more on the decision making process rather than outcomes per se. This is because of the more intrusive nature of financial sector policy, and the issues associated with observing outcomes (lack of quantification and very long lags). Put another way, there should be less reliance on ex post accountability mechanisms and more obligations placed on ensuring decision-makers are transparent about the basis for their actions.

I’m not sure I entirely agree –  although there is certainly the well-recognised point that absence of crisis is evidence of nothing –  but at very least a focus on strong process might argue for:

  • a more effective separation between policymaking and policy administration (as is customary for many regulatory entities, but largely not for New Zealand bank supervision),
  • a decisionmaking structure in which power did not rest simply with a single individual, who is himself not directly appointed by an elected person,
  • decisionmaking structures that involve real power with non-executive decisionmakers,
  • effective and binding budgetary accountability,
  • a high degree of commitment to transparency and to ongoing external engagement,
  • a culture that is self-critical and open to debate,
  • perhaps some more effective scope for judicical review (including on the merits, rather than just process),
  • monitors with the expertise, mandate, and resources to ask hard questions and to critically review and challenge choices being made around policy and its application.

At present, as far as I can see, we have none of these for the Reserve Bank of New Zealand as financial regulator.

Take the formal monitors for example.  Parliament’s Finance and Expenditure Committee has little time, no resources, and little expertise.  The Treasury has no formal role, no routine access to Bank materials (or eg Board papers) and is probably quite resource-constrained in developing the expertise.

And what of the Bank’s Board?   By law, they play a key role, as agent for the Minister of Finance in monitoring the Governor, and (now) obliged to report publically each year on the Bank’s performance.    The Bank often likes to talk up the role of the Board –  doing so provides them cover, suggesting the presence of robust accountability –  but the latest article is surprisingly honest.  The Board gets a single paragraph, which simply describes the legislative provisions.  There is no suggestion of the Board have actually played a key role in holding the Bank (Governor) to account – not surprisingly, since in the 15 years they have been publishing Annual Reports, there has never been so much as a critical or sceptical word uttered.  Of course, it isn’t surprising that the Board doesn’t do a good job: it has no independent resources at all (even its Secretary is a senior Bank staffer), the Governor himself sits on a Board (whose main role, notionally, is to hold the Governor to account) and the Board members themselves typically have little expertise in the areas (quite diverse) around which they are expected to hold the Governor to account for.   (Their job is, of course, made harder by the rather non-specific mandate the Bank has in regulatory areas –  there is nothing akin to the Policy Targets Agreement (which has its own challenges in monitoring).)

What of some of the other claims about accountability?  The Bank points out that it is required to do regulatory impact assessments –  but these are typically done by the same people proposing the policies, and there is (or was when I was there) nothing akin to the sort of process some government departments have for independent panels vetting the quality of the regulatory impact assessments.

They are also required to consult on regulatory initiatives, and must “have regard” to the submissions.  But, except perhaps on the most technical points, there is little evidence that they actually do pay any real heed to submissions.    For a long time, they also kept the submissions themselves secret –  even attempting to claim that they were required by law to do so.  They’d publish a “summary of submissions”, which highlighted only the issues they themselves chose to identify.   As they note, and in a small win for a campaign by this blog, they have now started publishing individual submissions, belatedly bringing them into line with, say, Select Committees of Parliament or most other regulatory bodies.  But there is no sign of much change in the overall attitude, or of any greater openness to ongoing debate and critical scrutiny.

Then, of course, there is the Official Information Act.  The Bank is subject to the Act, but chafes under the bit, is very reluctant to release much, threatens to charge requesters, and generally seems to see the Act as a nuisance, rather than an integral part of an open and accountable government.

We had a good example just a couple of months ago as to how unaccountable the Bank is in its prudential regulatory areas.  It emerged that Westpac had not had appropriate regulatory approval for some model changes used in its risk-modelling and capital calculations.   But, as I noted at the time, the short Bank statement left many more questions than it answered, and no one –  including journalists asking directly –  has been able to get straight answers from them, even though capital modelling is at the heart of the regulatory system.

