Reserve Bank

A government agency planning more nice-to-haves

Michael Reddell Reserve Bank, Statistics

Almost all government agencies are in cost-cutting mode at present, under instructions from the incoming government. All sorts of things they, or the previous government, thought were nice to have and some things perhaps they thought were really rather useful indeed seem to be going by the wayside.

But at the Reserve Bank they are planning a new nice-to-have.

The Bank has a consultation process open at present on a proposal to “invest in” (that is public sector for “spend”) a new survey of business people, asking about their specific numerical expectations for a subset of macroeconomic variables. What is striking, in this climate of general public sector austerity, is the utter absence of any analysis of what gaps this survey is designed to fill and how material they might be for monetary policymakers. That was one thing in the era of bloat and lavish increases in public spending – in which the Bank fully participated over the last few years – but it really shouldn’t be acceptable at present.

On the substance, I’m sceptical of asking specific numerical questions to a wide range of businesses about specific macroeconomic variables (up, down, or the same questions just might be useful) and of whether there are really information gaps at all. I put in a fairly short submission, as follows:

Submission to the Reserve Bank on proposed Business Expectations Survey

Michael Reddell

23 March 2024

This is my personal submission in response to the Reserve Bank’s consultation document on the proposed Business Expectations Survey.  I have been a long-term user of business and household surveys, was involved in various refinement to the existing (and now) expert survey of expectations the Bank runs, and was a user of such material for several decades as a senior monetary policy adviser in the (former) OCR Advisory Group.   I am now also a monetary policymaker in another country, so am very much attuned to the perspectives and interests of policymakers.

There appears to be no prior background document referred to, so I am working on the assumption that the current document is all the information/analysis that the Bank is choosing to provide.

On that basis, it is quite astonishing that there is no analysis of the case for (or against) a survey of the sort the Reserve Bank proposes to spend additional public money on.   As you will be well aware, there is a plethora of surveys in existence (which wasn’t the case several decades ago), including the monthly ANZBO, the monthly BNZ PMI and PSI, the quarterly QSBO, and of course the Bank’s own survey of (now) expert expectations –  to name just the more-prominent of the business surveys.   The Bank used to be a large funder of the QSBO, and I assume that that is still the case  (and I used to, and would still, champion the case for some slight extensions to the QSBO, notably around wages).

The survey you propose is of a subset of macroeconomic variables.  You will no doubt be aware that the existing Survey of Expectations began with a much larger range of respondents, including business and union people, and was eventually slimmed down towards its current form in part as it was realised that many of the business respondents had no particular reason to have formed specific expectations for many macroeconomic variables, or even in some case to be aware of the specific measures being asked about.   I am aware, of course, that your current proposal is for a more-limited subset of questions, and in the case of near-term inflation it is a fairly commonly asked question even of households.  But do you really believe that many business respondents are likely to have well-developed thoughts on what the inflation rate might be in 10 years’ time (or even that they have risen or need to have even implicit views given that very few nominal contracts exist)?  Similarly, how many of your respondents will be familiar with the details of the specific wage series you ask about, or will recognise a difference between annual GDP growth and annual average GDP growth (let alone know the numbers).  

It is much more common for surveys of the wider business community to use tendency questions and focus reporting on net balance results.  Absent any compelling analysis or evidence from abroad, I’d have thought that was likely to be a much better way to go, if you really believe there is value to the MPC in yet another business survey (typical targeted respondents seem much more likely to have some sense as to whether growth or wage inflation might speed up or slow down over the period ahead than to have meaningful numerical expectations.  In respect of labour market slack existing questions in other survey (“difficulty of finding labour”) seem to cover the ground these sorts of respondents could typically generally offer (few will, by contrast, have particular to care what the specific HLFS definition of unemployment is).

But, more generally, where is the evidence of gaps in the (survey) data that the MPC needs to make good monetary policy?   This is posed as a serious question.  I’m not aware of such gaps, but perhaps you are and could have elaborated on this point for submitters.  Material monetary policy mistakes have (and no doubt will again, in the nature of imperfect individuals and institutions) be made, but is there really any evidence that it is (a subset of) business expectations of macroeconomic variables that is lacking, or which led the MPC astray in the last few year?  I’d be surprised, but am certainly open to evidence.

It was perhaps surprising that there was no indication in the consultation document of the cost of (a) developing and (b) administering the proposed survey, which makes it even more difficult to assess whether it is plausible that there will be net benefit for taxpayers (as ultimate funders of the Bank).

On a couple of specific items in your document:

  • It was rather surprising to see several references to “respondent burden”, including to justify leaving out very small businesses from the possible sample base.   It is a highly relevant consideration when the state uses the coercive powers SNZ in particular has to insist on private firms and citizens completing surveys, but as you note this proposed survey will be quite as voluntary as any of the other business surveys, and it isn’t obvious that –  to the extent you are likely to get any useful data from this survey – businesses with 5 employees will have anything less to offer than those with (say) 15, again bearing in mind that it is macroeconomic variables you are asking about.  Moreover, since you propose to revolve the panel, no one potential respondent would be asked for response all that often or for that long.    More generally, I note the very low response rate you expect (“10-20%”) and given the severe selection bias that probably introduces one is again left wondering about the strength of the case for the survey at all.
  • I’m also unpersuaded by the (very sketchy) case made for the exclusion of primary industry firms.  It might be common to exclude such firms, but (as you recognise) this is an economy in which the primary sector is of some considerable importance, and (again) these are macroeconomic questions you are proposing to ask, and it isn’t obvious why primary industry respondents would be any less equipped to answer such questions than other firms their size. I note that you say that primary industry firms are not generally price-setters, but it is a galaxy of macro questions you are proposing to ask, not ones about price-setting intentions (and primary sector firms employ, borrow, fx hedge (or not), and so on).

Finally, and while I recognise that the Reserve Bank’s current funding agreement does not run out until next year, in the current climate in which government agencies pretty much across the board are being expected to exercise considerable spending restraint, often cutting established functions and activities, it seems extraordinary (but consistent with a longstanding culture of Reserve Bank exceptionalism –  and yes, I used to share and even champion it) for the Bank to be proposing a new ongoing spending commitment on what is, at best, a nice-to-have, supported by no serious underlying analysis of the need for this new survey, or even of the Bank’s ability to continue to fund it (against other priority claims) if and when the Minister of Finance finally catches up with the Bank and adjusts its authorised spending levels.

Conflicts of interest

Michael Reddell Reserve Bank

A while ago I stumbled on the report of Kristy McDonald QC, dated 22 February 2022, which had been commissioned by Hon David Clark, then Minister of Commerce, into aspects of the appointment of the default Kiwisaver providers, and specifically around the handling of conflicts of interest involving the then chief executive of the Financial Markets Authority (FMA) whose brother-in-law was the chief executive of one of the providers. The FMA provided a strictly limited bit of advice to the Minister.

I was less interested in the specifics of the case - which didn’t reflect very well on the FMA or its board/chair, but was (from the report) hardly the worst thing in the world - than in Ms McDonald’s observations on conflicts of interest. This is probably the most useful excerpt from her report (the document mentioned in italics is from the Public Service Commission).

There is a heavy emphasis on three things really. First, avoiding actual conflicts of interest. Second, ensuring that outside (“fair minded”) observers can be confident that decisions have not been improperly influenced. And, third, documentation, documentation, documentation (which helps demonstrate, at the time and if necessary later, that actual and apparent conflicts have been recognised and dealt with appropriately).  As McDonald notes in 6.22 you’d think considerations like these should be particularly important in a regulatory agency, especially one - such as the FMA - with regulatory responsibilities in the financial sector. This is from the very top of the front page of the FMA’s website

You’d really have hoped that the Financial Markets Authority would have gone above and beyond in setting and applying standards for its own people, But…..no. You might remember them banging on a few years ago about “culture and conduct” in the private financial sector. I guess those were aspirations for other people.  One hopes that, in the light of the McDonald report, the FMA has now lifted its game in handling such issues in its own organisation. One might hope…..

One of the classes of financial product/entity that the FMA has regulatory responsibility for is superannuation schemes. It has particular responsibility now for a class of so-called “restricted” schemes, closed off to new members and generally in multi-decade run-off.  One of the FMA’s predecessor entities was the office of the Government Actuary which had in times past been required to consent to any changes in superannuation scheme rules. In old-style defined benefit superannuation schemes - a form of deferred remuneration where the effects (contributions/entitlements), even for an individual, stretch over decades – those sorts of protection and oversights, whether embedded in statute law or in the deeds of schemes are vitally important.  Such schemes are typically established as trust structures in which all trustees are required to undertake their duties with the best interests of members in mind. Being a trustee is, or should be, no small thing, not a duty entered upon lightly.

