Looking back to the deposit guarantee

12 October 2008 was a frantic day.  It was a Sunday, and I never work Sundays (well, two financial crises, one in Zambia, one in New Zealand, in 30+ years).  There was a call in the middle of our church service summoning all hands to the pump, to put in place a retail deposit guarantee scheme that day.   We did it.  My diary later that night records that we’d “delivered a brand spanking new not very good deposit guarantee scheme”, announced a few hours earlier.   It was a joint effort of the Reserve Bank and The Treasury.

I had recently taken up a secondment at The Treasury.  I’d been becoming increasingly uneasy about the New Zealand financial situation for some months (flicking through my copy of Alan Bollard’s book on the crisis I found wedged inside a copy of an email exchange he and I had had a month or so earlier about Lender of Last Resort options for sound finance companies, potentially caught up in contagious runs) but I hadn’t had any material involvement in the unfolding sequence of finance company failures.   But it was the escalating international financial crisis – this was four weeks after Lehmans, 3.5 weeks after the AIG bailout, two weeks after the US House of Representatives initially voted down TARP, and two weeks after the Irish government surprised everyone by announcing comprehensive deposit guarantees –  that really accelerated interest in the question of what, if anything, New Zealand should do, or might eventually be more or less compelled to do.    The initiative for some more pro-active planning came from The Treasury, but with some parallel impetus  –  including around guarantees – from the then Minister of Finance, Michael Cullen (who, a few days out from Labour’s campaign launch, was also looking for pre-election fiscal stimulus measures).

On Tuesday 7 October, there was a long meeting at the Reserve Bank, attended by both the Secretary to the Treasury, John Whitehead, and the Governor of the Reserve Bank.  My memory – and my contemporary diary impression – is that the Governor was considerably more focused on the managing the Minister’s political concerns than on any sort of first-best response.    But the outcome of that meeting was agreement to quickly work up a joint paper for the Minister which would not, at that stage, recommend introducing a deposit guarantee scheme, but which would outline the relevant issues and operational parameters, giving us something to work from if the situation worsened.

Which it quickly did, both on international markets, and with the political pressure, with the Prime Minister signalling that she wanted to be able to announce something about guarantees in her campaign launch that coming Sunday afternoon.

I and a handful of others on both sides of The Terrace scurried round for the next few days.  I see that in my diary I wondered what the best approach was: do nothing, allow some risk of the crisis engulfing us, and then pick up the pieces afterwards, or be more pro-active and take the guarantee route.  My conclusion –  and even today I wince at the parallel (but this was a late-at-night comment) – “I suspect that if the pressures really come on, the Irish approach is best”.   As relevant context, although much of the finance company sector was in solvency trouble (many had already failed) there were no serious concerns about the solvency of the banking system.   (Liquidity was, potentially, another issue.)

At Treasury we had recognised the importance of the Australian connection –  most of our banks being Australian-owned.     I’m not sure of the date, but we had taken the initiative –  at Deputy Secretary level –  of approaching the Australian Treasury to see if they were interested in doing some joint contigency planning around deposit guarantees, and had been told that the Treasurer had no interest in such guarantees and so our suggestion/offer was declined.

But even Australian authorities could look out the window and see that the global situation was deteriorating rapidly, and by late in the week that recognition was being passed back to authorities on this side of the Tasman.  Alan Bollard always kept in close contact with his RBA counterpart Glenn Stevens, and on the Friday my diary records (presumably told by some RBNZ person I was working with) “apparently Glenn S[tevens[ told Alan this afternoon that the RBA/authorities might fairly soon have to consider a blanket guarantee”.     In the flurry and uncertainty, one other senior RBNZ person –  still holding a senior position there –  told me that in his view nothing should be done here unless there were queues outside New Zealand banks.

Between a handful of people on the two sides of the street, we got a paper on deposit guarantee scheme possibilities out to the Minister of Finance on the Friday afternoon.  It was a mad rush, with some uneasy negotiated compromises (and everyone’s particular hobbyhorse concern got its own mention). I was probably too close to it to tell, and noted I wasn’t that comfortable with it, but when I got Alan Bollard’s signature he indicated he was happy with it.  I noted “lots of small details to sort out next week –  we hope only that, not implementation”.     To this point, we were focused mostly  on retail deposits, but I see in my diary that in The Australian on the Saturday there was talk from bank CEOs of a possible need for a wholesale guarantee scheme.

The full, unredacted, paper we wrote is available on The Treasury’s website.   The thrust of the advice was that (a) action was not necessary immediately, but (b) that should conditions worsen a scheme could be put in place at quite short notice.  The rest of the paper outlined the relevant issues, and the recommended features of any such scheme, and we advised against announcing a scheme until the remaining operational details had been sorted out, something we suggested could be done in the folllowing week.

These were the key features we suggested, largely accepted by the Minister.

dgs 1

One thing that puzzles me looking back now is why we were focused on guarantee options, rather than lender of last resort options.  The latter would have involved lending on acceptable collateral to institutions that we judged to be solvent, perhaps at a penal rate.  It was the classic response to the idea of a contagious run –  troubles elsewhere in the financial system spark concerns about other institutions, and people “run” –  cashing in deposits, retail or wholesale –  just in case.  A sound institution could, in principle, be brought down very quickly by such a run (empirically there are few such examples –  most actual runs end up being on institutions that prove to be at-best borderline solvent).

In the paper we sent to the Minister on 10 October we don’t seem to address that option at all.  I presume the reason we didn’t was twofold.  First, guarantees were beginning to proliferate globally.  And second, there probably is a pretty strong argument that if (a) you are convinced your banking system is sound, and (b) there are nonetheless doubts in the wider environment (in this case, a full scale global crisis, and a domestic recession), a guarantee is likely to be considerably more effective in underpinning confidence.  Not so much depositor confidence, as the confidence of bankers (and their boards).    Even if lender of last resort funding, on decent collateral, had been available without question, few bankers would have been happy to rely on that, and many would have been very keen to cut exposures, pull in loans, and reduce their dependence on the good nature of the Reserve Bank Governor.   A guarantee –  where the Crown’s money is at stake –  is a much stronger signal than a loan secured on the institution’s very best assets.   On the other hand, as the paper does note, once given a guarantee may not leave one with much leverage over the guaranteed institution.

Almost all of the subsequent controversy around the deposit guarantee scheme related in one form or another to one key choice.

All the systemically significant financial institutions in New Zealand were banks (not that all banks were systemically significant).  But they were not, by any means, the only deposit-taking institutions, and we were in the midst at the time of a finance company in which many companies were proving to be insolvent and failing.  Other finance companies appeared –  not just to the Reserve Bank, but to the market, and to ratings agencies – just fine.

Treasury and the Reserve Bank jointly recommended to the Minister that any deposit guarantee scheme include finance companies.  Why did we do that?

The simple reason was one of both fairness and efficiency.  Had we proposed to offer a guarantee only to banks (let alone only the big banks) then in a climate of uncertainty and heightened risk, there would have been an extremely high risk that such an action would have been a near-immediate death sentence for the other deposit-taking institutions, including ones with investment grade ratings, and in full compliance with their trust deeds.    We knew that finance companies (while small in aggregate) were riskier than our banks, but that was no good reason to recommend to the government a model that would have killed off apparently viable private businesses.  It still seeems, with the information we had at the time, an unimpeachable argument.  Classic lender of last resort models, for example, don’t differentiate by the size of the borrowing institution.

We weren’t naive about the risks –  including that there was still no prudential supervision of finance companies and the like –  and we explicitly recommended that risk-based fees (tied to ratings) be adopted, and the maximum coverage per depositor be much lower for unrated entities.   We included in the table an indicative fee scale, based credit default swap pricing for AA-rated banks in normal times, scaling up (quite dramatically) based on the much higher default probabilities of lower-rated entities.

We even included a indicative, totally back of the envelope, guess as to potential fiscal losses –  drawing on the experience of the US S&L crisis.  As it happens, actual losses were to be less than that number, even though the scheme as adopted by the Minister of Finance was less good than the one we recommended.  (Treasury provided some other –  but lower – loss estimates a few days after the actual announcement, but I can’t see those on the Treasury website and can’t now recall the approximate numbers.)