And, of course, if the formal monitors are lightly (or not at all) resourced, there isn’t much other sustained scrutiny.   Banks are scared –  and more –  to speak out: this is where culture matters a great deal, as banks will always have a lot of balls in the air with the regulator, and in an open society should feel free to openly challenge the regulator, without fair of undue repercussions.   Academics with much expertise in the area are thin on the ground, as are journalists with the time or expertise.

Mostly, in its exercise of its extensive financial regulatory powers, our Reserve Bank isn’t very accountable at all.   Providing it jumps through the right, minimal, process hoops it can do pretty much what it likes in many areas of policy, and the public is left just having to take the Bank’s word (or not) that things are okay.  That needs to change –  and thus phase 2 of the current review of the Bank’s Act needs to be taken seriously.    Making the changes isn’t about one single measure, and there are plenty of details that will take a lot of work, and thought, to get right.   Part of it is about building a better internal culture, one that (from the top) really wants to engage, and which welcomes challenge and critical review.

After yesterday’s post I had an email from a reader with considerable senior-level experience in the banking sector noting just how weak much of the formal scrutiny of the Bank is in these areas.

From my perspective the Bank would benefit from independent challenge about their prudential responsibilities, and cost-benefit analysis. I am unsure if they have reviewed this post the Westpac capital model issues.

I am unsure how the Board discharges the independent prudential review role effectively given their experience – two Directors have insurance experience  and no directors have Banking, payments system or other non-bank financial experience. Likewise experience of Insurance/Banking/Payments technology systems and risks. While there are some very good RBNZ executives they are not particularly strong in banking risk experience – funding, liquidity, credit etc.

…. I think it would be useful for the RBNZ at a governance level to have experience of how financial balance sheets, and liquidity operate under stress, they will have some very important decisions to make when the next financial crisis occurs.

Much of that rings true to me.    We have typically had Governors with more experience of macro policy, and perhaps financial markets, than of banking –  and yet financial regulation is a hugely important role in what the Bank does – and now have a new Head of Financial Stability with no background in banking or finance at all.   We have a Board responsible for monitoring the Bank across monetary and regulatory responsibilities, and with little specialist expertise.   The contrast with, say, the FMA is quite stark.

Quite what the right balance of a solution is, I’m not quite sure.   I favour moving to a committee-based decision-making structure, and moving more of the policy back to the Minister (with the Bank as a key adviser), but even a Financial Policy Committee might only have three or four externals on it, and no such group is going to encompass all the right bits of expertise.   As often, I guess it is partly about the willingness to ask the hard questions, and to be willing to commission independent expertise (whether from New Zealand or abroad, from academics or people with industry background) and to engage.   If the Board remains as a monitoring agency –  as Rennie recommends, but I’m sceptical of –  it needs to be provided with resources.   And the Minister needs to be willing to use his statutory powers to commission independent reviews of aspects of the Bank’s stewardship, to enable us (and the Bank) to learn from experience by critically evaluating performance (and process).  Personally, I’m still tantalised by the idea of a small independent agency resourced to pose questions, and commission research, on the stewardship of fiscal, monetary and financial regulatory policy.

If not all the answers are clear, what is clear is that New Zealand is a long way from having got the model right: the right allocation of powers, the right accumulations of expertise in the right places, the right cultures, and the appropriate mix of formal and informal accountability that can really give New Zealanders confidence in the regulation of the financial system.

 

Food, culture, regulation….and a walk with the kids

Spurred by a Herald article yesterday, my kids and I went for a walk (well, we do most days but this one had a specific purpose).  The newspaper was reporting  new Auckland university research showing –  shock, horror – that.

“Sixty-nine per cent of urban schools have a convenience store within 800m and 62 per cent have a fast-food or takeaway shop in that distance”

Frankly, I was surprised the number was that low, but then in Wellington one finds small schools in all sorts of odd nooks and crannies.  My three kids now go to three different schools, and each of the schools has shops nearby.  But, as it was nearest, we walked around the area that encircles my youngest child’s decile 10 primary school.  And what did we find?