Conflicts of interest can, at times, be a significant issue. In a typical employer-sponsored superannuation scheme some of the trustees will be elected by members and some will be appointed by the employer. These days - in what is mostly regulatory impost (thank you Key government) – schemes are also required to have a Licensed Independent Trustee. (There were hazy warm thoughts at the time that these might be courageous independent thinkers who’d be a force for good, but the model really seems built more to encourage box-ticking – there are lots of boxes to tick – establishment figures earning a bit of pre-retirement income: you aren’t likely to be appointed to such roles if there is any fear you might rock the boat.)

In a scheme that defers for decades employee remuneration there can be material tensions between the interests of the employer and the members.  But much of the time there aren’t such conflicts. The day-to-day responsibility is to ensure that the pensions are calculated correctly and paid reliably, that member queries are dealt with in an appropriate and timely way, that statutory reporting and compliance requirements are met, and that money is collected properly and invested prudently.  I’ve been a trustee of the Reserve Bank scheme for 15 years and those issues go by pretty harmoniously, with any differences of view rarely falling along Bank-appointed vs member-elected trustee lines. And if the rules are clear and discretion strictly limited the room for seriously conflicting interests is minimised.

But the differences come to the fore when there is any consideration of material changes to the rules or the status of the scheme. Things are especially problematic if employer-appointed trustees form a majority. That is why, for example, it is common to require regulator consent to change rules and to include protections such that member consent is required from any members who might be made worse off by a rule change (to which they might still consent if, for example, one adverse rule change was balanced by other changes the member considered was to their benefit).

And here the situation is supposed to be pretty clear. A member-elected trustee is not generally regarded as intrinsically conflicted simply by virtue of being a member (since the entire purpose of the trust is to benefit members, whose interests all trustees are supposed to advance). A member-elected trustee can, of course, be specifically conflicted and should then recuse themselves (as an example, it turned out some years after I left the Bank that my retirement benefits from the pension scheme had been materially miscalculated. I stood aside for any deliberations on that matter). But the situation of employer-appointed trustees is generally regarded as different: often they will be senior managers or Board members of the sponsoring employer and the potential conflicts between the interest of the employing firm and that of the trust (and its beneficiaries) can be all too evident.

There is very little regulator guidance on these issues in New Zealand - perhaps not surprising when the FMA hadn’t really handled its own well - but shortly after I became a trustee I found a lengthy guidance note from the UK Pensions Regulator, which I have since regarded as something of a guidepost (it is still current). It is a different country to be sure, but with broadly similar culture, a large DB pension sector, and much of the case law that gets cited here comes from the UK. In any case, the question here is not what is lawful, but what is proper (substantively and in terms of perceptions and appearances).

You might remember that the whole “culture and conduct” tub-thumping exercise a few years back was done jointly with the Reserve Bank. You’d have thought that the Reserve Bank might be some sort of exemplar of good conduct, and concerned to be seen as such. I guess you might have thought that of the FMA too. More fool us.

For the last decade the trustees of the Reserve Bank pension scheme have been grappling with arguments and evidence around claims that several significant deed amendments done in the white heat of the reform era (late 80s, early 90s) were not lawfully made and are thus invalid. No one really quite knows what the implications would be if these changes were to be held to be invalid, but it would be unlikely to be good for the Reserve Bank (either reputationally or financially). It would, I think, generally be conceded now that the rule changes were, to say the very least, not handled well by former trustees and management (eminent figures such as Sir Spencer Russell, Don Brash, Suzanne Snively, but also able members’ trustees). In fact, Don Brash himself has raised specific concerns with trustees regarding events on his watch - and trustees simply refused to ever meet him.

Three of the six trustees are appointed by the Board of the Reserve Bank from among directors or staff members (a fourth – the LIT – is chosen by other trustees but long ago declared he never wanted to come between member and employer interests). Those Bank-appointed members can be replaced at will for any reason or none. Over the decade they have included a Governor, a Deputy Governor, a deputy chief executive, a couple of Board members, and a long-serving relatively junior staffer.  As we have dealt with the issues over ten years there has never been any sign of these appointees putting member interests first. It is not that nothing has happened - some serious mistakes have been acknowledged and or fixed – but only things that are not awkward or potentially costly for the Bank. It is, of course, impossible to know whether these trustees have actually prioritised Bank interests, but it is impossible to tell apart their actual approach from the sort of approach that would be predicted were Bank interests to be prioritised.  Nothing has ever been done to acknowledge the serious conflicts of interest or to document how those conflicts are being managed or dealt with (and the Bank trustees have consistently refused suggestions of either using an arbitrator or approaching the courts for (definitive) guidance and resolution).

Tomorrow morning in Wellington there is a meeting of the members of the Reserve Bank scheme, called by a group of members (including two former senior Reserve Bank managers) under the provisions of the Financial Markets Conduct Act. The members say that they want to seek explanations for the thinking behind various decisions the trustees have made (usually by majority). Rather than engage, it appears that the intention of the Bank-appointed majority is to stonewall. The current chair – one of Adrian Orr’s many deputies - appears more interested in pursuing me for openly articulating my dissent and criticisms of trustee processes and advice than in engaging with members or getting to grips with the substance of the issues. And - par for the course – never seems to recognise any sort of conflict.

I’ve put as much emphasis on atrociously poor processes (in one part of the decade I was moved to describe what was going on as a “corrupt process”, words today’s trustee wanted excised from the version of minutes provided to members for tomorrow’s meeting). But the process problems go back to the start.

Way back when these issues were first raised with trustees, Geoff Bascand - at the time one of Graeme Wheeler’s deputies, with overall responsibility for Bank HR and finance issues - was the chair of trustees. His quick response to the initial approach - itself in the form of a letter and 30 page document- was to suggest, in writing, to trustees that we simply write back to the member who had raised concerns stated that the issue was closed. He sought to reassure trustees that they needn’t worry because even if anyone took legal action trustees were indemnified by the Reserve Bank. Bascand was later Deputy Governor and Head of Financial Stability at the time of the “culture and conduct” campaign.

Things, and processes, were mostly a bit less blatantly egregious after that, but the conflict of interest issue was simply never addressed, and the process was often Potemkin-village-like (expensive, time-consuming, but pretty much working towards innocuous ends). On all hard decisions the Bank-appointed trustees voted for the interests of the Bank……and all of them were left in office by a Bank management and Board that (fully informed throughout) no doubt appreciated their services….in the best interests of members of course, as the law required.

I have written a retrospective assessment of the experience.

The Indifference of the Powerful RBNZ Superannuation and Provident Fund, Reserve Bank, and the FMA

It is probably of most interest to present and past members of the pension scheme, but it is - to me - a fairly egregious example of simply ignoring serious conflicts of interest.  The scheme is not itself a regulatory body, but it is sponsored and underwritten by one, and the bulk of its trustees serve wholly at the pleasure of the government-appointed board of another of our financial regulatory agency (Orr and Quigley cannot escape responsibility).

As for the Financial Markets Authority, they’ve displayed almost no interest whatever. I imagine it is mostly a matter of being too small, too hard, and too unglamorous but……this entity’s forerunner (the Government Actuary) actually approved some of the more egregious rule changes, so perhaps turning over rocks would be uncomfortable for them, and of course, the FMA and the Reserve Bank work closely together. You might think that something of a conflict, and a dimension that might mean one needed to be seen to go above and beyond to reassure fair-minded observers. But….this is New Zealand and here you’d be dealing with the FMA and the Reserve Bank.

The latest Transparency International Corruption Perceptions Index is, on past timings, due out any day now. No doubt it will repeat the self-congratulatory self-perceptions that are so standard. No doubt too there are many places more corrupt than New Zealand. But maintaining and preserving standards involves sweating the small stuff….or the not so small when they involve key financial regulatory agencies.

UPDATE: As it happens, the Transparency International results were out less than two hours later, with New Zealand slipping out of the top two places. Seems overdue in multiple ways, sadly.

Fiscal impulses and fiscal spin

Michael Reddell Fiscal policy, National Party, Reserve Bank

In yesterday’s PREFU The Treasury was quite open about the fiscal impulse – the estimated impact of discretionary fiscal choices on demand and domestic inflation pressures in the current year.