But all that was just warm up.   We’d been under the impression that the Prime Minister was going to announce, in her campaign launch speech, that preparatory work was underway on a deposit guarantee scheme.  That was probably her intention.  But that didn’t allow for the Rudd effect.  The Australian Prime Minister decided that he was going to announce an actual retail guarantee scheme for Australia that day –  the Sunday.  And so it was concluded that New Zealand had little choice but to follow suit.   As a matter of economics, there probably was little real choice but to follow the Australian lead.  But the timing was all about politics.  Neither economic nor financial stability would have been jeopardised if we hadn’t had a deposit guarantee scheme announced before the banks opened on Monday morning.  We’d have been much better to have taken a bit more time and hashed out some of the details with the Minister in his office in Wellington, not at campaign launches and then, as the day went on, airport lounges (at one point late that afternoon I –  who’d talked to the Minister perhaps twice in my life previously –  was deputed to ring Dr Cullen and get his approval or some detail or other of the scheme).   But I guess it might have left open a brief window in which critics might have suggested that New Zealand politicians were doing less for their citizens and their economy than their Australian counterparts.

The main, and important, area in which Dr Cullen departed from official advice was around the matter of fees.   We’d recommended that the risk-based fees would apply from the first dollar of covered deposits (as in any other sort of insurance).     The Minister’s approach was transparently political –  he was happy to charge fees to big Australian banks (who represented the lowest risks) but not to New Zealand institutions (including Kiwibank).  And so an arbitrary line was drawn that fees would be charged only on deposits in excess of $5 billion.   Apart from any other considerations, that gave up a lot of the potential revenue that would have partly offset expected losses.  The initial decision was insane, and a few days later we got him to agree to a regime where really lowly-rated (or unrated) institutions would have to pay a (too low) fee on any material increases in their deposits. A few days later again an attenuated pricing schedule was applied to deposit-growth in all covered entities.   But the seeds of the subsequent problems were sown in that initial set of decisions.

The weeks after the initial announcement were intense.  We rushed to get appropriate deed documents drawn up, dealt with endless request from institutional vehicles not covered who sought inclusion (property trust, money market funds etc), and set up a monitoring regime.  In parallel, we quickly realised that the way wholesale funding markets were freezing up suggested that a wholesale guarantee scheme was appropriate, and got something announced in a matter of weeks –  a much more tightly-designed, better priced scheme, operating only on new borrowing (but I’m biased as that scheme was mostly my baby).  As it happens, that scheme provided the leverage to actually get the big banks into the deposit guarantee scheme.  Once the government had announced the retail scheme the big banks had little incentive to get in –  they probably thought of themselves (no doubt rightly) as sound and as too big to fail –  and the scheme was an opt-in one (we couldn’t just by decree compel banks to pay large fees).   But the Minister of Finance –  probably reasonably enough –  insisted that if banks wanted a wholesale scheme (which they really did) it would be a condition that they first sign up to (and pay for) the retail scheme.  Perhaps less defensible was the Minister’s insistence that any bank signing up to the guarantee scheme indicate that it would avoid mortgagee sales of home owners in negative equity but still servicing their debt (the ability of banks to do so is a standard provision of mortgage documentation).

After the first few weeks of the retail scheme I had only relatively limited ongoing involvement, and so I’m not going to get into litigating or relitigating the South Canterbury Finance failure, and whether –  even the constraints the Minister put on –  and how that could by then have been avoided (the Auditor-General report some years ago looked at some of those issues).   The outcome was highly unfortunate, and expensive.  Nonetheless, it is worth remembering that the total cost of all the guarantee schemes – retail and wholesale – was considerably less than officials had warned was possible.  And it is simply not possible to know the counterfactual –  how things might have unfolded here had either no guarantees been offered, or if the finance companies and building societies had been excluded from day one.  Personally, I think neither would have provided politically tenable, but we’ll never know that, or how that alternative world played out.

But with the information we had at the time –  including, for example, the investment grade credit rating for SCF (which had outstanding wholesale debt issues abroad –  and actually my only meeting with SCF was about their interest, eventually not pursued, to try to use the wholesale guarantee scheme) –  the recommendation made on 10 October seem more or less right. Given the same information I’m not sure I’d advise something different now.  And once Australia had made the decision to guarantee retail deposits, there was little effective economic or political choice for New Zealand.   Had they not done so –  and there was real data, regarding increasing demand for physical cash in Australia, supporting Rudd’s action (rushed as timing was) – perhaps we could have got away with a well-designed wholesale guarantee only.   That would have been a first-best preferable world, but it wasn’t the set of facts we actually had to work with.


Race and the Living Standards Framework

The Treasury has been at work on its Living Standards Framework for some years now (since at least 2011).  When it was first dreamed up I recall remarking to various people that it seemed like preparation for a Labour/Greens government.  And so it has come to be, with the new government embracing the framework –  a substitute for actually doing anything about New Zealand’s dismal productivity record –  and talking endlessly about their forthcoming “wellbeing Budget”, plans for which must now be well underway.

There have been numerous papers published.  Among them were several playing identity politics:

Strangely, the Pacific paper emphasises that there is a wide variety of different Pacific cultures, but the Asian one talks repeatedly of “the Asian culture”.   This was the paper Gabs Makhlouf was touting in China a couple of weeks ago, talking up the “value” of “recognition of the hierarchical orderings of relationship.”

Personally, these papers strike me as largely a waste of public money.   But then so is the whole project, and I am very uneasy about The Treasury trying to analyse policy by loose race-based “preferences” or sets of values.  It has been notable, for example, that they have made no effort (to date) to look at perspectives on “wellbeing” by religion, for example –  where any differences may well be starker than those across race-based lines. Nothing either by political affiliation or ideology.  Only race.

Treasury were the ones who set off on the race-based path.  So I was curious –  and, okay, being slightly mischievous –  about what they’d done to look at the perspectives on the issue of European New Zealanders?   I didn’t actually expect they’d have done anything –  maybe they just assumed that their British CEO could adequately represent a (or the likely wide range of) European perspective(s)?   But I lodged the OIA request, and had a response this afternoon.

This was my request

Dear Sir/Madam,
I have noticed that Treasury has recently released papers on Maori, Pacific and Asian New Zealanders” “wellbeing” and the Living Standards Framework.  This is to request any similar work on European New Zealanders’ wellbeing, and if no such work exists any explanations why, and copies of any papers/emails relevant to the decision not to prepare such a paper.
Thanks in anticipation.
and this was the response,  provided on the very last of the standard 20 working days, and certainly not (as the Act requires) as soon as reasonably practicable.
The request is being declined under section 18(e) because the document/s requested do not exist.

In other words, it seems it never even occurred to them to think about the distinctive perspectives of the largest ethnic group in New Zealand.

Telling really, about the tokenism and identity politics that seems to infest this project.


The IDI and government data linking

Browsing on The Treasury’s website the other day, it was the title that caught my eye: “Talkin’ about a revolution”.   I’m rather wary of revolutions.  Even when –  not always, or perhaps even often –  good and noble ideas help inspire them, the outcomes all too often leave a great deal to be desired.   There are various, quite different, reasons for that, but one is about the failure to think through, or care about, things –  themselves initially small or seemingly unimportant – that the revolution opens the way to.

This particular “revolution” – billed as “a quiet and sedate revolution, but a revolution nonetheless” – was sparked by Statistics New Zealand’s Integrated Data Infrastructure (IDI).   Here is the Treasury author

The creation of Stats NZ’s IDI (or Integrated Data Infrastructure), a treasure trove of linked data, sparked the revolution, and its ongoing development drives it along. The IDI doesn’t collect anything new. Instead it gathers together data that is already collected, links it together at a person level, anonymises it, and makes it available to researchers in government, academia, and beyond.

The author goes on

Since 2013, its growth has been far more rapid. From a handful of users in its early years, there are now hundreds of people using IDI data to help answer thorny questions across the full range of social and economic research domains. The IDI is incredibly powerful for research, and has a number of important strengths.

  • Longitudinal – Providing a picture of people’s lives over time, crucial for understanding the effect of policies and services.
  • A full enumeration – Incorporating administrative data for almost all New Zealanders, enabling a focus on minority groups and small geographic areas.
  • Accessible – By making data available to researchers at relatively low cost, agencies are no longer gatekeepers of the data they collect, and a culture of sharing in the research community is encouraged.
  • Cross-sectoral – Allowing researchers to explore the relationships between different aspects of people’s lives that may be invisible to individual agencies.

There is a breathless enthusiasm about it all.

Stats NZ’s new online research database highlights the huge breadth of research underway for the benefit of all.

It is never made clear quite how the Treasury author gets to his conclusion that all this research benefits us all.