On the first corner:

  • a dairy
  • a specialist pie shop

On the next corner:

  • two dairies
  • a Chinese takeaway
  • the Empire Cinema, with its neighbourhood café and gelato outlet

And then in the main shopping area

  • the supermarket, (as the kids pointed out, it was chock full of all sorts of stuff, “good” and perhaps “not so good”)
  • a Hell Pizza outlet
  • two fairly casual daytime cafes with plenty of take-out options
  • a combination fish and chip shop/Chinese takeaway
  • the video (and Post) shop, with lots of sweet and savoury nibbles
  • an Indian takeaway
  • another dairy
  • a lunch-bar/bakery
  • the butcher –  bacon and cheerios don’t score well on the “disapproval” lists, and that is before getting onto the question of red meat.

And that was without including the:

  • bottle store and bar, and
  • three other evening-focused restaurants, two offering take-out
  • and a couple of arty galleries/shops selling quite good chocolate.

But so what?  If 70 per cent of urban schools are close to at least one convenience or takeaway outlet, isn’t that simply telling us that our schools are typically in the heart of our neighbourhoods.  Which is probably where they should be.   And I’d be surprised if the number of dairies and takeaway places has changed much in the almost 40 years since I was getting off the school bus at one of these corners (although there was no gelato back then, even in this Italian-influenced suburb).

Buried in the Herald article, well past the calls for governments to “do something”, was this comment from the lead researcher

But she acknowledged that no link between obesity and access to unhealthy food shops had been clearly established by research.

‘The evidence is quite mixed…You don’t have to wait for the evidence to take action.  It’s the same with the sugar tax –  there’s no definite evidence. It’s hard to get definite evidence in science.  The fact is, unhealthy food is so available, accessible, affordable, we should protect children from potentially harmful products. ‘

At one level one can sympathise.  Definitive evidence is certainly hard to come by in lots of areas (including the ones I’ve been closer to, in macroeconomics).  But it is also a good reason for governments to be particularly wary of optional regulatory interventions, that directly impinge on ordinary citizens’ choices and options.

And that is even if one granted that obesity was somehow the government’s problem.  The common argument is that the public health system makes it so, because the government bears the medical costs of the choices people make.  There is something to that of course –  although we all die of something, and the longer-lived cost more in New Zealand Superannuation, rest-home subsidies etc)   – but as an argument it has chilling implications: we should give the government the right to coercively regulate all manner of behavior, simply because the government bears one lot of the costs if things go wrong?  I support a public health system, but taken very far this argument will eventually risk undermining support for such a system, and that would be unfortunate.

In fact, most of the costs of obesity fall on the individuals concerned, and perhaps their families.  A shortened life expectancy, or more sick days, has a cost to the person concerned.  The benefits from the food consumption, or choice to do things other than exercise, also accrue to the individual.

Do people always make wise choices?  Of course not.  Do children and young people always do so?  Even more so, of course not.  Part of growing up is taking risks, and pushing the boundaries.  But a big part of good parenting is to constrain the choices, and to educate kids in a way that means they are less likely to push the boundaries too far.  It is about the ability to say no. It is about the ability to offer treats, in sensible sizes and sensible frequencies. And to balance that with a good basic balanced diet, with all sorts of foods mostly in moderation. And for adults to model eating sensibly –  both within the family, and within whatever other groups the family might be part of (church, marae, sports club, or whatever).  That is a big part of what culture is –  memorizing, practising and reinforcing a sense of the way we do things, ways that support getting through life reasonably successfully.

Do governments have a role in all this?  I don’t see one (and was unnerved  to read that the Health Minister is apparently proud of the fact that the government has “22 initiatives targeting child obesity”).  Which Ministers  (or their Opposition peers) would I regard as good role models, or qualified to provide guidance on shaping the next generation?  A few perhaps, but not many.   Speaking personally, I’ve never found the presence of dairies, takeaway, or even the layout of supermarket shelves, makes my parenting more difficult.  Perhaps others have a different experience  but –  to loop back to the Auckland University researcher’s acknowledgement –  some robust evidence would be nice before governments rush in, trying to tell people where they can locate their businesses, who they can sell to, and so on.

But my inclinations are more austere Puritan than New Zealand Initiative libertarian, and so although I don’t see a role for government controls in this area, I was quite shocked last night when my elder daughter told me that her intermediate school sells potato chips and a variety of other foods of dubious nutritional value at the morning break.  I’m running for the Board of Trustees –  just to make some points in my campaign statement, rather than expecting the Green voters of South Wellington to prefer someone like me – and if elected would want to encourage the school to look again at quite what products it was offering for sale.