In other words, a slightly larger degree of pressure on resources/inflation in the year to June 2024 than they’d thought in May’s Budget (and anything beyond the current year depends almost wholly on future budgets).

The IMF a few weeks ago had an almost identical estimate

Different measures, but very similar estimates of the impulse, the pressure fiscal choices are putting on inflation etc. It is an entirely conventional cyclical macroeconomic perspective.

On Radio New Zealand just now, the interviewer put the impulse point to Labour’s Grant Robertson. He pushed back, noting (correctly) that the Reserve Bank had been unbothered about fiscal policy in its recent statements, quoting one of Orr’s egregious lines that “fiscal policy was more friend than foe” for monetary policy.

He quotes the Bank correctly, but what the Bank says has no foundation in the numbers, or in any serious argument they’ve ever advanced. I’ve dealt with this in a couple of posts.

The first was back in July, in the wake of the July OCR review but unpicking material the Bank had included in the May Monetary Policy Statement.

The second was last month, following the August MPS and comments the Bank made at FEC the next day.

From that August post

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

When I wrote that post I thought I should give the Bank a chance to put its case out there. After all, surely there would be some research or analysis they’d done which would back the distinctive and idiosyncratic approach to fiscal stimulus that the Governor had taken to touting this year? So I lodged an OIA request.

I am writing to request copies of any internal research, analysis or other less formal material undertaken by Reserve Bank staff in the last 12 months on the effect of fiscal policy on aggregate demand and inflation pressures.
 
I am also interested in (and thus this request includes) any material, internal or external, the Bank relies on to support the Governor’s claim at FEC this morning that what matters about fiscal policy for monetary policy purposes is government consumption and investment spending, or that explains why the Bank no longer appears to regard the Treasury fiscal impulse measure or a change in a structural fiscal balance measure as the relevant sorts of metrics.

Of course, if there had been anything of substance to see, it would have been a simple matter for the Bank to have responded by return email (or by putting out a pro-active release with relevant notes or research). Almost certainly there is nothing of substance, but the Bank isn’t any more keen to disclose that than it has been in times past when the Governor has simply made up stuff (including in front of FEC).

Yesterday I had an email from the Bank about my request.

The Official Information Act 1982 requires that we advise you of our decision on your request no later than 20 working days after the day we received your request. Unfortunately, it will not be possible to meet that time limit and we are therefore writing to notify you of an extension of the time to make our decision by 20 working days, to 12 October 2023. We will still provide you a response as soon as reasonably practicable, sooner than this date if possible and without any undue delay.

This extension is necessary because consultations needed to make a decision on your request are such that a proper response cannot reasonably be made within the original time limit.

If you believe that final sentence (a common one agencies like to invoke) you’ll believe anything. It wasn’t a complex request, it wasn’t a request for papers to or from other agencies or ministers or their offices. It was a request for material the Bank had to hand and/or had done itself. Can’t be hard to find…..if it exists at all.

But instead there is a 20 day extension which conveniently takes disclosure of what is (or more probably isn’t) there out beyond the last pre-election OCR review. Delayed embarrassment is valuable to bureaucrats with a track record of just making stuff up.

At the moment it smacks of the episode a couple of years ago when Orr told FEC, unequivocally, that the Bank had done its own modelling and research on the financial stability impacts of climate change, only for an OIA to show that they’d done none at all and in fact all they could offer was one short – and quite comfortable – staff note written a couple of years earlier. Perhaps the difference from then is that it could have been true – some central banks had done research – and just wasn’t. For the fiscal spin – which seems all too convenient politically- it seems most unlikely to be grounded in anything of substance.

So when the Minister of Finance tells people the Reserve Bank is unbothered about deficits and fiscal impulses don’t think “oh, well they have a big team or macroeconomists and should know” but (and sad to say) ask yourself instead which party winning the election is more likely to be in the personal interests of the Governor and RB senior management and Board. Because that is the most plausible – and I wish it were not so – explanation for the Bank’s fiscal lines at present.

On other matters fiscal, after the PREFU Christopher Luxon put out a statement which I responded to thus

RNZ’s interviewer put this to Luxon (as the view of a “fiscal conservative” – a description I will embrace) this morning only for Luxon to dismiss it as “what a load of rubbish”. He is of course entitled to his view, but it would be good to see some solid arguments and evidence, or engagement with the substance of the criticisms I and others have made. Without it, voters are entitled to draw their own conclusions.

Decaying institutions

Michael Reddell MPC, Reserve Bank, Reserve Bank Board

Decades ago I worked for a central bank in another country. I woke up one morning to learn that the Governor had been sacked, and by the time I got to work he was clearing his desk. He hadn’t done a bad job – and was one of the more inspiring people I ever worked for – but had fallen foul of the government (Minister of Finance and his colleagues/bosses). The law as it was meant that Governor could be removed whenever the government felt like it. for whatever reason the government felt like. It wasn’t a good model.

In the numerous attempts to capture just how independent various central banks are, one of the dimensions that usually appears is something around the dismissal provisions for key decisionmakers (in these days of committees and board, not just the Governor). Many older pieces of central banking legislation make it very hard to remove the Governor (in particular), removal often requiring things like the bankruptcy, severe mental or physical breakdown/incapacity, or imprisonment (and perhaps even a vote of Parliament). The Reserve Bank of New Zealand Act 1989 was quite unusual for its time, in that it made it easier to remove the Governor, but not because the Minister didn’t like the Governor’s policy calls (and all power was vested in the Governor personally) but if the Governor had failed to deliver on the policy targets he had agreed with the Minister that the Bank would pursue. Under the Act (and rightly so) the Bank didn’t get to define its own goals: the Governor got independence at an operating level to pursue an agreed policy target, and could be removed (at least in principle) if he did a poor job of using the operational independence. The Governor could not be sacked simply because the Minister got annoyed with him, or because the Governor had been appointed or reappointed by a ministerial predecessor of a different party.

That is pretty much as it should be. You can argue (and I long have argued) that even with a well-written law it is hard to make such accountability effective, and the dismissal of a Governor on policy grounds is almost inconceivable (reappointment could, in principle, be another issue) but the balance on paper is probably more or less right.

But these days we have a Monetary Policy Committee to make monetary policy decisions. The government chose to adopt a model in which several external members serve on the MPC, and I’m pretty sure it would not be hard to find speeches from the Minister of Finance championing this innovation and the important contribution people with a diverse range of views and experience would bring to monetary policy decisionmaking.

In principle, appointments to the MPC are at a considerable arms-length from the Minister (the Board proposes candidates and the Minister can’t substitute people he or she prefers). On paper, members of the MPC can’t be removed because the Minister doesn’t like them or because they advocate monetary policies the Minister doesn’t like. It is hard to remove an MPC member

(Actually doing monetary policy in accordance with the Remit is one of the “collective duties”.)

What is more, at least on paper MPC members can only serve two terms, so if there is a bit of an incentive to stay on the right side of the Minister in the run-up to reappointment, at least any such period shouldn’t last long.

If you believe in an operationally independent central bank (and, on balance, I still probably favour one), the basic framework looks good. The Act does actually allow the Minister to explicitly override the Bank on monetary policy, but that has to be done openly and formally, not by the dangling threat of dismissal.

But then the Caroline Saunders term came to end (or so it appeared) and we were sent back to check the statute books. I wrote about it here. There we were reminded that there was a provision for an MPC member to have their term extended for up to six months. This appeared to be a more or less sensible provision given that election timing sometimes interferes with the making of permanent appointments or reappointments to significant government roles (although other than for the Governor hardly a vital provision given that there are seven MPC members in total, and the MPC could probably function just fine for a few months with 5 or 6 members), and it was quite similar to a position in the UK central banking law.

What probably few of us noticed was that the law also contained a provision under which when an MPC member’s term of office ends they can simply remain in office unless or until the Minister of Finance actively appoints another person or tells the person whose term in ending to go.

Caroline Saunders’ first term as an external MPC member expired a month ago and she is still in office (it is now May and the Reserve Bank website shamelessly continues to describe her term ending in April). There has been not a word from the Minister of Finance or the Bank (Board or Governor) as to what is going on. In effect, the Minister of Finance has transformed Saunders’ position from one that looked like an explicit fixed term one to one in which she serves from day to day at the pleasure of the Minister of Finance. Just like my story in the first paragraph. It is a terrible way to be doing things (and a month on is clearly a conscious and deliberate choice by Robertson, not a matter of a few days until last minute reappointment loose ends could have been tied up).