And here is the SNZ graphic illustrating the range of data they have put together (and linked)


I’m a bit torn about the IDI (and its business companion, the LBD).   As an economist and policy geek, I’m fascinated by some of results researchers have been able to come up with using this new database.  A few months ago I wrote (positively) here about how Treasury staff had been able to derive new estimates on internal migration.   Here is a chart I showed then on the various databases linked together that enabled those estimates.

tsy popn
And here is a more-detailed SNZ graphic on what data are in the IDI at present (and more series are still being added).


More details are here.

Note that it is not even all government data –  for example, the Auckland City Mission is providing data on people it assists.  Specifically

Auckland City Mission data

Source: Auckland City Mission
Time: From 1996
What the data is about:  Income, expenses, housing status, and household composition of Auckland City Mission clients, and the services these clients use. Auckland City Mission is a social service provider in Auckland CBD, that helps Aucklanders in need by providing effective integrated services and advocacy. Note: data dictionary available on the IDI Wiki in the Data Lab.
Application code: ACM

Even if in 1996 those individuals gave their consent for their (anonymised) data to be used, few people in 1996 would have had any idea of the practical linking possibilities in 2018.   (And at a point of vulnerability how much ability did they have to decline consent anyway?)

It is researcher heaven.  But it is also planner’s heaven.

Statistics New Zealand sings the praises of the IDI (as does Treasury –  and any other agency that uses the database).  I gather it is regarded as world-leading, offering more linked data than is available in most (or all) other advanced democracies –  and that that is regarded as a plus.   SNZ (and Treasury) make much of the anonymised nature of the data, and here I take them at their word.  A Treasury researcher (say) cannot use the database to piece together the life of some named individual (and nor would I imagine Treasury would want to).   The system protections seem to be quite robust –  some argue too much so – and if I don’t have much confidence in Statistics New Zealand generally (people who can’t even conduct the latest Census competently), this isn’t one of the areas I have concerns about at present.

But who really wants government agencies to have all this data about them, and for them to be able link it all up?   Perhaps privacy doesn’t count as a value in the Treasury/government Living Standards Framework, but while I don’t mind providing a limited amount of data to the local school when I enrol my child (although even they seem to collect more than they need) but I don’t see why anyone should be free to connect that up to my use of the Auckland City Mission (nil), my parking ticket from the Dunedin City Council (one), or (say) my tiny handful of lifetime claims on ACC.  And I have those objections even if no individual bureaucrat can get to the full details of the Michael Reddell story.

The IDI would not be feasible, at least on anything like its current scale, if the role of central government in our lives were smaller.   Thus, the database doesn’t have life insurance data (private), but it does have ACC data.  It has data on schooling, and medical conditions, but not on (say) food purchases, since supermarkets aren’t a government agency.   I’m not opposed to ACC, or even to state schools (although I would favour full effective choice), but just because in some sense there is a common ultimate “owner”, the state, is no reason to allow this sort of extensive data-sharing and data-linking (even when, for research purposes, the resulting data are anonymised).   There is a mentality being created in which our lives (and the information about our lives) is not our own, and can’t even be stored in carefully segregated silos, but is the joined-up property of the state (and enthusiastic, often idealistic, researchers working for it).   We see it even in things like the Census where we are now required by law to tell the state if we have trouble “washing all over or dressing” or, in the General Social Survey, whether we take reusable bags with us when we go shopping.    And the whole point of the IDI is that it allows all this information to be joined up and used by governments –  they would argue “for us”, but governments view of what is in our good and our own are not necessarily or inevitably well-aligned.

In truth my unease is less about where the project has got to so far, but as to the future possibilities it opens up.  What can be done is likely, eventually, to be done.   As I noted, Auckland City Mission is providing detailed data for the IDI.  We had a controversy a couple of years ago in which the then government was putting pressure on NGOs (receiving government funding) to provide detailed personal data on those they were helping –  data which, in time, would presumably have found its way into the IDI.   There was a strong pushback then, but it is not hard to imagine the bureaucrats getting their way in a few years’ time.  After all, evaluation is (in many respects rightly) an important element in what governments are looking for when public money is being spent.

Precisely because the data are anonymised at present, to the extent that policy is based on IDI research results it reflects analysis of population groups (rather than specific individuals).  But that analysis can get quite fine-grained, in ways that represent a double-edged sword: opening the way to more effective targeting, and yet opening the way to more effective targeting.  The repetition is deliberate: governments won’t (and don’t) always target for the good.  It can be a tool for facilitation, and a tool for control, and there doesn’t seem to be much serious discussion about the risks, amid the breathless enunciation of the opportunities.

Where, after all, will it end?   If NGO data can be acquired, semi-voluntarily or by standover tactics (your data orno contract), perhaps it is only a matter of time before the pressure mounts to use statutory powers to compel the inclusion of private sector data? Surely the public health zealots would love to be able to get individualised data on supermarket purchases (eg New World Club Card data), others might want Kiwisaver data, Netflix (or similar) viewing data, library borrowing (and overdue) data, or domestic air travel data, (or road travel data, if and when automated tolling systems are implemented), CCTV camera footage, or even banking data.  All with (initial) promises of anonymisation –  and public benefit – of course.  And all, no doubt, with individually plausible cases about the real “public” benefits that might flow from having such data.  And supported by a “those who’ve done nothing wrong, have nothing to fear” mantra.

After all, here the Treasury author’s concluding vision

Innovative use of a combination of survey and administrative data in the IDI will be a critical contributor to realising the current Government’s wellbeing vision, and to successfully applying the Treasury’s Living Standards Framework to practical investment decisions. Vive la révolution!

Count me rather more nervous and sceptical.  Our lives aren’t, or shouldn’t be, data for government researchers, instruments on which officials –  often with the best of intentions –  can play.

And all this is before one starts to worry about the potential for convergence with the sort of “social credit” monitoring and control system being rolled out in the People’s Republic of China.    Defenders of the PRC system sometimes argue –  probably sometimes even with a straight face –  that the broad direction of their system isn’t so different from where the West is heading (credit scores, travel watchlists and so).   That is still, mostly, rubbish, but the bigger question is whether our societies will be able to (or will even choose to) resist the same trends.  The technological challenge was about collecting and linking all this data,  and in principle that isn’t a great deal different whether at SNZ or party-central in Beijing.   The difference –  and it is a really important difference –  is what is done with the data, but there is a relentless logic that will push erstwhile free societies in a similar direction  –  if perhaps less overtly – to China.  When something can be done, it will be hard to resist eventually being done.    And how will people compellingly object when it is shown –  by robust research –  that those households who feed their kids Cocopops and let them watch two hours of daytime TV, while never ever recycling do all sort of (government defined –  perhaps even real – hard), and thus specialist targeted compulsory state interventions are made, for their sake, for the sake of the kids, and the sake of the nation?

Not everything that can be done ends up being done.  But it is hard to maintain those boundaries, and doing so requires hard conversation, solid shared values etc, not just breathless enthusiasm for the merits of more and more linked data.

As I said earlier in the post, I’m torn.  There is some genuinely useful research emerging, which probably poses no threat to anyone individually, or freedom more generally.   And those of you who are Facebook users might tell me you have already given away all this data (for joining up) anyway –  which, even if true, should be little comfort if we think about the potential uses and abuses down the track.   Others might reasonably note that in old traditional societies (peasant villages) there was little effective privacy anyway –  which might be true, but at least those to whom your life was pretty much an open book were those who shared your experience and destiny (those who lived in the same village).   But when powerful and distant governments get hold of so much data, and can link it up so readily, I’m more uneasy than many researchers (government or private, whose interests are well-aligned with citizens) about the possibilities and risks it opens up.

So while Treasury is cheering the “revolution” on, I hope somewhere people are thinking harder about where all this risks taking us and our societies.

Makhlouf on China

In a blog post the other day, which briefly touched on the activities of the People’s Republic of China in New Zealand, former ACT MP and senior lawyer Stephen Franks observed that

Our colonial forebears gained their colonial power and wealth by suborning the elites of the peoples subjugated more often than with military violence.

I hadn’t particularly thought of it that way before, but of course once one thinks about it for even a moment he is correct about the history, and (I suspect) about the relevance of the parallel to the current situation.

In fact, the parallel came to mind in pondering the latest public speech by Gabs Makhlouf the British ring-in Secretary to the Treasury, who not only qualifies as one of the “elite” but isn’t even someone with a strong ongoing personal interest in the future of ordinary New Zealanders, or even of New Zealand institutions.  Of course, even public servants holding as high an office as Secretary to the Treasury don’t make policy –  we hold politicians to account for that –  but Makhlouf seems to be actively engaged with, and supportive of, the longrunning deference to one of the most evil regimes on the planet, and apparent indifference to the tentacles of that regime in our system and country.