Speaking of the New Zealand Initiative, Geoff Simmons of the Morgan Foundation had an op-ed in this morning’s Dominion-Post attacking the Initiative for its new report The Health of the State and its skeptical take on specific taxes on disapproved classes of food (and alcohol and tobacco).  Simmons leads with the point that the Initiative is “corporate-funded”, as if somehow that matters  It is not as if there is any secret as to where the Initiative gets its money from – its members are listed in the Annual Report, and if anything I was rather disconcerted to learn that the Wellington City Council (always happy to intervene in anything) was a member (and Auckland University in fact).  There are lots of things I disagree with the Initiative on, but the issue should surely be the quality of the argumentation, analysis, and evidence. That goes for the Morgan Foundation surely just as much as for the New Zealand Initiative –  both privately-funded research and advocacy bodies, whose presence lifts the generally weak level of public debate in New Zealand.

Simmons suggests that it is really all about “ideology”.  I don’t think that is right –  there is plenty of debate, or should be, about evidence (partial as it inevitably often is).   But he ends his column this way:

“Instead of a facile debate over whether a sugar tax would work or not, we should be discussing which we value more –  living in a free society where you can eat what you like and burden the state, or whether we value having a healthy productive society”

Surely there is room for both?  A serious ongoing debate about the impact and efficacy of proposed interventions, using insights from overseas experience, from other similar interventions, and so on.  But also a debate about what sort of society we want.  Personally, I like the idea of a free society, in which people can eat whatever they like –  but typically choose to restrain themselves, in food as in all other areas of life.  We don’t exist as servants of the state – if anything, it is the other way round.  Civilisation and prosperity have always required restraint and self-discipline in a whole variety of areas of life.  But the track record of governments in creating such cultures doesn’t look good:  governments more often corrode cultures than foster successful ones.

 

 

 

 

School choice and the ACT Party

Reading the Herald over lunch, I found an article about potential future heightened pressures on the rolls of Auckland Grammar and Epsom Girls’ Grammar.

But what struck me was the stance of the local MP, and leader of the ACT Party, David Seymour. In addition to these roles, Seymour is also

  • Parliamentary Under-Secretary to the Minister of Education
  • Parliamentary Under-Secretary to the Minister of Regulatory Reform

The ACT website says of ACT’s policy on schools and pre-schools

ACT believes that education at this level is an investment in human capital that the government rightly makes.  However, the delivery of the service has been captured, at the primary, intermediate, and secondary levels at least, by a providing bureaucracy that limits choice and innovation for the purpose of self-preservation.

ACT believes that state education funding should be seen primarily as an asset of the parent and child, to be used at a school, public or private, of their choice.  ACT would diminish the role of the Ministry of Education in allocating resources, separate the property ownership role of the Ministry from the operations role, make Boards of Trustees more autonomous in their  governorship of schools, introduce better mechanisms for State and Integrated schools to expand and contract according to demand, and increase the subsidy to private schools to the extent that it is expenditure neutral.

To be sure, ACT has only a single seat, in effect gifted to it by the National Party, but where is the evidence of this sort of approach in the stance adopted by Mr Seymour?  ACT has pursued the cause of so-called Partnership Schools, but these are not really a vehicle for parental choice, since the only people who can set up these schools are those targeting “underachieving children”.  That is one worthy goal, but it is quite different from a framework that facilitates widespread parental choice on schooling.  Reasonable academic achievement isn’t the only thing parents value.

What does Seymour have to say about the pressures in the Grammar zones?  Is he suggesting abolishing the zones?  Is he suggesting establishing new excellent state schools?  Is he suggesting allowing new integrated schools to be established easily?  Is he suggesting practical ways to treat “state education funding…primarily as an asset of the parent and child”.  The answer, of course, is none of the above.  And it gets worse, as he is reported as toying with an idea that students in new houses would not be included in the zone?  And this from a party allegedly favouring more responsive housing supply.