To be clear:

  • there is nothing to have stopped the Minister of Finance formally reappointing Saunders to a further full four year term (at least, so long as the Minister’s handpicked underqualified Board was willing to recommend here),
  • there would have been nothing to have stopped the Minister formally extending Saunders’ term for up to six months (seems not to even require a Board recommendation), a term that itself would have been short but fixed.

But there is no sign that the Minister or the Board have put in place any process to reappoint or replace Saunders (although I have various OIAs in which may shed some light), and instead the Minister has setted for a de facto “dismissable at will, serving at the pleasure of the Minister” model.  It has got no coverage, but it should have, including because it sets a terrible precedent.

Since he has said nothing,and has been exposed to no media or parliamentary scrutiny, I have no idea what is going on in Robertson’s head here.   I don’t really believe that he has done it to exert policy leverage over Saunders (“keep voting a way I’m comfortable with or you’ll be gone tomorrow) both because no one believes the external members wield or attempt to wield any clout, and because Saunders has a day job in other fields (she doesn’t really need the MPC role).  It is also odd because the election is approaching and you’d have assumed this government wouldn’t want to risk leaving an open seat for an incoming Minister to fill early on (they will already be unable to appoint pre-election a replacement for another external MPC member, Peter Harris, whose term expires in October).    Perhaps I’m being too charitable, but whatever the explanation (a) we should be getting one, and (b) if small things are allowed to slide it opens the way to more serious abuses and pressure by others later.   MPC members simply should not be dismissible at will, and at present Caroline Saunders is.   The current situation reflects poorly on the Minister, but also on the Board and the Governor (who have presumably gone along), and actually on Saunders, who if she cares at all about operational independence for monetary policymakers should have insisted that she be reappointed formally or, if not, should have walked (which she could have done with no drama whatever).      An incoming government that was serious about fixing the deficiencies in Robertson’s legislative reform of the Reserve Bank should simply repeal the “serve at the pleasure of the Minister” provision (I am not aware that comparable advanced country central legislation elsewhere has that sort of provision, especially when there is already statutory provision for a short fixed-term extension to deal eg with election timing issues).

Changing tack, I stumbled on this call for papers on the Reserve Bank website the other day

Were it the website of a university sociology department or policy centre it might all be rather unexceptional, but this is the central bank. 

The Reserve Bank of New Zealand Act, freshly minted, sets out objectives for the central bank and functions for the Reserve Bank.  I won’t bore you with another big cut and paste.  Suffice to say, neither of those sections mention, or even hint at, “financial inclusion”.  In fact, the words don’t appear in the Act at all.

Now, the Reserve Bank would no doubt point out the under the new Act there is a new document, the Financial Policy Remit. The first one is here. But the legislation itself makes it clear that whatever the Minister puts in the Remit, it is all about the exercise of the Bank’s statutory powers, fulfilling its statutory functions and purposes. It isn’t licence for the Bank to go spending public money and scarce management focus on just anything it, or even the Minister, might like.

. Much of the Remit wouldn’t get too much argument from most people, and the government’s “desired outcomes” are well within a reasonable range of possible emphases, as guidance for how prudential and crisis management powers should be exercised.

“Inclusive: does get a passing mention there, but over the page under “Other government policy priorities” we get this (1 of 4)

You might, or might not, think that sensible, but…..it has got nothing to do with anything the Reserve Bank has statutory responsibility for, or powers (which can only be exercised for statutory purposes). If there was a policy role for any agency, you might expect them to be turned to MBIE (ministry of subsidies) or The Treasury.

The Reserve Bank got a huge budget increase a few years ago (although the surprise inflation they inflicted on themselves and the rest of us means the real increase is less than they thought), so you might have thought that the Bank had money, time, and staff galore to throw at hosting symposia. In fact, they seem not to have had the resources or the interest in hosting workshops, symposia or conferences on issues they are actually responsible for – including ones where there have been major recent puzzles and failures.

They have a Seminars and Workshops page. Here are the events of the last few years

Readers of a charitable disposition –  shouldn’t we all be? –  might look at that top entry and think “well, that is clearly topical and something they were responsible for”.  Unfortunately, it is also almost two years ago (before either the inflation or LSAP losses were much in focus at all), and as my write-up of the event records, it was much more of a Treasury event with little on monetary policy and no serious policy contribution from any Reserve Bank figure. 

Since then, basically nothing.   The Bank is currently finalising its advice on the next Monetary Policy Remit, and although they took public submissions on that there has been no workshop or conference or call for papers.   Late last year, the Bank published its five-yearly review of the MPC’s conduct of monetary policy, and there has been no workshop or conference or call for papers on any of that.  Serious speeches on monetary policy (let alone financial regulation and supervision, which most Bank staff now work on) are all-but non-existent.  And the Bank publishes no research itself on financial stability or regulatory matters, and hardly any on things relevant to monetary policy.  Lose $10bn of taxpayers’ money and have core inflation blast well beyond the top of the target range, and we get….well, almost nothing.  Not even an apology, let alone some serious engagement, scrutiny and critical review and analysis.

But…..indigenous financial inclusion is apparently where the Governor and Board have decided to establish their research/workshop priorities. 

Of course, many other central banks these days hare off down paths that seem barely relevant to the purposes they were established for (that entire Central Bank Network for Indigenous Inclusion fits that bill –  and won’t anyone think of the Icelanders) but I can’t spot one whose only conference or serious workshop in several years is on something they have no serious responsibility for at all.      Among the almost-countless such events hosted by bits of the ECB or the Fed (yes, they are big economies) the best known is of course the annual Jackson Hole symposium.  These are the topics from the last few years

The Reserve Bank of New Zealand doesn’t have those sorts of resources or the pulling power.  We are a small and not very wealthy country.  But in such countries, scarce public resources should be being used in ways ruthlessly aligned to institutional priorities and statutory functions.  The Reserve Bank’s workshop, by contrast, has the feel of management and the Board plundering the public purse to pursue personal ideological whims and interests.   The same management and Board that displays no interest whatever in serious scrutiny or engagement or research on things they are actually responsible for, where they have made big calls in recent years, some of which have already proved deeply costly.

Jackson Hole it ain’t.

Here, you can go four years and not hear a speech or a paper from even a single external MPC member –  members barred from doing any further research or analysis themselves.  But never mind I suppose they say, it is only taxpayers’ money.

The OIA, the RB, and the MPC

Michael Reddell MPC, OIA, Reserve Bank, Rodger Finlay

One comes to take for granted the gross inadequacies of the Official Information Act, including the systematic under-resourcing of the Ombudsman’s office, which just reinforces the incentives on officials to play fast and loose with the spirit of the law, banking on the fact that if their agency ever loses at the Ombudsman it will be so far down the track that most people – possibly including the requester- will have lost interest in whatever it was the agency didn’t want to release.

But just occasionally it still gets to one. No doubt many requesters have this sort of experience.

I had an email this afternoon from the Ombudsman’s office

It didn’t sound like much of an update – “we are writing to tell you that we have still done nothing about your complaint and have no idea when we will”. I couldn’t even remember what I’d made a complaint about or when. On checking, I found that my complaint was lodged on 3 February. This was the complaint

The original request had been lodged with the Reserve Bank on 10 November 2022

10 November was the day the Reserve Bank released its first five-yearly review of the conduct of monetary policy. They took the best part of three months themselves to withhold almost everything deemed relevant. They did release three documents, which contained almost nothing of substance (that being the point), including this one

which doesn’t really appear to be in scope at all.

As a reminder of the context, this five-yearly report came out amidst inflation having burst well beyond the target range, the MPC having lost taxpayers the best part of $10 billion on the LSAP, and as the MPC was racing to raise the OCR to get inflation back in check.

As I noted in my complaint, one of the oddities of the five-yearly review provision in the Act is that the Bank (management, and I suppose the Board) get to do the review, and yet the MPC is the entity that sets monetary policy, and the MPC includes the three external members who don’t formally answer to the Governor. We know from the finished report what the Governor thinks of the MPC’s stewardship – and as a reminder management has the majority of the votes – but we know almost nothing at all about what the external MPC members thought. Did they reflect differently on the Covid period than management did? Or did they perhaps not reflect very seriously at all? Did their views or input (if any) have any impact on the substance of management’s report?