It mightn’t even be quite so annoying if his pandering was supported by decent economic analysis or a compelling understanding of the economic challenges facing New Zealand.  But it isn’t.    The speech, given at the university in Beijing, is under the title “The role of the China-New Zealand relationship in raising living standards”.

He burbles on about his beloved Living Standards framework, reaching the astonishing conclusion in his final paragraph that

Green mountains and blue rivers are as good as mountains of gold and silver.

Perhaps when you have a secure government income of many hundreds of thousands of dollars a year they are, but not to most New Zealanders – the people who struggle to get by, who’d appreciate the opportunities for better housing, better medical treatment, or even a better holiday.     Of course, the environment matters (rather a lot), and greater wealth and productivity has given us cost-effective options to reduce pollution (contrast the pollution levels in London or Beijing).  Perhaps we could extend the parallel: uninhabited New Zealand 1000 years ago –  beautiful and untouched as it may have been –  as good as a reasonably prosperous country today that makes extensive use of natural resources, and which has changed the landscape?   Few will think so, but perhaps the Secretary does?     If this is the sort of economic analysis governments have been getting, no wonder there is no progress in reversing our relative productivity decline.

Makhlouf goes on at length about the value of international trade and investment, and I can go a reasonable way along that line with him.  But it is as if he is talking for a totally different country when he observes enthusiastically that

And back in 1990 the ratio of global trade to world GDP was 30 percent; by 2015 that ratio had doubled to around 60 percent.

Which is good, but in New Zealand –  the country he supposedly represents –  the total exports and imports were 52 per cent of GDP in 1990 and 54 per cent last year.    We simply haven’t shared at all in the dramatic increases in world trade.   And because he seems not to understand that, the Secretary presumably has no credible analysis for what might make a helpful difference in future.   As it is, the New Zealand story is even worse than those snapshots suggests: exports as a share of GDP peaked as long ago as 2000, and even exports of services –  where the Secretary likes to talk up tourism and export education –  peaked as share of GDP in 2002.    The services exports share of GDP is now 30 per cent smaller (three percentage points) than it was then.

Then there is one of his tired old lines, claiming that “we” (New Zealand) are “part of the fastest growing region in the world” when, as he delivered his speech in Beijing, he was closer to home in London than to his office in Wellington.

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

He begins his speech with the rather empty claim that

Yet there is so much that we have in common.

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

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

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

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

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

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

Then we get this

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

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

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

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

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

The Secretary goes on

I believe one of the main reasons the China-New Zealand relationship is so close and constructive is because we both recognise the importance of diplomacy.

A line so vacuous it can only mean that New Zealand knows when (almost always) to rollover, never upset Beijing, and so on.   And who would want a “close and constructive” relationship with such a tyrannical regime anyway –  unless money is now all that matters (surely not so, especially in the Secretary’s wellbeing world.   Do these people have no shame?

Channelling the government, the Secretary touches on the Pacific, where the PRC is increasingly active, and in ways that look quite damaging not just to our interests, but to those of the ordinary citizens (although, again, not necessarily the “elites) in those countries.  Here is his final line.

We believe it is in everyone’s interest in the region – including New Zealand and China – to encourage sustainable economic development, good governance, respect for sovereignty and the rule of law.

I guess that is really a timid suggestion to the PRC, but they are quite open that they have no time for the rule of law (unless, of course, in their own interests), good governance (surely you’d practice what you preach), let alone “respect for sovereignty” –  ask the neighbours in the South China Sea, or Taiwan, the peaceful independent productive democracy.

We believe it is in everyone’s interest in the region – including New Zealand and China – to encourage sustainable economic development, good governance, respect for sovereignty and the rule of law.

Sounding like his countryman, Neville Chamberlain –  who did finally come to his senses –  we apparently don’t believe in right and wrong, or standing by those who are threatened.  The Secretary –  and his government –  just want to be “honest brokers”.  It is a shameful stance.

Perhaps you think I’m being a little unfair to Mr Makhlouf.  He is after all just a (very senior) public servant, channelling government policy.  But no one forces him to parrot these sorts of lines, and to make public speeches re-emphasising New Zealand’s deference and subservience, all under the mask of “mutual benefits”.  Sure, he can’t run an alternative, more challenging, perspective in public, but it is entirely his choice to attach his name to these lines.    He is one of the guilty, sacrificing our values, our institutions, while giving cover to the evils of the PRC regime, all for what?   A few more dollars for a few more big institutions.  In the Secretary’s case there isn’t even the shameful, feeble excuse about political parties “needing” to fund themselves.

Sacrificing our values?  Well, in his speech Makhlouf also talked about his living standards framework and how Treasury had gone out to do some weird race-based consultations about what mattered to people. I haven’t read these papers yet but he reported that of their consultation with Asian New Zealanders (emphasis added)

There is a strong belief in the value of collectivism, diligence, responsibility, frugality and recognition of hierarchy in relationships.

Surely, if there is any traditional New Zealand value –  and as I noted earlier in the week, I’m not fan of values-test – it is the polar opposite of “recognition of hierarchy in relationships”.  But probably Makhlouf, MFAT, and the political elites of all parties would prefer we all knew our place and left all this to them; another deal, more donations, and a refusal to ever stand for the values the Prime Minister sometimes talks about if it might even create even a little awkwardness in Beijing.

Sometimes, moments of hope arise in the strangest places.  I’m no fan of Donald Trump, and could only agree with the right-wing US columnist who the other day declared Trump the single most unsuited person to be President in all of US history.  And yet the other day, his Vice-President Mike Pence gave a speech on the Administration’s policy towards the PRC that came as distinctly refreshing after reading the Makhlouf effort.  I’m not going to excerpt it at length, but for anyone interested I suggest you read it.  I was pleasantly surprised by much of it, and have seen fairly positive commentary on it from various Democrtic-leaning China commentators.

But I come before you today because the American people deserve to know that, as we speak, Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States.

China is also applying this power in more proactive ways than ever before, to exert influence and interfere in the domestic policy and politics of this country.

Pretty much what Anne-Marie Brady (I’m pretty sure no right-wing Republican) has been saying here, although you will never hear such honesty from our politicians.

Previous administrations made this choice in the hope that freedom in China would expand in all of its forms -– not just economically, but politically, with a newfound respect for classical liberal principles, private property, personal liberty, religious freedom — the entire family of human rights. But that hope has gone unfulfilled.

Gabs Makhlouf claims to believe we have so much in common with the PRC.

Beijing is also using its power like never before. Chinese ships routinely patrol around the Senkaku Islands, which are administered by Japan. And while China’s leader stood in the Rose Garden at the White House in 2015 and said that his country had, and I quote, “no intention to militarize” the South China Sea, today, Beijing has deployed advanced anti-ship and anti-air missiles atop an archipelago of military bases constructed on artificial islands.

Blunt, but unquestionable.  And thus utterly unacceptable in New Zealand.

At the University of Maryland, a Chinese student recently spoke at her graduation of what she called, and I quote, the “fresh air of free speech” in America. The Communist Party’s official newspaper swiftly chastised her. She became the victim of a firestorm of criticism on China’s tightly-controlled social media, and her family back home was harassed. As for the university itself, its exchange program with China — one of the nation’s most extensive — suddenly turned from a flood to a trickle.

While in our universities, Confucius Institute advance PRC interests, and our multi-university Contemporary China Research Centre is chaired by someone who chairs a Confucius Institute, advises the PRC on Confucius Institute, and has a range of other interests that could be severely disadvantaged if the PRC were ever upset.

I don’t have any confidence in the Adminstration’s willingness to stick to anything, or in Trump’s temperament in handling a crisis.  But at least the US government is willing to call a spade a spade in this area.  Ours are determined to see never ill, say nothing ill, while their party leaders (sickeningly) praise the regime, and the party donations keep flowing in.

Sadly, there is a yawning vacuum where courageous and honest political leadership, standing for our system, our values, and (to the extent we can) for the rights and freedoms of people in China, might be.   As Stephen Franks put it, it is the elites we have to worry about.

And, in closing, I noticed this link this morning on Anne-Marie Brady’s Twitter account

The article it links is (or at least I found it so) a little difficult to make your way through, but it represents the efforts of some ethnic Chinese New Zealanders not content with successive New Zealand governments’ supine approach to the PRC.

The Secretary to the Treasury and productivity

As I noted in Saturday’s post about The Treasury, the Secretary to the Treasury –  he of the rushed citizenship presumably on the grounds of some exceptional services the previous government thought he might offer to New Zealand –  gave a speech last week on productivity.