Seymour’s response seems to be primarily about protecting the choice, and the property values, of one small group of among the highest income New Zealanders, in Mount Eden, Parnell, Newmarket, Remuera, and Epsom.  And it is not as if this stance is new.  As the Herald reports, he has previously come out opposed to intensification in his own area, and opposed efforts of neighbouring schools to extend their zones in ways that overlap with the Grammar zones.  ACT rightly criticises corporate welfare, and has also been fairly critical of the growth of the welfare benefit system, but there is gaping inconsistency right at the heart of their home territory.  It looks a lot like protecting elite privilege.  Many people would like to send their kids to one of the Grammars –  or schools like them.  But a rapidly decreasing number can afford the house prices in those suburbs and the dominant state provider doesn’t build any more.  Why would one take Seymour seriously on any proposed policy when he is not willing for his policies to start at home?

I think he is right about the education bureaucracy, but it isn’t only the provider bureaucracy that seems driven by self-preservation.  The Under-Secretary for Education and MP for Epsom seems to have gone the same way.  ACT is likely to be at its best when it is attacking, not defending, established advantage, and when it is campaigning to democratise access to excellence and strongly advocating competition, even if it means some transitional costs fall on some of their own supporters.  Thank goodness that governments that abolished import licensing – which had provided many very comfortable livings –  did not take the ACT approach.  I’m sure Seymour (and his party colleagues), knows that his position is untenable when put up alongside party policy.  And so I wonder what he really stands for?  Allowing bars to open more easily on the mornings of a few rugby games is all well and good, but beginning to make progress on allowing real school choice for the mass of middle New Zealand is a rather more important, and more enduring, issue for the longer-term.

These issues don’t just arise in Auckland.  In the weird world on education bureaucracy, my son is zoned out of the closest state boys’ school (which we don’t particularly want him to attend) because for decades the Ministry of Education has failed to build even a single state school in what is generally regarded as New Zealand’s largest suburb.

New Zealand already has a limited quasi-voucher system in the integrated schools system.  For some parents, there is an effective choice, between a neighbourhood state school and a (slightly more expensive) integrated school.  But in practice the choice is limited: most of the schools are Catholic, and Catholics are supposed to attend Catholic schools and (reasonably enough) there aren’t many places for those from other traditions.   And rolls are capped.  The integrated schools model was a far-reaching reform of the Third Labour Government in the 1970s, in response to a funding crisis in the Catholic system.  More than 10 per cent of New Zealand children are educated at such schools, and (unlike the so-called Partnership Schools) there seems to be little debate around their performance –  it is just recognised that some parents will prefer one sort of school, and others will prefer different types.  But why not use the integrated schools model as a basis for a real extension of choice?  Allow proprietors –  existing, new, for-profit, and non-profit –  to set up new schools, as they like, and provide per capita funding accordingly if they can attracts parents and students.  For most parents –  especially with more than one child – private schools aren’t a real choice –  the financial burden is just too heavy.    And perhaps there will never be much effective choice in most small towns. But most of our population lives in our larger cities –  half in Auckland, Wellington and Christchurch alone –  and in those places (and no doubt most of our larger provincial centres) effective and genuine affordable choice could be made to work.

Yes, no doubt there would be some duds set up.  There are some disastrous schools now.  No doubt there would be some excess capacity built.   But that is akin to an argument that we’d be better off with one supermarket in a suburb than two, to avoid the wasted extra physical capital, or the old days of licensing when a new entrant might have to prove there was insufficient capacity, rather than simply being allowed to take a risk and open up.

Yes, there are lots of other details to work out  The state has some legitimate interest in ensuring a minimum standard of schools, but it has much less interest in that than parents have. The state, its bureaucrats and ministers, gets to make mistakes over and over again.  But each child only goes through school once: the stakes are that much higher for parents and kids than they are for the education bureaucrats and politicians.

None of that necessarily helps with what should happen in Auckland right now.  Someone is going to miss out, and political choices will (openly or not) decide who.   That is a  problem for Mr Seymour, and perhaps one he should have thought harder about before campaigning for school choice and reduced land use restrictions in suburbs like Epsom.  Real choice rarely comes from the elites –  they aren’t, generally, the ones with most to gain from it.

“Larry Summers on TPP makes perfect sense”?

Tyler Cowen wrote last night “Larry Summers on TPP makes perfect sense.  I haven’t seen anything on the anti- side coming close to this level of analysis, and in a short column at that.”