You might have thought that disclosing MPC members’ views, or input to the report, might be the very least sort of effective public accountability for the considerable power they helped wield, the considerable and hugely costly the mistakes they helped make.

Perhaps one day we will get an answer. But the Reserve Bank – like so many government agencies around town – knows that it only needs to say no, and if the requester can even be bothered complaining that it could be 12-18 months or more before there is any hope of the Ombudsman getting round to addressing the complaint. Meanwhile, the external MPC members (and management) go on wielding their power and collecting their salaries.

But it does remind me that I had overlooked lodging a complaint with the Ombudsman about the Bank’s bare-faced obstructionism in the matter of the appointment of the chair of the majority owner of a large bank being appointed to the board of the Reserve Bank, an appointment almost certainly done with the acquiescence (or worse) of the Governor.

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.

At it again

Michael Reddell inflation, Reserve Bank

At last year’s Annual Review hearing at the Finance and Expenditure Committee the Reserve Bank Governor was shown to have misled (presumably deliberately) Parliament twice. Last month he was at it again with the preposterous claim to FEC that the Bank would have to have been able to forecast back in 2020 the Ukraine invasion for inflation now to have been in the target range. It was just made up – quite probably on the spur of the moment – and of course they’ve never produced any later analysis to support the claim (despite an MPS and the five-yearly review of monetary policy in the following weeks).

On Wednesday afternoon the Bank was back for this year’s Annual Review hearing. It was the last day of term for Parliament, and there was quite a feel to it in the rather desultory scatter-gun approach to the questioning from the Opposition. You wouldn’t know that the two Opposition parties had just openly objected to the Governor’s reappointment to a new five year term.

But MPs – and the viewing public – were still subject to more of Orr being anything other than straightforward, open, and accountable. More spin, usually irrelevant and sometimes simply dishonest.

The meeting opened with Orr apologising that the Board chairman was absent. Apparently he had some function to attend in his fulltime executive job, but you might have thought that when you were the chair of the Board through a year when inflation went so badly off the rails, and still chair now when the Bank is averring that a recession will be needed to get things back under control, you might have made it a priority to turn up for Parliament’s annual scrutiny of the Bank’s performance. And if your day job commitment was really that pressing you might have sent along a deputy. Whether prior to 1 July (the year actually under review) or since the Board was explicitly charged with holding the Governor and MPC to account. and the Board controls all the nominations for (re)appointments. The Board was, after all, complicit in barring people with actual relevant expertise from serving as external MPC members.

No doubt the failure of anyone from the Board to show up just speaks to how – whatever it says on paper – the Bank is still a totally management (Orr) dominated place.

Then there was Orr’s transparent attempt to talk out the clock, reducing available question time with a long opening statement (with not even a hint of contrition over the Bank’s monetary policy failures). Mercifully, the committee chair eventually told him to cut it short.

If the Opposition’s questioning was never very focused or sustained, to his credit National’s Andrew Bayly did attempt a question about the appointment of Rodger Finlay – then chair of NZ Post, majority owner of Kiwibank, subject to Reserve Bank prudential regulation – to the “transition board” as part of the move to the new governance model from 1 July this year. As regular readers will know, the Reserve Bank has been doing everything possible to avoid giving straight answers on the Finlay matter, and Orr was at it again on Wednesday. First, he attempted to deflect responsibility to the Minister of Finance as the person who finally makes Board appointments (even though documents the Minister and The Treasury have already released make it clear that management and the previous Board were actively involved in the selection of people to recommend for the new Board) and then he fell back on the twin claim that there was no conflict of interest as regards the “transition board” (which had no formal powers) and that if there were any conflicts they had been removed by the time Finlay was on the Board itself.

There was no follow-up from Bayly, who could and should have made the point that when Finlay was appointed to the “transition board”, in October 2021, he was also appointed to the full Reserve Bank Board from 1 July 2022, and at that time – indeed right up to mid-June this year when Cabinet was considering his reappointment to the NZ Post role – there had been no suggestion that Finlay would not remain in his NZ Post role while serving on the Reserve Bank Board which would be directly responsible for prudential regulation. Indeed, documents already released reveal that the Bank had told The Treasury and the Minister that they had no concerns about this. It was an egregious appointment, inconceivable in any well-governed country, and yet the Opposition did not pursue the matter and the Governor – the one who likes to boast of his “open and transparent” institution – makes no effort to honestly account for his part in this highly dubious appointment.

If Orr was put under no pressure on the Finlay matter, on monetary policy and related issues he had a clear field. There were no questions at all – nothing for example about the Annual Report (the basis for the hearing) in which climate change featured dozens of times and the inflation outcomes – well outside the target range, on core metrics – got hardly any attention. No suggestion that a simple apology from the Governor and MPC might be in order – not one of those faux ones regretting the shocks the New Zealand economy was now exposed to. It was after all these people who voluntarily took on the role (and pay and prestige) of macro stabilisation and, on this occasion and perhaps with the best will in the world, failed. Just nothing.

And so the field was left to Orr. In his opening remarks we had this

Which is just spin. He seems to want to claim credit for New Zealand’s low unemployment rate even though (a) as he often and rightly points out the Reserve Bank has no influence on the average rate of unemployment or the NAIRU (which are functions of structural policy), and (b) the extremely overheated labour market and unsustainably low unemployment rate are a big part of our current excessively high core inflation problem. In the end, aggregate excess demand is the fault of the Reserve Bank. not something they should be claiming as a “good thing”, let alone seeking credit for. (In their better moments – eg the MPS – they know this, talking about the labour market being unsustainably overheated, but then Orr’s spin inclinations take hold). At the peaks of booms, unemployment is always cyclically low (or very low). But often what matters is what needs to be done to get inflation back in check.

And what about that claim on inflation? Well, if he wants to simply say the New Zealand is fortunate not to be integrated to the global gas and LNG market that is fine, but it is a complete distraction from a central bank that is responsible primarily for core inflation in New Zealand. On core inflation – in this case, because it is available and comparable, CPI inflation ex food and energy – for the year to September (latest NZ data) we are no better than the middle of the pack.

An honest central bank Governor, committed to serious scrutiny, might better say that we are in a quite unfortunate situation, for which the Reserve Bank itself has to take much of the responsibility. Instead we get more spin

“Even with the expected slowdown in the period ahead, it is anticipated that the level of employment will remain high.”

which is no doubt true, but the Bank’s own forecast is for a sharp rise in the rate of unemployment.

But Orr is more in the realm of minimising (his) responsibility. In recent months we’ve had the absurd and unsupported claim that without the war inflation would have been in the target range. We’ve also had the suggestion – heard a couple of times from his chief economist – that perhaps half the inflation is overseas-sourced. This claim also appears to be undocumented, and simply doesn’t stack up: core inflation is the Bank’s responsibility, the New Zealand domestic economy is badly overheated, and the whole point of floating the exchange rate decades ago was so that even if other countries had increases in their core inflation rates, New Zealand did not need to suffer that inflation. We had our own independent monetary policy, and a central bank responsible for New Zealand core inflation outcomes.

To FEC, Orr ran this claim

It is certainly true that if the Bank had begun to raise the OCR a little earlier in 2021, it would not have made that much difference to inflation (core or headline) now. 25 basis points in each of May and July 2021 might together have lowered headline inflation by September 2022 by half a percent at most. But in this framing – also in their recent Review – there are two elements that are little better than dishonest. Purely with the benefit of hindsight (their own criterion) it is now clear that monetary policy should not have been eased at all in 2020, and that monetary policy should have been run much tighter over the period since then. Had that been done, core inflation would have stayed inside the target range. Now that might be an impossible standard, but that is simply to point out what I noted in my post on the Review was the major weakness: there was just no sign the Bank or MPC had devoted any serious thought or research to trying to understand what they (and everyone else) missed in 2020 and 2021. But they were responsible.

And then there is the continual effort to blame food and energy price shocks, in a way that simply flies in the face of the data. Headline inflation is the year to September was 7.2 per cent. Excluding food and energy, it was 6.2 per cent. 6.2 per cent is a long long way above the top of the Bank’s target rage – more than 4 percentage points above the target midpoint the Minister of Finace requires them to focus on.

And as I pointed out in a post debunking the “war is to blame” claim, core inflation was very high, the labour market well overheated, before the war.