One can feel a little sorry for senior public servants venturing into the public domain.  After all, there are limits as to what the head of a government department can really say, while still retaining the confidence of his/her minister (let alone that of the State Services Commissioner).  Political masters change and with those changes there are changes in what can’t really be said in public by their most senior advisers.  All of which is probably a good reason why heads of government departments shouldn’t really give any but the most anodyne (or perhaps obscurely technical) public addresses (in fact, most simply keep quiet in public – do a search for speeches by the Secretary of Justice or the chief executive of MBIE and you won’t find much, if anything).  After all, their primary job is to advise ministers, not to act as public lobbyists for their own policy preferences  Upon leaving office they are, of course, free to champion whatever causes they like.

But all that assumes some idealised fine public servants, who have laboured to generate judicious but penetrating insights.  Wise men and women whose words shed light in dark corners, enrich our understanding, and could –  if only we listened – help resolve some of these intractable challenges that face any modern government and society.

And then there are the Makhlouf speeches.  I written about several of them here (eg here, here, here and here).  They often read fluently enough at a first glance, before quickly turning to dust under any close examination.

Last week’s effort wasn’t that much better.  At least the Secretary to the Treasury was talking about productivity –  something I noted was strangely totally absent from The Treasury’s Briefing to the Incoming Minister last year – but he didn’t have a credible or robust story to tell.

The speech was delivered in Queenstown, so Makhlouf began with some local colour –  some good, some bad.  Among the less positive indicators was

The mean income for people in the Queenstown-Lakes District in 2017 was about $51,000 compared with the national mean of $59,000.  With low incomes but the highest average weekly rental cost in the country and an average house value of more than $1.1 million, the housing affordability problem in Queenstown is in the same league as Auckland.

To which the Secretary’s response was

In response, the Government’s Housing Infrastructure Fund is contributing $76 million in 10-year interest-free loans to support an increase in Queenstown’s housing supply.

So the Secretary to the Treasury now thinks interest-free loans by the government are sensible economic policy?    This isn’t supposed to be some local MP’s party-political broadcast, but the Secretary to the Treasury, guardian of the public purse.

The Secretary then touches on the failure that is New Zealand productivity growth, recognising that we’ve done poorly (while taking no responsibility as head of the leading economic advice agency).  But there is nothing new, and litttle specific.

There are various unsupported assertions  (emphasis added)

We know that our productivity levels stem from a number of factors including weak international connections, the small size of domestic markets, low investment in knowledge-based capital and weaknesses in the allocation of labour.

as if symptoms (in some cases arguable ones) are causes, and then a string of platitudes

It remains a fundamental truth that successful economies need, among other things, a stable and sustainable macroeconomic framework, sound monetary policy and a prudent fiscal policy. It remains true that a well-regulated financial system matters, that properly functioning markets matter, that price signals matter and that incentives matter. And, perhaps most important of all, it remains true that productivity matters.

No doubt largely true (I’d quibble about the “well-regulated” financial system, substituting “sound and stable) but New Zealand has had these features for decades, and we are just slowly drifting further behind.

The second half of the speech builds off this paragraph

The Treasury believes there are a number of factors that always matter for productivity: our human capital, the management of our resources, our international connections, the dynamism of our markets and the effectiveness of our rule-making. I want to say a few words about each of these. To improve our productivity we will have to be more effective in their utilisation and the interactions between them.

First, skills matter.  As if we didn’t know.

There seemed to be two areas of focus

In the Treasury’s view, to help achieve this there should be an emphasis on attainment of cognitive and non-cognitive foundational skills and social skills that are transferable and support life-long learning, as well as greater rates of progression to higher tertiary qualifications.

But I’m not sure what the first half of the sentence really means (Great Books programmes for all, to teach people to think and write?) and the second half looks like a bid for even more tertiary education, when there is little sign that the massive public and private spend on tertiary education in recent decades has been reflected in commensurate increases in productivity or earnings.  And none of this seems embedded in some comparative analysis about whether, and to what extent, New Zealand is doing worse than other advanced countries.

The other specific was slightly surprising

I should also add that we will need to look carefully at whether our social welfare system – which was initially set up to help people make transitions from one job to another in what was expected to be a similar trade – is optimal for the changing world ahead of us.

I presume he means the bits of the system around the unemployment benefit (or whatever it is now called) since most of the social welfare system wasn’t set up to support employment transitions at all (age pensions, widows’ pensions, DPB, sickness and invalid pensions etc), but as his current political masters have, as a matter of policy, been weakening the sanctions in the welfare system that were, supposedly, designed to assist such transitions, I’m left a bit puzzled as to what the Secretary means by this cryptic observation.  Perhaps he is toying with notions of a Universal Basic Income (but, charitably, I’ll assume not)?

Then there is a section on resources.  Some of it seems sensible enough, including around water use rights.  I’m right with him when he favours congestion charging.  But I’m left wondering whether he or The Treasury really believes that either is a significant part of the story explaining our severe relative underperformance.  I don’t.

And lets just say that I rather doubt the robustness of The Treasury’s analytical framework when the Secretary includes these sentences.

The Emissions Trading Scheme is a good example of a tool that can promote the more productive use of resources. Including agriculture within its scope would provide incentives for investment in R&D or innovation in on-farm practices and improve productivity.

An ETS can, no doubt, be a good mechanism for constraining emissions, and even for doing so in a way which might be economically efficient.  But it simply isn’t a way to improve New Zealand’s economywide relative productivity and/or incomes.  Impose an impost (perhaps quite justifiably) on firms in a particular industry, and those who survive will have to adapt their production techniques, perhaps even lifting their own firm productivity.  But it will also considerably shrink the industry in question, when it is an internationally tradable industry, when efficient alternative technologies don’t yet exist, and when other countries aren’t adopting the intervention The Treasury proposes.  All else equal, New Zealanders would be poorer rather than richer if this bit of the Secretary’s prescription was adopted –  the government’s own commissioned economic modelling, by NZIER says as much.

Then Makhlouf moves on to “international connections”, one of the ill-defined buzzwords in this debate.

Mostly it is just empty conventional slogans

Improving the flow of people, capital, trade and ideas will help improve productivity. Strong people-to-people relationships build confidence and understanding and promote learning. They help our businesses to identify capabilities that will help them improve their productivity and ultimately compete and succeed in both domestic and global markets.

All of which would have sounded good in 1984, and yet we greatly liberalised immigration, got rid of most tariff barriers, signed up to all manner of trade agreements, and……the productivity gaps are larger than they were, and actual trade (exports and imports as a share of GDP) is smaller than it was.  The Secretary is either unaware of these basic facts, or simply chooses to ignore them.

I’m closer to the Secrerary’s position when it comes to foreign investment –  where he has to step delicately around the recent legislative choices of his masters –  but there is no sign that he has thought hard about why foreign investment here isn’t more attractive or, indeed, why not many New Zealand based firms do much foreign investment themselves.

There is a section on “markets” that I’m going to skip over.  I don’t particularly disagree with much in it, but there also isn’t much specific there, and nothing to suggest The Treasury has thought seriously about the connection to sustained New Zealand relative productivity underperformance.  Much the same goes for the section on Rules.  I’m all in favour of robust policy evaluation –  it is a shame it hasn’t been applied to Treasury advice on productivity –  and I’m sure there are real opportunities there, but again is there any evidence that things on that score are worse here than in other countries?  Perhaps, but if so he doesn’t mention it.

(The dig at the massive taxpayer subsidy to the cattle industry was interesting, and welcome

Speaking of incentives, I find the situation around the eradication of mycoplasma bovis an interesting one. Responsibility for the genesis and subsequent spread of the mycoplasma bovis outbreak sits with the cattle industry. The question is, should the taxpayer compensate those affected, or should the industry pay for the consequences of the industry’s making? We might also ask what incentives are signalled to the industry by these different options.

And yet, how different is it anywhere else? )

There was an odd section on co-operatives, as if it was a matter for governments to decide on the appropriate sort of vehicles through which business activity is undertaken, and one on public sector productivity, which was really no more than a footnote.

And then there was tax reform.  Mostly, it was in praise of the New Zealand tax system, including the –  highly questionable –  claim, that

the New Zealand tax system is much less distortionary than the tax systems of other OECD countries

That might be true, more or less, if we look only across activities in the same time period, but is demonstrably not true once we take account of intertemporal dimensions.  Not consuming your income now and delaying until later (ie saving –  particularly retirement savings) is much more heavily penalised by the tax system here than in almost any other advanced economy.  That is a distortion The Treasury has been consistently reluctant to address or (it seems) even acknowledge.