I’ve been a bit ambivalent about TPP, so thought that I’d better read the Summers piece.  My problem was that I came away more skeptical than I went in.

My own priors are pretty clear.  Free trade is good –  as a matter of liberty and as a means to greater prosperity.  I’m sure one can find exceptions, but the rule is a pretty good one to live, and make policy, by.

But then Summers tells us that:

First, the era of agreements that achieve freer trade in the classic sense is essentially over. The world’s remaining tariff and quota barriers are small and, where present, less reflections of the triumph of protectionist interests and more a result of deep cultural values such as the Japanese attachment to rice farming. What we call trade agreements are in fact agreements on the protection of investments and the achievement of regulatory harmonization and establishment of standards in areas such as intellectual property. There may well be substantial gains to be had from such agreements, but this needs to be considered on the merits area by area. A reflexive presumption in favor of free trade should not be used to justify further agreements. Concerns that trade agreements may be a means to circumvent traditional procedures for taking up issues ranging from immigration to financial regulation must be taken seriously.

But if free trade is good, the same case can’t be made for “regulatory harmonisation”.  We just don’t know enough about what regulation is sensible, and worthwhile, and we live in democracies where the case for regulation in specific areas should be fought out through domestic political processes.    A diversity of regulatory approaches is often the way we learn.     And protections for intellectual property are typically far too high anyway –  in other words, agreements on such matters risk being (or are by design) generally anti-competitive, anti-market, measures.

In fact, the strongest argument for TPP I could find in the article was one grounded in domestic US politics ( recalling that Summers had been a senior official in both the current and previous Democratic administrations).

The repudiation of the TPP would neuter the U.S. presidency for the next 19 months. It would reinforce global concerns that the vicissitudes of domestic politics are increasingly rendering the United States a less reliable ally.

Really?    We all know that second-term US Presidents, especially those whose Vice-President is not heir presumptive, quite quickly become lame ducks.  Is this presidency really any different?  And where is the pressing demand for TPP?  No doubt there are elites in each of the negotiating countries with a great deal at stake, but where is the popular demand for this agreement?  As Summers puts it, it doesn’t seem to be a free trade agreement anyway.  Which population centre will think worse of the US if negotiations stall?    No doubt some US business groups will be aggrieved, but that is domestic politics, not international relations.  Failure of TPP would be embarrassing for Barack Obama, but that seems less like a national interest issue than a partisan one?

I’ve long been a bit puzzled by what was supposed to be in any deal that would make it economically worthwhile for New Zealand (as distinct from being “inside the club”).  I recall the IMF doing some modelling a decade or more ago on the US-Australia FTA, which had concluded that that agreement had been modestly welfare-diminishing for Australia –  as if a desire for a deal, any deal, and perhaps the momentum that any  process takes on over time had overridden a hard-headed assessment of the economic interests of Australia.   If there were genuine large-scale liberalisation of the global dairy trade, then we might reasonably think New Zealand would be better off from a deal.  But has that ever seemed very likely?  And if only small (or no) trade gains are on offer, how should we weigh that against the losses from strengthened intellectual  property protections?

And how should be think about the incentives on our key political participants?  Having pursued an agreement for so long, what sort of threshold would have to be crossed before they would be willing to walk away from negotiations?  It is not clear that the personal and national interests are necessarily tightly aligned.  Perhaps the US Congress will  vote in ways that mean they never have to make that decision.

To repeat, I’m a free trader.  I think New Zealand should have removed its remaining tariffs, and wound back its anti-dumping regime, long ago.  I’m in favour of a materially more liberal approach to foreign investment.  And I generally favour less regulation rather than more.  But all these are causes that should be fought out openly, and in the domestic political process.    So, I hope there is a better case for TPP than that put forward by Larry Summers, who actually seems somewhat ambivalent if it weren’t for the impact on Obama’s political position, but so far I haven’t found it.

And that before I saw Keith Woodford’s recent column on interest.co.nz.  Woodford knows a great deal about the global dairy industry, and he makes what seem like pretty persuasive arguments that there might not be much in it for New Zealand even if the US and Canada were to move towards an unsubsidised and less heavily regulated dairy industry.