Oh, and Orr was at it again with his claim – apparently intended as a defence – that

I’ve shown before that 7 OECD central banks (out of 20 or so) had started raising their policy interest rates before the Reserve Bank of New Zealand (Orr seems to want to claim credit for stopping the LSAP but (a) he has claimed that by 2021 it wasn’t having much effect anyway and b) the Funding for Lending programme carried on all the way to this month). And since each central bank is responsible for its own country’s (core) inflation, a simple ranking of who moved when reveals precisely nothing. As early as the end of 2020, only 8 OECD central banks were experiencing annual core inflation (ex food and energy) higher than New Zealand (quite a few with higher inflation targets than New Zealand, including chaotic Turkey). By mid 2021, there were only 7 central banks with higher core inflation than New Zealand (mostly the countries that began raising policy interest rates earlier than New Zealand). New Zealand’s core inflation then was already materially higher than that in Australia, Canada, the UK, and the euro area (but behind the US, and I find the Fed’s approach to monetary policy last year quite impossible to defend).

Overall it is hard to find any OECD central banks that have done a good job over the last couple of years (the central bank of Korea looks like one candidate for a fairly good rating). It is quite possible – current core inflation might suggest it – that the Reserve Bank of New Zealand has done no worse than average. But that isn’t ever the spin we get from the Governor, for whom responsibility let alone contrition seem like words from a foreign language for which no dictionary was available. No one is suggesting the last 3 years have been other than hard and challenging for central banks, but that is nothing to what they are proving for the people who have suffered – and will suffer over the next year or two – from their misjudgments, well-intentioned as they may well have been.

Orr’s behaviour has been given licence by the Minister of Finance – reappointing him despite his poor record on multiple counts. But it would have been nice if Parliament’s Finance and Expenditure Committee had ever shown a bit more vigour and focus in holding the feet of the Governor and his colleagues to the fire, instead of all wishing each other Merry Christmas and heading off for the holidays.

Staff turnover

Michael Reddell Reserve Bank

Over the last couple of years I’ve commented at various times on (a) the loss of experienced research staff (b) the rapid turnover of senior managers, and (c) the bloated number of (very highly paid) new senior managers at the Reserve Bank.

I haven’t paid overly much attention to the overall staff turnover data. And it turns out that was probably just as well.

Here is a chart of annual staff turnover rates for the Bank this century. There has been a sharp increase in the last year (to June 2022).

But Simon Chapple, at Victoria University’s Institute for Governance and Policy Studies, went to the effort of digging out the same data for the Bank and a bunch of other public sector agencies, and kindly sent me a copy of his spreadsheet.

Of all the other public sector agencies, perhaps the best comparator is The Treasury. They are very different agencies but have often been bracketed together.

There is a lot more variability in the Treasury series, but (a) it has been higher or no lower than the Bank every year this century, and (b) over the last year has had an absolutely staggering 36.5 per cent turnover rate. It was bringing to mind the stories from 35 years ago when at one point (and if I recall correctly) the median length of service at The Treasury was under two years.

Here is the data for three other agencies: the (public service) Department of Prime Minister and Cabinet, the Public Service Commission (previously SSC), and Statistics New Zealand.

I suspect the DPMC figures can be discounted, as DPMC built up a huge temporary operation to co-ordinate the Covid response (including lots of comms staff for all those adverts), but in the most recent year even SNZ had slightly higher staff turnover than the Reserve Bank. (For the public service as a whole – not shown – the staff turnover rate was exactly the same as at the Reserve Bank.)

Over the last year or so, presumably two – mutually reinforcing – influences have been at work. First, the economy has been materially overheated reflected, among other places, in an extremely tight labour market. When the opportunities are good and finding new jobs is easy a given person is more likely to move in any particular year. And the second is the rather arbitrary block on wage increases for many public servants. All else equal, not only has that made moving to the private sector relatively more attractive – private sector wage increases have run well ahead of public sector ones – but has also created the readily-visible bizarre incentive that the only way many public servants can get a pay rise is to change jobs (whether to other positions in the private sector or elsewhere in the public sector), perhaps with some grade inflation thrown in (people who aren’t really senior or principal analyst material getting given those titles and salaries). Moving simply because it is the only way to get a pay rise – in a generally overheated labour market – makes sense for the individual, but almost certainly does not for the public sector as a whole.

(And here I am not entering into questions of whether public sector salaries are generally too high (or not) or the size of the public sector: issues for other people on another day.)

Zero staff turnover would generally not be desirable. When I used to pay more attention to these things at the Bank we used to be told that for established well-run professional organisations a 10-15 per cent annual turnover rate was fairly normal (perhaps coincidentally that was the rate the Bank tended to have). I find it harder to believe that 25-30 per cent annual turnover rates – as at The Treasury – is entirely healthy, no matter how much you might encourage rotation, fresh opportunities etc. But one would have to hope that the 2022 turnover rates for all these public sector agencies prove to be peaks, and that by the 2023 and (especially) 2024 annual reports, staff turnover has settled back to much more normal levels for organisations of this sort. Whatever your view of the appropriate size of government, what agencies we do need need capable and experienced staff.

The Spencer precedent

Michael Reddell Adrian Orr, Reserve Bank

Over the last couple of months, the National Party has been running the line that a Reserve Bank Governor should not be appointed to the normal full five-year term when Orr’s existing term expires in late March, but that rather an appointment should be made for just a year so that whichever party takes office after next year’s election can appoint a Governor of their preference. We are told (although we have not yet seen the letter) that they made this case to the Minister of Finance when, as he was required to, he came consulting on his plan to reappoint Orr.

It is a terrible idea, on multiple counts.

But what is also irksome is the idea that in making a five year appointment, for a term beginning probably at least six months prior to the election, the Minister is breaching some established convention. That is simply a nonsense claim. This clip (from Bernard Hickey’s newsletter, this one opened to everyone) has some relevant quotes

There is simply no foundation to what Luxon is saying about what happened in the past. Since the Reserve Bank was made operationally independent in 1990, there have been two cases in which a Governor’s term has expired in election year but before the scheduled election. The first was in 1993, when Don Brash’s term expired on 31 August. The 1990 election had been held on 6 November 1990, so presumptively any new term was going to start within three months of the 1993 election. As it is, and partly to allay any possible market concerns (these were still fairly early days), Don’s reappointment was made and announced very early (if memory serves correctly in late 1992). I don’t recall any particular controversy about that reappointment (although the then Prime Minister had not been a huge Brash fan), but then Brash had initially been appointed by a Labour government (and the then Labour leader and finance spokesman had both sat in the Cabinet that had appointed him).

Of the next few (re)appointments:

  • Don Brash was appointed to a third term commencing in September 1998, not an election year
  • Don Brash resigned suddenly in April 2002, about three months before the general election.  The then Deputy Governor was immediately appointed (lawfully) as acting Governor, both to run the Bank in the interim and to enable a proper search process to take place.  Recall that under New Zealand law, the Minister of Finance cannot simply appoint his or her own person as Governor, and in those days the Bank’s Board used to guard its prerogatives (right and responsibility to nominate).  The eventual appointment of Alan Bollard was not made until after the election.
  • Bollard was reappointed in 2007 (not an election year) and Wheeler was appointed in 2012 (also not an election year)

Which brings us to 2017.  In 2016 Graeme Wheeler had advised that he would not be seeking a second term (probably to the general relief of both government and opposition parties at the time).  Documents later released show that The Treasury (and the Board and minister) envisaged making a permanent new appointment some time early in 2017, well clear of the likely election date.  However, those same papers also show that when the relevant authorities (in this case, Cabinet Office) were consulted it was established that the convention now (though perhaps not in 1992/93) was that permanent appointments should not be made when the new appointment would commence very close to (within three months of) an election date.  In other words, the government could not get round the fact that Wheeler’s term expired close to the expected election date simply by making an early announcement of a permanent replacement.   And thus they more or less had to settle on the idea of an acting Governor (Grant Spencer).  Unfortunately, the then law was badly written (did not envisage the circumstances), and Graeme Wheeler (who could lawfully have been extended for six months) seemed keen to get back to commercial life ASAP, and the actual solution they landed on was almost certainly unlawful (I wrote a lot about it at the time, but here is a post that comments on the best arguments the Crown’s lawyers could make in defence).