There is also no recognition of the possible connections between low rates of foreign investment, and low rates of business investment (symptoms he touches on elsewhere) and business tax regime, where (for example) our company tax rate –  a key consideration for foreign investors –  is now towards the upper end of the OECD range.

And then it was interesting to see that in a speech on productivity, the specific policy proposal that the Secretary devotes most space to (in the entire speech, not just this section) was the call for a capital gains tax.

But there is one area where we stand out as an outlier and which I think needs further attention. The current approach to the treatment of capital income – in particular, capital gains – is highly inconsistent. Some gains are already taxed but others are not. The result is therefore something of a patchwork, the results of which can be unfair, regressive and distortionary. A more consistent approach to the taxation of capital gains would increase the fairness of the tax system, and reduce distortions by levelling the playing field between different types of investments.

For these reasons, the Treasury has long believed there is a real case to extend the taxation of capital income. I recognise that this would come with its own risks, and give rise to higher compliance and administration costs. But there are interventions available to address these risks. The extent to which the impacts are realised – whether positive or negative – will depend significantly on the design of policy.

Some readers will support a capital gains tax.  I don’t particularly, partly because a real-world one (ie the sort many other countries actually have) just introduces a whole new set of distortions, but does anyone seriously believe that a capital gains tax –  whatever the case on “fairness” grounds –  is going to make any material difference to economywide productivity?  And if there is such a case, not even the Secretary to the Treasury advances it.

The Secretary, of course, has to keep on side with his masters, so we read this

I should also add that there are many things being done to address points I’ve just raised. The government has been working on education and training, welfare reform, tax reform and trade relations, to name just a few of the actions happening.

If the Secretary to the Treasury really believes that the goverment’s policy agenda –  at least as revealed to the public –  is going to make a helpful difference in reversing the decades of relative productivity decline, he must surely be the only such person.    But I guess that if he is going to speak in public, he has to say such stuff.

In the final paragraph of the speech there is material for both a brickbat and a rare bouquet.

The brickbat?

And the ‘we’ means everyone: businesses, workers and government seizing the opportunities offered by being part of, and closer to, the fastest-growing region in the world.

Which is simply nonsense of course,   New Zealand is incredibly remote from Asia, or from any other major part of the world economy.     We might be a little less far from some of Asia than we are from Europe or much of North America, but we aren’t even a little close to the major bits of Asia, let alone “part of” it (whatever that means).  When the Seceretary was at home in London he was closer to Mumbai or Bangalore or Delhi than he is in Wellington.  He was actually a little closer to Seoul or Shanghai too.

It is a fundamentally unserious “analysis”.

But there is a bouquet.   Early in his speech, the Secretary was rather downplaying the failure of New Zealand policy, and policy advisers, in observing that labour productivity is “now about 20 per cent below the OECD average”  –  an average considerably lowered by the entry to the OECD of a large group of emerging countries (especially in eastern and central Europe), all of whom throughout modern New Zealand history were considerably poorer and less productive than New Zealand.

But the Secretary ends

Recent research indicates that if New Zealand’s productivity caught up with the better-performing countries in the OECD, our incomes would be 50-60% higher.

It doesn’t take much “research” –  a quick download of an OECD table does the job.   Here is an extract of that table I did recently for a paper I’ve been writing on these issues.

GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1990 2017
New Zealand 21.4 28.6 37.2
Netherlands 27.4 47.5 62.3
Belgium 25.0 46.7 64.6
France 21.7 43.3 59.5
Denmark 25.1 44.8 64.1
Germany 22.3 40.7 60.4
United States 31.1 42.1 63.3
Median of six 25.1 44.1 62.8
NZ as per cent of median 85.4 64.9 59.2
Source: OECD

If anything, a 50-60 per cent lift is an understatement: it would take a two-thirds lift in New Zealand productivity to match the average of this group of high-productivity countries.   And such a lift could be expected to be mirrored in commensurately higher living standards,

But it is great to see the stark magnitude of our failure –  and “failure” is the only honest word for it – as the note the Secretary ends on, even if there isn’t much sign the institution he leads has any serious answers.

And, to be entirely fair, the Governor of the Reserve Bank’s own speech last week makes the Secretary’s effort look like a fine piece of public sector analysis and communications by comparison.  I will write about the Governor’s extraordinary speech tomorrow.


Stakeholders, The Treasury, and economic failure

The Treasury runs a survey of external stakeholders every couple of years, and usually publishes the results on their website quite quickly.  Last year, the results weren’t very good, so they delayed publishing them.  In fact, it was only a few days ago, in response to an OIA request from Eric Crampton at the New Zealand Initiative, that they finally released them.

As Eric notes the results aren’t all bad, but

Among those people interacting with Treasury about its core business of economics, macroeconomics, and fiscal projection, satisfaction dropped from 70% in 2015 to 47% in 2017. The proportion of stakeholders viewing Treasury staff as well-informed dropped significantly, as did overall confidence that staff do a good job, that Treasury challenges thinking on critical issues, and that Treasury can offer insights.

Eric has been concerned for some time about The Treasury’s de-emphasis on core economics and finance skills in Treasury’s recruitment.  For example, apparently

Only four of fifteen hired by Treasury in the 2019 graduate recruitment round had at least Honours-level training in economics and finance.

And then there are specific survey results like this (the blue bits are those respondents who think Treasury is improving)

Tsy stakeholder 1

and in the same vein

tsy stakeholder 2

Not exactly positive results for an agency whose website blares at people that

“The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy”

In some ways, I’m not sure what to make of the survey results.  After all, if one goes to the demographics at the back of the survey document, in the latest survey an even larger proportion than usual of the respondents are from elsewhere in the public sector itself (the blue bars are the latest survey).

tsy stakeholder 3

Consistent with that, an even larger proportion than usual of respondents live in Wellington (58 per cent, up from 50 per cent in the previous survey).

There are, I’m sure, still plenty of individual good people in the public sector (including in The Treasury), but if in the land of the blind the one-eyed man is king, what happens when the entire kingdom is blind.  The public sector more generally is greatly diminished in its policy capabilities –  the sorts of concern Victoria University’s Simon Chapple raised last week – and it isn’t clear to me why, for example, one would trust the Ministry for the Environment (of flakey analysis of plastic bags and emissions) or the Productivity Commission (this week’s Green Party cheerleading) to recognise a good, or bad, Treasury when they saw one.   Either that, or The Treasury is now so poorly performing that even the rest of the public sector recognises it –  and this survey was taken last year, before the “wellbeing Budget” silliness, championed by Treasury, got underway.

Much as I lament the reduction in the extent to which Treasury is hiring people with strong economics and finance skills, I think that is a symptom rather than the cause of the problem.  In fact, at the upper levels of the organisation there is less of a vacuum of economics skills now than there was a few years back.  At one stage, I could spot only one person with a solid economics record in their senior management group, but now there are at least three, all of whom I’ve worked with previously.

But there is still little useful analysis or advice on turning around decades of economic underperformance.  Instead, what economics skills are being deployed seem to be being used on exercises in distractions –  focusing on all manner of aspects of “wellbeing” (recent papers on Asian and Pacific New Zealander dimensions of “wellbeing” –  are we soon going to see ones on European New Zealanders’ wellbeing, or middle-aged people’s wellbeing? ), while avoiding the elephant in the room, decades of economic failure, for which The Treasury seems to have given up thinking hard about serious answers.

In putting this post together, I noticed that the Secretary to the Treasury had actually given a speech this week about productivity.  Glancing through it – I may come back to it in detail next week – it seems about as devoid of serious analysis and answers as most of the rest of Treasury’s work during the term of Makhlouf’s stewardship.   He notes that productivity matters  –  but blind Freddy knows that –  and there are lots of conventional rhetorical tropes, but he appears to have nothing to offer the government or citizens on what might make a real and sustained difference to New Zealand’s fortunes.  He can employ all the economists graduating from our universities and it won’t much any difference unless the Secretary –  or his replacement next year –  and his senior management are really interested in digging a lot deeper, and asking uncomfortable questions about why economic policy, with the best of intentions, has done so poorly for such a long time.  He is now, perhaps, somewhat constrained by the government’s commitment to the feel-good “wellbeing Budget”, but that is no excuse –  they were led down that track by a Treasury not doing its core job well, and with nothing substantive on offer for a new government had it been interested in seriously addressing the productivity growth failure.

The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.The Treasury is New Zealand’s lead advisor to the Government on e

The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.

Treasury and modish ideological agendas

You might have thought that there were real and important issues for The Treasury to be generating research and advice on.   Things like, for example, the decades-long productivity underperformance and the associated widening gap between New Zealand and Australia.  Or a housing and urban land market which renders what should be a basic –  the ability to buy one’s own house –  out of reach for so many New Zealanders.    Or even just preparing for the next recession.   Analytical capability is a scarce resource, and time used for one thing can’t be used for others.

But instead…..

In a post last night about various papers presented at the recent New Zealand Association of Economists conference, Eric Crampton alerted his readers last night to a contribution from Treasury’s chief economist (and Deputy Secretary) Tim Ng and one of his staff.

I did not attend Treasury’s session in which they noted Treasury’s diversity and inclusion programme which saw the scrubbing of the word “analysis” from Treasury’s recruitment ads as overly male-coded. Those interested in priorities at Treasury might wish to read the paper.

And so I did.   I’m not sure I could recommend anyone else do so, except to shed light on what seems to have become of a once-capable rigorous high-performing institution.   We’ll see later the background to the “overly male-coded” stuff, but –  in fairness to Treasury –  the first Treasury job advert I clicked on did still look for

  • Critical thinking, analytical ability and learning agility
  • An ability to drive discussion and provide critical analysis

[UPDATE: As Eric notes in a comment below, he has now amended his reference to “analysis”.]

There is no standard disclaimer on the paper, suggesting that we should take it as very much an institutional view (perhaps not surprisingly, when one of the authors is a member of the senior management of The Treasury).

The Ng/Morrissey paper has several sections.  The first relates to what the authors describe as “women’s (in)visibility within mainstream economic theoretical approaches, in particular, with respect to the conception of ‘rational man’.

A well-known trope in economics (and in critiques of economics and of economists) is that of the rational individual, one who is self-interested and seeks to maximise their own welfare, and who is consistently rational in the sense of diligently and correctly applying the calculus of constrained optimisation using complete information. Sometimes this actor is explicitly referred to as a man (especially in writings earlier than the mid-20th century – no doubt at least partly reflecting the linguistic conventions of the time). At other times, it has been argued that this is implicit in the way in which the scope of the subject is defined for the purposes of research or pedagogy.

In my years of formal economics study –  some decades ago now –  I don’t recall any aspect of economic analysis ever being framed in terms that focused on men, or male involvement in the market.  Since I focused mainly on macroeconomic and monetary areas, perhaps it was different in other sub-disciplines, but I doubt it.    And if standard simplifying assumptions –  as much about tractability as anything – about rationality are a common feature in models, those assumptions are not, actively or implicitly, focused on male perspectives.   They are a proposition that people will use the information they have, that they will pursue the best interests of themselves, their families, or other things they care about.  None of which should be terribly controversial.

But Ng and Morrissey seem to think something terribly important is missing.

We look at the degree to which mainstream theory adequately captures the value of the roles typically undertaken by women, especially unpaid care work, and examines how alternative models, such as those based on the mother/child relationship, could improve economic understanding and policy advice in contemporary developed economies.

They go on

There is a consensus from a number of notable authors that the new paradigm would have the mother / child relationship at its heart as this provides a more accurate depiction of fundamental human interaction.

Both Orloff (2009) and Strassman (1993) identified human’s dependency in infancy and old age, and often in between, as unchosen but present. By identifying dependency as natural they resist the negativity now associated with the term. Folbre (1991) considers how this negativity came about and suggests that women’s dependency was created as a fact through discourse, in the vocabulary used in the political and economic census, which tied non-earning women to earning or moneyed males.

Held (1990) makes her case by identifying the inherent dependency within the relationship between the mothering person and the child, and based on her observation of children as ‘necessarily dependent’, she puts this need at the centre of human interaction. Hartsock (1983) makes a similar argument in asserting mother/ infant as the prototypical human interaction. The importance of this relationship is discussed by Fineman (1995) who suggests the classic economic focus on the sexual relationship neuters the mother from her child.

I struggle to see how any this –  even if it has any substantive merit –  has any relevance to the sort of work, and advice, The Treasury should be providing.  But no doubt it goes down well with the Ministry for Women.

The authors do offer some thoughts on the potential relevance. They begin thus

The implications of the above for policy depend to some extent on the degree to which gender roles and preferences are socially constructed (rather than innate). If the latter, then policy settings (e.g. labour market regulation) have a role not only in recognising different gender roles and preferences, but also in possibly reinforcing or leaning against gender roles that contribute to gender inequality. A more comprehensive microeconomic and measurement approach that incorporates care work would support better analysis of policy settings to promote better gender equality over the longer run.

But even this is almost content-free.    Whether things are socially constructed (society having evolved the way it did for reasons that presumably had survival value) or innate, what role is it of The Treasury to be trying to impose its vision on how people organise their lives?    What, after all, does “gender equality” mean –  beyond individual equality of opportunity, before the law – if there are indeed innate differences (on average) between men and women?

It is a very heavy-handed feminist analysis

A number of feminist theorists have noted the value of paid employment for women. It has been suggested as being ‘constitutive of citizenship, community, and even personal identity’ (Schultz, 2000:1886). It has also been proposed to be a vehicle for participation in society and entitlement to social insurance rights (Lister, 2002:521). Of course paid work also has benefit to women in terms of poverty alleviation (Lawton and Thompson, 2013; Ben-Galim et al, 2014; Thompson and Ben-Galim, 2014).

Whereas I’m quite sure my grandmothers (and even my mother) would not have seen paid employment as a positive for them (or for their families).  Both would have seen it as constraining their ability to be heavily involved in church and community activities.  Nor, in today’s terms, is there any recognition of the fact that many families would prefer one parent (often the mother) to be able to stay at home fulltime with young children, but find that a near-impossible choice to make given the dysfunction that is the housing market.   (And, as a voluntary stay-at-home parent –  albeit male –  I don’t feel remotely disenfranchised or devalued as a result of that household choice.)

Four pages of the paper is devoted to a rather strained attempt to demonstrate the potential value of a gendered lens on macroeconomics  (Ng is a macroeconomist, indeed a former Reserve Bank colleague of mine).    Some charts show basically no difference between the cyclical behaviour of male and female unemployment rates, but the authors are undeterred

Of course, this descriptive commentary is just that – we are not attempting here to make strong empirical claims about gender differences relevant to the cyclical labour market behaviour. Instead the idea is to simply to illustrate, with a bit of introspection, the directions in which policy thinking – macroeconomic in this case – could be enriched if a gender lens is taken, exploring the possible links between behaviour within the household regarding participating in the labour market vs. other activities, and the possibly gendered impacts of macroeconomic phenomena on employment, which is an important contextual factor for within-household decisions. A public policy which aspires to be relevant to different groups in society, including different genders, and cognisant of the possibly different impacts of policy on those groups, could be strengthened by taking more of this kind of approach.

For all the blather –  and without denying that it can be interesting to understand differences in how different population groups (male and female, old and young, European and Maori, Christian, Muslim, Hindu, and pagan, and so on) behave –  there is, it seems, nothing there.

Having failed to demonstrate a problem –  except perhaps an agenda to pursue –  the authors push on to look at the participation of women in the economics discipline.  This. it appears, is key (to what, one might ask?)

Education is our critical starting point. Those who study economics will later be those who practise economics, those who work in policy making, and those who undertake economic research. In order to ensure diverse perspectives are represented within that work, particularly with respect to gender and other distributional consequences of economic policy, it is important to have diversity within those who study economics. As this paper specifically focuses on gender, we will consider the position of women in economic education, in particular. Such a focus is supported by New Zealand’s international obligations through the Convention on the Elimination of all Forms of Discrimination against Women (CEDAW) and the Sustainable Development Goals (SDGs).

When authors have to invoke CEDAW (twice in two paragraphs) and UN SDGs you know they are on substantively weak ground.

As the authors demonstrate, numbers of people studying economics have been in decline (not just in New Zealand).  That probably should be of concern, at least to agencies wanting to employ economists.   The authors present numbers suggesting that, at least at high school level, the drop has been particularly concentrated among girls (personally –  and I have both a son and a daughter doing high school economics at present –  that seems a wise choice on the girls’ part, so mind-numbing (and non-economic) is much of what is taught as economics at high school).

At an advanced tertiary level, it seems that perhaps a third of the economics students are female (in 2014, 31.4 per cent of economics doctorates were awarded to women).  Ng and Morrissey don’t like this at all.