So there is a precedent for an acting appointment (which, since the law was amended, could now be done lawfully) when the Governor’s term expired within three months of the election.  That same convention, about not making permanent appointments, isn’t just about the central bank.  But Orr’s term expires on 27 March, and the election seems likely to be at least six months after that, in a system with a three-year parliamentary term.  It simply isn’t very serious or credible to argue that the government –  otherwise still governing fully –  should be unable (or even unwilling) to appoint a permanent Governor six or more months out from an election.  You might argue, and I might have a bit of sympathy for such a view, that perhaps it would be better to give a Governor a six year term (the RBA Governor has a seven year term), so that overlaps with election years happened much less often, but the law is as it is, and I don’t recall the Opposition opposing five year terms when the reform bills were before the House.   But there is no established precedent or convention about not making permanent appointments that start that far out from a likely election.

In passing, one might note that whereas with past appointments all powers of the Reserve Bank rested with the Governor, the various reforms put in place by this government have (at least on paper) considerably diminished the extent of the Governor’s powers, and created other appointments (notably external MPC members) which (at least on paper) provide avenues to shape and influence the Bank.  I don’t want to put too much weight on this argument – I’ve spent years arguing that many of these changes in practice have been largely cosmetic – but not only could those provisions be used more aggressively by an incoming government that cared, but it would be quite legitimate for an incoming government to amend the legislation further (at the margin) to reduce the relative dominance of any particular individual serving as Governor.  Our system would be better for such changes.  (To be clear, like various other commenters, I would not support law changes designed directly to remove Orr: that way lies Erdogan type central banking.)

Whatever the law and precedent, it would also be a bad idea to be making acting appointments in circumstances like the present one.  Our whole system around the Reserve Bank –  and central banks in other advanced economies of our type –  is set up around the idea that incoming governments don’t just get to pick their central bankers as soon as it suits.  Instead, the system of operationally independent central banks has been built on (among others) the notion of technically capable, respected, non-partisan figures serving (whether as Governor or MPC members) for terms that do not align with the parliamentary term.   Consistent with that vision, New Zealand’s legislation went further than most (too far in my view) in not even allowing the Minister of Finance to choose a Governor (or MPC members), but rather requiring that the Minister only appoint people who had first been nominated by the Board of the central bank, itself appointed for staggered terms by the Minister of Finance.     Legislation was recently amended to even further reinforce this vision – of technically competent, respected, non-partisan appointees – when Labour explicitly added provisions requiring that other parties in Parliament be consulted before appointments are made (whether as Governor or Board members).  

You could mount a counter-argument that this approach is a bit wrongheaded.  After all, the legislation has also been amended recently to make it clear, that in monetary policy at least, the target the Bank works to is directly set by the government of the day.  But notwithstanding that, the central bank still has a lot of practical policy discretion, and not just around monetary policy.   Most advanced countries have made the choice that we do not want key central bank decisionmakers changing routinely when the government changes.  That still seems, on balance, prudent to me, and in their calmer moments I’d be surprised if National really disagreed.

So the big problem in the current situation is NOT that an appointment has been made for five years. That should be the norm, whether or not it is six months from an election.  The problem is specifically with the appointment (at all) of Adrian Orr.   National seems reluctant to say that (perhaps because they may well be stuck working with him) but it is the main issue.  There would be no such concern had a (hypothetical) generally highly-regarded (professionally, and among politicians), technically excellent, respected, non-partisan figure been appointed to the role.  Specifically, National (and ACT) would not be raising concerns about the term of the appointment if they had any confidence in Orr.  They do not.    One can perhaps debate whether or not they should have such confidence, but in our system respect and confidence are earned, they are not something anyone can simply be forced to adopt.    As I noted in yesterday’s post, the rank politicisation that has happened this week is not of National’s or ACT’s making, but of Robertson, in pushing ahead with an appointment –  to a long-term position, where cross-party respect etc is important for the institution and its functioning – that the main Opposition parties seem to have been quite clear in opposing.   It is not the job of Opposition parties to simply go along with whoever Robertson (and his, technically ill-equipped, board (itself, in some cases appointed over Opposition objections) determine).  All the more so when Robertson himself was the one who introduced the formal consultation requirements, seeming to establish an expectation that strong (and reasoned) objections would be taken seriously.    The responsibility was on Robertson – who holds the power to appoint or not – to respect the notion of only appointing someone who commands (even grudging) professional and personal respect.  Orr no longer qualifies on that count.  It is hard to think of any advanced country central bank Governor who will start a new term commanding so little respect, support, and confidence.  That is really bad for the institution, and the institutional arrangements.

(Having said all this it would be good if National and ACT would pro-actively release their responses to Robertson’s consultation, rather than making us wait for OIA releases. It would be helpful to see what grounds the parties objected on, and whether they actually raised substantive concerns, or just relied on ill-founded process arguments.)

UPDATE: Having been sent a copy of the National letter of 30 September, it is now clear that National did not raise any substantive concerns about Orr, and focused wholly on the non-existent “convention” about not appointing a substantive Governor even 6-7 months out from an election.

 

Reappointing Orr

Michael Reddell Adrian Orr, Monetary policy, Reserve Bank, Reserve Bank Act reforms

Yesterday’s announcement from the Minister of Finance that he was reappointing Adrian Orr as Governor of the Reserve Bank was not unexpected but was most unfortunate. I was inclined to think another commentator (can’t remember who, so as to link to) who reckoned that it may have been Robertson’s worst decision in his five years in office was pretty much on the mark.

When Orr was first appointed, emerging out of a selection process kicked off by the Reserve Bank’s Board while National had still been in office, it seemed to me it was the sort of appointment that could have gone either way. I captured some of that in the post I wrote the day after that first appointment was announced, and rereading that post last night it seemed to at least hint at many of the issues that might arise and come to render the appointment problematic at best. Some things – a good example is $9.5 billion of losses to the taxpayer – weren’t so easy to foresee.

The timing of the reappointment announcement itself was something of a kick in the face for (a) critics, and (b) any sense that the better features of the new Reserve Bank legislation were ever intended as anything more than cosmetic. The Reserve Bank is tomorrow publishing its own review (with comments from a couple of carefully selected overseas people) of monetary policy over the past five years. Adding the statutory requirement for such a review made a certain amount of sense, but if there is value in a review conducted by the agency itself of its own performance, it was only going to be in the subsequent scrutiny and dialogue, as outsiders tested the analysis and conclusions the Bank itself has reached. But never mind that says Robertson, I’ll just reappoint Adrian anyway. Perhaps the Bank has a really compelling case around its stewardship of monetary policy – and just the right mix of contrition and context etc – but we don’t know (and frankly neither does Robertson – who has no expertise in these matters, and who appointed a Reserve Bank Board -the people who formally recommend the reappointment – full of people with almost no subject expertise).

But, as I say, the reappointment was hardly a surprise.

It could have been different. I’ve seen a few people say it would have been hard to sack Orr, but I don’t think that is so at all. No one has a right to reappointment (not even a presumptive right) and Robertson could quite easily have taken Orr aside a few months ago and told him that he (Orr) would not be reappointed, allowing Orr in turn the dignity of announcing that he wouldn’t be seeking a second term and would be pursuing fresh opportunities (perhaps Mark Carney would like an offsider for his climate change crusades?) Often enough – last week’s FEC appearance was just the latest example – Orr’s heart doesn’t really seem to be in the core bits of the job.

There are many reasons why Orr should not have been reappointed. The recent inflation record is not foremost among them, although it certainly doesn’t act as any sort of mitigant (in a way that an unexpectedly superlative inflation record in a troubled and uncertain world might – hypothetically – have).

There is nothing good, admirable, or even “less bad than most” about the inflation record. This chart is from my post last week

A whole bunch of central banks made pretty similar mistakes (and the nature of floating exchange rates is that each central bank is responsible for its country’s own inflation rate). Among the Anglo countries, we are a bit worse than the UK and Canada and slightly less bad than the US and Australia. Among the small advanced inflation targeters – a group the RB sometimes identified with – we have done worse than Switzerland, Norway, and Israel, and better than Sweden and Iceland. In a couple of years (2021 and 2022) in which the world’s central bankers have – in the jargon – stuffed up badly, Orr and his MPC have been about as bad on inflation as their typical peers.

You could mount an argument – akin to Voltaire on the execution of Admiral Byng – that all the world’s monetary policymakers (at least those without a clear record of dissent – for the right reasons – on key policy calls) should be dismissed, or not reappointed when their terms end, to establish that accountability is something serious and to encourage future policymakers to do better. You take (voluntarily) responsibility for inflation outcomes, and when you fail you pay the price, or something of the sort. Inflation failures – including the massive unexpected wealth redistributions – matter.