What is our impressionistic conclusion about these patterns in participation in economics education by gender? There appears to be a “pipeline” problem with both genders, and some evidence that the proportion of women is falling – a double whammy in terms of the female economist pipeline in particular. Evidence is accumulating on a number of smoking guns relating to the way in which economics itself is taught and perceived, how leaders in the field are presented, and questions about the social construction of our identity as economists. It appears that a lot of work is needed on several fronts to improve the female pipeline into the profession.

But what, specifically, is the problem?  They don’t say?  Do they have a problem with the fact that 97.5 per cent of speech langugage pathologists are women or that 98.3 per cent of automotive service technicians and mechanics are male (US data for 2016)?   Can they, for example, point to areas where The Treasury’s analysis and advice has been deficient because female students have chosen –  and over decades now it has been pure choice –  not to study economics?   They make no effort to do so in the paper.  The consistent undertone appears to be that Treasury (and economists) make policy, when in fact politicians make the big choices (and, as it happens, in New Zealand three of our last five Prime Ministers have been female).

Ng and Morrissey go on to a new section of the paper

This section reports some experience with a programme to increase gender diversity in an economic and financial Ministry, the New Zealand Treasury.

They perhaps don’t help their case by suggesting that the current head of the International Monetary Fund is an economist, when in fact she is a lawyer and politician.

Treasury is certainly at the forefront of politically-correct blather

In the context of the now well-established literature on the benefits of diversity for the quality of decision making, as well as an obligation to be a good employer, the Treasury has for some time had an active and comprehensive diversity and inclusion (D&I) programme. The discussion in Section 2 about the (non-)role of women in mainstream economic models and approaches, and the consequences of the potential “blind spots” this might imply for policy development, reinforces the importance of gender diversity in a Ministry focused on economics and finance such as the Treasury. Meanwhile, the gender imbalance in the economist pipeline discussed in Section 3 underlines why the Treasury cannot be complacent about this issue.

In fact, this stuff carries over to the Treasury Annual Report

The Secretary to the Treasury co-leads the diversity and inclusion work stream in Better Public Services 2.0 and is a Diversity Champion for the Global Women’s Champions for Change initiative.

Too bad he isn’t a champion of analytical excellence, or of fixing New Zealand’s deep-seated economic problems (but then, not being a New Zealander, he doesn’t have much motivation to care).

Consistent with all this, they run quasi-quotas.  They would probably object to the numbers being called quotas, but when you report your target near the front of your Annual Report, it must put a great deal of pressure on individual managers to hire to the quota, not to ability to do the job.

tsy quotas

Franly, citizens should be more worried about the proportions of people who are top-notch economic and policy analysts, not their skin colour or sex.

But not, apparently, at Treasury.  Here is Ng and Morrissey again

As the data above suggest, a clear issue is the lack of women in senior leadership positions, and part of the response includes obligations on managers to have regular career discussions with all staff on a regular basis and for succession planning to more systematically address possible sources of disadvantage for women. Within-grade gender pay gaps are regularly examined and the target of eliminating any such gaps explicitly included as a criterion in annual remuneration reviews. The parental leave and flexible working policies are regularly reviewed to check for gendered impacts.

But still with no attempt whatever to suggest how any of this has adversely affected Treasury’s policy advice.    Surely that should be the most important test?

It is also clear that The Treasury is dead-keen on the flawed concept of unconscious bias (here for some problems with the Australian public service experience), and the associated training/indoctrination.

Application of emerging insights from studies of unconscious bias have been quite influential in this work, and point to certain interventions and relatively simple changes in HR processes that may help to address some of these biases. For this paper, we took the opportunity to explore in some detail the Treasury’s recent use of a tool, Kat Matfield’s Gender Decoder, which provides an easy way of assessing the potentially different impacts on prospective male and female applicants of language used in job advertisements. The Treasury now has about two years of experience with using this tool as a way of reducing unintended gendered impacts on pools of job applicants

What of this tool?

The Gender Decoder is available on the web at http://gender-decoder.katmatfield.com/. This tool is based on the findings of Gaucher et al. (2011) which provide evidence that certain words in job ads appeal differently to each gender, which may be a channel to exacerbate existing gender imbalances by profession, especially in traditionally male-dominated occupations. The theoretical mechanism is essentially that words connoting individualism and agency (“leadership”, “ambitious”, “challenging”), or that reflect stereotyped male traits, tend to appeal more to male applicants, while words connoting communalism or that reflect stereotyped female traits appeal more to female applicants.

They attempt some analysis of Treasury’s experience with the tool  (emphasis added)

To look at gendered language in Treasury job ads in general and the possible impact of the use of this tool, we sampled 40 job ads posted by male and female hiring managers, 20 before and 20 after the introduction of the use of the tool in March 2016 as a recommended practice in Treasury recruitment.

Looking at the pre-2016 ads, it is notable that male and female hiring managers tended to code their ads towards their own gender, with male managers in particular tending to use strongly “masculine” language. Post 2016, male managers showed roughly balanced gender coding in their ads, while female managers showed a dominance of masculine-coded ads. The preponderance of strong gender coding increased after the introduction of the use of the tool, the opposite to what one would expect if the tool alerted managers to unintended or unnecessary gendered language in ads and if the managers wanted to attract gender-balanced pools of applicants (as they are encouraged to do by Treasury policy).

So those were “quotas” again, in that final sentence?  I’d hope Treasury managers, male and female, wanted the best pool of applicants, based on ability to do the job, not based on some institutional gender quota approach (that seems to disregard the fact –  demonstrated earlier in the paper –  that at least among economists, there will only be half as many women as men in the overall pool to atract applications from).

The authors reflect

Faced with this somewhat surprising result…..we looked at the nature of the jobs advertised themselves, and this exercise suggested to us some limits to the effect that scrubbing job ads of unintended gendered language can have on the gender split of applicants, including for economics jobs. The masculine-coded ads tended to be for jobs in the analytical functions of the Treasury, and “analysis” is coded as a masculine word by the Gender Decoder. Treasury also routinely presents itself as “ambitious” and a “leader” – another masculine-coded word – in the area of economic policy. The feminine-coded ads tended to be for “support” and corporate jobs, with an emphasis on “collaboration” – both feminine-coded words.

Dear, oh dear.  Treasury management has for some time been using an HR tool that treats “analysis” as some nasty male word.    Perhaps this paragraph should lead Ng and his senior management colleagues to rethink, and to wonder whether zeal and ideological presuppositions have not been not been outstripping evidence and analysis?

The Ng and Morrissey paper concludes this way

This paper has reviewed the position of women in economic theory, economics education and economics practice. We argued that the role of women and care work is insufficiently incorporated into mainstream economic models and approaches, and illustrated how a more gender-sensitive approach could enrich a particularly gender-blind sub-discipline – macroeconomics. We then documented the lack of a deep pipeline of women entering the profession, and the gender imbalance at senior levels in our own economic Ministry.


We conclude that the position of women in all three areas of economics is unsatisfactory. While the quality of management and decision making in general has been shown to benefit from diversity in general, in the delivery of quality economic policy advice that benefits all New Zealanders, it is particularly important that a diversity of perspectives is represented.

As a profession we have lots of work to do.

Eric Crampton has previously challenged  as “wishful thinking” (or worse) the Secretary to the Treasury’s repeated insistence on the substantive benefits from “diversity” (population diversity, rather than diversity of view).  Other recent New Zealand research has challenged that proposition too.

The Treasury seems to have become committed to the modish view that how one analyses an issue depends on where one comes from (at least race and sex, although presumably their logic applies to age, religion, birthplace, and all the other trendy identity markers).  As an institution, they now have a huge distance to go, lots of work to do, to restore a reputation for analytical excellence.  Between their institutional weaknesses and the lack of demand for excellence from our politicians, it is no wonder our serious economic problems aren’t seriously addressed.  Pursuing modish causes, no doubt ones in favour with the government of the day, is easier I guess.

The former Minister of Finance, Bill English, had many weak points in his political record.  Among them was his decision a few years ago to support the reappointment of Gabs Makhlouf as Secretary to the Treasury (when, within the law, he’d have been quite within his rights to have asked SSC to find someone who might actually restore the quality of Treasury we once had).    We are the poorer for that degradation of what was once a strong, robust, and analytically-driven institution.  Politicians make policy, and a good Treasury can’t force them to make good policy, but a poor Treasury gives them all the excuses they need to avoid tackling the real issues (while revelling in the feel-good content-lite nature of the coming Wellbeing Budget).

In the meantime, one has to wonder about the opportunity cost of the Ng/Morrissey paper.  Time spent writing it, is (taxpayers’) time that could have been used for tackling some real issues.