Maybe, but it was never likely to happen, and it isn’t really clear it should. As I’ve noted here in earlier posts until well into 2021 the Reserve Bank’s forecasts weren’t very different from those of other forecasters, and I’m pretty sure that was also the case in other countries. Inflation outcomes now (year to September 2022) are the result of policy choices 12-18 months earlier. With hindsight it is clear that monetary policy should have been tightened a lot earlier and more aggressively last year, but last February or even May there was hardly anyone calling for that. Absent big policy tightenings then, it is now clear it was inevitable that core inflation would move well outside the target range. There are plenty of things to criticise the Bank for – including Orr’s repeated “I have no regrets” line – but if one wants to make a serious case for dismissing Orr for his conduct of monetary policy it is probably going to have to centre on (in)actions from say August 2021 to February 2022 (whereafter they finally stepped up the pace) but on its own – it was only six months – it would just not be enough to have got rid of the Governor (even just by non-reappointment). The limitations of knowledge and understanding are very real (and perhaps undersold by central bankers in the past), and even if Orr and the MPC chose entirely voluntarily to take the job (and all its perks and pay) those limitations simply have to be grappled with. Were New Zealand an outlier it might be different. Had the Bank run views very much at odds with private forecasters etc it might be different. But it wasn’t.

I am, however, 100 per cent convinced that Orr should not have been reappointed. I jotted down a list of 20 reasons last night, and at that I’m sure I’ve forgotten some things.

I’m not going to bore you with a comprehensive elaboration of each of them, most of which have been discussed in other posts. but here is a summary list in no particular order:

  • the extremely rapid of turnover of senior managers (in several case, first promoted by Orr and then ousted) and associated loss of experience and institutional knowledge
  • the block placed –  almost certainly at Orr’s behest –  on anyone with current and ongoing expertise in monetary policy nad macroeconomic analysis from serving as an external member of the MPC
  • the appointment as deputy chief executive responsible for macroeconomics and monetary policy (with a place on the MPC) of someone with no subject expertise or relevant background
  • $9.5 billion of losses on the LSAP – warranting a lifetime achievement award for reckless use of public resources – with almost nothing positive to show for the risk/loss  
  • the failure to ensure that the Bank was positioned for possible negative OCRs (having had a decade’s advance warning of the issue), in turn prompting the ill-considered rush to the LSAP
  • the failure to do any serious advance risk analysis on the LSAP instrument, as being applied to NZ in 2020
  • the sharp decline in the volume of research being published by the Reserve Bank, and the associated decline in research capabilities
  • the way the Funding for Lending programme, a crisis measure, has been kept functioning, pumping attractively-priced loans out to banks two years after the crisis itself had passed (and negative OCR capability had been established)
  • lack of any serious and robust cost-benefit analysis for the new capital requirements Orr imposed on banks (even as he repeatedly tells us how robust the system is at current capital levels)
  • repeatedly misleading Parliament’s Finance and Expenditure Committee (most recently, his claim last week that the war was to blame for inflation being outside the target range), in ways that cast severe doubts on his commitment to integrity and transparency
  • his refusal to ever admit a mistake about anything (notwithstanding eg the biggest inflation failure in decades) 
  • the fact that four and a half years in there has never been a serious and thoughtful speech on monetary policy and economic developments from the Governor (through one of the most turbulent times in many decades)
  • Orr’s active involvement in supporting and facilitating the appointment of Board members with clear conflicts of interest (Rodger Finlay especially, but also Byron Pepper)
  • his testiness and intolerance of disagreement/dissent/alternative views
  • his often disdainful approach to MPs
  • his polarising style, internally and externally
  • all indications are that he is much more interested in, and intellectually engaged by, things he isn’t responsible for than for the things Parliament has charged him with
  • organisational bloat (think of the 17-20 people in the Communications team or the large number of senior managers now earning more than $400000 pa)
  • the distraction of his focus on climate change, but much more so the rank dishonesty of so much of it – claims to have done modelling that doesn’t exist, attempts to suppress release of information on what little had been done, and sheer spin like last week’s flood stress test. It might be one thing for a bloated overfunded bureaucracy to do work on things it isn’t really responsible for if it were first-rate in-depth work. It hasn’t been under Orr.
  • much the same could be said of Orr’s evident passion for all things Maori –  in an organisation with a wholesale macroeconomic focus, where the same instruments apply to people of all ethnicities, religions, handedness, political affiliation or whatever.  What “analysis” they have attempted or offered has been threadbare, at times verging on the dishonest.
  • the failure to use the opportunity of an overhaul of the RB Act to establish a highly credible open and transparent MPC (instead we have a committee where Orr dominates selection, expertise is barred, and nothing at all is heard from most members)

And, no doubt, so on.  He is simply unfit to hold the office, and all indications are that he would have been so (if less visibly in some ways) had Covid, and all that followed (including inflation), never happened.   

But the crowning reason why Orr should not have been reappointed is that doing so has further politicised the position, in a most unfortunate way.

In the course of the overhaul of the Reserve Bank Act, Grant Robertson introduced a legislative requirement that before appointing someone as Governor the Minister of Finance needed to consult with other parties in Parliament (parallel provision for RB Board members).  It was a curious provision, that no one was particularly pushing for (in most countries the Minister of Finance or President can simply appoint the Governor, without even the formal interposition of something like the RB Board), but Robertson himself chose to put it in.  The clear message it looked to be sending was that these were not only very important positions but ones where there should be a certain measure of cross-party acceptance of whoever was appointed, recogising (especially in the Governor’s case) just how much power the appointee would wield.  That provision never meant that governments could not appoint someone who happened to share their general view of the world and economy, but there was a clear expectation that whoever was appointed would be sufficient to command cross-party respect for the person’s technical expertise, non-partisan nature, dispassionate judgement and so on.  Robertson simply ignored Opposition dissents on a couple of the Board appointees.  That was of second order significance, but it is really significant in the case of the Governor.  It isn’t easy to dismiss a Governor (and rightly so) so for a Minister of Finance to simply ignore the explicit unease and opposition of the two main Opposition parties in Parliament is to make a mockery of the legislation Robertson himself had put in place so recently.   The Opposition parties are being criticised in some places (eg RNZ this morning) for “politicising the position/appointment” but they seem to have been simply doing their job –  it was Parliament/Robertson who established the consultation provision –  and the consultation provisions, if they meant anything, never meant giving a blank slate for whomever the Minister wanted to offer up, no matter the widely-recognised concerns about such a nominee.   No one has a right to reappointment and when it was clear that the main Opposition parties would not support reappointment, Robertson should have taken a step back, called Adrian in and told him the reappointment could not go ahead, in the longer-term interests of the institution and the system.  If you were an Orr sympathiser, you might think that was tough, but….no one has right to reappointment, and the institution matters.

And, of course, now the position of the Governor has inevitably been put into play, with huge uncertainty as to what might happen if/when National/ACT form a government after the election next year.    (And here is where I depart from National’s stance –  I never liked the idea of a one year appointment, made well before the traditional pre-election bar on new permanent appointments.  We want able non-partisan respected figures appointed for long terms (it is the way these things work in most places), not for each incoming PM to be able to appoint his or her own Governor.)

A few months ago, anticipating that Orr would probably be reappointed, I wrote a post on what an incoming government next year could do about the Bank.    The key point to emphasise is that a new government cannot simply dismiss a Governor they don’t like (or nor should they be able to).  I saw a comment on a key political commentary site this morning noting that the process for dismissal isn’t technically challenging, which is true, but the substantive standards are quite demanding (the Governor can be dismissed only for specific statutory causes, and for (in)actions that occurred in his new term (which doesn’t start until March)).  Generally, we do not want Governors to be able to be easily dismissed (in most countries it is even harder than in New Zealand).   More to the realpolitik point, any dismissal could be challenged in the courts, and no one would (or should) want the prolonged uncertainty (political and market) such actions might entail.   Moreover, senior public figures cannot just be bought out of contracts.   

We still don’t know –  and perhaps they don’t either –  how exercised National and ACT would be about any of this were they to form a government next year, but unless Orr was himself minded to resign (as the Herald’s columnist suggests might happen) things would have to be handled carefully and indirectly (perhaps along lines in that earlier post of mine) to change the environment and the incentives around the institution.   Most of those changes should be pursued anyway, to begin to fix what has been done over the last few years    And if Orr were to be inclined not to stick around for long, perhaps an offer of appointment as High Commissioner to the Cooks Islands might smooth his way?